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Tech buyers have grown wary of networking vendors' march toward subscription pricing. While the revenue model pleases Wall Street investors, customers sense they are getting duped.
Vendors' passion for extracting annual payments for the software that powers their security and networking gear is unmistakable. Cisco Systems and Juniper Networks, for example, provide investors with quarterly updates on subscription sales.
In its most recent quarter, Cisco told financial analysts subscriptions accounted for more than 70% of its multibillion-dollar software business. Juniper, on the other hand, reported that software subscriptions in the quarter ended in December grew 170% year over year, contributing to a software business that accounted for 12% of total revenue.
Not all tech buyers are as pleased as Wall Street with vendors' embrace of the multi-year recurring revenue model. They're uneasy with deals that require them to buy hardware that's useless unless the software subscription that accompanies it is up to date.
"It really and truly feels like you're renting what you've bought," said Lee Badman, a network manager responsible for the Cisco Meraki wireless LAN at a major university. Badman requested that the university's name be withheld because he is not authorized to speak for the school.
Buyers also complain of subscription pricing costing more overall than traditional perpetual licenses that transferred ownership of hardware and software to the buyer. Under the new way of doing business, customers own the equipment, but not the right to use it. That requires an active software subscription.
A recent Gartner report highlighted Cisco customers grousing about higher prices.
Lee BadmanNetwork manager for a major university
"Cisco and its [partner] channels often describe these changes as simply 'better' for customers, due to increased flexibility and ongoing 'access to innovation,'" the Gartner vendor rating report said. "However, in certain scenarios, customers are finding these new proposals complex and confusing, with higher overall expenditures."
Negotiating a subscription deal is undoubtedly more complicated than before, Badman said. He found that sales representatives often get confused over which features a license covers and the final cost.
"The licenses have gotten so complicated that [sales reps] can't even explain it," Badman said. "It's just an absolute mess."
Saying 'no' to subscriptions
David Boos, director of technology at Mitchell Technical Institute in Mitchell, S.D., said he wouldn't buy hardware with a software subscription. When the construction and manufacturing training school upgraded its Wi-Fi network, he picked Aruba, a Hewlett Packard Enterprise company. The vendor was willing to sell Boos the five-year perpetual license he wanted for the Wi-Fi 6 gear.
Aruba beat Cisco Meraki for MTI's business. In addition to being subscription-only, Meraki gear integrated poorly with Microsoft Intune, software the school uses to manage mobile devices that connect to corporate applications.
Boos prefers perpetual licensing because he can still use the technology he bought when the license expires -- albeit without vendor support.
He also prefers to bring in multiple vendors to compete for his business every four years. That ensures he's getting the best price, as well as the best technology.
Boos believes vendors' software subscription models take advantage of the fact that networking departments are extremely busy. As a result, enterprises are more likely to renew a subscription, rather than start a round of complex negotiations with several vendors.
"When you go with those [subscription] products, you end up -- in my opinion -- buying long-term, never-look-at-it-again support," Boos said. "I think you get too comfortable."
Non-subscription pricing also lends itself to MTI's technology budget, which fluctuates with the number of students enrolled. Because Boos' budget varies year-to-year, there's no guarantee he'll have the money to spend on an annual subscription. Therefore, the school buys its technology when it has cash and depreciates the assets over time.
Negotiating price holds on subscriptions
Subscription pricing does have a significant benefit. It allows companies to know how much they will spend every year on technology -- a plus for organizations with less volatile budgets.
"People's brains struggle with it [subscriptions] in the beginning, but then it becomes very predictable," said Jeff Gredlein, commercial practice lead for Hartman Executive Advisors. "That is very attractive from a planning, budgeting and executive point of view."
But technology subscriptions have their gotchas. Vendors make it easy for companies to go online and add licenses for more technology. However, the additional cost can be much higher than the initial negotiated price, said Corinne Boyles, a senior analyst at contract consulting firm ClearEdge Partners.
To avoid sticker shock, companies should negotiate a price hold for the term of a subscription license, Boyles said. The price-control mechanism ensures that companies can add technology at the original subscription price.
Without a price hold, "the sales rep knows that you need a license, and they're going to give it to you at whatever price they choose," Boyles said.
The savings from a price hold can be substantial. The negotiated payment for Cisco access points, for example, is typically 45% of the list price, Boyles said.
The impact on used hardware, third-party support
Subscription pricing can also increase the cost of secondhand gear or eliminate the option of buying support from third parties, which often charge significantly less than vendors.
"The number that gets thrown around a lot is 70%," Boyles said.
In 2018, for example, Cisco required subscription licenses for version 16.9 or higher of its IOS XE operating system, which powers the Catalyst 3650, 3850 and 9000 series campus switches. The licensing program, called Smart Licensing, effectively required support through Cisco's Smart Net program.
Cisco also increased the cost of buying secondhand hardware since its subscription licenses do not transfer to the buyer. Instead, the purchaser would have to buy a new subscription from Cisco.
Negotiating a subscription deal
To lower the cost of a subscription license, Boyles recommends that a company find several vendors willing to compete for its business. Because Cisco is particularly aggressive in selling subscriptions, Boyles had specific advice for companies considering the vendor's switches and security technology.
Tech buyers should take time to understand Cisco's feature bundles and renewal options. To avoid paying for unnecessary technology, ClearEdge advises buying only the products needed over the next six to 12 months and adding technology gradually on an as-needed basis. Also, negotiate the price of adding technology in advance.
"You can sign up for three years," Boyles said. "You just don't need to buy everything you need over those three years upfront."