The dramatic changes in the software business over the past few years have important implications for both users and producers of software products and services. Traditional product sales and license fees have declined, and product company revenues have shifted to services such as annual maintenance payments that entitle users to patches, minor upgrades, and often technical support.

New Pricing Models in Software Service Industry

There are some exceptions to these changes. Product sales continue to account for most of game-software revenues, although online-gaming service revenues are growing fast. Platform companies like Microsoft—which has a large ecosystem of PC manufacturers as well as enterprise and individual users driving sales of Windows and Office— continue to generate enormous revenues from products. But even Microsoft is encountering change.

Services’ growing importance for software product firms dates back to at least 1990. The advent of free and open source software (which drove down software prices), as well as Y2K and the Internet boom and bust, accelerated the trend. In general, since 2000 or so, we’ve seen many enterprises and individual customers’ rebel against paying a lot of money for standardized or commodity-type software products.

New pricing models in Software Service Industry

A complicating factor is the rise of new business and pricing models such as software as a service (SaaS) and “free, but not free” software. Companies like Google, Yahoo!, and even Microsoft (with Windows Live and Office Live) now deliver what used to be for-free software products ranging from search and e-mail to basic desktop applications as a nominally free service. The user doesn’t directly pay for the software (unless you count the time to watch advertisements), but advertisers pay the software service vendor.

SaaS vendors such as still count SaaS as product revenues and keep them separate from professional services. However, the SaaS pricing model actually eliminates maintenance payments—a major source of service revenues for software companies—and often includes some bundled technical support—a source of costs. So the SaaS model has confused the traditional A dramatic shift is under way in the enterprise-software industry as established vendors embrace services in the wake of declining product revenues. It remains to be seen whether life-cycle dynamics or business model choices are behind the long-term trend. Michael A. Cusumano Massachusetts Institute of Technology discussed separation of product and service revenues as well as costs, and this should result in a decline in service revenues because of the elimination of maintenance payments.