I don’t know whether it was by design or by circumstance, but given the recent data privacy issues, this is a topic that needs to be re-examined: is software a product or a service?
Background: I still remember a time where if you wanted to load a program onto your computer you had to know how to use a command prompt. You then had to mentally prepare yourself for the axe-grinding sounds of a floppy drive. And if you were lucky enough not to have a problem during installation, a dozen or so 3.5” floppy disks later, you were allowed the privilege of playing classic videos games like 688 Attack Sub and Joe Montana Football or make literary wonders (or psychobabble) on WordPerfect. And you know what? During those times I never worried about Electronic Arts or Broward (or Novell or Corel) denying me the ability to use any of that software simply because I exploited the perfect Hail Mary pass that worked every time I was down a few touchdowns or because I typed something so horribly insensitive like “pyukt” (that’s how I thought you spelled “puked” in grade two).
You see, “back then” – this isn’t a nostalgia piece by the way – software was considered a “product”. It was pretty cut and dry. You went to a store, you bought a box full of floppy disks (and later CDs) and loaded them up on your computer and off you went. Sure, you scrolled down as fast as you could through the end user license agreement (EULA) so you could click “I Accept” but you also never really had the fear your product would suddenly cease to operate because you typed up some provocative thought gibberish.
Welcome to 2019 and all of that kind of changes with evermore complex, lengthy, and eye-twisting EULAs that – let’s be honest – (virtually) nobody reads. That should concern you because if you haven’t noticed, over the last decade or so, software companies have recognized that it’s more profitable to keep you hooked to a product through a subscription fee. You see, in this business model, you no longer “own the product”. Rather, you are a “subscriber to a service”. Sure, this has allowed many more people to access software that was otherwise prohibitively expensive, but it’s also a dangerous hook that, at best, fuels a privacy nightmare and, at worst, is an exercise in changing societal behavior. How so? Well, let me explain using the stories of two imaginary companies.
The Story of General Toywagen
You know how the car industry developed. It’s over 100 years old and over the years, the industry saw a great deal of changes. Ups and downs, innovation, and so on. There were some new entrants, who became very strong, while others didn’t meet market needs and withered away into the ether. The industry was also regulated as more cars hit the road. As a result, lots of work went into ensuring the industry made safe cars. More or less, you know how the story goes.
Let’s imagine a car company, General Toywagen. General Toywagen started off as any other car company: they sold cars. When people bought their cars, they’d hold on to them for a few years and eventually bought a new model. Some people were very happy with these cars and stuck to them, but if you didn’t like a General Toywagen, you had some other options, like a Dustin Fornda or a Beta Nissodge. The ways to buy a car are just as you would expect them to be: you can buy outright, finance, or lease. And even if you needed to rent a car, there were agencies that would help you do that. In some cases, people bought used or pre-owned cars also. That was the benefit of having a “product”. As newer models of General Toywagens were produced, they came with the expected updates, none of which really changed the “nature” of what a car does: get you from A to B.
There were some great updates that made the drive smoother and safer. There were also a lot of fancy and neat updates but were mostly useless to the actual function of the car. Some of these features included a choice of which twinkle sounds you would hear when you use the flash indicator, as opposed to usual “click click click” noise. Other features included the ability to automatically change the tint of your windows at a push of the button. Sure, they made you look and feel cool, but still didn’t change the purpose of what a car was: get you from A to B.
As we said earlier in this story, people held on to their cars, say for about 5-10 years, and did pretty well for themselves. It worked out alright for General Toywagen also, as they would make some money – good money even – repairing these older models through parts and maintenance. Sometimes they did it on their own, other times they used agents. Along the way, the deep thinkers at General Toywagen asked themselves: how do we make more money? It’s a pretty straight forward thing to ask since that’s what corporations are designed to do.
One of the deep thinkers at General Toywagen, let’s call her Alice, said, “Aha! I got it! What if we lease more cars instead of selling them?” Another deep thinker, let’s call him Bob, intrigued, says “tell me more.” Here’s the thinking behind Alice’s business model: instead of people buying “a product” (their cars), people will now be given the option to pay for a “service” (a lease) instead so that they could “use” the car. The added benefit of the “service” model is that General Toywagen will push out all the new car updates as they come, giving the customer all these flashy features which would “enhance the driving experience.”
