Why has "Software as a Service" become such a Popular Business Model?

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Not that long ago, if you wanted computer software, you'd buy it "off the shelf" - literally, or from an online retailer. However, things have changed, with even the biggest names in the world of technology embracing an alternative "software as a service" model. With software as a service, people usually pay a monthly subscription to have access to the latest version of a software product. It's spread to every corner of the IT industry, with products ranging from Adobe Photoshop to Microsoft's Windows operating system now available on this subscription-based model.

Microsoft, Apple and Adobe
Microsoft's first major foray into software as a service, also known as SaaS, was in 2011, when it started pushing the Office 365 range of Office applications. Previously, people wanting the industry standard Office applications, such as Microsoft Word, Excel and Powerpoint, would have to splash out a (not insignificant) amount on a "retail" copy of the software. This allowed the customer to continue to use the software for as long as they desired, but wouldn't usually entitle them to upgrades to the latest version. Office 365 turned that on its head. Instead of requiring a significant initial outlay, customers were given the choice of paying a small monthly fee for ongoing access to the software. Thanks to a lower financial "point of entry," this became a popular model, with income from Office 365 overtaking income from traditional software licences in 2017. In the fourth quarter of this year, Office 365 commercial revenue was reported to be up by 43%.

In June 2017, Microsoft expanded the Office 365 offering to include legal use of the Windows operating system. Many in the IT industry saw this coming, and perhaps saw the move as overdue, after Apple made its equivalent operating system free of charge in 2013, with the launch of OS X Mavericks. Adobe is another tech giant that's fully embraced software as a service. Prior to 2013, people wanting to use market-leading creative apps such as PhotoShop and Illustrator needed to find the money to pay several hundred dollars for legal copies of the software. Nowadays, the preferred choice is to opt for a subscription to Adobe's Creative Cloud service, which gives people the right to use the latest version of individual Adobe applications, or the entire product suite - but only while they continue to pay the subscription.

Although the software as a service model undoubtedly has its detractors, for many this is a model where everybody wins; Consumers get to always use the most up-to-date software, and avoid the prohibitive up-front cost of traditional "retail" software. Meanwhile, the software companies establish a reliable stream of income, and one that can potentially exceed the revenue from selling "old school" licences. Moreover, this supports the costs of cloud servers which allow for syncing across devices and online access from anywhere in many cases. Having more of the user-base using the most up-to-date software versions no doubt has support benefits too.

"Freemium" Products and Microtransactions

It's not just full-blown software products that use a software as a service model. A variation on the theme is where developers release software under a "freemium" model, which uses a system of microtransactions to provide access to features, enhancements and add-ons. Some software applications have moved in this direction. On Apple's App Store, there are plenty of apps which are free to download, but require small payments (in the form of microtransactions) to unlock features, such as additional filters and effects for photo and video software. The world of gaming has embraced this too. When mobile apps became popular, game developers took this on board, incorporating microtransactions and "freemium" features for their games. According to Statista, the microtransactions market in the US alone is valued at 2.94 billion in 2017. One example of this phenomenon is the popular Candy Crush game, where players can play for free, but opt to pay small amounts for power-ups and extra goes. Microtransactions of sorts, are already very familiar to anyone who frequents online casinos. Paying for an additional spin of the roulette wheel with a small transaction, or trying out an additional slot machine with another, is the way many people typically enjoy these services. In other words, the player can choose to pay (or not) in order to receive an enhanced experience, and they can also choose how much they'll pay. This system clearly works for the developers, who continue to see their revenues rise.

Is there any going back?

With both software as a service and microtransactions proving popular with companies and consumers, it's difficult to envisage anybody wanting to change the current status-quo. Taking gaming as an example, people now have the ability to dip into a game and pay out for an enhanced experience if, and only if, they like what they see. This beats spending a notable sum, only to find out the gaming experience isn't compelling. And the success of everything from Office 365 to Candy Crush suggests that it works well for the companies too. With technology moving so fast, it doesn't seem feasible to return to a world where companies release new "boxed product" every year, when online updates can keep everything up to date at all times - so long as you're a paying customer. People have become used to small subscription fees, and the ability to track small electronic payments. This is just the same as how a bettor can look back at their staking history. This model seems to work well for all - so it's hard to see it changing.

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