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Not true. I work in the enterprise software space. We definitely noticed a strong trend, starting around mid-2010, where prospective customers started shying aw

Not true. I work in the enterprise software space. We definitely noticed a strong trend, starting around mid-2010, where prospective customers started shying away from one-time, upfront purchases and demanding a subscription model. The reason is simple: one is a capital expenditure, whereas the other can be categorized as an operational expense. With a subscription model, even if you end up paying more in the long run, you realize the return on investment almost immediately.

HeyLaughingBoy 8y ago
I get the feeling this is something they always wanted, but the software business model had to catch up to that need. Thinking back to my first job as an EE in the early 90's, I clearly remember the new owner of the company who had been a CFO in his previous life, trying to figure out a way to move our hardware sales to a leasing-type model. His experience as a CFO led him to the conclusion that larger companies would prefer to bill items to OpEx rather than CapEx for just the reason you said.
- enraged_camel 8y ago
  >>I get the feeling this is something they always wanted, but the software business model had to catch up to that need. It's more that the need manifested itself with the economic crash, as companies realized they would rather keep as much cash as possible in the bank in order to more successfully navigate the uncertain economic climate. Subscription model satisfies that risk aversion.
TeMPOraL 8y ago
I keep hearing this "capex vs. opex" argument from time to time; are there tax benefits to this, or something else that justifies putting the same costs under different label?
- enraged_camel 8y ago
  Yes. Cash at hand is very valuable. It cushions you against certain types of business risk and also gives you the ability to pounce on opportunities that may come up (e.g. acquiring another company). In some companies there are also budgetary reasons. For example, a department may blow their capex budget on something early in the year. If you have a payment model that supports regular payments, the customer can still buy your product, as opposed to having to make room in next year's budget (which is not only not guaranteed, but also delays the purchase). But the biggest reason is ROI. Let's say there is a software that will save your department $1000 per month. You can either buy this software for a $24,000 one-time payment, or for $500 per month. If you do the former, it would take you two years to start realizing the ROI. If you do the latter, you start realizing it immediately. And of course, if you don't like the software, you can always cancel your subscription, which means you're also protected against the risk of, say, buying something that never gets adopted by the users (or project failures, etc.).
  - jerf 8y ago
    Even for individuals, it can be useful. I've taken out loans for vehicles I could technically have afforded to drop the cash for (turning a one-time expenditure into a subscription, basically), but dropping the cash would have in a stroke eliminated my entire cash reserve. I'd rather have a (secured) loan at what was at the time an absurdly low interest rate (in the end I think I paid ~$300 interest total) and still have my reserves around for the entire time, rather than had a window of time I would have been lacking reserves in. As it happens, I would have been fine just dropping the cash. No major emergencies occurred. But I didn't know that at the time.
- mbesto 8y ago
  Interestingly enough, there are arguably better tax benefits towards capitalizing licensed software (Capex), instead of subscriptions (opex). I have a lot of PE clients who actually prefer CAPEX because it can make EBITDA look larger, but like the simplicity of OPEX.
- toast0 8y ago
  My understanding is that capex purchases must be deducted over time, but opex costs are deductable immediately. Moving tax deductions sooner is generally a good thing, although, as a sibling pointed out, moving the deductions later makes your current net income look more attractive, and there are many reasons that deductions in a layer year could be more advantageous in specific situations.
- manigandham 8y ago
  It's about cashflow. Capex is a major investment, and harder to account for by deducting over time. Opex is much more reactive, both in accounting and in scaling costs of goods with actual sales.

HeyLaughingBoy 8y ago

I get the feeling this is something they always wanted, but the software business model had to catch up to that need. Thinking back to my first job as an EE in the early 90's, I clearly remember the new owner of the company who had been a CFO in his previous life, trying to figure out a way to move our hardware sales to a leasing-type model. His experience as a CFO led him to the conclusion that larger companies would prefer to bill items to OpEx rather than CapEx for just the reason you said.

enraged_camel 8y ago
>>I get the feeling this is something they always wanted, but the software business model had to catch up to that need. It's more that the need manifested itself with the economic crash, as companies realized they would rather keep as much cash as possible in the bank in order to more successfully navigate the uncertain economic climate. Subscription model satisfies that risk aversion.

TeMPOraL 8y ago

I keep hearing this "capex vs. opex" argument from time to time; are there tax benefits to this, or something else that justifies putting the same costs under different label?

enraged_camel 8y ago
Yes. Cash at hand is very valuable. It cushions you against certain types of business risk and also gives you the ability to pounce on opportunities that may come up (e.g. acquiring another company). In some companies there are also budgetary reasons. For example, a department may blow their capex budget on something early in the year. If you have a payment model that supports regular payments, the customer can still buy your product, as opposed to having to make room in next year's budget (which is not only not guaranteed, but also delays the purchase). But the biggest reason is ROI. Let's say there is a software that will save your department $1000 per month. You can either buy this software for a $24,000 one-time payment, or for $500 per month. If you do the former, it would take you two years to start realizing the ROI. If you do the latter, you start realizing it immediately. And of course, if you don't like the software, you can always cancel your subscription, which means you're also protected against the risk of, say, buying something that never gets adopted by the users (or project failures, etc.).
- jerf 8y ago
  Even for individuals, it can be useful. I've taken out loans for vehicles I could technically have afforded to drop the cash for (turning a one-time expenditure into a subscription, basically), but dropping the cash would have in a stroke eliminated my entire cash reserve. I'd rather have a (secured) loan at what was at the time an absurdly low interest rate (in the end I think I paid ~$300 interest total) and still have my reserves around for the entire time, rather than had a window of time I would have been lacking reserves in. As it happens, I would have been fine just dropping the cash. No major emergencies occurred. But I didn't know that at the time.
mbesto 8y ago
Interestingly enough, there are arguably better tax benefits towards capitalizing licensed software (Capex), instead of subscriptions (opex). I have a lot of PE clients who actually prefer CAPEX because it can make EBITDA look larger, but like the simplicity of OPEX.
toast0 8y ago
My understanding is that capex purchases must be deducted over time, but opex costs are deductable immediately. Moving tax deductions sooner is generally a good thing, although, as a sibling pointed out, moving the deductions later makes your current net income look more attractive, and there are many reasons that deductions in a layer year could be more advantageous in specific situations.
manigandham 8y ago
It's about cashflow. Capex is a major investment, and harder to account for by deducting over time. Opex is much more reactive, both in accounting and in scaling costs of goods with actual sales.