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Thursday, July 02, 2015

Open Source Subscriptions Disrupt Legacy App Vendors

The ongoing success of open source software subscriptions continues to take a heavy toll on traditional vendors. Application software revenue grew by just 2.7 percent year-to-year for the twenty-three vendors tracked in Technology Business Research (TBR) "Applications Software Vendor Benchmark" study.

Growth was supported primarily by subscriptions revenue of 48.9 percent, compared to 48.2 percent in 4Q14, but dragged down by a license revenue decline of 16.6 percent -- that's compared to a decline of 15.7 percent in 4Q14.

According to the latest TBR assessment, vendor delivery models continue to shift in line with customer consumption patterns -- driving rapid subscriptions growth as open source cloud-based offerings gain traction, but eroding similar traditionally licensed enterprise software products.

"Traditional software vendors must mitigate the impacts of lower revenue per solution as customers select cloud offerings by not only retaining their existing install base, but by also winning market share from competitors and monitoring margin erosion,” said Meaghan McGrath, analyst at TBR.

Especially in the saturated U.S. market, TBR believes that this heightened competitiveness dictates that vendors differentiate with analytics, integration and solutions bundling to appeal to business outcome buyers. The following are top trends curated from software vendor 1Q15 earnings results.

Applications Delivery and Monetization Shifts

The industry-wide transition from license-based models to subscription-driven revenue results in lower price points per offering and lower operating margins. Traditional vendors see overall product revenue erosion in light of this, as some cloud-native vendors continue to experience unprofitable growth.

TBR sees vendors broadening the applicability of their portfolios by bundling products that can be sold as cohesive, integrated solutions to business outcome buyers and building on core technologies with vertically oriented extensions.

Specifically, fragmented growth opportunities in North America require vendors to invest in making their portfolios more applicable to specific business needs. Besides, few open source vendors seem to have mastered the art and science of the subscription-based business model that their customers crave.

How U.S. Currency Strength Challenges Vendors

Currency exchange rate dominated earnings calls in 1Q15, with executives spending a lot of time discussing how rates will impact financial results and how firms will hedge the currencies, which is a greater factor given more ratable, unrecognized revenue from subscription sales.

Those vendors covered in the Benchmark that are based outside the U.S. were hit not in their earnings but in the TBR conversion of their earnings to USD for comparison purposes. Also, TBR says that slowing economic activity compounds uncertainty in international sales within EMEA and APAC and will further threaten applications growth.