I have been an Apple fan, user and developer pretty much continuously since I was 9 years old and learned my first programming language (Basic) on my father’s Apple II. So its going on 30 years now. Apple’s product and innovation have, if anything, only gotten better over the years and are well documented, so no need to rehash it all here.
But it recently struck me in discussions with various folks that there is one key lesson Apple can’t or won’t learn. It affects many technology companies that grew up in the 80s or 90s, especially a group of companies i know well, enterprise software vendors. The problem is transparency.
One of the most misunderstood changes as a result of the move towards Software as a Service (SaaS) and the dreaded “Web 2.0″ is this embracing of transparency. And it covers a lot of ground. Apple (and really here we mean Steve Jobs) is hard-wired not to release information.
Some of this is tied to not wanting to let a competitor get early information on your Next Great Widget, so they can’t steal your thunder, or indeed your entire idea, and become massively successful with an inferior version of your product (Jobs has some experience of this problem you might recall). In Apple’s case at least it is also driven by wanting to maximize the publicity surrounding a product launch.
The problem is, once it is in your DNA it is very difficult to switch it off when it is either unnecessary or unwise. Apple has been hit by both of these scenarios recently. The “unwise” side relates to how they handled Steve Jobs illness (hint: badly).
The “unnecessary” angle comes with how they handle bugs in their products. Rather than acknowledge a problem and give an ETA for a fix, they say nothing. Nada. Zip. This infuriates otherwise loyal customers. All in all though, its hard to argue with success or, to look at it another way, Apple gets away with it (to date) because, well, they’re Apple.
Turning to enterprise software companies though, a big change is coming and very few are well positioned to handle it. Transparency once again is the issue. Pricing transparency in this case.
One of the open secrets about enterprise software is that although there is officially a “list price”, pretty much nobody pays it. Vendors know this and customers know this. Pricing is essentially based on the vendor figuring out how much budget the customer has and charging that. Customers try to do the opposite by negotiating the price down. Vendors almost always win. But things are changing…
If you look at almost any web-based service (especially those that would have been a software purchase 10 years earlier such as email services, accounting systems and such) a key feature is total transparency in pricing. Not only are the prices listed for all to see, they have two other key characteristics:
- They are pay-as-you-go (monthly, based on usage)
- There are no contracts
Think how different it is to an enterprise vendor to move from charging a customer several million dollars in advance for a multi-year contract versus utility pricing, per month, based on usage where you can (in theory) change vendors at any time.
Salesforce.com have of course been pushing this model for years so it is not like it is new. But today most web users (at least some of whom are involved in corporate purchasing decisions) have experienced pricing transparency in consumer services they use. Just like Amazon and Google raised the bar for any web-based product in terms of ease of use, the impact of these Web 2.0 services is about to be felt big time by enterprise software vendors.
The biggest challenge they have is that moving to a utility revenue model means taking an awfully big short-term hit in revenue to transition to a subscription model. And if you think the revenue hit is bad, the cash flow one is significantly worse. That’s why I think most enterprise vendors, especially the small to medium sized ones, will not successfully make the transition and will ultimately see their business go downhill over the next 5 years. Incumbents will find it very hard to compete with start-ups who adopt the new revenue model from Day One and have no historical revenues (or short term public market focus) to haunt them.
Some will try to appear to be true SaaS businesses, for example by offering a hosted version of their product. But the real sign of a true SaaS business is utility pricing. Anything else is just marketing.
And it is a shame, because there are some really innovative folks in many of these companies who could create great products in this brave new world. They are in one sense victims of their own success. And if they don’t embrace the shift that is taking place they will be consigned to the same technological graveyard that holds so many former great companies. Unless they happen to be run by Steve Jobs.

