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Getting There

Ever since 1985 when I first I proposed the ``AutoCAD Professional Subscription'' as a means of finding the holy grail of recurring revenue, I have been following the evolution of the software business from a retail sales model to a subscription/service base. When I look at the convergence of the trends and events I've noted above, I cannot help but believe we are, if not already in that era, at least on its threshold.

Emerging from this period of transition with a large, stable, and growing subscription base will render the companies who succeed formidable, almost invincible, competitors compared to firms with smaller market share forced to generate their revenue entirely from new sales. Reinvestment of a stable revenue base can, if done wisely, further widen the gap between the dominant firm and the dwarves.

For some reason, when I discuss the subscription model of software distribution, many people get confused and think I'm talking about something in the medium to far future--``Well, yes, things may indeed go that way once we have interactive television/fiber to the home/data highway/..., but for now....''. But other than the Microsoft cable box venture, which is interesting but unnecessary, nothing I have discussed has any technological contents whatsoever; it is purely a question of marketing and distribution strategy. Bucks, not Buck Rogers.

To summarise and demonstrate that all the foundation pieces exist:

Unlike many major transitions in distribution strategies, moving toward a subscription model can be done, as far as I can tell, with little or no risk (effort and expense, yes; risk, no). In a business which concentrates primarily on new sales, the installed base is often an underperforming asset waiting to be discovered. Moving to direct marketing of ``frequent, cheap'' updates and upgrades, as Microsoft has done, is unlikely to alienate existing channels geared to selling new products. As Autodesk has discovered, as long as we keep new sales of AutoCAD firmly in the dealer channel, providing direct options for ``the little stuff'' may provoke grumbling, but seldom more grumbling than we hear about ``unprofitable, time wasting update business''.

I believe a subscription strategy can be evaluated and planned relatively simply once we discover the answer to the following question:

How much revenue do we generate, per annum, from the average unit of AutoCAD, after its sale?

Now, I don't have the vaguest idea of this number, but let's play a little napkin engineering and make a wild stab. The wild and wooly R12 update generated $22 million in update revenue and the subsequent quarter $13.5 million (Pru-Bache report, May 24, 1993). Let's assume we hold the $13.5 million level (which Laura and folks don't expect, but I want to err on the high side). So we have $63 million in update revenue, liberally construed, in a year with a blockbuster update. Folding the napkin and continuing, we have about a million installed copies, but let's say they're, oh, 700,000 ``active'' copies, disregarding shelfware and people who haven't upgraded since Version 2.6. Well, that comes out to about US$90 per year per ``active'' copy. So, for example, if we could get half our ``active'' users to subscribe for, say US$250 per year, we would have a recurring revenue stream greater than our biggest update year ever, and without all the push and cost it takes us to launch an update. And given what Autodesk usually charges for updates, many users would probably consider this a bargain, particularly if it avoided all the hassle currently involved in updating a copy of AutoCAD.

It's also intriguing to divide the Pru-Bache FY 94 estimate of US$430 million by my ``active base'' of 700,000. That comes out to US$614 per active unit per year. So were we, for example, to move to a subscription for AutoCAD of about US$100 per month for new sales, we would generate, month after month, year after year, revenue equal to what we largely derive today only from new sales--again assuming only 50% conversion of the already active base. This implies a more radical change in the way we do business which could be deferred until experience with the installed base upgrade/update program confirmed its viability, or simply put off forever, retaining different channels for first sale and subscription as in the magazine business and Microsoft's current practice.

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Editor: John Walker