A Critical Analysis of the Subscription Economy

https://medium.com/@guisebule/subscription-psycho-a-person-who-knows-its-a-good-idea-to-get-you-away-from-perpetual-licensing-b8dec71bf7d0

by BuleBule • 9 years ago

113 93 9 years ago

medium.com

BuleBule12• 9 years ago

This is a follow up to my previous article "To Catch A Liar: 1Password Edition" : https://medium.com/@guisebule/to-catch-a-liar-1password-edit...

yborg• 9 years ago

Completely agree with your analysis, and at the same time cannot fault 1Password for doing this since they are in a position to do it. They are potentially a hundreds of million dollar acquisition if they juice those sub numbers. But they have to do this NOW, because what they are doing is not that difficult, and come the day, as it always does, that Google spies an attractive mechanism to drive more people into their ecosystem and decides they don't want to acquire you, your business will (probably) evaporate overnight.

This, for the vendor, is the other edge of the subscription model. If another flavor of the day arises that costs less, your customer base can swiftly move to this new contestant, especially in the enterprise space, because unlike a fixed license, a subscription isn't a capitalized cost. For Adobe, with their massive ecosystem, this is less practical for their customers, but a password manager? There are already a host of commercial alternatives that to an end user are all more or less the same.

BuleBule12• 9 years ago

I had not considered this angle, thank you for commenting.

bocz• 9 years ago

It is hard to classify Microsoft in the "#SubscriptionPsycho" category in regards to Office. They still offer perpetual licenses alongside the subscription model. However I do believe there is a huge marketing failure in making the distinction between the two product offerings.

pspeter35• 9 years ago

As a counter point, I hope that by paying a subscription, I get a continuous stream of small patches with bug fixes, security updates, and design improvements.

I like the subscription model, especially if it has a free tier, because passionate customers can support the developer team and subsidize less passionate users

zAy0LfpBZLC8mAC11• 9 years ago

As a counter point, I hope that by paying a subscription, I get a continuous stream of small patches with bug fixes, security updates, and design improvements.

But you do realize that the subscription model is exactly the thing that removes the incentive to do that, right?

pspeter35• 9 years ago

Can you provide your reasoning? I assume that the subscriptions continue to fund software developers working on the product.

cwyers2• 9 years ago

But you do realize that the subscription model is exactly the thing that removes the incentive to do that, right?

Can you name a single case where this has happened with subscription software, though? The big named examples in the article (as far as I could stand to read it, at least) are Adobe Creative Cloud and Microsoft Office 365.

Here's the What's New page for Photoshop CC 2017, along with links to the changes in various bugfix releases that have occurred since release:

https://helpx.adobe.com/photoshop/using/whats-new.html

You can find the release notes for the past few releases of Photoshop:

https://helpx.adobe.com/photoshop/photoshop-releasenotes.htm...

They aren't sitting on their laurels. And Office hasn't stagnated, either. If the subscription model removes the incentive to do that, why are they still doing that? You get new features in Office 365 sooner than you do on shrinkwrap Office releases. Adobe products have been subscription only for over four years now. The incentive seems to be in place.

Dylan16807• 9 years ago

a continuous stream of small patches with bug fixes, security updates, and design improvements

That doesn't require a subscription. Plenty of companies offer a permanent purchase that comes with a year of updates or all minor-version updates or similar.

The option is there to treat it similarly to a subscription, but importantly you never have to pay and what you already own can never be changed or taken away.

brynedwards• 9 years ago

One I know is Bitwig who recently changed their licensing model so you get 12 months updates with your perpetual license and can pay to continue receiving updates after 12 months[1].

[1] https://www.bitwig.com/en/17/new-license-model.html

TimJYoung2• 9 years ago

That's how we do it with our products (purchases include a subscription). A subscription consists of:

- A year of support on our forums (real company-provided support, not just peer-provided).

- All minor releases and bug-fix builds within the year.

- After the subscription has expired, you still keep everything that you purchased forever, including being able to download anything you own at any time (we keep track of all of that for you).

