Selling hardware on a pay-per-use or subscription model is a 'lie' created by marketing bods
- Reference: 1602237908
- News link: https://www.theregister.co.uk/2020/10/09/hardware_as_subscription_not_ideal/
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So says Mike Norris, the straight-talking chief exec at Computacenter, Europe's largest reseller, who made the comments via a webcast interview broadcast at the Canalys Forum 2020 virtual conference.
"If I was a vendor, I would want a consumption model," he said. "I see absolute logic in why I would want to sell as-a-service and not sell capital goods."
Norris had been asked by Steve Brazier, CEO at the channel analyst, whether pay-per-use deals being promoted by the likes of HPE, Cisco, Dell, Nutanix, VMware, HP, and Lenovo actually suited customers. His response was emphatic.
"I do think vendors have to be careful because I don't think customers want to buy that way if they can avoid it," Norris added.
He said some vendors were "fixated" on consumption models.
Cisco began pushing its usage and subscription payment models last year, as did Dell. HPE has long sold storage and compute in this way. Companies that have near-monopolies can call the shots but it's less easy to do in competitive battles.
Norris gave an example to prove his point: Computacenter has spent £1.25m on solar panels that cover the roof of its Hatfield distribution centre, generating £250,000 worth of electricity every year.
"If you look at the multiples of that business, that is super sensible," said Norris. "That is using my capex to improve my opex... any chief executive, any finance director, would use its capital to improve its opex because that's what improves the share price. That's what takes the business forward."
"Yet we're an industry that wants to go, 'reduce your capex – turn it into opex'," he added, and this is the opposite of what most senior leaders want.
The tech industry has grown inordinately more powerful "and the marketing machine is so good" that the message about shifting to consumption-based models is ubiquitous.
"So we're out there, punting, you know, 'capex to opex, capex to opex, capex to opex'. It is a lie, it is a fallacy, it is just not what people really want."
The marketing machines of our vendors that want to sell consumer models are brainwashing the industry and brainwashing their sales forces
He added: "The marketing budgets, the marketing machines of our vendors that want to sell consumer models are brainwashing the industry and brainwashing their sales forces."
In a separate webcast, Brazier at Canalys also asked Michael Guschlbauer, COO at Germany-headquartered Bechtle – another European reseller giant – how he viewed such deals.
"I think most of our customers want the consumption models because they see the advantage of consumption models. But when I take a look in detail on the existing consumption models, there are some hurdles... sometimes the model with normal financial services are better than a consumption model."
Brazier told us today that Wall Street loves vendors' warm embrace of the as-a-service model, pointing toward the moves by Adobe and Microsoft. Adobe, for example, killed off boxed software in 2013 and since then it's share price has risen from around the mid-$40 mark to $516.
He said IT vendors are "desperate to go as-a-serivce", warning "If the vendor puts all its efforts into as a service, and biases its sales force towards as a service, they're gonna have a problem."
Alastair Edwards, chief analyst at Canalys, said the shift to cloud has sped up in the past months since the COVID-19 outbreak, a point not lost on the infrastrucure hardware manufactuers.
"The established vendors are looking not to lose share and they are following where they think the market is going. And to a certain extent, the market is going that direction, definitely, we’ve seen that shift in customers, but we also believe this is partly a response to the current situation and there are still a lot of customers that don’t necessarily want to buy that way."
Lenovo said at the Canalys conference that it expects to generate $1bn this year via Desktop-as-a-Service sales, and reckons that will double next year.
"You can see the trend is coming," said Che-Min Tu, senior veep and COO for the Intelligent Device Group at Lenovo. "I agree potentially, from your point of view it is more expensive to the user. From our point of view, as well as the channel partner, it is better margin and better top line."
He said some customers in the pandemic want to reduce capex, and that Lenovo has just signed a "very, very big" deal. "We already see the breakthrough that everything as a consumption model is going to fly."
HPE said its own as-a-service model, GreenLake, has generated over $4bn in total contract value and a 99 per cent renewal rate.
