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October 16, 2017
By Tina Lux-Boim, President & CEO, MMI
Apple’s most recent earnings statement revealed that services are now a major driver of revenue for the tech giant, providing yet another example of the shift toward service-based earnings in the technology sector. In its third-quarter earnings report, Apple revealed that the services business is now the brand’s primary driver for revenue growth. In Q3 (Apple’s fiscal year ends in September), iPhone sales represented approximately 55 percent of total revenue, the lowest in the last 12 quarters. On the other hand, Apple’s services business, comprised of Apple Music, iCloud, Apple Pay and other offerings, yielded $7 billion, a year-over-year increase of almost 22 percent.
The shift demonstrates Apple’s response to a new marketplace reality in which customers are no longer obsessed with marginal device improvements. In essence, hardware can no longer be relied upon as the primary source of revenue growth. And Apple isn’t alone: According to a July report from Gartner, worldwide PC shipments in Q2 2017 totaled 61.1 million units, a 4.3 percent drop from Q2 2016 and the 11th straight quarter of declining PC shipments. In fact, shipments in the second quarter of this year reached the lowest point since 2007.
Across the industry, Cisco, HPE, IBM, Lenovo and many other technology companies are focusing on subscription and support services, maintenance contracts and renewals to capture revenue in the face of declining or cyclical device and PC sales. Partners are all about MRR. In some cases, services now represent recurring, contract-based annuity streams that can be forecast to shareholders three to five years in advance, creating financial incentives for tech companies to prioritize services revenue growth. MRR translates to higher valuations.
IT manufacturers and their resellers need to recognize and harness the continued shift to services.
From a business standpoint, the shift to services makes sense. The commoditization of hardware has lowered margins on devices, and the cloud makes services more attractive because they provide recurring revenue streams with little to no manufacturing costs.
But while subscriptions and services present important revenue opportunities, there are several issues IT manufacturers and their resellers need to be aware of as they navigate the transition.
1. Service revenue is all about renewals. Loyalty aside, hardware-based revenue models are based on one-time transactions. Even Apple rarely sells customers two iPhones in a year. But in a service revenue model, IT manufacturers must shift to a renewal mindset. Selling the service isn’t enough. To achieve revenue growth, manufacturers have to become adept at automating renewal processes. If you have Apple Music, when’s the last time you had to manually renew your plan?
In the software field, many traditional manufacturers have transitioned to the SaaS model to better serve customers that don’t require an on-premises solution or in-house IT personnel. The most successful SaaS providers are the ones that protect recurring revenue streams by …
… empowering end-users to monitor subscriptions and automate renewals processes.
2. Good data is the key to service revenue success. Manufacturers could live with a certain amount of disparate data when they depended heavily on hardware-based revenue — the sale was complete when the customer purchased the hardware or device. But disparate data is incompatible with a services-based revenue model because distribution chains and resellers need a complete and accurate view of contracts.
To eliminate the challenge, ensure the manufacturers you work with have a logical way to normalize data in a way that is consumable for you as a distributor or reseller. Have you seen an Apple store on hot-new-device release day? It’s orderly because customers must pre-order, and stores know who has purchased what. Normalization gives distributors, resellers and channel partners the actionable data they need to measure usage, review opportunities, provide quotes and perform actions that drive revenue back upstream.
3. The normalization of data is more difficult than it sounds. Normalization that delivers one view of clean, actionable data is a complicated and potentially time-intensive process. It’s possible to build data warehouses and normalize data in-house, but it would involve the use of manual spreadsheets and a team dedicated to the process. Automation provides a more practical approach to normalization. Once a solution is in place, automation drives nearly every stage of the process, from initial contact and quotes to qualification and renewal. The result is ease of use and crisp visibility, both of which are hallmarks of data handling processes in organizations that rely on services-based revenue.
The shift toward services revenue is here to stay. Even if the current trend toward declining hardware-based revenue reverses itself, services will likely grow alongside hardware. By investing in data normalization processes and technologies now, the hardware ecosystem can lay the groundwork for reliable services-based revenue streams going forward.
Tina Lux-Boim is a co-founder of MMI and serves as the company’s president & CEO. In this role, Tina oversees the day to day operations of the business, and works with the rest of the management team on setting overall strategy and driving execution.
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