Keep in mind: it’s still just a car that gets you from point A to point B, but instead of owning it, you’re paying for the right to use it.
Bob, still a little unsure of how all this works, asks Alice for some more information. Alice says that the “service” model has a hidden benefit: it allows the buyer base to grow. Instead of trying to find customers that only have the ability to buy or finance, something that usually requires a high upfront cost, you can now sell General Toywagens to people who only have the ability to pay a lower monthly fee. Bob likes where this is going because he understands the growing consumer base argument. Bob realizes that by moving people onto this “subscription fee model” – the lease – is also a way to get people hooked on General Toywagens because customers may become dependent on the service.
Therefore, not only are you expanding the base of customers, but you’re also potentially holding on to your customers if they believe your updates have value, even if they’re just flashy and cosmetic in practice. Even better if they become used to using General Toywagens and how they operate. People rarely like change goes the thinking. Bob also sees that this model provides good current and future revenue streams if executed properly. That relieves part of the pressure on General Toywagen to have a “major update” every four years, as most car companies do by releasing a “new generation” of a model. It saves on R&D costs and you can push out “incremental” updates along the way.
Remember, they can just be flashy updates if people are buying into the hype. But Bob is still a little worried. He fears that in order for the service fee model to work and be profitable, General Toywagen needs a huge customer base to work. That means he needs to find a price point that is low enough for people to prefer General Toywagens over all other cars. Alice has the solution ready. She explains that since this business model is a “service” General Toywagen still owns the car, which in turn means that means terms and conditions can be added to the contract.
Alice explains that within those terms and conditions, General Toywagen would be allowed to learn about how a driver uses their car, all in order to “enhance the driving experience”. General Toywagen could use that information to save money on developing new updates and even sell that data to its own suppliers and vendors, so they too could jump on “enhance the driving experience” train. Alice goes on to say that General Toywagen can even sell that information to aftermarket suppliers too!
For example, the information collected on how people listen to music in their car can be sold to companies like Magnetbox, Panaphonic, and Sorny in order for them to sell even more products to people. Bob is sold. He realizes this business model can turn into a “lease in perpetuity” structure and that if General Toywagen knows how to work the system, there will be General Toywagens in 90% of driveways. Before we find out what happens to General Toywagen under this business model, let’s tell the story of another company.
The Story of Gooface Softfruit
Imagine a software company named Gooface Softfruit. They started off by selling products, but now they sell us “services” instead. They actually pulled off what General Toywagen wants to do, in large part because the market developed so fast, was left generally unregulated, and producing safe and secure software was not really seen as a critical business function. “Good enough” was generally the mantra, especially since the market was all hyped to get these flashy new updates.
Gooface Softfruit software, which is sold primarily now as a “service” now, is installed on 90% of all computer devices worldwide. These “services” are really just products but Gooface Softfruit was able to relabel them as something else. And people, without really having a choice because they are so reliant on this software now, a part of that business model now. That’s it. The end.
So does the “Product vs. Service” Distinction Matter?
You’ll find your answer here, courtesy of a great philosopher. You see, if you own your car, once it’s off the lot, it’s kind of your problem if something goes wrong. Sure, you purchase warranties, you maintain the car, but the car is your problem. Just like when a copy of 688 Attack Sub was picked up sometime in 1989, once the box is out of the store unless the product is defective, it’s up to the owner to make sure I don’t lose or damage the installation disks. If I bust ‘em, I got to buy an entire new box of 688 Attack Sub disks. Kind of like when your car finally goes kaput: the best you can do is go visit your local General Toywagen and hear them say, “I have this great 2018 model I’d like to show you.”
But that’s not really the case if you’re leasing, because the ability to lease comes with conditions. General Toywagen takes on some of the liability and cost, but only if you follow a whole bunch of rules because you see, the is car never really yours…it is General Toywagen’s. Here’s how it works when you lease a car – today – in reality land: before you sign your life away for the next few years, somebody sits you down and starts explaining things like “abnormal wear and tear” (uh oh), or “mileage allowance” (gasp), or “early termination fees” (egad!), or “administrative fees” (FAQ). You do this in order to avoid certain concerns happening to your car, just as our great philosopher raises here. So, after being read your rights, including all the penalties you will incur if you do something abnormal, you get handed a pen to sign on the dotted line. And hopefully, the pen is handed to you by a character more credible and reliable than this.