A spokeswoman told us: "We believe the market in general has seen increasing interest in pay-as-you go models, which started in consumer segments but has come to B2B as led by the public cloud services, and is more and more what vendors are being asked to provide. In fact, IDC predicts that by 2024, over 75 per cent of infrastructure in edge locations and almost half of infrastructure in corporate data centres will be consumed/operated in part or in total via an as-a-service model."
Dave Roberts, vice president of Sales, EMEA, at Dell Financial Services told us: "Customers see immense value in Dell Technologies On Demand flexible consumption models to help them pay for only what they use and to move fixed costs to variable costs, which is critically important in today's fast-moving business environment.
"A consumption-based approach also gives flexible capacity, simplified management, transparent pricing, and robust services. We have also seen significant interest in our broad range of payment solutions for customers that have more 'known' or fixed workloads."
Andrew Brinded, veep and GM of EMEA sales at Nutanix, said cloud computing has grown "hand in hand" with cloud computing, providing utlity-like tariffs and capacity that cxan be switched off.
"Customers want flexibility and by looking at our retention rates of 96%, we are clearly providing what they want... While some vendors are selling perpetual licenses, creating complexity and getting organisations locked into enterprise license agreements, we want to provide nimbleness, a subscription model, cloud-like agility and ultimately choice," he told us.
In the past 24 months, 88 per cent of Nutanix customers "opted for subscriptions". "And it's not just us: look at the hyperscalers and the cloud movement generally. The subscription model is the best model because it delivers transparent value and spread payments with no shocks or taxes."
The Register has asked HP Inc, VMware, and Cisco to comment. ®
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Spot on!
It is not just the vendors, but also their investors - businesses with long term recurring revenue streams are far more valuable than businesses that sell devices and have to 'run to stand still'.
The article is a bit too negative, as there are some real benefits for the customer:
- avoidance of capex (and potential debt/difficulty to get loans)
- avoidance of maintenance cost
- avoidance of obsolescence
- elasticity/flexibility up and down and in terms of contract terms
- immediacy of services (for cloud services at least) with no lead times
- outsource of infrastructure expertise
- outsource of hosting and connectivity
For some (types of) hardware I think you are right. Laptops and printers fall into that category.
Software tends to be used longer than hardware. Windows XP machine finally died? Get me this program working on Windows 7. Doesn't work in Windows 7? There is XP mode. Need a XP program to run in Windows 10?
https://www.tenforums.com/tutorials/135551-hyper-v-add-windows-xp-mode-virtual-machine-windows-10-a.html
There is also Dosbox, Freedos on a VM, Windows 3.1 on Dosbox. A Windows 3.1 emulator for Windows 10, WINE all you want... this old software is here to stay.
Cashflow & tax rules
Vendors like subscription because it provides regular cash flow. It potentially also reduces competition and, thus, price wars once customers are locked in. Companies will generally go with what's most tax efficient and there is huge pressure to go from capex to opex for all manner of purchase. But they also like being able to outsource and offload the maintenance of devices: subscription can also include onsite replacements which don't need negotiating separately. You can see why third parties don't like this, because they get cut out. For customers the net effect may initially be small. But, as we can expect additional concentration in the industry, we'll no doubt see potential savings on the manufacturers side only and further concentration of capital.
The tax effect is to shift the write-offs to the manufacturers. This first started with the card industry in the early 2000s with leasing the preferred way of disposing of fleets of cars after that particular financial crash. And car manufacturers discovered the joy of regular cashflow combined with the ability to write off the excess vehicles it was producing.
Re: Cashflow & tax rules
But, as we can expect additional concentration in the industry, we'll no doubt see potential savings on the manufacturers side only and further concentration of capital.
Yup. Generally these changes don't seem to benefit the customers. I 'buy' tin, I pay X for annual support/maintenance and the costs are easy(ish) to understand. I might even decide that after 5 years, I don't want to pay support any more and just replace kit as it breaks.
What I don't like is to 'buy' tin, and at some random point in the future it goes EOS/EOL and stops working, forcing an upgrade. Or having to allow tin to phone home to some licensing server or it stops working. Thus adding security risks in exposing that tin, or just having to depend on connectivity to a 3rd party server which I don't control.