We do have some "catches" to prevent free-riders at the expense of customers that maintain subscriptions, notably that you can only renew a subscription at the normal price within 2 years of your last renewal. After that, we start to ratchet up the renewal costs until, at the 5-year mark, you'll need to (effectively) purchase a new license.

Also, we offer inexpensive direct phone/email support through a separate "support session" method that is not tied to your subscription. So, even after a subscription expires, you still have direct support options.

The key is that any arrangement be fair and beneficial to both parties. In our case, we get a steady, predictable stream of revenue, and the customers get support, enhancements, and bug fixes quicker and at less cost.

rcthompson• 9 years ago

We're not talking about subscribing to a service or subscribing to updates. We're talking about the "keep paying us or you lose access to the software" kind of subscription.

pspeter35• 9 years ago

Yeah, that's an important distinction. I don't like that model.

zAy0LfpBZLC8mAC11• 9 years ago

Or in other words: You should not allow a company to build a monopoly on a skill of yours, because, as it happens with monopolies, they will end up abusing it.

aerique• 9 years ago

While I don't like the move to a subscription model for a lot of software, I really couldn't finish this piece. I don't think it was very well written, mostly because it kept repeating the same points over and over written a little differently. It could have been much shorter.

I don't like the subscription model because in the end, for multiple subscriptions, it all adds up and ends up being more expensive. And that after spending a lot of money on a subscription you still don't own the software.

(Not to mention "season passes" for games.)

BuleBule12• 9 years ago

This is actually the best feedback I have had on that article, thank you so much for commenting, you know proper critical feedback is the best kind of feedback. Truth be told, I hammer the same point how thrice, simply because my papa told me people were stupid.

michaelt• 9 years ago

I know a lot of people here on HN think subscription models are pretty swell - personally I think they're not so great.

Sure, they provide revenue that can support security fixes - but at the cost of decimating the incentive to improve features to generate upgrade revenue.

After all, if spending more on development doesn't raise revenues much, but cutting down to a skeleton team of maintenance developers means that subscription revenue is almost pure profit, there'll always be investors pushing for that.

Seems to me that invites our industry to stagnate and stop producing value, if you don't need to make a better product in order to bring in revenue.

adrianN• 9 years ago

In my opinion software doesn't have to add features all the time. It would be okay for me if it kept doing what it's doing, except bugs get fixed and performance improves.

tonyedgecombe2• 9 years ago

Yes, this was particularly evident at Adobe where they were scratching around adding features to justify the upgrade costs.

brandon272• 9 years ago

I actually think that pressures from customers increases somewhat when they are dealing with an ongoing fee which they see hitting their accounts on a monthly basis. Every time I see it there is a question of, "how is this software working for me? Do I still need it?" ... Not so much the case with perpetual licensing until it is time to (potentially) upgrade.

samsolomon2• 9 years ago

The case of Adobe is interesting. I think the move to a subscription model has been a hostile move for customers. The second you stop paying for the software, you lose the ability to open your old files.

This has allowed smaller software applications such as Sketch, The Affinity Suite and Capture One to grab marketshare. I think Sketch’s current business model is perfect. Customers pay for a year of updates. If a customer decides not to upgrade, they stay at the same version as when their license expires.

I’m certain Adobe has made a good amount of money in the short term, but they've forfeited a monopoly. I’m more skeptical about their long-term business.

EDIT: Updated for clarity.

maxxxxx3• 9 years ago

"The second you stop paying for the software, you lose access to any of your old files."

It seems you lose editing access, you still can view them. Still not great, but I wanted to clarify.

gaius• 9 years ago

That is the case with Office 365 too.

samsolomon2• 9 years ago

I've updated my comment. You don't lose access, but you cannot open old files.

I suppose you could use a PSD or AI to Sketch converter. I'm unsure about other file types.

snuxoll• 9 years ago

While not perfect, I think JetBrains made an acceptable compromise with their new subscription licenses. Getting stuck with a 1-year-old version rather stinks if you decide to cancel, but you're never "stuck" without access to a product you rely on because you decided to stop paying.

dennisgorelik• 9 years ago

We stopped using ReSharper (and paying for upgrades), so we never paid for that new subscription.

