In the years leading up to Autodesk unilaterally imposing subscription payments on its customers, Carl Bass told financial analysts that he liked the example set by Adobe. (At the time, Mr Bass was ceo of Autodesk.) Adobe had switched to accepting only subscription payments, abruptly and apparently successfully. (Older Adobe software purchased with a permanent license continues to work.)
Mr Bass wanted Autodesk to also make the switch successfully, even as he recognized that "While there are certainly similarities between Autodesk and Adobe, there’s also a big difference," as he told financial analysts in 2014. The differences included license payment types and classes of software offerings.
Since then, the transition became a financial nightmare for Autodesk, with the company suffering losses for nearly three years non-stop (10 financial quarters in a row, to date) -- the longest streak in its 35-year history. For this article, we reviewed Autodesk's quarterly conference calls with financial analysts going back to 2010.
So, what when wrong? In my opinion, it appears that the differences between Autodesk and Adobe were far greater than the executive suite realized before they embarked down this leg of the wye. The result of our analysis is that two major factors played a role: price and third-party development, along with a few other factors.
Pricing of Subscriptions
The biggest problem Autodesk created for itself was where it set the price of annual subscriptions: 1/3 of the old permanent license cost. That's expensive. Monthly subscriptions cost more than annual ones; three-year subscription terms offered by the company do not cost less.
I argue that PhotoShop is more important to the overall design world than is AutoCAD, yet Adobe charges far less. Adobe's low price makes it easier to convince customers to buy in; even my professional photographer daughter can afford Adobe.
- Adobe charges $20/month for any software package
- Adobe charges $600/year for all of its software, 20 titles in all
- Autodesk charges $185/month for AutoCAD (9x more than PhotoShop)
- You cannot subscribe to all of Autodesk's software; the closest are collections of vertical programs that cost $2,040 to $2,690/year, depending on the focus (3.4x more)
Cost Increases
Adobe keeps its subscription prices on an even keel. Since introducing subs in 2013, the price has not gone up. Sometimes, 50%-off sales bring prices down to $10/month.
Autodesk has already raised the cost of subscriptions twice, and promises to continue doing so in the future. Sometimes, a 20%-off sale brings down the annual price. While the three-year subscription guards against annual increases, customers then pay later for a bigger spike, should they renew.
Third-party Developers
Both companies support add-ons written by third-party programmers, but Autodesk's is much stronger than Adobe's. Add-ons for Adobe software are helpful but not crucial; many are free.
Those for AutoCAD, Inventor, and Revit are significant, and that's a crux for Autodesk. Let's take a company like Intergraph (now Hexagon PPD). It has a $5,000 add-on for designing processing plants in 3D. It comes with a permanent license, but the software that it runs on, AutoCAD, can expire after a month or a year or three. If we cannot afford the payment at that time, AutoCAD simply stops working after a month's grace period.
For a company like Intergraph, this level of unreliability is unprofessional, and so it looked for an insurance policy on behalf of its process plant and P&ID customers: a second CAD platform. So it worked with Bricsys to port the CADWorx software -- in its entirety -- to BricsCAD. Customers again have the reassurance that comes with a permanent license on both halves of the package. That the platform BricsCAD software costs 4x less than AutoCAD is icing on the cake.
Mature Markets
Let's take a look at some of the other factors affecting Autodesk's agonizing transition.
Both Adobe and Autodesk explain that they needed to switch to subscriptions in order to smooth out the quarterly ups and downs from "big-R" annual releases. Both also said subscription are needed to access functions performed on remote servers and by mobile apps. Nevertheless, Autodesk continues big-R releases for its desktop software, beginning anew each year in March.
Left unsaid by the duo is that the desktop market is mature. Our software does pretty much everything we need it to do. Most of the programs I use to make my business productive have copyright dates ranging between 2000 and 2006. In recent years, Autodesk seems to have become surprisingly miserly in doling out new functions inside AutoCAD, which just might not inspire confidence in prospective subscribers.
Because it's can be hard to charge customers for upgrades with new feature sets that might be seen as shallow, the tactic is reversed: Charge customers first, with a promise of some future value. Mr Anagnost has stated that he wants hesitant customers to give him a year to prove the value of subscriptions. Time's nearly up.
Share Price, Up!
The contraindication to my doom-and-gloom story is the ADSK share price. It has zoomed up as losses mounted. For most of last year, it repeatedly breached all-time highs. (Share price represents the future value a shareholder places in the company, not its current value.) Wall Street has been liking Autodesk's story of millions of more customers switching -- very soon! -- to annual subscription payments.
How many millions? Autodesk includes in its count pirates, who apparently are willing give up free software and start making annual payments: "The other base is the 12-million pirate base that is going to move from pirated software to subscriptions. We understand that base, we know they're moving forward," Mr Anagnost told financial analysts a year ago. You understand Wall Street's excitement: the implication is that 12 million new customers paying roughly $1,000 yearly -- why, that's a $14 billion-a-year future for this $2-billion-a-year company!
Another part of the stock price enthusiasm comes from the $1.76 billion the company cannot touch; this too is future income. At the same time, the hoard of cash is part-reason for its ongoing losses. When a company receives subscription income, accounting rules permit it to recognize only 25% each quarter. The other 75% is stuffed in the bank account, and then in each quarter another 25% can be recognized on financial statements. The more subscribers Autodesk enlists, the less money it initially makes than it otherwise would. The irony is profound.
The price of ADSK shares dropped in late November when Autodesk admitted practical fallouts from the ongoing losses: no increased spending into 2019, and massive layoffs. Reality finally hit home, as a thousand employees lost their jobs just before Christmas. (Autodesk has never celebrated Christmas.)
Before the subscription embroilment, Autodesk had been pretty close to a $2.5-billion-a year company; now it seems stuck at the $2-billion level, while arch-competitor Dassault Systemes races towards four billion in annual revenues.
Then There's the Competition
Speaking of competitors, Autodesk has viable ones, far more so than Adobe. While there are alternatives to PhotoShop, the market offers many more alternatives to AutoCAD LT and AutoCAD, and even to Inventor and Revit.
For instance, instead of paying $50 every month for AutoCAD LT (which lacks all APIs), it makes sense to switch to Draftsight, which also lacks all APIs, but is free. Other examples abound.
Not that customers with permanent licenses need to switch away. Not at all. With the software being mature, Autodesk and Adobe customers can keep right on earning a profitable living by using their valuable permanent licenses -- as do I.
Summing Up
Two years ago or so, I predicted that Autodesk would do poorly financially due to the onset of subscriptionitis. Last year, I refined my diagnosis by declaring that it was due to two fundamental flaws: the high subscription pricing and the conflict with third-party licenses.
Autodesk has millions of customers who have not switched to subscription payments. Autodesk reports nearly two million on annual "maintenance" payments. (Maintenance = a permanent license + annual support.) Autodesk is deliberately increasing the cost of maintenance in an attempt for force them to switch, because new ceo Andrew Agonost wants all the 'maints' on subscription by late 2019 or early 2020.
The switch these millions might make, however, is to the competition. #PermanentSecurity
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