The relationship between buyers and sellers isn’t usually hostile or adversarial, but it’s naturally wary, particularly on the buyer side. Sellers make money by making buyers spend money, and while that spending can often be offset by benefits, there are times when it isn’t. One such time is when changes in pricing policies set by sellers increases the cost of the “budget” side of network procurement. That part of network spending focuses on sustaining what’s already been justified, and because it doesn’t draw on new benefits, there’s constant downward price pressure on it. Pricing changes that push costs the other way aren’t welcome.
One of those pricing policy changes, the one that buyers express the most concerns over, is the shift to subscription pricing. Subscription pricing has also taken hold in the software space, and the same forces that encouraged vendors to adopt it there influence networking. The same resentments are building, too.
Whether you call it “subscription” or “as-a-service”, the concept is the same. A buyer of a product, instead of purchasing it for a given amount, acquires what’s essentially a lease. Remember when Microsoft Office was purchased? The problem for Microsoft was that the purchase model put Microsoft under constant pressure to create meaningful feature enhancements to drive buyers to purchase an “upgrade” version. When a buyer didn’t see an improvement, they hunkered down on their old version and produced no incremental revenue for Microsoft. So we got Microsoft 365.
For over a decade, we’ve had a kind of hybrid subscription model in the network equipment space. A buyer purchases a router, for example, and a maintenance contract that provides updated software features and fixes. More recently we’ve seen the hardware and software “unbundled” and the latter sold on the same sort of subscription deal that we had with Microsoft Office. Network vendors, like software vendors overall, have touted this shift in pricing policy to Wall Street because it offers them more revenue. Which, of course, is what gives buyers angst, because it’s a factor that’s raising the cost of sustaining infrastructure.
There are arguments in favor of the subscription model, of course, and even the more radical “network-as-a-service” approach. Many companies who have to watch cash flow prefer to have their costs incurred as expenses rather than capitalized, because the expenses apply at the same time the money is spent and capital costs have to be amortized, so early cash outflows aren’t fully offset when they do their books and file their taxes. The subscription model also assures that network software doesn’t get outdated, and that can be a big factor in keeping the network secure. Up until 2020, three-quarters of network buyers thought the subscription/as-a-service trend was positive, and over half of buyers feel that way today. But since 2020, I’ve been getting more and more reports from buyers that the CFO doesn’t like subscriptions any longer. And that they want something done.
Subscription pricing is the second-most-cited reason to look at “open-model” networking, and the number one reason is overall cost. Even two years ago, almost no enterprise buyer would have said that subscription pricing was a reason to look at open networks. In the service provider space, though, the interest in open-model networking was fueled in part by subscription pricing changes as far back as 2015. Two years ago, enterprises said they would look at alternatives to a vendor who raised subscription prices significantly (by 25% or more), and today a third of enterprise buyers are looking at open networks as a way of reducing costs, even if no changes in subscription pricing are in the offing.
Despite the views they expressed on subscription pricing, only about 8% of enterprises say they changed vendors or adopted open-model networks to get away from them. Just under half said that they’d pressured their vendors to give them a break on subscription pricing, and in most cases the pressure paid off with a cost reduction somewhere, but not always in the subscription costs themselves. In fact, enterprises said that vendors seemed more willing to discount equipment, perhaps fearing that they’d get caught in a never-ending erosion of their subscription revenues.
Enterprises also say that they “understand” the shift to subscription pricing, with the majority linking it to ongoing changes to software to enhance security or to fix problems. Less than a quarter of enterprises said that they believed that maintenance of embedded network software should be free, and the number who believed that software not installed on devices should be maintained for free indefinitely was even smaller.
Given this, how much of the push-back against subscription pricing of network software is really aimed at the practice, versus a simple reaction to the increased pricing pressure buyers feel? Well over 90% of enterprises say that over the last three years, they’ve felt more pressure to reduce spending on sustaining their networks. Most admit that this pressure has led them to take a harder look at subscription pricing, and this is particularly true of enterprises who are stretching out the useful life period of their equipment. Once gear is fully depreciated it contributes no further costs except for any ongoing maintenance and software subscription costs. It makes sense to look at those next, then.
Another interesting fact is that just over 80% of the enterprises I’ve heard from say that they use open-source software in their data center or the cloud, and that they pay annual subscription charges for that software. Candidly, I’m not sure I believe all those who say they don’t, but I was unable to find any network buyer who said they’d started compiling and maintaining their own open-source tools to avoid subscription payments. That suggests that either network software subscription practices are resisted in part because they’re relatively recent, or that ongoing feature progress in data center software is sufficient to justify the payments.
And that may be the critical point. Software subscriptions are, for the vendor, a way of ensuring ongoing revenue when buyers might otherwise resist upgrades. If buyers are resisting upgrades, they’re likely doing that because they don’t see much value in the new features the upgrade offers. In a way, then, imposing subscription costs could be a vendor admission that they fear they’re not providing enough incremental value with new software versions.
With desktop software, there’s always an influx of new buyers to create revenue. With network software, the number of “new” buyers is limited because companies that need large-scale network purchases don’t spring up out of nowhere. Desktop software vendors need to play to the new buyer more than network vendors do, perhaps, and also perhaps they need to rethink that point unless they want to see the current nascent movement toward open-model networks take hold, aided by resentment over subscription practices.