It was not pure fault of subscription model though. ReSharper became too slow in the recent years.

greggman• 9 years ago

I personally hate the Adobe model and am still on Photoshop CS6 but my artist friends all love it. Maybe they don't realize they're paying at least double. All they concentrate on is it's cheap to stsrt.

blacksmith_tb• 9 years ago

But licenses for the old Creative Suite were an eyewatering $2500 USD for the full suite. Sure, you'll get there in four years with a full-on CC subscription, but for the large number of users who only want Photoshop, the ~ $10 USD / mo. plans are pretty appealing (and Adobe now makes money off of them, since it's easier than pirating it to pay for it).

detaro• 9 years ago

The pricing difference really depends on what apps you use and what your update schedule was before, it was from a general paying at least double (yes, a lot of the professional users I know obviously did those calculations when the subscription stuff started. Enthusiasm about it varies accordingly)

ladon862• 9 years ago

I kind of disagree about Sketch having a customer-friendly model, because files produced by a newer version can't be opened by an older version - regardless of whether any new features have been used in that file.

So you pay for a year of updates, but if anyone you collaborate with updates their software, you have to as well, because you can't open the files they produce or even edit and save.

Most of the time you're paying for updates so that you can open collaborator files, not because you want new features. It's effectively a subscription paid annually.

mortenjorck• 9 years ago

While I still consider Sketch's model leagues more customer-friendly than Adobe's, I'm not happy that they appear to have given up any attempt at meaningfully versioning the file format. I can completely understand something like an overhaul to the way symbols are handled breaking compatibility with older versions of the app, but when an update is adding things like a new color picker and tweaking vector snapping, it seems like a stretch that the previous version can no longer open files created by the latest one.

nodamage3• 9 years ago

I’m certain Adobe has made a good amount of money in the short term, but they've forfeited a monopoly. I’m more skeptical about their long-term business.

I don't think they ever would have had a monopoly, even if they had kept their perpetual licensing instead of moving to subscription. The cost of those licenses was pretty high, so there was always room for someone to come in at a lower price point and undercut them.

Besides, $10/month for Photoshop and Lightroom is much more accessible than $699 for a perpetual license, especially if you don't need to use it that often.

Glyptodon• 9 years ago

Adobe users like to whine but ultimately they're more likely to give up their firstborn child than switch products they're so attached to the Adobe tools and ecosystem. And I'm not sure the upper tier of users who are kind of setting the standard is all that price sensitive to begin with. I'm sure they lose hobbyists. But I don't think there are enough defectors to change the bottom line of their de-facto monopoly on raster/vector graphics software.

BuleBule12• 9 years ago

True.

Houshalter4• 9 years ago

It's worth considering what a subscription would be worth as a fixed cost. Like say the company was going to invest the fixed cost into the market, and take the interest as if it was continuous income from subscriptions. Or if a user wanted to just invest a fixed amount of money so the interest will always be there for to pay for the subscription.

At 5% interest, a subscription of $1 a month is worth a fixed cost of $240. Photoshop and Netflix's $10 a month is worth a fixed cost of $2400. Xbox Live's $60 a year subscription makes it worth about $1200, making it cost 3 times more than the console itself. World of Warcraft's $15 a month subscription comes out to a whopping $3600, making it 60 times more expensive than a normal new game (if you wanted to subscribe to it forever.)

softawre2• 9 years ago

Can you explain why considering the dollar amounts that would earn interest equal to subscription costs has any relevancy into how much these services cost?

Or put another way -- what?

zAy0LfpBZLC8mAC11• 9 years ago

I think they meant to use the concept of the time value of money, like this:

https://en.wikipedia.org/wiki/Time_value_of_money#Example_2:...

But their calculation was ... let's say wrong :-)

nobodyorother• 9 years ago

It seems like GP is calculating 20 years worth of subscription cost.

