New offerings and business models : pay per use, subscription, freemium

The main transformation in terms of offerings stems from the absence of upfront investment and the shift towards pay per use or subscription based revenue models.

A case in point : in the early days of the GPS based fleet management market (for delivery drivers, technicians, doctors, etc.), two startups competed. One offered a software package sold upfront, combined with a PC and embedded devices, financed through leasing. The other offered a subscription model with a web platform to manage the fleet.

At first glance, both models appeared similar : the customer paid a monthly fee, either through leasing repayments or a subscription, in exchange for a service. In reality, the business models, and the services themselves, were fundamentally different. In the first case, the service was tied to a fixed setup, both in terms of hardware and software. In the second, a simple password enabled access from anywhere, always with the latest version available. For the provider as well, the difference was significant : one had to resell new versions, while the other relied on subscription renewal.

This model is now expanding rapidly : online messaging, video streaming (YouTube, VOD, etc.), online software (Web 2.0, Picasa, Photoshop, etc.), and even music streaming subscriptions (Deezer, Spotify, LastFM, Qobuz, etc.). Both content and software are becoming fully dematerialised.

Data and applications are accessible everywhere : since they are hosted online, personalised applications can be accessed from any connected device. There is no need for backups, reinstallation, data transfers or duplication. Data and applications are always up to date, as real time synchronisation ensures continuous updates, eliminating compatibility and format issues.

Usage is significantly more flexible : shared infrastructure enables virtually unlimited capacity to respond to immediate needs. There is no upfront investment required : the pay as you go model allows users to pay only for actual consumption. Within organisations, large scale deployment becomes instantaneous and cost free, as applications are delivered via the internet.

This also enables new pricing models : the relationship between PaaS providers and SaaS providers, when distinct, is generally based on a pay per use model. SaaS providers can then charge end users either on the same basis or through subscription fees. Alternative revenue streams, such as advertising, can complement or even replace direct customer payments. This is where the freemium model emerges : free access for basic services, and paid access for advanced features. Examples include Megavideo, Second Life, Rapidshare, and others.

These models also apply to large enterprises, with the outsourcing of servers to data centres, whether through platforms where applications remain owned by clients (PaaS), or through full service outsourcing (SaaS), with solutions such as Google Pro, Salesforce.com, SAP, or industry specific applications (fleet management, etc.). While core business work such as processes, configuration, data management, training and change management remains essential, project implementation is significantly simplified.

That said, the full potential of cloud computing has not yet been realised, as the lack of standards continues to discourage institutional players from fully adapting to its possibilities. Nevertheless, it appears to be an inevitable evolution : cloud traffic is growing rapidly, with Gartner estimating a 50% annual growth over the next five years.

While this "all internet" paradigm opens up vast opportunities, a major barrier to adoption remains : connectivity availability and speed. For example, users often want to share photos while travelling, during a weekend in New York or London, in rural areas or in the mountains. Today, mobile data costs abroad can be up to 1,000 times higher than domestic rates, reaching €10,000 per gigabyte, while network availability (3G or Wi Fi) remains inconsistent in many locations. In some cases, it is still cheaper to print and mail a photo than to send it by email while abroad.

Apple has recognised this challenge, potentially driving more disruption in pricing models than in products themselves : first with unlimited internet plans alongside the iPhone, and more recently with prepaid data plans available through the App Store for the iPad, regardless of country or operator.

Connection speed, particularly upload speed, remains another key challenge. While it is generally sufficient for current usage, the continuous increase in bandwidth, combined with the emergence of new technologies, drives ever growing demand : HD video, higher resolution images, high quality audio. Uploading 1 GB of photos can still take several hours, even with a good connection. With memory cards now reaching capacities of 64 GB, this becomes a real challenge.

Morand Studer