Reinventing the Technology Wheel

The rise of consumption-based models is a disruptive force that has many technology vendors scrambling to find ways to remain relevant and profitable. Consider today's prevailing networking, server and storage equipment heavyweights: they've built their entire business model around selling high-end goods on capital-based budgets. Their products haven't been designed to be delivered in a pay-per-use model.

Traditional hardware often has features and functions that go unused. The utilisation of a server in a typical business is about 15% − in most corporate IT environments it's considered best practice not to run servers at their full capacity, to avoid impeding the performance of applications. Cloud drives out this kind of waste ... thereby driving down hardware vendors' profit margins. In the new model, they're no longer selling big deals to enterprise clients. Instead, they're selling to cloud providers that are running the hardware at its full capacity. The prospect of massive loss of market share and profitability is very real for technology vendors; their old business model simply isn't working anymore.

Survival tactics

Right now, many technology manufacturers are looking to build or acquire cloud businesses, forging new partnerships and building software capabilities in order to compete. Some are looking to separate their product's software from the hardware, and are building in more programmability and automation, but they still have much work to do.

Automation and orchestration, and the ability to unify traditional on-premise infrastructures with new, cloud-based services are what will differentiate players. For this reason, the picture looks more promising for system integrators, particularly those that also have capabilities in building and operating cloud environments.

Value-added resellers of technology are possibly most at risk - the ability to effectively resell cloud services has yet to be proven.

There's a perception that software vendors will find it easier to adjust to this new model than their counterparts in the world of hardware, simply because their products have fewer physical components. However, they face their own set of challenges. With the new model, clients expect to pay only for the software they use - and only if they're using it at all. Today, it's not uncommon for businesses to own software that hasn't been deployed and probably never will be. The amount of unused features in software is also set to become problematic. Until now vendors have been able to charge clients for the entire feature set as part of the software sale, even if only a small percentage of features end up being used. This will need to change.

In the early days of software, Microsoft sold its software to businesses in the form of physical disks in a box. This proved to be a somewhat inefficient approach and it wasn't long before a model emerged that made it less cumbersome to acquire software and gain access to greater levels of software discounts ... on the condition that the organisation entered into a multi-year agreement and made upfront commitments about the amount of software that it would buy. Thus, the notion of 'volume licensing' was born. While it's proven to be a highly successful model for Microsoft, it's not one that most businesses feel necessarily serves their interests.

Game of catch-up

Today, while there's a growing awareness that the software industry can and should make it possible for users to pay for only what they use, licensing arrangements haven't quite caught up yet. For example, if you by Microsoft services from a cloud provider, the core infrastructure is billed on a per-use basis, but the software required to support the service can either be bought in the traditional upfront model or on a per-use basis ... but at premium. Software vendors have yet to master the true outcomes of consumption economics: the day when you pay for the exact number of emails that you send or the number of electronic forms that you process is still some way off. On the upside, software vendors are increasingly introducing software and services that are charged on a per-user per-month basis, as opposed to the number of desktops over a two- or three-year period. In the world of mobility and bring your own device this makes the software asset management process simpler.

Remaining relevant

There's no better time for hardware and software companies to take stock of the changes sweeping through the industry and carefully consider the various tactics available to them to reposition themselves and remain relevant. Some will adjust their business models successfully and weather the storm that's threatening their viability and profitability. Those that fail to take action face the very real threat of obsolescence. As the various players make their moves, long-standing alliances will crumble ... and new rivalries will emerge.