Seems reasonable, but I'd also stop using most subscriptions before 20 years: 5 years seems more likely. I'd probably cancel a subscription if I stopped using the product after a few years or if the related hardware died.

Houshalter4• 9 years ago

Economically you can convert between a fixed price and a subscription price. A subscription has a fixed economic value governed by the interest rate. That is if you have a thing that generates $10 every year, you should be able to sell it for $200 (if the interest rate is 5%.)

I think this is something people don't often think about. But it makes it very easy to compare different costs and benefits that involve time. E.g. imagine a building is costing $1000 a year to maintain, and a new building would cost $50,000 to build. You can figure that it would be easier just to invest $20,000 and use the interest to pay for the maintenance. And save $30,000.

But if building a new building cost only $10,000. It would be a good investment. And you would expect to save more money than you would gain from anything else you could invest in with that money.

The same logic applies to subscription fees. If a software license costs either $120 a year, or a fixed price of $5,000. You should prefer the subscription. Hypothetically you could just invest $2400 and use the interest to pay the subscription. Saving $2,600.

bruxis• 9 years ago

From a company's perspective here, they need to target the most common denominator. This means looking at various cohorts of users and determining a pricing model for the average duration those cohorts continue to pay for the service.

However, coming up with some number X prices for various cohorts is not particularly useful, since simply introducing choice confuses some users and causes drop-off, let alone optimizing those choices and explaining them.

jonny_eh• 9 years ago

If you play World of Warcraft for 20 years, it's easily worth $3600, especially paid out in monthly installments.

Houshalter4• 9 years ago

Perhaps, I'm just comparing the cost to other games. If you buy a normal game you own it forever. If you wanted to go into debt and pay for a $60 game in unending monthly installments, you'd only need to pay 25 cents a month.

cratermoon• 9 years ago

Are you saying Blizzard doesn't provide a service for the $15/month that it takes to play WoW?

ChuckMcM• 9 years ago

Interesting take on it. For historical accuracy this was something that Sun talked about in the 90's, you sold someone some software, and that was the last bit of revenue you ever got from them. Except you still had the programmers who wrote the software to pay.

This then is the fundamental problem, when you finish the software do you fire the engineers that worked on it? If not, what do they do?

The fact is that software can actually be "done" and it happens every where. And it takes a special kind of engineer who will work on simply removing blemishes (bugs) and not write any new features.

And that fundamentally points at a really really deep problem, engineering software rather than just writing it.

If your software has very well specified and defined interfaces, and no 'escapes' then you can say it is engineered to be partitionable. And an engineer can be tasked with fixing one part, they can fix that part, and do the qualification tests for that part and then when they integrate it they can be assured the system as a whole continues to work as it always did, but now with a slightly different part. Not surprisingly this was a part of, if not the major part of, the notions in object oriented programming. Once the part (object) worked, you didn't have to think about it any more. An auto-mechanic doesn't have to know the physics of a an ignition system to replace a spark plug, a spark plug manufacturer doesn't have to know the geometry of every cylinder to make a spark plug.

Software as books. You don't go to the library and periodically buy updates to the books you own. Textbooks pull that off but even they know its really a scam. Pythagorean's principle hasn't actually changed and the last text book was just fine.

Open source kind of wins and kind of loses here. The poster child is gcc. Looking at the code base changes over time for a given architecture they start with a flurry of functionality changes, then smooth out to just bug fixes and the occasional optimizer tweak, and then when the noise floor of change frequency gets to a certain level you start seeing really sort of adhoc changes or perhaps changes that only help a very very small part of the user base. Its hard to capture both a gcc for ARM9 and gcc for ARM9 embedded in an FPGA fabric that can have optimized bespoke instructions. And yet they will try.

The author calls them psychopaths but they are the current generation of entrepreneurs which are building businesses based on rents rather than sales. Its all the rage, is not Uber a rent seeking business that simply takes a tax or rent for you using their app? The 'sale' was the car ride, the 'tax' is everything else. This works because collecting rent of $1 a month from a million people is "easy" they hardly miss it, and you're $12M/year richer for it. Selling them $12M worth of value is so much harder. Why push yourself? Everybody is doing it, the streaming company, the phone company, and even the maker of your coffee machine. If you haven't got an ARR you aren't a 21st century company these days.

