In an important Stratechery post titled “Overstating the Consumerization of IT,” Ben Thompson argued there is a critical difference in how consumers and enterprises (or more broadly, business) approach technology. Consumers are willing to pay for hardware but balk at paying for software or services. Business values software a services and is willing to pay–a lot–for them.
There is a huge amount of confusion among tech writers, who often don’t know better, and analysts, who should, that produces a lot of very bad analysis. It leads to gross underestimation of the staying power of Microsoft, ((Microsoft, to be fair, has brought a lot of this upon itself by trying to redefine the company as a “devices and services” provider, focusing attention on its struggling consumer business rather than its successful enterprise business.)) not to mention a host of other business software and services providers, while overestimating the potential and value of the latest cool app.
Apple and Google, in their very different ways, have figured this out. Apple sells high-end hardware at margins sufficiently fat to let it provide an array of free software and services to consumers. Of course, it’s not really free. Instead of trying to charge consumers for things they won’t buy, Apple builds the cost into the price of the hardware, which they cheerfully pay for. Google gives away software and services and uses the information it gains to increase the value of the services it provides advertisers. The common theme is that they make consumers pay for the goodies only indirectly.[pullquote]Apple sells high-end hardware at margins sufficiently fat to let it provide an array of free software and services to consumers. [/pullquote]
Businesses have a very different view of the world. A business needs software to do a job and ultimately to make a profit, whether it’s QuickBooks for a small company or a multi-million-dollar SAP ERP system for a large enterprise, and it pays for it. I see this myself, as a one-person business. I pay for tools, from Microsoft Office to Adobe Creative Cloud, because I need them to satisfy client demands.
There is real convergence between consumer and enterprise needs in devices. IT managers would have loved to keep the iPhone out of their companies because, at least initially, it did nothing but create cost and problems for them. But executives insisted, both for their own convenience and because, at least among the more far-sighted, they saw real business opportunities in the technology. Once Apple made it possible for IT to support corporate systems on iPhones and iPads, CIOs had no choice but to relent.
Nut a result of this has been the development of expensive, by consumer standards, apps, both custom line-of-business applications and commercial products. Most consumers may balk at paying $5 for a useful app, but physicians will cheerfully pony up $160 a year for Epocrates Essentials. (Epocrates has latched on to one consumers trend. It actually gives the iOS app away, but charges $160 as an in-app purchase for the Essentials module and more for supplementary modules.)
The willingness of business to pay for the software it needs doesn’t mean that incumbents such as Microsoft, SAP, and Oracle, have safe business models. Upstarts such as Salesforce (which is no longer really an upstart), Workday, and Box stand ready to disrupt them. The difference is that the enterprise takes a much more rational and value-oriented approach to investing in software. It understands ROI and is willing to pay up front. Consumers don;t and won’t, leaving would-be consumer software and service providers scrambling to find a different route to profits.