For a few years I was a sales rep selling a business oriented computer product into the MSP Market. MSP stands for managed service providers. These are the types of companies that act as a sort of the outsourced IT firm for small to medium-sized business. The classic example of an MSP customer is the small doctor’s office that has pretty extensive computer needs but is not big enough to hire a full-time computer person. The actual product I sold wasn’t nearly as important as the way we pitched it to our MSP Channel partners. The entire pitch was we are going to transition your business model from selling products to selling services with monthly recurring revenue. They would buy our product on a lease, add additional services and then charge the end customer the total plus some additional profit dollars. The price didn’t go down when the lease ended so after the lease expired, typically in year three, Profit went through the roof. Our channel customer didn’t have to pay the lease anymore but could still continue to charge the end customer the same amount. The channel partners absolutely loved it because it allowed the little guys to compete with the services that were offered from the big guys. In short, they got to take part in the “as a service” movement that was being adopted by the big IT conglomerates.
To understand why the MSP’s wanted ‘in’ we have to have a bit of a history lesson. In the early days of software you would go to the store and buy a box. In the box would be a disc. On the disk would be software. You would put the software in your computer and you would use the program in perpetuity without ever having to pay any more money. Companies who wanted to continue to make money off of existing products had to come up with newer and better features that incentivized people to purchase upgrades. This process worked pretty well in the early part of the computer revolution because every time a new software product came out it had amazing new features that justified the cost of the upgrade. As these technical products matured it was harder and harder to come up with new features worthy of upgrades. As an example, companies wanted to stick with the version of Windows they purchased for as long as possible, ditto for Microsoft Office and really every other software application. Their attitude was: If it ain’t broke don’t fix it.
These software companies got bigger and more sophisticated. They understood that the model did not provide the kind of regular revenue which Wall Street as well as any business manager prefers. Spurred by the growth of the internet, the entire software industry started moving to an “as a service” model because it was more profitable. Oracle, Microsoft Office, and Adobe, amongst many many others transitioned to this model with their core product lines. Microsoft Office became Office 365. Adobe introduced the Creative Cloud. The list goes on. Their customers, for the most part, liked it. If you’re an IT manager and you always have access to the latest and greatest products this gives you better flexibility. If you’re a CFO managing a large business you can move the money from capex to opex which has some accounting benefits but also means a lot less arguing and pleading from staff to get a purchase approved. In the end it was pretty much a win-win for everybody.
Parallels and Proliferation
We are seeing a parallel environment develop at the consumer level. The challenge is that I’m not so sure it’s as much of a win-win. “But I don’t pay monthly for software” you may be thinking. Just to set the baseline, music is software, television shows is software, videos are software, video games are software, the written word is software. Web based services is software. Any form of access and manipulation of these formats is probably software.
In the early and even some of the current days of the internet the vast majority of services were available free of charge to the consumer. YouTube, Pandora and pretty much any website chased profitability using the advertising model. Long term it was simply unsustainable for the exponentially growing number of organizations that create or provide access to content. Unlike the days of network broadcast television there were too many outlets splitting the eyeballs and only so many advertising dollars to go around. The next logical step was to charge a monthly fee and transition the product to a service.
Let’s talk proliferation of services. For video gaming you have Xbox Live, PlayStation Plus, EA’s origin service, and even Nintendo has got in on the ACT. Do you want more gaming? How about Xbox game pass and PlayStation Now. Although these are the most well-known,there are of course many others. Do you want video services? Everybody knows Netflix and Hulu. Then their services like HBO and Vudu. Traditional free video providers like YouTube now have a subscription tier so they can transition to video as a service. Spotify Pandora and YouTube Red are all trying to Corner the music as a service Market. It’s not just music and video consumption. Online newspapers and blogs have a paid tier. There are education subscription services like Lynda.com and grammarly. Even Feedly, a free news reader for free news sites, has a subscription model.
