Cloud computing and software as a service (SaaS) offers amount to examples of our notion of “razorblade” product design applied to office automation and information technology (IT) markets. For both of these types of products, the durable component of the system amounts to the computer hardware, networks and web browser software required for participation in the offer. The non durable component usually amounts to nothing more than time, which dictates the rate at which the customer must pay to maintain the benefits delivered by these products.
It is important to recognize that, broadly speaking, the durable and non durable components of these offers can be decoupled. In other words, a cloud services provider, or an enterprise IT ISV with an SaaS offer, may end up with no revenue, whatsoever, from sales of the durable component of the system. Nevertheless, durable components in the form of computers, networks and web browsers are still required for use of these products. Some participants in these markets, for example, Dell and/or HP, have attempted to capture the durable revenue component, but, generally speaking, this added benefit has alluded them.
Something of an exception to this rule, in our opinion, is the Office 365 offer from Microsoft®. In fact, Microsoft owns the largest segment of the operating system market for its cloud service as the result of the near universal usage of Windows®. But the way Microsoft captures the durable component revenue portion of the Office 365 product does not conform to our “razorblade” product model. The durable component revenue is indirectly paid to Microsoft by its OEM partners, and not from the actual end customers of Office 365.
As we mentioned above, the non durable component of most cloud and/or SaaS offers amounts to no more than time. We think this component, which usually amounts to a monthly subscription model, is actually a weakness of these products. In our experience, customers will require cloud and SaaS vendors to provide new content in order to ensure reliable, long term subscription to services. Therefore, if IT ISVs are to successfully use cloud and SaaS products to drive recurring revenue, then business planning for these products should include the cost of regular development of new features for offers. Therefore the operating expense (OPEX) portion of cost of goods sold will be comparatively higher than products that align more precisely with our “razorblade” model. In fact, examples of IT products that constitute a better articulation of a durable and non durable component mix are already available as we will illustrate in the next post to this blog.
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