My favorite source of online music is Pandora and their Music
Genome Project. If you’re not familiar with them, it’s a web based service that streams high quality music to your browser through a flash applet. Just the idea of working out my musical “genetic” make-up was cool to me, but it was the exploratory nature of it that really got me hooked.
Essentially, you first of all seed your stream with some of your favorite tracks, musicians, or bands. From that Pandora’s algorithm starts to stream to you similar music with the bands you selected sprinkled in. The genetic part of it is when you see common threads across music that you may not have listened to or heard of otherwise…but you like. For example, seeding with 80’s alternative music (New Order, Joy Division, Spear of Destiny, etc.) got me to modern era Killers, The Strokes, and a few other bands that I either hadn’t heard of, or only peripherally. But you can tell their “musical genetic makeup” is very similar…and I liked it!
So - a cool app that many people love, but their business model was broken. There they were delivering tons of value to users, but they were trying to monetize that value through advertising. Of course this wasn’t working for them, especially as they have to pay royalties on the music they stream. So today I noticed that they have moved over to a subscription, or “freemium” model. This makes complete sense. You get 35 hours free per month, and then you have to pay $36 per year for better audio quality and no advertising (there are other premium features, but who really cares about “skins”?) There we have it - Music-as-a-Service! MaaS!!
Now that their platform is built, their greatest costs are licensing royalties that I’m assuming they pay after the fact. So charging “power users” up-front will put them in a good position to fund the company and the royalties. I hope they make it (there were rumours that they were struggling hard and may even shut down).
Now, why $36?
SaaS (Software-as-a-Service) is all about charging for value as that value is consumed…or as near to this as is reasonable to expect, ie. monthly or annually (with discount). And here lie the challenges for companies looking to move to a SaaS model:
- Is there a free (or relatively cheap) version of the product with a reduced feature-set that provides some value without giving up the farm?
- Can the lower priced version of the software be delivered and supported in a low cost manner?
- Is there a clear and natural path to upgrade to the premium product that will make up the core of your business?
- What are the features of your software that provide 80% of the value…and what is their value to the end-user?
- What is that value, what is it worth, and how should it be charged?
Within the electronic design tool industry segment, business models and use models are essentially orthogonal today. SaaS provides a way to bring these models more in line.
But as I’ve argued before, unlike the current license-based model, it’s not a simple equation for electronic design tools with a one-size-fits all approach. Not only do different tools deliver different levels of value, but also the value is consumed in different ways - ie. use models differ depending upon the tool being used and where in the chip design process the tool is being used (verification and simulation tools are a good example of this variance over time).
Fortunately, a SaaS model not only provides a low cost delivery and support vehicle, it also provides you with visibility into the use of your product and the mechanisms to adapt relatively quickly to market conditions and learnings gained.
There-in lies the opportunity to better serve your customers, and your investors…or maybe GET customers and investors!
This post was written by James Colgan on August 25, 2009