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Remember when a software sales rep would put together a million-dollar quote for a prospective customer and spend months working to find an internal champion, then convince multiple groups that such a large upfront expense was worth making? Those days aren't entirely gone, of course, but things are changing -- away from conventional licensing and toward software subscriptions.
The idea that companies could "rent" software with periodic payments isn't new; software as a service (SaaS) has been around for many years. However, cloud computing has exploded the adoption of the software subscription model. The cloud is a perfect fit for SaaS applications, making them easy to deploy and use without a business needing to invest in its own infrastructure.
What's happening now is that the SaaS subscription approach is moving on premises. A notable example was Tableau Software's announcement earlier this year that it's shifting to subscriptions as the primary pricing model for its self-service BI and data visualization software.
To understand what's behind that decision and others like it, let's have a brief SaaS history lesson.
Going back to the 1960s, there was a company called Tymshare; its business model, known as time-sharing, was to rent mainframe hardware cycles and software time to organizations not yet ready to purchase either their first computers or additional ones. Tymshare continued doing so into the early 1980s, as did other so-called service bureaus. In those days, there weren't many PCs, the internet was tiny and the companies that could afford time-sharing services were in the Fortune 1000.
Reaching the cloud inflection point
The time-sharing business model died after the IBM PC came out and Unix servers became viable platforms for corporate uses. However, the service concept didn't disappear, and some vendors offered predecessors of today's SaaS technologies using dongles and other methods to control the use of their software.
For years, most companies, from small to large, still felt better using software that they owned via license purchases. Ours is not a stable industry -- software vendors come and go. A software subscription model carries with its a perceived threat of losing access to the application and your data if the vendor goes out of business. By comparison, owning your software provides a feeling of safety.
But then the internet became part of our everyday world, and servers and networks advanced to the point where significant computing power could be kept in external server farms and accessed by users in a more affordable way than in the past. The result was the emergence and rapid growth of the cloud computing business.
The big cloud push didn't come from the enterprise sector. The great, shining example of the power of the cloud was the breakthrough of Salesforce. Its founders looked at all of the small and medium-sized businesses (SMBs) that had a need for real business tools, but minimal to no IT support; they couldn't afford their own servers, nor could they consider purchasing expensive sales force automation software. Salesforce initially built a very limited sales management system that met the needs of the vast majority of SMBs, then put it on the internet and provided access through web browsers. The rest is history.
Software subscriptions on the rise
The most obvious pricing model for this kind of structure was a subscription-based one. But there were still problems for the new SaaS application vendors to solve. For example, they had to figure out version control schemes, and security was now of paramount importance. Only when SaaS developers learned how to address those concerns did they begin to move upstream, into the enterprise market.
At that point, the established on-premises software vendors took note and responded. The battle became partly about private networks, or what are now referred to as private clouds, running on servers that sit within corporate firewalls. In parallel, managed hosting on cloud platforms grew; in addition to racks of servers, the top cloud companies began providing top-notch IT support, including advanced security features.
The above changes mean that the software subscription model is here to stay. It isn't universal yet, though. Enterprise software vendors are moving to the cloud with many of their offerings, while still maintaining on-premises versions of products that they license to buyers. That creates complexity for vendors and for corporate customers, which need to understand their expenditures over time so they can properly account for software spending.
Having to combine outlays and amortization for upfront purchases with periodic subscription payments is far from impossible, but the easier a vendor makes it to purchase and manage its software, the better it is for users -- and, potentially, the shorter the sales cycle.
Tableau puts subscription model first
Hence, we come back to Tableau's announcement. The BI and data visualization vendor isn't making a full jump to the software subscription model -- users can still buy its software through conventional licensing. But it's now leading sales proposals with monthly per-user subscription pricing.
Stephanie Richardson, senior director of product marketing at Tableau, said the promise of better scalability, increased flexibility and easier systems management is motivating companies to move at least some of their application workloads to the cloud.
"As a result, large enterprises are becoming more comfortable with subscription pricing and are recognizing the benefits of this model," Richardson said. "It made sense to support this approach across our entire portfolio so customers could easily adopt Tableau at scale, regardless of whether they are deploying on prem or in the cloud."
The line between on-premises and cloud environments is blurring; meanwhile, the software industry has learned its lessons on how to manage subscriptions. Consumer markets have used subscription models for centuries, and many other areas of business have already moved to them. BI, analytics and other types of enterprise software have been slow to do so. But, as Tableau's new pricing strategy shows, the time for software subscriptions is now -- and not only in the cloud.
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