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IT vendors seek the quiet life

Predictable recurring revenue streams. Lovely

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IT sales can be fun: there is a rush from winning a deal and killing the competition. But almost no salesperson enjoys the ever-lengthening sales cycle, the creeping featurism, and the necessity to make sales monthly, quarterly, and yearly that hallmarks the IT market. No wonder vendors are desperate to get out of this cycle and into the world of nice, predictable recurring revenue streams...

With many types of capital equipment, you buy a new factory, truck, or machine press when the old one breaks or when it no longer suits your needs. It is usually the former. And as far as the needs go, you can always work around the limitations of what you have so you don't have to buy something you would like but do not want to spend the money on.

In the computer business, even though we talk about the feeds and speeds of hardware and the new bells and whistles of software, the need to actually move from one product to another is less concrete when the computer or software is actually functioning. And by and large, computers are pretty reliable and do what they say they are supposed to do.

This makes selling hardware and software a serious drag. And as computers have matured (hardware and software both have become much more reliable, and the extra gadgets don't seem to be worth as much as they might have in the past when hardware and software were more primitive) the sales cycle has lengthened as the economic usefulness of an IT product has shrunk to zero.

Back to the old ways

It should come as no surprise that both IT consumers and IT vendors have had enough and are both looking for a different way to sell and buy IT components and services.

There are really no new ideas in the computer business. The basic fundamentals were worked out a long time ago, and what happens in IT is that ideas get rediscovered and modified to fit a slightly different set of circumstances. The underlying components of IT change all the time, but the ideas keep coming around again and again.

People talk about ubiquitous computing, utility computing, and pervasive computing, but what we really want (and what the vendors surely want) is thoughtless computing. They want to simplify computing as much as possible so we get something that looks like a monthly electric, phone, or cable bill. They want a recurring revenue stream that is predictable and, if it mirrors electric, phone, and cable bills, impenetrable and inarguable. They want to get off the sales cycle and return to the glorious past that existed back at the dawn of the computing age.

When IBM was king...

Back in the Depression and World War II eras, IBM was the dominant supplier of the punch-card equipment that was used for early government and business accounting systems. Because of predatory technology and pricing practices that yielded IBM profits that even Microsoft cannot match today with its software, Big Blue grew to have about 95 per cent of that tabulating equipment market, and as the computer age dawned in the early 1950s, Big Blue was sued by the Justice Department on antitrust grounds. The company had always leased its equipment, which gave it tremendous control over pricing, but also gave customers the option of unplugging their gear with 30 days' notice.

In 1956, IBM signed a consent decree with the US Government that forced the company to sell its tabulating and computing equipment at a reasonable price based on its leasing rates for the same equipment. This consent decree did a lot of things, including fostering the leasing of IBM equipment by third parties, but more than anything it set the precedent for acquiring rather than renting IT equipment.

With that IBM consent decree, IT moved from an operational cost to a capital equipment investment that had to be depreciated. And while that has been great for the industry in many ways, this move from one side of the balance sheet to the other inevitably leads to adding bells and whistles to products, hype in marketing, and other destructive behaviour. We end up with computers that grow ever more complex and rigid, which makes the next computers even harder to sell.

Vendors aim for recurring revenues

That is why vendors are all, in various ways, talking about moving away from product sales as we know it and toward recurring revenue streams that smell like the punch-card business of days gone by. IBM already has about 40 per cent of its revenue and 60 per cent of its profits coming in on a recurring basis through services deals, equipment leases, and monthly rentals on systems software. It has done a good job trying to get back to where it once belonged, and with the consent decree nullified in 2001, it has a very good chance of re-emerging as one of the dominant powerhouses of IT.

IT players are desperately trying to think of new pricing schemes and product packaging to get them out of the continual sales business and into the services business. But they are not as much interested in providing services as they are keen on not having to sell.

What this means is that pricing for IT components and services is going to get fuzzy. Application software maker PeopleSoft has, for instance, instituted so-called "value-based" pricing, which uses an algorithm based on company size, revenue, users, profitability, and comparisons to competitors to reckon what it should charge a specific customer for a suite of software. List price is, in effect, history. As will be comparison-shopping, since every customer gets a truly unique price and has no way of knowing what other customers pay.

This type of pricing will in many ways simplify the acquisition of IT products, which will be sold as services, but it will complicate the process of reckoning one product or service against another. And vendors could not be happier. They are waiting for customers to throw their hands up in frustration, which will make picking their pockets that much easier. And after a few decades of this services phenomenon, there will be another antitrust suit, another consent decree, and the cycle will repeat again.

Source: ComputerWire/Datamonitor

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