Storage, Hardware Suppliers Shifting to Lucrative Subscription Model

Updated: May 5

At the end of March, Hitachi announced it is purchasing the digital engineering services company GlobalLogic. This acquisition is indicative of the trend for hardware companies to take advantage of the rapidly expanding software industry, from not only digitization and data maximization but also their recurring pricing models.

Attracted by the high profit margins and recurring revenues provided by software subscriptions, storage and hardware vendors are moving quickly to adopt this software pricing model. Examples of recent offerings abound:

  • Dell EMC term TLAs

  • Licensing agreements that put storage software on a subscription-like licensing model (hardware is purchased separately)

  • Nutanix now exclusively focused on subscription-based software model

  • Hyper-converged software only available on subscription-basis

  • Nutanix no longer pays commission to sales reps on hardware sales

  • Gross margins increased to 82% in 2020, compared with 66% in 2016

  • Subscription-based billing in 2020 grew to 88%, up from 31% in 2017

  • Storage-as-a-Service

  • Pure and Dell EMC lead the way, but many vendors have STaaS offerings including IBM, NetApp, and Infinidat

  • In 2020, Pure subscription services revenue rose 30% (though product revenue declined)

  • Smaller vendors making the switch, too

  • VAST Data pivoted to software subscription model with Gemini offering

  • Cohesity and Rubrik offered consumption-based pricing models within the last year

  • NetApp cloud data services annualized recurring revenue increased 113% YOY in 2020

  • Other hardware vendors are moving to build/acquire these types of revenue streams

  • Palo Alto switched from mostly on-premise firewalls to cloud/SaaS security products

  • Hitachi acquired Global Logic

  • Cisco bought several software companies since 2017 (Viptela, AppDynamics, Duo Security)

What Does this Mean for Customers?

Just like Software as a Service customers, storage and hardware buyers are experiencing reduced leverage with their suppliers under this model. Subscription-based engagements favor the supplier because (a) the customer rents the solution and has no rights once the term of the deal expires, (b) locks the customer into a specific supplier, eliminating (or greatly reducing) the ability to use competition – a tactic that traditionally provided credible and significant buyer leverage in the storage and hardware markets. (While not impossible, using competition will require considerably more planning now.) Once a customer is locked into a solution, premium pricing is all but guaranteed to follow.

ClearEdge advises clients faced with subscription offerings to gain a clear understanding of their needs and develop a conservative forecast before negotiations begin. Net new purchase is a powerful negotiating lever, but it may be more prudent to buy additional storage (or hardware) later and avoid over-purchasing. One option is to build in pricing tiers to reduce costs as you hit certain capacity levels.

Further, contract terms and conditions that dictate what happens at the end of the term must be inspected for risk. We have seen clients face steep upticks when they attempt to reduce the scope of their storage environment, for example. We recommend that you negotiate a lock-in renewal cap of zero to 5% and eliminate language that allows for renewal at vendor’s “then-current rates”.

A final note: Customers who decide that a subscription offering makes sense should remain on the perpetual option as a viable alternative, since sales reps will likely be incentivized to move you over to the subscription model and therefore be flexible regarding your demands. We have seen this strategy allow customers to drive down pricing and negotiate competitive language that mitigates some of the risks of the subscription model.

For more information about the perils of subscription-based pricing, download the Software Subscriptions Maximize Supplier Revenue blog from our website, or contact your ClearEdge representative.

- ClearEdge Analysts Scott Braverman and Ben Brody contributed to this article.