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Can you explain why considering the dollar amounts that would earn interest equal to subscription costs has any relevancy into how much these services cost? Or

Can you explain why considering the dollar amounts that would earn interest equal to subscription costs has any relevancy into how much these services cost? Or put another way -- what?

zAy0LfpBZLC8mAC 9y ago
I think they meant to use the concept of the time value of money, like this: https://en.wikipedia.org/wiki/Time_value_of_money#Example_2:_Present_value_of_an_annuity.E2.80.94solving_for_the_payment_amount https://en.wikipedia.org/wiki/Time_value_of_money#Example_2:... But their calculation was ... let's say wrong :-)
nobodyorother 9y ago
It seems like GP is calculating 20 years worth of subscription cost. Seems reasonable, but I'd also stop using most subscriptions before 20 years: 5 years seems more likely. I'd probably cancel a subscription if I stopped using the product after a few years or if the related hardware died.
- FabHK 9y ago
  > It seems like GP is calculating 20 years worth of subscription cost. Well, yes and no. GP is calculating the discounted value of receiving $N annually forever (assuming a fixed constant interest rate r): N/(1+r) + N/(1+r)^2 + N/(1+r)^3 + ... = N/r Thus, receiving N$ forever, given rates are 5%, is worth 20N. (You can derive it from (for |q| < 1), 1 + q + q^2 + q^3 + ... = 1/(1-q) ) Note, by the way, that currently rates are very low (say 1%), and thus receiving a perpetual stream of $N per year is very valuable, namely 100N. That makes the switch to subscriptions even more valuable to these psycho firms.
  - zAy0LfpBZLC8mAC 9y ago
    Except ... they are the ones lending you the money, so they would be the ones paying that high price now for the comparatively low future interest payments from you?
    - FabHK 9y ago
      Not really. As you say, they're lending you what would've been the upfront payment for the software. They receive your subscription, and have to pay (in interest, to their bank) very low rates. So, on the (fixed) notional they currently pay low rates, while receiving high-ish subscription.
      - zAy0LfpBZLC8mAC 9y ago
        What is the basis for the assumption that the subscription is high-ish in comparison? In an ideal market, you would expect the discounted subscription to match the upfront payment, which would mean that the "high value" is simply the price that they have to pay to get those future subscription payments (or that they could sell those future subscription payments for on some sort of "customer subcriptions market" if there were one). Once they've bought them, they also have the risk of rising interest rates wiping out the value of that investment. (And also, this doesn't really apply all that well in this case anyway, because your typical software license subscription is not a perpetuity, the span of time that people will want to pay for using the software as it is now is rather limited, and they can pretty much stop paying at any point, while you'd supposedly have spent the loan from your bank on your programmers, and your bank will still want to get their interest payments.)
Houshalter 9y ago
Economically you can convert between a fixed price and a subscription price. A subscription has a fixed economic value governed by the interest rate. That is if you have a thing that generates $10 every year, you should be able to sell it for $200 (if the interest rate is 5%.) I think this is something people don't often think about. But it makes it very easy to compare different costs and benefits that involve time. E.g. imagine a building is costing $1000 a year to maintain, and a new building would cost $50,000 to build. You can figure that it would be easier just to invest $20,000 and use the interest to pay for the maintenance. And save $30,000. But if building a new building cost only $10,000. It would be a good investment. And you would expect to save more money than you would gain from anything else you could invest in with that money. The same logic applies to subscription fees. If a software license costs either $120 a year, or a fixed price of $5,000. You should prefer the subscription. Hypothetically you could just invest $2400 and use the interest to pay the subscription. Saving $2,600.
- zAy0LfpBZLC8mAC 9y ago
  > Hypothetically you could just invest $2400 and use the interest to pay the subscription. Saving $2,600. Except you do not actually use software forever, and there is also no market for licenses for 10-year-old versions, so you have to actually calculate it as an annuity. So, if you expect to use the software for ten years, the NPV of 120$ per year would be about 900$ at 5% interest.
- softawre 9y ago
  Thank you for explaining!
- neaanopri 9y ago
  One problem is that this has some externalities. Part of the appeal of perpetual licenses is that I know that even if there has been a nuclear war, if I have electricity I can run Photoshop 5. Also, it makes much more sense for a large corporation to be exposed to the risks of investment return, i.e., it makes more sense for fixed-price software licenses. Well, maybe. Whoever has a smaller fraction of total expenses over cash reserves, and is this able to ride out a recession, should get the risk. In the case of a person with a big retirement fund, they should get the risk. However, in the case of someone living paycheck to paycheck, the company should get the risk.

