*Originally published on CEPro.com
While establishing technology-as-a-service programs in the AV industry would be no small task, business owners should be well-versed in the benefits and drawbacks of the model.
In the last 3 years our company has hired 50 employees and outfitted each of them with the latest computer technology all without purchasing a single computer. The way we did this was by taking advantage of Apple’s technology-as-a-service (TaaS) pricing model for our company’s computer needs. It’s worked out beautifully for us. Rather than outlay up to $2,000 / new employee for the latest Apple hardware we pay $75/month for a computer, AppleCare support, and a guaranteed new computer in two years.
It’s clear why this approach is so attractive to all parties involved: the employee gets the latest hardware, Apple secures sales it may not have otherwise secured, our company gets to offer a generous perk of “choose whatever computer you want when you join the company”, and the financing provider gets interest on the loan. Everyone wins. And this isn’t just popular with SMBs, it’s also popular among consumers for iOS devices. I myself haven’t purchased an iPhone in several years, opting instead to simply lease one for two years and upgrade at the end of the term.
Can the CEDIA market pursue a TaaS model? We can analyze this by breaking down Apple’s ecosystem to appreciate the mechanics of each component.
Financing and the Cost of Support
Whether self-financed or through partnership with banks, someone has to be willing to fund the initial purchase of the asset. In the case of Apple, the hardware (computer) and ongoing support (AppleCare) are bundled together to create the asset. A 3rd-party bank (CIT) provides the financing to fund the purchase of this asset. The customer (our company) then repays the loan to the bank over time.
This requires both the ability to value the bundle in a profitable way and the ability to fund it. This is a relatively straightforward process for hardware, but more difficult when you include services of unknown intensity (more on this in Support section below).
For our industry to be able to move to an as-a-service model, we would need to develop an understanding of the cost of support for any given system or group of systems. Unfortunately, two identical systems can generate vastly different support costs depending on the people using them. In the absence of more and better data, this makes understanding our true cost structure exceedingly difficult.
Predictable Lifetime Value (Including Resale Value)
With Apple, their customers tend to know what their upgrade cycle will be for their computers. At OneVision we upgrade computers about every two years since the technology is still developing at a pretty quick pace. Apple is in control of this feature release cycle and engineers their feature development to create cyclical demand. In short, they know we will want new computers on a regular cycle so they are able to offer a timed lease program to match.
Furthermore; Apple knows there is a strong demand for their used hardware and they have a good understanding of the resale value. This allows them to certify and then sell the used technology to maximize the lifetime value. This is similar to how the car market works. Leased car sales make their money on the resale value of the certified pre-owned sale at the end of the lease.
For our industry to execute on a model like this, we need a stronger command of the upgrade cycle due to manufacturer’s feature improvements and evolving consumer needs. Beyond that, we’d have to source confidence in an efficient resale process that delivers predictable returns. No smart home is made up of one manufacturer so this becomes much harder for the integrator. Additionally, the resale value of home technology components is unknown at best. Given the pace of development and the continued commoditization of certain product categories, it is likely that the resale value as a whole is near zero. This makes it difficult, if not impossible, for us to resell the technology at the end of the lease.
Support for TaaS
A key component to Apple’s TaaS program is a highly efficient, effective, and predictable service model.
Contributing to this are:
- An established network of Genius Bars across the company that deliver high-quality support;
- Serviceable hardware with quick repair ability (e.g. replacing screens in the store);
- Supply chain control to repair hardware efficiently (e.g. inventory of refurbished hardware for quick replacement);
- Data to understand the actuarial math behind the cost of support over the life of a piece of hardware.
While Apple established a high bar in this category, they’ve made it clear that support is a significant component and competitive edge to their TaaS model. Our industry will likely struggle to achieve the efficiencies required for several reasons.
First, we need to achieve far more standardization than we have today. Additionally, the technology needs to become more reliable or serviceable (e.g. more remote repairs or first-visit repairs). And Lastly, the industry needs a more efficient means of providing all this support with the data that goes with it (i.e. service departments with teams, software, and processes that focus on service as a profit model).
Demand for Technology-as-a-Service
The value proposition of a TaaS model is that it reduces risk to the consumer by stabilizing an otherwise unpredictable ownership experience. Instead of having to engage in a high upfront cost of purchasing the computer, worrying about the cost of repair, and trying to optimize the upgrade cycle of the technology, we at OneVision simply pay a fixed and low monthly fee.
We would probably spend less money over time if we purchased the computers outright, stretched the lifetime of a computer to 3 years, attempted to repair things in-house, and resold the computers as used. But the opportunity cost of that cash and our energy to manage it all is significant for some. Like us, many companies prioritize cash flow and prefer a simpler approach at the expense of a higher lifetime cost. Without this option we very well might have chosen a less expensive computer vendor and Apple wouldn’t have gotten our business.
Contrast this to our industry. We thrive at the high-end of the market. The top 5% of the population earns >$300k/year. The top 1% of the population earns >$730k/year. Unlike cash-flow sensitive businesses, most high-end clients tend not to be cash-flow sensitive. They also place a high value on having the latest technology which creates a shorter upgrade cycle than a TaaS model would support. In short, they are unlikely to compromise on their experience for the sake of cash flow.
But Cash Flow is Valuable
With all of that said, there are some people who would love to have the option to preserve cash flow. If you’re a business trying to scale to the mass market or simply believe this option would help you win more projects, then consider the simpler option of financing.
For example, companies like Synchrony provides financing options so that integrators can propose large projects with a financing option spread out over a few years. This carries with it the majority of the cash flow benefits to the client (upfront hardware expense spread out over time) while eliminating all the risk to the integrator. In this case, Synchrony is simply providing a loan to the client.
That being said, establishing a TaaS program in our industry would be difficult to pull off. This is largely due to the unknowns surrounding service and support costs. To compensate for these unknowns, the offering would have to be priced so high that clients would likely balk at the price. Conversely, bringing the price down to a more digestible level for clients would expose us to undue risk.
Other industries have demonstrated that a TaaS model is possible, but we have our work cut out for us to implement it here.
Without more and better data surrounding the true cost-to-serve of integrated home technology systems, we won’t be able to price it appropriately. A lack of high and predictable resale values leaves us without one of the key pillars of successful TaaS models. And to top it off, it’s unclear that this would drive up sales among our target demographic. With time our industry will mature and until then we likely won’t be able to develop a viable technology-as-a-service model.