Software Subscriptions: Spreading the Cost or Gouging the Customer?

Why pay for something outright when you can borrow it? Renting is an obvious solution – particularly when the item is potentially very expensive – to be able to use something you can’t afford. Someone else makes the outright purchase and you pay them a small fee to have exclusive use.

So why do software developers such as Microsoft and Adobe seem to be particularly keen on the subscription model (AKA renting) for their software?

The recent announcement by CaptureOne that they were introducing a subscription model for their software caused a storm with accusations of a money-grabbing switch that would leave users out of pocket. It also seemed particularly egregious for a company that had touted lifetime licenses.

We’ve been used to Adobe “gouging” the market with its Creative Cloud for some time, but let’s return to them in a moment. Sticking with CaptureOne, their announcement at the end of 2022 effectively ended annual feature updates for perpetual licenses with only bug fixes up to the next release. The message was clear: move to subscription licensing.

Interestingly, the perpetual license has been left open as an option, something not available with Adobe’s Lightroom. The so-called “Loyalty Programme” turned out to be nothing of the sort, with a simple one-time discount for existing perpetual licenses. As PetaPixel has commented, the cost of developing software is expensive and perpetual licenses just don’t work for some businesses, but that may well be a convenient excuse for generating higher shareholder returns.

Adobe as a Case Study

Adobe is perhaps one of the best-known “software as a service” (SaaS) vendors, alongside Microsoft. It has carved out a niche in the creative sector since its foundation in 1982 and built up a hugely successful (and traditional) perpetual license software business across its wide range of products that (by 2011) generated $3.4 billion in revenue (with a remarkable gross margin of 97%).

After the switch to software as a service (SaaS), Adobe hit $15 billion in 2021 and grossed over £17 billion in 2022 which (crucially for investors) has significantly increased its stock price. Perhaps inevitably, Adobe just announced a 13% year-on-year growth for the first quarter of 2023 with revenue at $4.66 billion.

But why transition to SaaS at all if the traditional model was working? Cynically, as a publicly listed company, Adobe needs to realize a profit for its shareholders, which meant increasing both revenue and margin. The problem for Adobe was that the creative industry, its primary customer, was relatively small and the 18-24 month software release cycle limited the number of perpetual licenses it could sell. That left increasing the price of its software, but there was limited scope in the long term for this.

Subscription revenue, as any utility company will tell you, delivers stable income month-in, month-out. Every customer pays and while it might allow them to “pause” their subscription, you are able to remove that long “tail” of users on old software versions. This has significant business advantages as support is always for the current product, while system developers only ever support two versions: a live environment and features that are in development as they prepare for deployment. It can also reduce piracy by requiring users to authenticate every time they run the software.

More than that, a subscription model changes the customer’s relationship to its “value proposition” by providing a service rather than a product (the latter having incentivization through feature updates with every new version). This is perhaps a subtle cognitive shift, but as a user you are now paying to access a service, rather than for features in a new version. If you’ve noticed an increase in subscription licenses in everyday life then you’d be right: every business would like to extract their “pound-of-flesh” to keep you paying.

More than that, and as this rush to the promised land of the cash cow shows, subscription licenses generate more income per user than perpetual licenses; it really is a way of charging more without raising prices! Part of this is because charging monthly makes the cost seem smaller than it really is and spreads the payments out allowing the customer to afford a greater overall expense.

Even given all of the above, the developer is in no way obliged to deliver more features – you are only paying to access the software. Of course, Adobe’s success was predicated on one big assumption: the customer wanted to subscribe to the Creative Cloud.

One major reason for this success was that Adobe held an effective monopoly, at least across the suite of products it produced. No other business had the breadth of industry leading-software including Photoshop, Illustrator, In Design, Lightroom, and Premier Pro. There’s also a push-pull effect operating here: a relatively low monthly cost for all the apps, coupled with the risk of losing access to the software you’ve used to create your outputs.

Adobe is often seen as a textbook case of how to transition from perpetual licensing to SaaS for what was an extremely complex process. This involved putting in place the infrastructure for delivering cloud-based apps, alongside new coding, and then the seamless roll-out to a large user base.

It’s Not All Cons

The preceding paragraphs might sound a little negative, partly because it’s hard to disentangle what inevitably seems like a way of increasing the cost of software to the end user, but there are tangible benefits.

