IT companies give out their technologies and software products to be used for free and are convinced that the old approach of earning based on the number of licenses per workplace has become outdated. What are the risks that startup companies and companies using more traditional business models face?
Nowadays, more and more successful technology companies doing away with traditional business models and earning without actually selling their products, are popping up globally. This new order would have seemed rather unusual to some even just 15 years ago: technology companies like Microsoft, SAP, and 1C have always been primarily based on the sale of licenses for software products to users or other developers.
The next step was the appearance of “lighter” cloud products, and we started getting used to the fact that software could be purchased as a service (SaaS) or rented for the required time. But today, we can see that some companies aren’t even selling licenses any more, or even service subscriptions. For example, Uber is a technology company that doesn’t own its own fleet of cars or hire drivers. Clients and drivers access the app for free, and the company makes money by getting a commission from each trip taken.
This is related to the fact that for many of today’s companies, value isn’t created by individual products or technologies alone, but with the ecosystems they create. Platforms like Uber and Airbnb aren’t created solely by expensive startups either, but by the largest global companies like Apple, Google, and Amazon as well. Let’s take Apple Music and Apple Pay as an example. These are just two components of Apple’s huge ecosystem, each of which generates high revenues thanks to transactions between platform members and its additional services.
Why companies give out their technologies to be used for free
Interesting things are also happening in companies that sell “heavier” corporate software products. At first glance it might seem quite difficult to build a platform and an ecosystem around it to be monetized and use a business model that is different from selling more traditional licenses. But people who saw the potential to develop an ecosystem are showing very impressive growth rates today.
For example, H2O.ai developed its own machine learning technology and then released the source code: as a result, millions of third-party developers got free access to the product and used it in their own applications. For a long time the company survived with almost no earnings while a community of big data engineers coalesced around the product and the user growth rate was rising at 300% a year.
By doing so, the free nature of the product first ensured maximum user growth, and only then it started to offer additional valuable services to its audience and started generating earnings.
Unlimited access to technologies pushes the market forward
When you don’t have to worry about licenses for technologies, you can focus on creating new value for customers. I’ll take as an example a company from the translation and localization services industry that is close to me.
The volume of the translation market amounts to just 300 million USD. But our competitors are still using the classic business model: they sell licenses not only to translation agencies and companies that are in need of translation services, but to freelance translators as well. Translators and agencies always suffer a lot form this, and as a result both of them often use pirated products.
For your own reference, Translation Memory technology is the backbone of translation automation software, and allows companies and users to store and re-use translations: something that has already been translated once doesn’t need to be translated again because it can simply be pasted in from the database.
When we launched the SmartCAT cloud solution in 2014 to boost translator productivity, even from day one we made it free for freelance translators. This became the first step in the creation of our ecosystem and allowed us to attract more than 50,000 translators from 70 countries in the first year of operations alone. The second step was abandoning workplace licenses for corporate clients and translation agencies.
We noticed that most translation agencies don’t have the ability to generate the necessary number of license sales for professional translation software, because — believe me — this is a very expensive and impractical endeavor.
If market players get free and unlimited access to modern technologies and translator ecosystems, this can change their growth opportunities dramatically.
How to monetize free solutions
There are a lot of ways to monetize company’s solutions, and it is enough to just look at successful ecosystem platforms in various industries. Some companies earn money from transactions between buyers and service/product producers, while others earn from extended product support or an advanced set of functions. Still others integrate additional services into the product’s main functions, such as pizza delivery in Gett. It is often easy to see a combination of these models: for instance, the Upwork freelance search service.
What are the risks of adopting the “free use” model
Adopting the “free use” model is, needless to say, a risky step, especially for companies that have already stabilized using a traditional business model. This decision might be likened to a massive “killing off” of the company’s license earnings: companies won’t be able to offset losses immediately with different earnings from transactions and additional services.
Startups don’t have to risk losing any significant revenue, but they are still faced with the problem of building an ecosystem to become profitable, which is a long, challenging and capital-intensive process. If a startup chooses to follow this path, it postpones monetization, and in turn increases the risk that the “springboard” paid for by the investors will end before the company can cover operations with its own funds.