Exclusivity and the Hook
All of these services offer some sort of hook. The hook can be exclusive content. It can be a free tier and a paywall for higher end content. It can be access to older content. Where a one time purchase ruled the roost with video, written products, and music in the days of broadcast television, paper books, and records/CD’s, now everyone wants to build in an incentive to use their ‘as a service’ platform. They started this with content exclusivity. Wanna play Halo online? You won’t find it on Playstation. What about Game of Thrones? You have to subscribe to HBO Go. The list goes on and on. Even South Park made fun of the fact that Netflix is so aggressive about creating their own exclusive content that the joke is they will approve anything. The companies are getting good at manipulating you into the regular payment. Grammarly can fix some errors, but if you want the full gambit of editing services, that’ll cost you monthly. Apple’s iCloud offers a paltry amount of storage that easily gets filled up by anyone who takes photos and videos with their phone. Next up, the error message appears that your iCloud is filled and bam, another monthly payment for more storage.
I get that this is a necessary business model, and I get on the whole most of these organizations are offering tons of value for the $5 to $10 a month they charge. The challenge is that you get hooked, again and again. It’s actually quite seductive. I really want to support Paul Thurott as I love his content. Unfortunately he has to compete for his $7 a month from me with Microsoft, Google, Apple, Netflix, TiVo, Hulu, Amazon Prime, Libsyn and many others. I could think it’s only $7/month and sign up for another webservice, maybe with a discount if I pay annually but therein lies the life trap of it all. You may cut the cord with your video service provider but the $125/month or more you save on cable can easily be eaten up by video services. It’s the same with software and other services like Mr. Thurott’s news website. If everyone has a service, then you are always paying for everyone’s service, if you are using it or not. Which interestly is the model that was adopted by the cable TV companies when it came to channel packages.
Why this is important and what can you do about it?
I’ve written about it ad-nauseum but to succinctly recap, we live in a world with 30 year mortgages that expect regular payments but we don’t have tenured 30 year jobs with regular paychecks to service those mortgages. Now media, tools for creation and communications and even shipping your box of cereal from Amazon comes with a regular monthly payment. All these little payments stack on top of eachother so when you look up, there you are: your services bill is more costly than your other utilities combined. What happens when you lose your job?
I’ll say it right now, it’s foolish to have payments for something your not using and in some ways I’m very much a hypocrite for writing all this. I have not only made mistakes in this area but I also have a patreon, i.e. i’m one of the people out there begging for a bit of cash every month to keep doing what I do. As I said earlier ad’s just don’t cover the bills and there are too many of us content creators.
Two rules for success:
I feel like an alcoholic who has had some good periods and some bad periods when I write my rules for success, but this is what i’m doing to help ameliorate the incessant call for monthly service payments. The first rule is to pay outright and in full where you can to avoid service charges. ‘Lifetime service’ usually pays for itself even though the initial payment can give anyone pause. Admittedly, even I can make the mistake of choosing monthly over the big nut of ‘lifetime’. As an example when I look at my TiVo monthly bill, I continue to kick myself for not buying the lifetime service on my last TiVo. I swear that i’ll get lifetime service when I get the next generation model as soon as it comes out. It’ll be interesting to see if I can keep my promise to myself.
The second rule is to continue to evaluate your needs. Do you really need Amazon Prime? Just order the stuff a few days early to get the free shipping. Do you really need the premium content on your local news outlet dujour? Are you really using that TiVo? Basically if you don’t feel like your getting an absolute steal of a deal for how much you use the service, don’t pay it. It’s as foolish to pay for IGN Prime as it is to pay for the monthly Gym membership if you only walk into the gym once per month.
In the past I discussed that one method for life success is to play financial defense. Turning off services that you don’t use, or barely use falls into this line of thinking. As long as we have a low barrier to entry for content creation there will be more content than there are advertisers to support that content. Ditto for information services. As we continue to use the ‘as a service’ model vendors will get better and better at incentivizing us to sign up for that payment even if we don’t really need it. It’s a scary proposition and I worry that many people will get caught in this particular life trap and all of the little payments will add up to a huge and unnecessary drain on their resources. Then I looked at my patreon, and I felt a little better. Apparently my readers and listeners are smarter than I am.
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