Written by Kevin Okell on Wednesday 28 August 2013
I’ve just got a new smartphone and have been busy downloading the usual apps to beef up its capabilities – Google maps, LinkedIn, YouTube, TripAdvisor, etc. In the process I’ve probably acquired the fruits of several hundred man years of software development at a total cost of zero pence. Even the few apps I did have to pay for cost no more than a pound or two.
Meanwhile, in the world of enterprise software systems where I spend much of my time, prices are a little more eye-watering. It’s not unusual for the annual costs of core administration systems to run into millions of pounds and that doesn’t include the perennial cost of changing them where project costs can dwarf the licence fees.
So what’s going on? Is it really that much harder to write software to manage a SIPP than to map every corner of the earth and render it in 3D on an iPad? Clearly not so the answer for the price disparity must lie in commercial models rather than the complexity of the software. Google, as everyone knows, makes almost all its revenues from advertising rather than software. Enterprise software giants like IBM, on the other hand, earn their crust from selling systems to corporations in much the same way they have done for the last 30 years.
Despite the optimistic forecasts of social media firms, I don’t think it’s credible to believe that all software can be paid for by advertising; there’s only so much stuff we can all buy! But neither do I believe that enterprise software suppliers can continue with their current commercial models. As new generations of tech-savvy leaders work their way up the corporate ladder, they will inevitably demand much more for much less.
There are pointers from other parts of the software industry on how this could be done. Major games titles can cost up to £100m to develop but have traditionally been sold for less than £100 per unit. That model was successful enough to make several of the large games software companies worth a lot of money but their value went through the roof when they moved to an online subscription model – Activision’s share price grew by a factor of ten after it adopted the new model despite initial scepticism.
Enterprise software is not sold to end-consumers but to businesses, of whom there are far fewer, and this drives the current commercial model with a relatively small number of businesses absorbing high fixed system costs and bundling these into their fees to a much larger number of end-consumers. Whilst this may have made sense historically in a world where consumers had no idea of the systems lurking beneath the surface of retail financial services, it looks much less credible in a D2C environment populated by investors who are very familiar with technology.
If the platform industry shifts, as I believe it will, to a more transactional charging model where consumers pay for the services they use, then it may well be that the subscription licensing model adopted by successful games developers will provide a blueprint for technology vendors.
Or maybe some of them will just go down with the sinking bips!