Should software face the flat-rate music future?
CD sales dropped 20 percent in 2008, as reported by The Wall Street Journal. But this isn't the whole story.
As Ars Technica points out, the music industry as a whole grew in 2008, with online sales accelerating. But this, too, doesn't tell the whole story.
The real story behind this creative destruction is called out by rising revenues for organizations like ASCAP, and underlined in the Media Futurist blog, where Gerd Leonhard points out that the real shift in the music industry is away from copy-based license business and toward flat-rate, attention-based business models. What is an attention-based model?
It's a model in which the creator's brand offers more protection than digital rights management because you can't counterfeit a live performance, for example. But it's more than that. It's also about customers liking and trusting one's brand enough to subscribe to a steady stream from the creator, not just partaking in dribs and drabs (i.e., licensing copies to the music).
Attention-based revenues (i.e. not just advertising-as-we-knew-it but also revenue sharing of flat-rate offerings, next-generation advertising, up-stream selling and marketing, sponsorships and branding, linking and referring, etc.) will very likely surpass copy and unit sales revenues.
A future where many content creators of all kinds, in all locations, and within all levels of accomplishment will make more money based on what their brand stands for, based on their fans, aka users, having real, meaningful experiences with or through them, and based on who pays attention to them, when and where....
In our immediate future as content creators and companies that serve them, it's all about gathering and converting attention--at least until the world is so well-served with feels-like-free content in return for attention that physical copies become desirable again (and they will).
What does this have to do with software? Much, if you're an open-source or SaaS business, but I think it also applies to Microsoft and Oracle. Whether open-source or proprietary software, however, I think it's particularly germane to the big providers in these categories: Red Hat, Sun Microsystems, Salesforce.com, Oracle, and Microsoft.
Why do enterprises pay Red Hat for a Red Hat Enterprise Linux subscription today? In part, it's to get a license to use RHEL on a particular server for a particular application at a particular time.
But really, it's to tap into an ongoing value stream, as Red Hat CEO Jim Whitehurst intimated to me several months ago. It's a subscription to the Red Hat experience, in other words, not one copy once and for all.
Today, that Red Hat experience is somewhat limited: it's an operating system, and it's an application server. I suspect, however, that Red Hat's future lies in becoming an ASCAP of open-source software, rather than The Police of operating systems. Customers will look to Red Hat to provide a steady stream of open-source value, not a few big "songs."
The same thing is happening elsewhere. Oracle has set itself up as a broad brand that can provide value on a wide array of fronts, following Microsoft's lead. Salesforce? It clearly has set its sights on becoming more than just a CRM player with a novel delivery model. It aims to be the ASCAP of SaaS-based software delivery. And Google? Well, looking at its top 10 applications, it's clear that it, too, is building a broad Google experience, not simply one-off applications.
This is the near-term future of enterprise software. It's not about protecting individual copies of software so much as delivering a strong brand that can command broad-based subscriptions to one's overall value. For open-source vendors like Red Hat and Sun, it may mean that they need to start aggregating a wider array of open-source products into their subscriptions sooner rather than later.
Matt Asay brings a decade of in-the-trenches open-source business and legal experience to The Open Road, with an emphasis on emerging open-source business strategies and opportunities. Matt is vice president of business development at Alfresco, a company that develops open-source software for content management. He is a member of the CNET Blog Network and is not an employee of CNET. Disclosure.
Hence setting the correct price for a software subscription can be complicated. Even if the customer is always a business, you don't want to charge a five man enterprise the same price as Exxon.
The obvious solution is to implement a pricing structure which reflects the customer's size - but, even with human intervention, this still represents a major challenge (especially in an international context).
It would be great if there were a huge database indexing customer's email addresses to their company's enterprise value (debt+equity, best measure of scale) and even better if the EVs were expressed in <a href="http://en.wikipedia.org/wiki/Geary-Khamis_dollar">Geary-Khamis dollars</a> - but no such database exits.
So the real challenge* of implementing any sort of efficient payment system for software lies in the ability to automatically infer the customer's scale.
- David Semeria
*Even proprietary license keys face major obstacles in the cloud