The commercial computing, software and services industries have existed for half a century or so each. It might be interesting to review how their pricing and delivery models have evolved over time.
1960s and 1970s
Modern IT is commonly dated from the introduction of the IBM 360 mainframe in 1964-5. But even before then, there was a growing industry in what we’d now call outsourced services, specifically in payroll processing; major players included Automatic Data Processing (ADP), the company that gave us Senator Frank Lautenberg, and a variety of banks. This was (and to this day remains) a comprehensive service, priced by unit of work (e.g., number of payroll checks cut).
IBM mainframes, which quickly came to dominate the market, were in the 1960s and 70s commonly rented. IBM software that ran on them was hence typically priced on a rental/subscription basis as well. The independent packaged software companies, however, often preferred to get paid up front,* and hence sold perpetual licenses to their software. Annual maintenance fees for the licensed software started in the range of 10% of the perpetual license or even less, but migrated up to today’s 20-22% range.
*There’s a famous story of Cullinane Software making payroll only because a customer’s check arrived. Less well known is one of MSA in the same bind, which salesman John Arnold got them out of by posing as a bank executive and providing his own financial-stability reference from a payphone.
At the same time, there was a large business in what then was called “time-sharing”. Much was what we would now call “Software as a Service” (SaaS), in that it delivered applications or analytic tools. Other was rawer access to compute power, more akin to today’s general cloud services. A major driver for the time-sharing/SaaS choice was simply that computers were very expensive. (And so were computer rooms, personnel, etc.)
Of the multiple kinds of time-sharing companies, the three most prominent were (and these categories overlap):
- Companies that wanted to own computers but were looking for some help with their costs. In particular, every major aerospace company — I specifically recall Boeing, Lockheed, McDonnell-Douglas and Martin Marietta — seemed to have a substantial computer services division. So did other large industrial companies such as GE and Xerox.
- Application and analytic software providers who chose to deliver in a time-shared format. Examples included:
- Xerox Computer Services, a $100 million vendor in MRP (Material Requirements/Manufacturing Resource Planning).
- Banking software/service providers. EDS had two divisions for this, one each for banks and credit unions. Systematics — the star of the Little Rock tech industry — was another major vendor.
- Health care software/service providers, notably Shared Medical Systems.
- Some insurance software providers, notably Policy Management Systems.
- Gerry Cohen’s various ventures in analytic software.
- Networking services businesses. Tymshare/Tymnet was an early leader. Ordernet (later Sterling Commerce) was a special case.
Also noteworthy was the stock quote business. Quotron combined on-premises personal appliances, a network, and a data service, and had a significant business already in 1961; other contenders were Reuters and ADP. Starting in the 1980s, Bloomberg took much of that business.
1980s and 1990s
In the 1980s, multiple forces drove the industry towards a straightforward purchase-plus-maintenance model. In particular:
- Computers got more affordable. Most notably:
- IBM offered cheaper mainframes, starting with the 4300 series.
- Minicomputers, especially the DEC VAX, came into widespread business use.
- Smaller computers yet, including PCs, became important.
- Vendors were eager to recognize revenue from product sales, as opposed to subscriptions over time, because pulling revenue forward made them look more profitable.
The larger general-purpose time-sharing companies generally fizzled, although some special cases survived or even prospered. (A lot of those could be called “Networked payment services”.) And in a tactic that probably should have been echoed more often since, minicomputer-based MRP vendors,* while preferring to sell software licenses (and often to resell minicomputers as well), also offered time-sharing to ease installation and adoption.
*Notably the leader ASK Computer Systems.
Some packaged software vendors did emphasize term licenses for their software, so as to later get more “recurring” revenue when the licenses were renewed. Unfortunately, some of the top practitioners of that strategy — notably Computer Associates — were caught in accounting shenanigans. And for those customers who really wanted to pay on an annual basis, hardware and even software leasing options emerged to accommodate them.
The 21st Century to date
This century, three major trends have pushed toward subscription or other pricing-over-time:
- Open source software. Since open source software almost always has a $0 license fee, to the extent it’s paid for, it’s priced on a subscription basis.
- The resurgence of SaaS and the rise of public cloud computing. SaaS is usually paid for on a subscription basis. (The rest of the time, it’s priced per unit of work.) Ditto public cloud computing. Ditto anything in between.*
- Enterprise license agreements. Large enterprises and vendors commonly negotiate “all you can eat” enterprise-wide product and support licenses. Agreeing on a price is terribly hard unless there are shared expectations as to the enterprise’s level of usage. That’s easier to achieve for a fixed term than for the entire future history of time.
Hence, even on-premises software vendors typically offer both perpetual and term pricing models. Annual fees are typically 50% or more of the perpetual price, with Oracle’s stated 42% probably an artifact of the company’s discount-negotiating strategy. Appliances are to my knowledge priced mainly on a purchase basis — but again, if that bothers customers, there’s always a lease option.
*Truth be told, I don’t pay much attention to the distinctions between, for example, SaaS, PaaS (Platform as a Service), IaaS (Infrastructure as a Service) or DBaaS (DataBase as a Service). Indeed, I expect an announcement next month for PPTaaS (Partridge in a Pear Tree as a Service).
And with that I think this post has gotten long enough. Please stay tuned for future discussions of a more forward-looking kind.
- Last May, I offered advice about the specifics of software pricing.
- Last March, I opined that enterprise computing was moving toward a combination of appliances, clusters, and clouds.