On Service Oriented Economics, Enterprise Pricing, Napster, and More

As many of you have no doubt picked up by now, one of the characteristics – for better and for worse – of the RedMonk approach is breadth. We’ll look at technologies that we feel are leading edge and outliers for important trends – whether that’s the geeky Solaris 10 or Google’s Gmail.

One of the benefits of such an approach – which necessarily sacrifices depth in some areas (we tell people often that you’ll never see a product scorecard or face off from us) – is that it affords us the opportunity to see trends that cut across different product categories. For the developers out there, you might think of this as aspect-oriented analysis 😉

One of the more obvious trends to both myself and James has been that the foundation for enterprise software pricing is showing some cracks, and in my opinion is on the cusp of profound changes that will likely have ripple effects on enterprises everywhere. Without being too dramatic, I think the pricing models as we’ve known them have about run their course. Does that mean that everything will be free, or that enterprises will be paying peanuts for Oracle DBs? Hardly. But will enterprises pricing options – and complexity – change dramatically? Bet on it.

The key for any vendor or service provider, in my opinion, will be in striking a balance between buyer and seller. Similar to the choices open source vendors like MySQL have to make in licensing, so too will enterprises be forced to consider what’s best for them versus their customers. The bad news is that, in some cases, this means dramatically lower margins for vendors. The good news is that the lowered margins may in spots mean more volume – dramatically so.

The difficulty for everyone will be in learning what the ups and downs of new pricing models actually mean. My colleague, for example, has called out the absurdity of Sanford Bernstein’s Toni Sacconaghi calling Sun’s Java Enterprise System pricing model “confusing.” Given that the whole price list fits on a business card – or did until the announcement of the packaged subsets – “confusing” seems to be itself a confusing choice of words. But the difficulty for customers is in knowing what the pitfalls of an offer might be; what are the gotchas?

Take the Napster To Go consumer music service, for example. It’s pitched as simple math – 10K tracks for a mere $15 a month, for example, versus $10K on a service like iTunes. But as many are realizing after thinking it over a bit more, the math actually isn’t that simple. The key to this isn’t the actual pricepoint – it’s the right to use. That’s the lever issue for me in this case.

The Java Enterprise System mentioned above, as an example, includes an infite right to use. If you don’t want to pay the subscription fee any more, commandos aren’t jumping in through your windows and ripping the software off your hardware. Nor does it simply cease to work one day. Not so with Napster; if you can’t or won’t pay the fee any longer, all the music you once had is gone leaving nothing – literally – to show for it.

Does that mean the Napster model will never work? I don’t know – the jury’s still out on that one, in my opinion. But what I think the Napster model speaks to is the complexity of pricing questions that vendors of all shapes and sizes will increasingly face. What’s fair? Where’s the balance between margin and volume? It may be a services world we’re living in, but that doesn’t mean that long held and deeply felt issues around “ownership” can simply be waved away. My suggestion to vendors is be creative, understand what the lever issues are, and be sure to have a strong customer advocate in your discussions around pricing. It’s one thing to be seen as confusing, but quite another to be seen as greedy. Avoid that label at all costs because you’ll never shed it.