The rise of software licensing in networking changes some of my assumptions about the 5 year cost of ownership of products. Roughly, lets assume that you are buying virtual appliances like firewalls, DNS/DHCP, IDS/IPS, proxy servers and load balancers and that you pay some type of yearly license to use the product.
The legacy model is that customers pay the full capital value of assets prior to deployment. Lets say that you purchase $1MM of hardware devices/assets and, based on the typical maintenance contract of today, you can expect to pay 20% of the purchase price for software and hardware maintenance.
After five years you will have spent a total of $2MM on hardware and sofware maintenance for those devices. Fairly typical of the current business models offered by vendors today.
Software Subscription or Licensing
Consider a software licensing program for virtual appliances. Lets assume that $100K is needed to provide virtualization hypervisors to provide VMs and that cost stays consistent each year.
Then licenses for a firewall / proxy / load balancer are purchased on a subscription basis. My rule-of-thumb is that licenses are about 50% more than on current hardware/software maintenance/support contracts.
Simple software licenses are going to around $300K per year and over five years the total spend is the same as the capital purchase.
ROI Risk – Interesting Transition
When you commit to hardware purchase, the entire risk of generating a return on that investment is left with the customer. Once the purchase order is cut and the goods hit the dock, the customer must extract value from the asset for the project life, typically 5 years. In short, you “advance” $1.2MM in the first year to your vendor before your company can make revenue.
With a software licensing model, only the initial year of the license is a commitment and subsequent years can be terminated if the assets doesn’t “pay off”.
Licensing Pricing – Should be Cheaper
In this model, the assumptions result in the vendor making the same revenue for the virtual appliance license as for hardware. Its my view that software products cost vastly less than than hardware to produce, manufacture, warehouse/inventory and than the maintenance costs is also reduced by a significant amount since the cost of spare parts inventory and management no longer applies. Sure, developing good quality software is expensive but hardware is much more expensive proposition.
If you agree with this statement, then we could annual license & support fee should be half of the current purchase of hardware assets to reflect the cheaper costs of good manufactured and sold.
In this model, the 5-year price would be half of the previous model with a total cost of £1MM over 5 years.
The EtherealMind View
In this article I’m considering how much a license should cost for a virtual appliance compared to a hardware appliance. Company owners will expect the top line revenue to increase and could also wish for profits to increase and the second option is what vendors will offer customers first. But the second option reflects the underlying value of the product, where the customer is responsible for the virtualization platform, storage, compute and networking that will power the virtual appliances and could reasonably expect the price for firewall service to decrease.
It will be interesting to see what customers are willing to pay in the years ahead as the transition from custom hardware to commodity virtualization for network appliances continues.