Can you explain why considering the dollar amounts that would earn interest equal to subscription costs has any relevancy into how much these services cost? Or put another way -- what?

zAy0LfpBZLC8mAC 9y ago

I think they meant to use the concept of the time value of money, like this: https://en.wikipedia.org/wiki/Time_value_of_money#Example_2:_Present_value_of_an_annuity.E2.80.94solving_for_the_payment_amount https://en.wikipedia.org/wiki/Time_value_of_money#Example_2:... But their calculation was ... let's say wrong :-)

nobodyorother 9y ago

It seems like GP is calculating 20 years worth of subscription cost. Seems reasonable, but I'd also stop using most subscriptions before 20 years: 5 years seems more likely. I'd probably cancel a subscription if I stopped using the product after a few years or if the related hardware died.

FabHK 9y ago
> It seems like GP is calculating 20 years worth of subscription cost. Well, yes and no. GP is calculating the discounted value of receiving $N annually forever (assuming a fixed constant interest rate r): N/(1+r) + N/(1+r)^2 + N/(1+r)^3 + ... = N/r Thus, receiving N$ forever, given rates are 5%, is worth 20N. (You can derive it from (for |q| < 1), 1 + q + q^2 + q^3 + ... = 1/(1-q) ) Note, by the way, that currently rates are very low (say 1%), and thus receiving a perpetual stream of $N per year is very valuable, namely 100N. That makes the switch to subscriptions even more valuable to these psycho firms.
- zAy0LfpBZLC8mAC 9y ago
  Except ... they are the ones lending you the money, so they would be the ones paying that high price now for the comparatively low future interest payments from you?
  - FabHK 9y ago
    Not really. As you say, they're lending you what would've been the upfront payment for the software. They receive your subscription, and have to pay (in interest, to their bank) very low rates. So, on the (fixed) notional they currently pay low rates, while receiving high-ish subscription.
    - zAy0LfpBZLC8mAC 9y ago
      What is the basis for the assumption that the subscription is high-ish in comparison? In an ideal market, you would expect the discounted subscription to match the upfront payment, which would mean that the "high value" is simply the price that they have to pay to get those future subscription payments (or that they could sell those future subscription payments for on some sort of "customer subcriptions market" if there were one). Once they've bought them, they also have the risk of rising interest rates wiping out the value of that investment. (And also, this doesn't really apply all that well in this case anyway, because your typical software license subscription is not a perpetuity, the span of time that people will want to pay for using the software as it is now is rather limited, and they can pretty much stop paying at any point, while you'd supposedly have spent the loan from your bank on your programmers, and your bank will still want to get their interest payments.)

Houshalter 9y ago

Economically you can convert between a fixed price and a subscription price. A subscription has a fixed economic value governed by the interest rate. That is if you have a thing that generates $10 every year, you should be able to sell it for $200 (if the interest rate is 5%.) I think this is something people don't often think about. But it makes it very easy to compare different costs and benefits that involve time. E.g. imagine a building is costing $1000 a year to maintain, and a new building would cost $50,000 to build. You can figure that it would be easier just to invest $20,000 and use the interest to pay for the maintenance. And save $30,000. But if building a new building cost only $10,000. It would be a good investment. And you would expect to save more money than you would gain from anything else you could invest in with that money. The same logic applies to subscription fees. If a software license costs either $120 a year, or a fixed price of $5,000. You should prefer the subscription. Hypothetically you could just invest $2400 and use the interest to pay the subscription. Saving $2,600.

zAy0LfpBZLC8mAC 9y ago
> Hypothetically you could just invest $2400 and use the interest to pay the subscription. Saving $2,600. Except you do not actually use software forever, and there is also no market for licenses for 10-year-old versions, so you have to actually calculate it as an annuity. So, if you expect to use the software for ten years, the NPV of 120$ per year would be about 900$ at 5% interest.
softawre 9y ago
Thank you for explaining!
neaanopri 9y ago
One problem is that this has some externalities. Part of the appeal of perpetual licenses is that I know that even if there has been a nuclear war, if I have electricity I can run Photoshop 5. Also, it makes much more sense for a large corporation to be exposed to the risks of investment return, i.e., it makes more sense for fixed-price software licenses. Well, maybe. Whoever has a smaller fraction of total expenses over cash reserves, and is this able to ride out a recession, should get the risk. In the case of a person with a big retirement fund, they should get the risk. However, in the case of someone living paycheck to paycheck, the company should get the risk.