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I thought software subscriptions were a ripoff until I did the math
We've been in the software-as-a-subscription era for more than a decade now. The transformation from perpetual licenses to monthly or annual fees is nearly complete, yet people are still grumbling about it. Software subscriptions are a scam, the argument goes, designed for Big Tech companies to squeeze their customers for extra cash.
I'm sympathetic to that argument. But I also understand how we got here, because I've run the numbers.
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Adobe got the ball rolling in 2013 when it replaced its Creative Suite with the subscription-based Creative Cloud product. Instead of shelling out $2,599 for a new license and then $600 for upgrades, you got the entire collection for a flat $50 per month, with updates delivered for free. Despite some complaints from customers, the plan worked out well for Adobe.
That was also the year Microsoft officially transitioned its development of Office, the granddaddy of shrink-wrapped software, to the subscription-based, cloud-first Office 365. (The Microsoft 365 brand took over starting in 2017.)
Apple expanded the universe dramatically in 2016 when it changed the App Store rules to allow subscription-based pricing for apps in any category. Previously, app developers had to count on selling licenses and upgrades to remain in business.
Smaller developers have jumped on the subscription bandwagon, too. Take the popular password manager 1Password, for example. In 2021, after 15 years of selling a perpetual license product, developer AgileBits released 1Password 8, which requires a monthly or annual subscription to its cloud service. The earlier version 7, which allowed customers to create a standalone encrypted vault, is no longer under development.
Even the enterprise space is switching to the subscription model. Just this week, VMware announced that it would no longer offer perpetual licensing and would instead sell its entire line of services through two cloud-based platforms.
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But why can't we just buy software and be done with it? That business model was good enough 20 years ago. So, why not today? What changed?
For starters, no one in small or medium-sized businesses wants to pay $500 for a software license anymore, but that's what some serious productivity tools cost. If you dig deep enough on Adobe's site, for example, you can find the perpetual license version of Acrobat Pro 2020, which costs $538.80 (plus tax). Please note that it's supported until June 1, 2025, so you'll probably need an upgrade in the next year or so, which will set you back another $238.80.
Too much? OK, how about $19.95 a month for the Creative Cloud version instead. Adobe will even throw in a bunch of cloud storage and some cloud-based services to sweeten the deal, and upgrades will be free and automatic as long as you're a subscriber. At that monthly price, you'll wind up paying the same overall cost as the perpetual license version over the course of 39 months, but $20 a month is easier on your day-to-day budget than that big lump sum. If you own a small business, it's easier to budget for that recurrent cost then for the large but irregular cost of software upgrades.
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That's the same math that every product developer, big and small, is running when they make the decision to ditch perpetual licenses in favor of a steady revenue stream. Instead of a single, big influx of payments that then drops to a trickle, the companies can count on a continual stream of cash, as long as their customers find their app or service valuable enough to keep paying, month after month.
From the customer's side, having a software subscription also means that you don't have to deal with the hassles of product keys and online activation and transferring licenses when you change hardware. With a subscription-based product, you sign in using your cloud credentials to use the app, and there's a dashboard where you can activate new devices and deactivate ones you're no longer using. You can use the subscription on multiple devices, too, whereas most perpetual licenses limit you to installing and activating on one device. With a Microsoft 365 Family subscription, you can sign in to the software on up to 5 devices at a time; with a Microsoft 365 Business subscription you can install the software on up to five PCs, five tablets, and five smartphones at the same time. Adobe allows you to remain signed in to Acrobat and other Creative Cloud apps on two devices at a time. [This paragraph updated 26-Jan with details about usage on multiple devices]
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If you were a software developer with a popular app and you wanted to build a sustainable business, which payments model would you choose?
Selling perpetual licenses means you get a big surge in revenue with each new release. But then you have to watch that cash pile dwindle as you work on the next version and try to convince your customers to pay for the upgrade. If you want the opportunity to continually improve your software, you need to bring in enough revenue each year to justify the time and resources you spend on the project. That's the difference between a sustainable business and a hobby.
It strikes me that the real objection to software as a subscription isn't to the business model, but rather to the price. If you think a fair price for a piece of software is closer to $50 than $500, and you should be able to use it in perpetuity, you're telling the developer that you're willing to pay them no more than a few bucks a month. They're trying to tell you that's not enough to sustain a software business, and maybe you should try a free, open-source option instead.
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All the developers that are migrating to a cloud-based subscription model are taking a necessary step to help ensure their long-term survival. The challenge for companies playing in this space is to make it crystal clear that their subscriptions offer real value -- and a charge that's worth paying for indefinitely.