But a couple of examples of suckiness spring to mind. Way back, I was evaluating Alcatel kit for a new network. It was nice stuff, and had a very nice OSS. But the OSS also came with licence 'credits' for doing MACDs. The cost of the kit was comparable to other vendors, but the uncertainty around having to continually buy credits made the opex hard to model.. Plus additional headaches wrt purchasing those.
Or more recently, I've been musing about setting up a machinists school. Partly so I can play with CNC machines, but also because I think it's a GoodThing(tm) to train future makers of things. So I looked at AutoCad, and discovered that was 'sold' with annual licences, and cloud 'credits' for doing rendering or CFD in the cloud. It wasn't clear if some functions could be done locally, because compute is relatively cheap or if it was forced into their cloud at $1 a credit. Plus additional complications. So classroom licences could be cheaper educational versions, but production might need commercial licences, and licence challenges taking something produced in educational into production. But trying to figure out opex on that gave me a headache.
But such is 'progress'.
IBM until the 1990s
"Nobody ever got fired for buying IBM" should have been "Nobody ever got fired for leasing IBM." This is not new.
A big problem with opex ...
is that you need to be able to continue to service the on-going cost. This is especially painful when your income suddenly drops - maybe due to a certain virus. If you have bought the hardware outright then no one can take it away because you stop paying them. OK you do need to pay when something breaks, but that does not need to be who you bought it from (unless you bought a John Deere tractor).
Yes: capex means that you need to be able to stump up the cash when you buy it, this can be especially hard for a new/growing org.
Re: A big problem with opex ...
Depends how the licensing works. If it's paying to have access then yes you need to keep paying regardless. If it's paying for the usage then no.
Example: I pay my ISP a flat rate for access to the internet. In recent months I've been working from home a lot more, using a lot more data, but I pay the same amount. My mobile is on a pay-as-you-go model. I'm going out a lot less nowadays so using much less data and saving money. But if my landline fails and I have to use mobile data... ouch!
The real difference is that if you buy on capex you can make a decision to defer the next upgrade. eg replace laptops every 5 years instead of every 4 years. Instant saving for the buyer, instant penalty for the seller. There's no deferring on opex.
Re: A big problem with opex ...
With hardware you usually pay just for having it inside your company - even if it's still in a box collecting dust. That's not cloud services when you're paying (dearly) for the time something is consuming resources.
Your ISP flat rate is probably low enough it doesn't make a big dent in your pay, so you don't usually risk to lose it if your income suddenly decreases. But think about people who rent an house, or even a room, and suddenly lose their income and also have to move away.
Would you like to be a professional who, for example, has a sudden health issue, and see his or her devices - with all their data - seized because of unpaid rates? Maybe while you can't care about the last backup?
Capex to opex in a world of low interest rates
SaaS is already bad enough for the majority of instances. One can see that it's dreadful for the customer by the quoted stock price of Adobe. It only goes up that much because customers are paying a lot more. HaaS is insane unless you very rarely need the equipment.
I recently had to buy a machine for compute. The budget was about £6k, so not massive, but you can get something fairly decent for it. We were offered HaaS by one of our departments. A 5-year contract, two logins, some amount of data throughput, and it would cost more than buying a computer direct from Lenovo, which I can run as long as I want with as many users as I want. The previous machine is still going after 8 years, so their HaaS looked even more like a terrible deal.
Add into the mix low interest rates, which makes it much cheaper to move open to capex, and I don't see why anyone who isn't forced to would do it.
Follow the money
Vendors want to sell subcriptions because they think it will make them more money. It follows that everyone else should avoid them as much as possible because the entire point is that it will cost you more money.
Of course all the vendors want "as a service" It keeps the money coming in when the end user would rather just stick with the five year old (or older) version of the software they were previously running. As to hardware, the pace of change/improvement has slowed over the past decade so there is less drive to upgrade. I've seen people running 10 year old network switches as they're "good enough". (Sure, there might be some security issues, but with a bit of skill you can block that off and the switch keeps running)