BuleBule12• 9 years ago

You divined my thoughts exactly Sir. As others have expressed in this conversation, we lament the rent seeking world.

B1FF_PSUVM• 9 years ago

Plus, everybody and their dog want you to have a customer account with them - and cough up email or phone as id ...

v12golfcart• 9 years ago

Seems like the point of the article is that subcr is bad for customers and therefore bad for biz... the psychos should have known better.

It's true that we pay more for stuff now vs. perpetual licenses (it's prob a book's worth of material, but "opt-out is better than opt-in" and Houshalter's point on chunking are most of it). But in exchange, companies have the ability to invest that greater profit to a greater degree in innovation, so in the long-term we, customers, should get more out of it than we lost in dollars.

First an observation: Adobe's decision to increase profit secularly (i.e. beyond any accounting nuances at the time of switch) by switching to subscription is actually TWO decisions. 1) the switch in revenue mechanism itself and 2) the decision to NOT invest the additional profit.

#2 is the crux of my point, but the "to a greater degree" thing is a 1+1=3 effect:

"more profit" is straightforward because subscriptions increase dollars in, often more than making up for any churn. That cash could be invested to accelerate innovation. It's 1-to-1 apart from timing issues (queuing "yearly up fronts" :D)

"to a greater degree" - this is the special part. It is easier to spend more when predictability is higher. Or put another way, volatility is the enemy of spending to the "hilt". So companies like Netflix can spend (for our sake) more to the hilt when you have a tighter distribution as to where the hilt could be (vs. perpetual products which have poor visibility). Just ask any marketing person or sales person about how easy it is to spend in channels when attribution isn't a problem. BTW I define hilt as "as much as necessary to stay ahead of threats of competition/churn"

But yes, the company does have to choose to do this. Some are more relentless for their customers :). I just heard about the www.relentless.com thing lolz...

Quick aside: I saw this sick chart that compared 12-month lifetime value between Dollar Shave Club (subscription) and Harry's (previously per unit). Even though Harry's has always been branded as a more premium product, DSC made more money by the 12th month (even after churn). It's easy to forget that monthly click -_-

nodamage3• 9 years ago

The challenge with modern consumer software is that:

1. Users expect their apps to work on their computers, tablets, and phones, which generally means you need to provide some ongoing service to keep your data synced between all of the devices. (For some simple apps you can get away with using a third-party service, e.g. Dropbox or iCloud, but many apps with complex data will need their own custom-built solutions.) Depending on the kind of data you are storing, this can get expensive.

2. Users expect perpetual upgrades for every new version of iOS/macOS/Android/Windows that comes out. This obviously requires development work, especially since iOS/macOS/Android are annual releases at this point.

These ongoing costs imply that some kind of recurring revenue is necessary to keep the software running and up to date, which is why the move to subscription revenue has become more popular lately.

Besides, I question the premise that "perpetual" licenses have ever truly been perpetual except in name only: eventually that software you bought will stop working on newer operating systems and devices and you'll have to buy a new version anyway.

noobermin• 9 years ago

1. No they don't. Some may want it, but no one "expects" it and will gleefully accept your invalidation of their previous purchases so you can provide a feature they didn't ask for.

2. https://www.youtube.com/watch?v=sxXs0Yy5-0Y For 2, yes, users may get mad when some vulnerability ends up leading to a leak of PII or worse, but to claim they "expect" it, again, no.

nodamage3• 9 years ago

1. Yes, they do. Especially consumer software like 1Password or Evernote is expected to be accessible on your phone, tablet, and computer.

2. I'm not talking about OS updates. I'm saying consumers expect their apps to be updated to keep them compatible with new versions of their OS. That means someone that bought your app for iOS 6 five years ago absolutely expects it to be updated to work on their new iPhone 7 running iOS 10.

