Subscription Software and the End of Used Games

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This morning while drinking a diet coke and trying to fully wake up, I was browsing the tech section of Google News and stumbled upon an article regarding Adobe’s new Creative Cloud. To summarize, the article discussed how unhappy Adobe customers are, about moving from a buy-once license that never expires to a subscription model. This comes after last week’s Xbox One announcement and the subsequent rumors about the lack of used-game support. It seems like there are quite a few software companies that are pissing off their user-base. Why is this happening, and is it all related? The sad news for consumers is that it’s all part of a general trend that software companies have been following for years.

Background

Adobe is a software company that makes the majority of its profits by selling a package of design software called Creative Suite. Creative Suite consists of programs such as Photoshop and Dreamweaver, which are used to create and edit images, video, websites, and in general any design-related activity. Until recently, Adobe had released a new update every few years. The current version of Creative Suite 6, CS6, and a personal license sells for $2,599. Expensive, certainly, but not so much that Adobe doesn’t sell a huge number of licenses each year.

Last year, Adobe announced Creative Cloud. Instead of paying a large up-front fee to gain a personal, never-expiring license for the current version, users pay a monthly fee and gain access to a cloud-based version of the software which is receiving rapid updates. The catch … once a consumer stops paying the monthly fee, the license expires and access is revoked.

Additionally, other large software companies are making changes. The top two video game consoles, Xbox and Playstation, have new versions coming out later this year which will be changing the method of buying games to incorporate single-user licenses. And Microsoft is going similar route to Adobe with its Office software package, with a cloud/subscription model called Office 365.

A consumer might look at these changes and ask things like ‘Are these related’, ‘Should I be worried?’, and ‘If so, why?’ Turns out that yes, these are all related. While consumers needn’t feel worried yet, they should definitely be watching the developments in concern. All of these changes fit into a broad pattern with three (so far) phases, and the endpoint is a place most consumers don’t want to be in.

Phases

So far, there have been three distinct phases in how software is sold. Phase 1: User purchases a copy of the software, which can be resold and lasts forever. Phase 2: User purchase an individual license, which cannot be resold but lasts forever. Phase 3: User purchases an individual license to use the software for a set period of time (not forever), which cannot be resold.

Phase 1

In the beginning, software emulated hardware. It would be packaged on some type of physical form factor and sold individually. Users would be purchasing a copy of the software, and the license was tied to that copy, not a person. Because of this, the copy could be re-sold to anyone else. Computer games started with this phase, and console games have stuck with it even up to the current generation (PS3, Xbox 360, Nintendo Wii) which is in its twilight.

Phase 2

Eventually, companies start to take issue with people reselling copies of software. In their defense, software has an inherent problem that hardware doesn’t: it never wears out. Cars, microwaves, printers … all of these only last a certain amount of time before needing to be replaced. A computer program doesn’t change. Software companies either have to keep improving the product to keep people buying new versions, and any time a piece of software is re-sold they are losing a potential sale. So companies start placing activation codes into the software. Doing this allows the license for that software to be given to the initial purchaser, instead of the actual copy of the software. Consumers can no longer re-sell software, but there is the silver lining that software can be downloaded much easier, saving time and gas of going to a store.

Phase 3

Phase 2 is a stopgap however. It helps ensure a higher market penetration, but it doesn’t solve the problem of companies selling themselves out of business with a product that lasts forever. Hence the move to a subscription-based model. If what is being sold is only a temporary license, users are forced to continue buying. This ensures a more future-proof revenue stream.

How Does This Theory Relate?

We are currently entering an era in which Phase 1 holdouts are finally moving to Phase 2, and Phase 3 is starting to gain widespread adoption. Videogame consoles are a perfect example of the former. As mentioned earlier, up until now, video games have been purchased on physical media. With no activation codes, the games can be re-sold at will. Used videogames is such a huge market, in fact, that companies like Disk Replay and Gamestop can thank it for their existence. With the Xbox One and PS4, however, all games must be installed. Neither Sony nor Microsoft has come out with real clarity on the issue, because neither wants to allow the other to offer a more generous policy, but both want to amp up the restrictions as much as possible. However it works, console games are moving away from the buy and sell as much as you want era of Phase 1.

Adobe’s move to change from Creative Suite to Creative Cloud, however, is a perfect example of the latter, ie switching to Phase 3. This phase has hit large scale adoption only recently, and has been driven in part by web-based services which feature constant updates. Adobe has nearly worked themselves out of a job. CS6 is by nearly all standards a superb piece of software. Whatever quibbles one might have, it does the job, which has got to have Adobe worried about ways to keep consumers buying new versions. Hence the move to the subscription-based CC. This allows them to transfer users onto a platform that guarantees a steady revenue service. Microsoft Office is another example of this phase transition. Moving from Office 2013 to Office 365 is a change from personal licenses to subscription-based model, and Microsoft’s reasoning is similar. What else is there really to change in such a mature product? Microsoft can’t allow people to start thinking that and stop buying Office, however, hence this attempted switch.

Why Is This Important?

This is important because of what happens next. When software is sold in Phases 1 and 2, companies have a strong incentive to keep improving. They are the ones on the hook, because if consumers don’t see improvements they’ll stick with current software. With Phase 3, companies have a much lower incentive to continue improving. Competitors provide some incentive, but consumers are going to be paying constantly whether updates are worth it or not.

Some might argue that software is a service and should be considered such. However, if code is already written and no changes and improvements are being created, why would consumers keep paying? Consumers need to be aware of these changes, because enough negative feedback CAN impact a company’s decision.