My Take on Permanent vs Subscription Licensing

  • 2/1/2015

There’s been a distinct shift in the last couple of years in the engineering and design production software technology industry. For many years, the technology vendors have relied on the steady, predictable nature of permanent licensing.

When you adopt a tool set, the theory is that you acquire the number of licenses you need, then pay annually for the maintenance and support of those tools – on an on-going basis. This, of course, keeps Wall Street and all those analysts and shareholders very happy – a continual revenue stream that’s very predictable on a quarter to quarter or year to year basis. So what’s changed?

The answer is that the world in which engineering and manufacturing is conducted is much more fluid and elastic than it has ever been before. Consider the human resourcing changes. Shorter term contracts are now the vogue. This allows companies to manage their resource in a manner that much closer follows the peaks and troughs of product development effort.

Whether it’s in consumer electronics, automotive, or supply chain and services world, this is how things are done. When projects are in that heavy early phase, more hands are drafted in (if you’ll excuse the slightly out-dated pun). When things back off, those hands are no longer required and released back onto the job market.

[Ed – PTC’s new PLM offering, PTC PLM Cloud, is geared to the needs of small and midsized (SMB) product companies. This solution leverages the power of PTC Windchill, while simplifying PLM adoption with a flexible, hosted subscription offering that’s deployable at a pace that matches the needs of SMBs-see a recorded product demonstration here.]


PTC PLM Cloud is a new hosted subscription flexible enough to meet the changing needs of SMBs

What’s curious is that some areas of the software industry, particularly in the traditional engineering sector, have been very slow to catch up. Permanent licensing, while it does provide a baseline, predictable cost on the balance sheet from quarter to quarter, most vendors in this space haven’t allowed much in the way of flexibility. Yes, network-based licensing allows seats to be shifted where needed, but do we really need to constantly maintain the software we need, just in case we need it?

I suspect not.

The good news is that the change is starting to happen. Most technology vendors are now looking at some form of more subscription based licensing. These allow you to manage your software resources in the same manner that you do the talented folks sitting behind the monitor and driving the software. That means that when peak demand is there, seats can be added and used. Then of course, removed from that monthly, quarterly or annual cost when they’re not.

[Ed – did you know that in Q1 of FY15, PTC’s subscription bookings represented 19% of all license and subscription bookings! And that was 26% higher than we’d expected!]

There are also cost implications, particularly for the startup – whether that’s a new entity in its entirety or indeed, a group that’s spun off from a larger group (something that we’ve seen many times in recent years) that sudden needs to retool its software licenses.

Whichever is the origin, the challenges are the same. New company, new challenges and new work – which requires a new toolset. The issue is often that in the traditional permanent licensing model, there’s a huge up front cost to acquiring those tools — never mind the on-going costs. By providing a subscription licensing sales approach, this lowers the barrier of entry for these new entities.

Of course, those that have been in the permanent licensing world will often look at the subscription costs and scoff. From that vantage point, the costs of subscription are typically higher than the maintenance payments. And yes, it’s very easy to find the point where running multiple subscription licenses starts to cost more than an upfront+maintenance model, but that would be missing the point.

The point is that cash-flow, just when a company needs it most, isn’t swallowed up by software purchasing costs. That extra financial bandwidth can be spent on other research, development and manufacturing activities just when its needed. The same can also be said of adopting a more elastic approach if you’re already on maintenance – indeed, having a mix of the two – permanent licenses at the core, with peak demand solved by subscription licenses on top.

  • CAD