Besides, Windows is probably the outlier here. People might hate Windows 10's automatic update system (which was clearly implemented poorly) but a lot of people update to the latest iOS, macOS, and Android versions right after they're released.

BuleBule12• 9 years ago

You actually cut to the belly of the beast right here with this comment. After thinking about this a lot as the author of the article, I am inclined to agree with you. Perpetual in name only, perhaps we had it coming?

dredmorbius2• 9 years ago

This is a topic that could use a good article. This was not that article.

It's one thing to rail about the varios psychotics or psychopathics of this that or another. That's not the same as understanding the dynamics through which a situation emerges. What's particularly disturbing is when it appears that the outcome is inevitable.

I.F. Stone, writing in 1967 on the Arab-Israeli crisis:

The essence of tragedy is a struggle of right against right. Its catharsis is the cleansing pity of seeing how good men do evil despite themselves out of unavoidable circumstance and irresistible compulsion. When evil men do evil, their deeds belong to the realm of pathology. But when good men do evil, we confront the essence of human tragedy.

http://www.nybooks.com/articles/1967/08/03/holy-war/

Let's look at the problem here.

In a commercial software world, there's a mismatch between cash flows and development. Worse, there's also a conflict between market mechanims based on marginal-cost pricing, and the long-run average costs of development. There's also the tremendous variance in customers' ability to pay -- price discrimination -- particularly for enterprise software.

If you sell shrinkwrap, or some other form of buy-once software, then sustaining the development efforts for the next version is ... difficult.

The two largest consumer softare companies of the 20th century, Microsoft and Apple, both sponsored that development through hardware sales. Apple did so directly, by selling its own hardware. Microsoft did it indirectly by way of per-CPU licensing of IBM-compatible PCs. Both companies avoided the significant costs of direct software sales.

The concept of recurring-subscription revenue is usually associated with periodicals, though that is a relatively modern development. The term doesn't emerge until the 19th century (previous usage was generally in a religious context), and it generally referred to stock subscriptions. Another variant was the subscription library.

(See links below.)

In a magazine subscription, you pay for the right to receive fresh material, but continue to possess any previously received issues.

The model for software subscriptions was in large part IBM's practice of leasing rather than selling computer hardware. Phone systems often followed similar practices. Hardware and software occupy different worlds in that hardware is fairly intrinsically limited: you have a computer, or perhaps a rack, or aisle, or datacentre. But these are unitised, and you're not individually leasing, say, hard drives, CPUs, memory cards, or capacitors, within the computers.

My Debian systems typically have a few thousand individual software packages installed. For a proprietary OS, that number falls, but is still considerable.

Dealing with individual software packages on a subscription basis from here to eternity is itself a major complexity problem I'd, frankly, rather not have to deal with. It may work in instances, but not at scale.

At the same time, there are the financing and cash-flow problems of software developers.

How do you bridge those divides?

https://books.google.com/ngrams/graph?content=*_NOUN%20subsc...

https://books.google.com/ngrams/graph?content=subscription+*...

BuleBule12• 9 years ago

I agree with you, this is a topic that could use a good article and as OP, I did not write it. My hope was that others would pick up the thread and run with it, thank you for pointing this out.

dredmorbius2• 9 years ago

As a general suggestion: instead of looking for personality faults to explain some situation, look to systemic dynamics.

William R. Catton, Jr., has a concept he calls "futile vilification", short version: "There is no point to another morbid wringing of hands over mankind's alleged "greed" or immoral myopia."

Longer, quoted here: https://www.reddit.com/r/dredmorbius/comments/2v3251/william...

Donella Meadows has a concept of 12 leverage points. "Changing personnel" doesn't even rate mention.

https://en.m.wikipedia.org/wiki/Twelve_leverage_points

The history of IBM, AT&T, and Xerox focusing on leasing rather than selling hardware is useful, as is a reading of the history of the publishing industry. Software is, in some ways, a development of that.

A Critical Analysis of the Subscription Economy

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