Subscription Switchovers: Understanding the Software Vendor Trend  

With a mammoth 32,000 SaaS companies worldwide across more than 100 countries, cloud based software delivery is undoubtedly becoming the norm. While new SaaS companies 'born in the cloud' are springing up on the regular, established software vendors continue to switch to subscription-based licensing for their products. In 2004, Salesforce was one of the first to make the switch, followed by major vendors like Autodesk, Adobe, Microsoft, and many more.  

In this article, the second in our SaaS series, we’re going to explore the motivations behind the subscription switchover trend, how it’s influencing the software license audit landscape, and the key metrics that organizations should focus on to stay ahead of the shift.

For a quick recap on the difference between perpetual and subscription-based licensing, head to  this blog >> 

Broadcom Makes the Switch  

In November 2023, Broadcom completed their $69 billion acquisition of VMware. Like many other major competitors, Broadcom set its sights on VMware in order to expand their multicloud strategy, citing the industry-wide adoption of subscription and consumption-based licensing for cloud services as part of their reasoning. In a move that caused ripples across their user-base, Broadcom unilaterally cancelled all perpetual licenses for VMware software in March 2024. Broadcom offered continued support for already existing perpetual licenses in accordance with the terms of their existing contracts. This means that customers with active support contracts should still receive assistance and updates for a defined period. But in a distressing turn of events, according to ITAM Review, they notified users that they had “barely a week to download any keys for licenses from its portal with expired support." Despite promises that the subscription-based model would offer financial benefits, some customers have reported price hikes of as much as 12X their previous cost. 

The Motivation Behind the Move  

It seems like every vendor in the software market is making the move to subscription-based licensing, so what’s the motivation, and what's in it (or not) for modern businesses?  

The Positives of Subscription-Based Licensing for Vendors and Users 

SaaS is taking the software world by storm for a reason, and that’s because in many ways, it offers advantages over the parameters of traditional on-premise, perpetual licensing. These are some of them. 

Low Customer Acquisition Costs: Subscription-based applications are incredibly easy to try out compared to perpetually-licensed apps. This lowers the barrier to use and increases the likelihood that users will enter the sales pipelines through an app trial. However, this also encourages users to bypass customary software procurement procedures (Cough, cough: shadow IT. Read more on its impact in our first SaaS Series blog here). 

Faster Deployment: Everyone wins with the quick deployment of SaaS applications. Because so many of them are based in the cloud, users can access them with a simple sign-on via a web browser. No app installation needed.  

Fast and Frequent Upgrades: SaaS infrastructures are naturally more friendly to feature upgrades. When the software is third-party-owned and remotely hosted, incremental upgrades can be executed and deployed without the need for the installation of a new software version on-premise. This makes innovation easier to access.  

Hands-Off Use and Maintenance: Because SaaS applications are third-party owned and hosted, end users are not responsible for maintaining the software. The software owner performs the upgrades and maintenance remotely. Additionally, since all data is stored in the cloud, there’s also no hard drive implications associated with having the app on-premise.  

Payment Flexibility: Subscription offerings provide significant payment flexibility. Back in the day, if you bought an on-premise software you owned it for life, and usually at a hefty price. Photoshop cost nearly $1,000 by the time Adobe put an end to their perpetual licensing model, limiting its use to only professionals who could afford to use it. Other large vendors that made similar switches to fend off competition include Autodesk and Microsoft.  

The rise of the subscription model has allowed a broader user base to access these apps because of the ability to tweak or cancel subscriptions according to organizational needs (Spoiler alert: this benefit of SaaS is also a curse, and organizations that don’t actively cancel or adapt subscriptions as needed suffer for it. But more on that later!)

The Not-So-Positives of Subscription-Based Licensing for Users 

SaaS and subscription-based licensing comes with its own set of challenges and threats. These are some of the not-so-positive elements that companies need to stay on top of.  

Rising Year-on-Year Revenue Targets: The benefit of flexible SaaS pricing is also its curse. Perpetual licenses allow vendors only so much revenue, and subscription licensing is the perfect solution. With year-on-year price increase dictated by vendors and their revenue targets, SaaS prices are notorious for their exponential growth.  

In Vertice’s 2024 Report on the cost of SaaS and the cloud, they found that spend on cloud can sit anywhere between 5-20% of a company’s total budget (depending on organization size), with the percentage climbing yearly. 55% of companies reported spending more on cloud year-on-year, with 24% describing their upward spend as significant. 

More research by Vertice found that in 2023, 73% of SaaS vendors raised their prices. The average price increase per SaaS application was 12%, placing SaaS inflation at more than double consumer inflation. While this number has gone down in Q1 and 2 of 2024, it demonstrates a key challenge of SaaS management: controlling runaway spend. In providing their motivation for their recent subscription switchover, Broadcom’s CEO stated that they believe the subscription model will offer users “more predictable license spend”, and he’s right. What we can predict: the same SaaS stack will continue to cost more year-on-year. This makes managing under-utilized licenses through consumption data a key priority for optimal SaaS management.  

Third-Party Control of Data: This is another pro of SaaS/subscription-based models with a dark side. Because SaaS is hosted in the cloud, it means that the vendor retains total control of all data inside the application. In addition, vendors also manage upgrades and maintenance, saving on time and effort.  