Firstly, don’t forget that there is no upfront cost. Creative Suite 6 was pulled in 2015 when the top-tier cost was $2,600; remember those days when Photoshop cost $999?! The barrier to entry really is now extremely low.

Secondly, you can stop using it (and end any monthly fees), although the lowest costs are associated with annual pricing.

Thirdly, it’s delivered over the internet as a locally installed application, meaning you will always receive the latest version (assuming you have the bandwidth to download it).

Fourthly, that internet delivery means you get fixes and features as they are released, you don’t pay for updates, and can receive urgent patches as soon as they are available. This has a significant advantage in that you are no longer managing your software installation which is a genuine time saver across a suite of applications.

It’s worth clarifying that SaaS is about software delivery over the internet that is subscription based, rather than just a subscription per se. That said, SaaS can mean a web app (like Canva), an internet-delivered/managed application (like Office365), or just an internet download that you install yourself.

The Future of SaaS

Part of the problem with a traditional feature upgrade model is that it requires the manufacturer to continually develop their software and provide compelling reasons for users to upgrade. During the early stages of product growth, this is easy to achieve because each iteration offers significant improvements, after which they become more niche.

For example, I still run a copy of Lightroom 5 because it did everything I wanted. It was only when upgrading to a new camera that I looked for an upgrade at which point I switched to CaptureOne because it offered a perpetual license. What this highlights is that there is competition in terms of a user’s perceived value and that can come in terms of price, licensing, specific features, or breadth of features.

Price and license interact; a subscription is a low up-front cost traded for a long-term relationship. You can walk away at any time, but lose access to the software. Pay more for a perpetual license (if it’s available) but that is the extent of your commitment unless you choose to upgrade in the future.

Part of Adobe’s value option comes from the breadth of features available across some, or all, of its products. For example, Lightroom expanded to offer raw processing, tethered shooting, HDR merging, and panorama stitching amongst many other features. Many users were able to ditch other software packages for one overall offering. Of course, this has come at a cost of added complexity and – inevitably – bloat, such that Lightroom can feel like wading through molasses at times.

Competition in the photography realm has come from several quarters; for example, Serif has successfully pitched Affinity Photo as a Photoshop alternative at a low price point with a perpetual license. And it’s been very successful. On the Lightroom replacement front, it’s more mixed, although products such as ON1, CaptureOne, ACDSee, and Luminar all compete in this space. However, this presents like-for-like competition, which isn’t where the volume lies.

Consumer expectations of software products have shifted dramatically over the last decade since the Creative Cloud was released and on a PC this has meant web apps. This shift has been driven by casual photographers and designers, coupled with a desire to use a specific app for a specific purpose. This shift is no better exemplified than by the success of Canva, which passed 100 million active monthly users last year, around four times the amount that Adobe is rumored to have.

The other trend has been around the smartphone: simple, feature-focused apps. There is a vast breadth of competition, not least from the likes of Google, which is keen to ingest and monetize photos. Adobe has gradually shifted into this space with a focus on professional photographers in an attempt to merge the catalog experience seamlessly into the cloud. The ultimate extension of this work is with and Fuji’s tentative first experiments with shooting straight to the cloud and bypassing the PC entirely. This perhaps shows the best glimpse of the future: a cloud-based solution where the software resides and your photographs are instantly stored and processed. This vision might well fill you with dread!

That vision is some distance off, so where does that leave CaptureOne? Currently hedging its bets is the short answer in that – for all the frothing at the mouth by users that accompanied its licensing announcement – it offers both a subscription and perpetual license model. It’s as simple as that, although the behind-the-scenes finances might well be a little more nuanced. The heads-up cost of an annual subscription is $179, in contrast to Adobe’s $120 for Lightroom which then looks even more appealing when you factor in its Creative Cloud Photography plan at $240.

CaptureOne has always been more expensive, a result of its development history and target audience, and the subscription pricing won’t change that appeal. But that’s not the intention of this change – rather it’s to shift its existing users onto a subscription. The perpetual license won’t get new features, just a limited number of bug fixes. That said, if it does what you want then you don’t need to shell out any more money and while $299 might seem expensive, you will always find it discounted.

The future undoubtedly lies in subscriptions, but until that day dawns, you may well be able to nab a perpetual license bargain.