CAD and simulation vendors have resisted the trend toward subscription pricing from perpetual licensing. Let’s look at two examples of companies that have made the painful switch and the results.

The change from perpetual to subscription pricing is well underway for professional-use software. Let’s first define these terms. Perpetual pricing is when users purchase the software once and then own it forever. It’s like buying a car with cash. Subscription pricing, in contrast, is more like leasing the car, except that you don’t have three years of payments and you don’t have a residual value. You pay for the software every month, whether you use it or not.

Companies that have their roots in perpetually licensed software (like Autodesk) insist that their EULAs (end-user license agreements) meant that their software was technically never really owned by the user—it was instead licensed in perpetuity. A distinction without a difference? It was certainly a distinction that was lost on the users. Seriously, what user has ever read a EULA?

Newer software companies that started with subscription-only models (Salesforce.com), never offered perpetual licensing and were the envy of older software companies. Those newer software companies didn’t have to worry about transitioning their userbase to a different payment model.

But most professional-use software vendors—many of which gained prominence in the ’80s, selling the likes of AutoCAD and Photoshop for personal computers—sold their software for a one-time cost, at several thousand dollars. It was great at first. Designers, engineers and graphic artists eager to computerize, rushed toward PC-based applications. Thousands of dollars was little to pay for the advantages of computerization, previously unavailable except to a few that could afford mainframe and minicomputers (remember DEC VAXs), $25,000 workstations (Apollo, Intergraph) and software that would cost at least that much.

But it wasn’t long before the good times were over and there was no one left to sell to. Everybody was computerized—at least in the industrialized countries. Software vendors had to keep improving their products so they could sell upgrades to customers. A business model developed where only incremental upgrades (aka point upgrades—those with a decimal point, like R13.1) were free. The incremental upgrades would have bug fixes and fixes for features that had been rushed out the door for the paid upgrades, that is, the revenue-generating annual upgrades. The annual upgrades had the must-have new features that were worth paying for. And so, the vendors were able to rake in much-needed revenue from a userbase that was already saturated with their products.

But annual releases could miss the mark. Big improvements could take longer to implement than expected. This would make for a bad year for the company’s CEO and its investors. Companies without big improvements faced an existential problem. Without an annual revenue spike from annual upgrades, their only hope to stay in business was to downsize or create new products.

But users began questioning the value of the annual upgrade. By the new millennium, the prevailing feeling in CAD userbases was that the CAD software they had was good enough. It had all the necessary features. It could do everything they needed. The new features being introduced were unnecessary. Users still demanded the incremental upgrades because the bugs from the last annual upgrades still needed to be resolved, but they began resisting the annual paid upgrades, seeing only diminishing returns. Autodesk customers began adopting an “every other release” schedule or skipping odd number releases—especially after the ill-fated AutoCAD R13, perhaps the most unpopular AutoCAD release ever, was released prematurely, rife with bugs. CEO Carol Bartz would apologize for it.

What were the giant software companies to do? Millions of customers who used their software were content with the status quo. They had bought their car, paid for it up front, and felt it was running just fine. Thousands of dollars was a lot for small companies and individuals, but they had paid it and were done with it. Some software companies (like SolidWorks) bragged that most of their users were on “maintenance” programs and that they were still generating revenue from them. That may have been true in the early years of SolidWorks when the maintenance program provided, free of charge, annual releases with significant improvements. But when the improvements became less significant, SolidWorks users also got the idea that the software was good enough and turned off the maintenance program.

Here was that existential problem again. What was a CEO to do? Would they have to downsize the company, lay off employees, lose office space, lose face and, God forbid, decrease their pay, forgo their bonuses or tear up their stock options? Clearly, those were deal-breakers for any CEO. There had to be a way to get users to cough up money on a regular basis and get over this hump. They had been watching the success of newer companies—SaaS (software as a service) companies like Salesforce. They floated trial balloons, messages of impending subscription licensing. They were quickly shot down.

There was simply no reason, legacy users said, to start paying for something they already owned. Would GM start charging them for their old Chevy they had already paid for?

The Case of Autodesk

Carol Bartz was to weather the ill-fated R13. And Autodesk was to introduce several new products (Inventor, Revit), and those “vertical” products allowed for additional and deeper revenue streams. Autodesk became a billion-dollar company. During the Carl Bass days, Autodesk introduced subscription-only products (like Fusion 360, BIM 360). While these new products increased the product portfolio, their effect on income was small compared to their desktop-based, perpetually licensed counterparts.

Carl Bass was to leave Autodesk under a cloud of investor lack of confidence despite his popularity within the company and media as a product and technology guy. It was an abrupt departure without a clear successor. Two vice presidents, Andrew Anagnost and Amar Hanspal, fought for the company’s top position. Anagnost had a plan to force customers to move to subscription pricing. Hanspal did not. Guess who won.

The Case of Adobe

Autodesk, and probably the rest of the CAD industry, had their eyes trained on Adobe. Years ago, Adobe had taken the plunge into a subscription model, forcing all its users to switch to subscription-based pricing. Never had a major software vendor been so bold, so complete and so forceful.

Adobe’s conversion to subscription-only pricing was bloody at first. Several quarters were soaked in red. Of course, revenue plunged. We knew that was coming, Adobe executives said. But have faith. Stop looking at revenue. Ignore profits. Look at annual recurring revenue (ARR). ARR is a better measure of success, they insisted. Patience, please!

Industry watchers and media, accustomed to the perpetual license model, asked how to spell ARR.

Users were mad as hell at being forced to pay for what they thought they already owned. Critics predicted that users would abandon Adobe products. A few users may have found other products to use. Several products from rivals and startups offered graphics processing applications for less than Adobe was charging. But even though the protests were loud, most users stayed with Adobe. Eventually (it took a year), Adobe’s financial quarters started showing an increase in revenue. The company’s profit never dipped into the red and 13 quarters later, the company went on to surpass the profit of its last perpetual licensing quarter.

Autodesk—Steady at the Wheel

How much of an influence did Adobe have on Autodesk’s Anagnost? We were not privy to the conversations in the boardroom, but Autodesk’s parallel to Adobe is unmistakable.

Autodesk was to declare its commitment to the subscription-only model for AutoCAD, Revit, Inventor … and all its desktop products. Unlike Adobe, the red ink started to flow for Autodesk. And it kept flowing—for two years.

Anagnost, the architect of the Autodesk subscription plan, the one who had the most to lose, was unwavering. Autodesk’s board of directors, having appointed Anagnost based on the move-to-subscription plan, was willing to let this play out. Showing courage amid the loud grumbling—even widespread user revolt—Anagnost stood firm. Forays by competitors, offering “choice,” that is, subscription or perpetual licensing, did not faze him. Like Christopher Columbus at the helm, Captain Anagnost insisted that the company was not going to fall off the end of the Earth. They had ARR on their side. An aeronautical engineer by education, Anagnost had managed to learn enough about finance to make ARR convincing to jaded industry observers.

What Have We Learned?

In the end, Andrew Anagnost emerged triumphant. Like Adobe, Autodesk’s userbase, despite the grumbling, stayed largely intact. What did we expect? Did we really think that users of professional software—that which takes years to master, that common language, those skills that can be expected to come with every new employee—would have abandoned the product? Would you have abandoned your child when a kidnapper asked for a ransom?

In the case of Adobe and Autodesk, at least, we saw how a company that has secured a loyal user base is very likely to survive a change in pricing models.