Cloud vendors are killing off the old way selling software.
It’s astounding how often the internet supplants business models, like some great tsunami sweeping away a town overnight and clearing a path for a blizzard of construction. One might expect that IT, whence the internet sprang, would have at least a little foresight to this creative destruction compared to the publishing, advertising, music, film and other industries.
It’s not the case, however.
Customers of cloud software and virtual servers(referred to as software-as-a-service and infrastructure-as-a-service respectively) come with a very different set of expectations compared to customers of on-premise software and servers. These expectations are causing problems for established vendors because they dramatically change the rules of the game.
Cloud software customers expect: to rent instead of buy; to pay only for what they use; to access their software wherever there is an internet connection; and to use it on mobile devices or desktops.
Two recent debates on BoxFreeIT about pricing of cloud software brought these tensions to light.
Reckon, distributor of desktop accounting software QuickBooks and Quicken, took on cloud accounting vendor Xero in a war of words over which was more expensive.
Reckon points out that the QuickBooks range offers many more features for the price. Xero’s response was that Reckon charges for two services that Xero provides for free; support and upgrades.
Both companies make fair points, but the biggest shift is in what a customer expects to receive when they buy cloud software. Upgrades and support are no longer a benefit to the customer; they are a responsibility to be paid for by the vendor.
I didn’t really think much about this until an article this week by BoxFreeIT’s Loryan Strant that shed some light on the mystery of Office 365 prices in Australia. As mentioned previously on this site, Australians pay as much as double for the same service enjoyed by Americans.
The defence offered by Microsoft and Telstra (which exclusively distributes Office 365 to most businesses under 250 seats) makes sense to businesses that buy desktop software. The reasons included: Microsoft fixed the exchange rate at 83 cents to the US dollar in Telstra’s distribution contract; Telstra provides free phone support; Telstra gives discounts if you buy its complementary telecommunications services.
However, these explanations don’t really sell with businesses used to buying cloud.
The currency hedge should be irrelevant to customers. The fact that a business in Sydney pays double for the same cloud service used by a business in Singapore, where Microsoft’s Asia Pacific data centre is located, is ridiculous. Microsoft should set a price in Australia based on the US price and not the state of the Australian dollar, which treats the service of providing cloud software as an exported product.
Google Apps, Office 365’s biggest competitor, charges a flat US$50 per user per month globally. Many other cloud vendors also charge a single price in US dollars.
Support has become part of the cost of doing business. This is a trend set by cloud vendors and it’s not going away. Cloud software can be continuously updated to rid it of bugs while desktop software must be manually upgraded, if possible, so there should be less support calls for cloud software as a result.
The fact that Telstra cites its phone support as one reason for charging more is problematic for two reasons. Most businesses, even small ones, will buy the enterprise licences because they include more features and desktop versions of Microsoft Office. Everywhere else in the world Microsoft provides free support for enterprise licences.
Microsoft is asking Telstra to provide that support in Australia instead and asking customers to effectively pay twice for it.
Secondly, Telstra and Microsoft have accepted that the quality of their support has been substandard since Office 365’s launch 10 months ago. And that’s putting it nicely. Nearly every business on Office 365 that I’ve spoken to has a terrible story about T-Suite support.
One trend cloud vendors have avoided is to discount their products, though there are a few exceptions. Most charge what they think the product is worth rather than adding fat that can be trimmed under the right conditions.
Which is why it’s particularly galling for a business to look up what Americans pay for Office 365 and compare it to Telstra T-Suite. Cloud software is sold with fewer mirrors and tricks; just pay the price as advertised.
Businesses already using cloud software will struggle with Microsoft’s approach in Australia because they will come to the table bearing these expectations. The excuses hide another big problem brought about by cloud software – it is nearly all sold direct by the vendor. Physical products need a distributor to lubricate the supply chain. Cloud software, accessible through any browser, does not.
The sooner that Microsoft and other software vendors conform to the new rules the better they will be able to compete against the new crowd. But this will involve painful adjustments to their business models.
There is no doubt that Microsoft will make some changes to the Telstra T-Suite relationship when the current contract expires midway next year, according to industry sources. It will be interesting to see whether Microsoft chooses to maintain the exclusivity arrangement with Telstra or to open up distribution to its huge reseller network.
If that does happen the big question then is – what will happen to the Australian price of Office 365?