Lack of First-Hand Security Monitoring: Third-party control is good because it takes a lot off companies' hands, but it can raise some issues for the very same reason: it takes too much off their hands. One of the salient downsides of third-party software ownership includes the limitation on data accessibility that this places on end users, as well as reliance on the third-party vendor to protect customer data robustly and and use it ethically.  

When a third-party vendor promises the data is safe, companies essentially have to take their word for it. Given that 78% of organizations store sensitive data in SaaS applications, and in 2023 82% of security breaches involved data stored in the cloud, orgnizations need to make sure that when a vendor gives their word, they can trust it. By nature, SaaS and subscription-based licenses require more due diligence when it comes to protecting sensitive data. This challenge can be managed through prioritizing vendors with independently awarded security compliance standards like SOC 2 and ISO 27001. 

The Effect of Subscriptions on the Software License Audit Landscape  

The Nudge: As in the Broadcom acquisition, vendors often incentivize their users to make the switch from old perpetual licenses to subscription-based ones. Many major vendors have taken this path, at times alienating their users who prefer their on-premise offerings. In 2023, SAP users expressed strong criticism of the software vendors’ cloud-only innovation strategy and push for migration to their S/4HANA cloud. Oracle is another vendor accused of using financial nudges to tempt users to make the switch (although their customers would use another term). In fact, they were sued by a customer who felt that they were “systematically coercing and bribing” existing customers into cloud migrations, and inflating cloud revenue numbers to make the software seem more attractive. 

Turn-Key Technologies said the following in their report on the Broadcom acquisition:  

“One of the key strategies Broadcom plans to employ is the use of upgrade pricing incentives. While the specifics of these incentives have not yet been fully disclosed, the goal is to make the transition to subscription licenses more attractive and cost-effective for customers.”  

The Shove: For users who don't respond to financial incentives and prefer to wait until their perpetual licenses are totally unsupported, vendors have begun to utilize software license audits to speed up the switchover. This is also known as the 'nudge, and then shove' technique. 

Picture this. You’re an organization who’s had a perpetual license for many years. One of your vendors introduces a new subscription option, but you want to try and hold out as long as possible before making the switch. Out of the blue, you get an audit notice.  This is how it’ll go: they’ll audit you, fine you, and then propose that a portion of your fined amount go towards the purchase of SaaS licenses.  

For example, if a company is fined $100,000, the software vendor might offer that instead of paying the whole amount for non-compliance, $30,000 of the fine payment goes towards the purchase of SaaS licenses instead. This strongly incentivizes companies that are holding onto perpetual licenses by providing both a financial penalty and a financial incentive to make the switch happen. 

This will likely continue to become common practice for software vendors as the landscape is transformed by the spread of SaaS. And the truth is that while making the switch might feel complex and full of tedious work (and it often is), it’s ultimately not a bad thing. SaaS has many, many benefits for business as discussed earlier. What is does mean is that license management is changing, and organizations needs to learn how to master SaaS license management.  

What To Do If/When an Audit Arrives 

Organizations with a significant on-premise environment who fear that the SaaS switchover is looming should keep this in mind: major in the majors, and the minors will take care of themselves.  IAITAM's COO Jim Shepard zeroed in on this message in an interview with Xensam at IAITAM ACE 2024. This principle is easy to forget but crucial to remember as the software landscape changes, and changes fast.

If the fundamentals of on-premise management are under control, companies are in the best place they could be for making the SaaS switchover. And that’s because the fundamentals are still the fundamentals: accurate application inventory, appropriate management of apps and users, and as much utilization data as possible to inform these decisions. With a SAM platform that addresses these core measures, and that's built to support SaaS, companies have little to worry about if an auditor comes knocking to make the change. After all, SaaS is the future. 

This is particularly true in light of the rise of consumption or usage-based SaaS licensing, which has nearly doubled since 2018. When it comes to SaaS, utilization data is a must-have feature of a SAM platform. Xensam’s platform was designed to support business navigating the modern software landscape, with unprecedented recognition of both on-premise and SaaS applications. With a library of more than 70,000 SaaS applications and 200+ vendors, Xensam offers 2X the recognition of other tools using a sophisticated combination of AI-driven and human approved software normalization. 

In addition, Xensam’s platform delivers one of the most beneficial metrics possible when it comes to SaaS: Active Usage data. This unique feature distinguishes between total application usage, and actual application usage down to the minute, enabling data-driven decisions on licensing that drive tangible cost savings. Reliable data will always be the best defence, because the truth is that SaaS management is only a nightmare if you can’t see what you have, and you don’t know how much you’re using it. 

The Fundamentals of Subscription Management 

Subscription-based licensing is an inevitable feature of the modern software landscape, particularly as vendors use audits as a tool to force oragnizations' hands', and as more vendors terminate their perpetual licensing and leave their customers with no other option but to make the change. So, whether they’re coming for you next, or you just want to manage your existing SaaS infrastructure better, your organization needs to master the fundamentals of SaaS subscription management.  

To learn more about getting on top of SaaS visibility and spend, head to the first blog in our SaaS series here >>

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