I’ve had a lot of conversations lately with product managers who are wrestling with the appliance question:

Should they create a software-only product, or should they deliver an integrated hardware-plus-software appliance that contains all the underlying hardware and software needed to run the product?

It’s an important question because:

  1. It has broad ramifications for the company: Are you fundamentally a hardware + software company (with hardware engineers, warehouses of physical product, etc.) or the more streamlined software-only company?
  2. It is very difficult (and potentially ill-advised) to do both.

There’s a lot to say about this topic, and there are no pat answers.   Thus far, the market has not shown an overwhelming preference, even though specific customers have strong opinions. So, no matter whether you sell appliances or software-only, you’ll find you can’t participate in many deals for which your product would otherwise be a great fit.

Because of this, some hybrid approaches are emerging under the monikers of “software appliances,” “cloud appliances,” etc.  I’ll go into these hybrids in a future post, but for now I’m going to focus on the decision between traditional on-premise installed software and a hardware+software appliance.

Anyway, here are some things for product managers to consider as they go through their decision calculus (in no particular order):

The Pros of Appliances

  1. Appliances are sometime easier for business users to buy. If your target buyer is on the business side (not in IT), it might be easier for him/her to just purchase and run an appliance rather than getting IT involved.  Corporate IT can be notorious for squelching purchases for new products, especially if they’ve already aligned themselves with a big vendor like IBM or HP.  I heard of one business-side buyer buying an appliance and hiding it under his desk, all so the IT director next door wouldn’t find out, since the appliance was not on IT’s “Approved” list.
  2. Customers perceive simplicity. One purchase to make. One price to negotiate. One vendor to deal with. One “throat to choke” if things go wrong. This perceived simplicity might give you the edge versus competitors.
  3. Quicker and less risky deployments, leading to higher success and happier customers. At least that’s the theory.  The customer does not have to integrate, configure, tune, and test a complicated combination of storage devices, processors, device drivers, operating systems, application servers, databases, database drivers, security software, etc.
  4. Goes with Geoffrey Moore’s recommendation of offering absolute full solutions to your target market. The appliance does it all. For other markets that are opportunistic and not truly strategic, let them (or partners) piece together their own full solutions.
  5. Say goodbye to the enormous Supported Product Matrix, and the huge amount of QA effort needed to test your software on all the possible combinations. As a company, you won’t have to purchase and maintain these pieces of hardware and software either. At one company I know that moved their business model to appliances, they were able to reduce their build-and-test time from 36 hours to 6.  And they were able to reduce their inventory of test platforms from 100+ boxes to 10 or so.  (Of course, reducing the number of computers might also be accomplished via cloud Platform-as-a-Service, but that’s a different article).

The Cons of Appliances

If you are offer an appliance, you’ll have to overcome the following:

  1. If you, the vendor, are small, and your customers are big companies, you probably can’t buy the hardware as cheaply as your customers. If you’re an appliance, you will eat the difference between your hardware cost and what your customers could obtain it for.
  2. You’re at the whims of hardware suppliers. This can be particularly bad if some of your suppliers might decide to become your competitors.
  3. Customers can’t re-use boxes they happen to have lying around for your product, which might have lowered their project costs.
  4. Hardware and software buying cycles are often different. Hardware is often bought when the previous boxes “become obsolete” according to the customer’s IT department’s obsolescence plan.  Software can more frequently be bought whenever the business case is compelling, regardless of whether the old hardware in the data center is due for a refresh or not.
  5. Customers seem to have a tighter range of price expectations for hardware than software. You might find your appliance being compared to a hardware server, or to other appliances that are not even in the same problem domain. Software, in contrast, has a huge range of prices – ranging from free to several million dollars – that seems to preclude customers from taking a “cost-plus” mindset or comparing one piece of software to another based on anything but the benefits that the software will bring.
  6. Recognizing revenue takes longer. To recognize revenue, you need to get the entire product in their hands.  For installable software, that means that at 11:59pm on December 31, the customer can download the software from your website and you can count that revenue in the year-end financial results.  But for an appliance, you have to get the product assembled and on a truck first.  And in some cases, you might not be able to recognize revenue until the appliance is actually delivered to the customer’s site.
  7. You’ll need to carry inventory, possibly on several continents. You’ll need to develop relationships with warehouses, drop shippers, and hardware assemblers. Alas, more parties between you and your customers means you collect less revenue and that your relationship with the customer is more distant and less under your control.
  8. You need to collect sales/use tax and handle the special accounting and financial rules for physical goods.  In fact, you’ll have to learn how to do this in all the countries/states/provinces/counties/cities where your customers live.  In other words, you’ll need to outsource order fulfillment.  And that means you’ll need to carry inventory.
  9. You’re on the bad end of “one-throat-to-choke.” YOU are now responsible for, say, the bugs in the IBM DB2 instance, or the propensity of these particular EMC disk drives to error out.  Even though you have no ability to fix these problems, other than call into IBM or EMC support.
  10. Your appliance might not fit in with your customer’s data center standards. Although you would think that customers should not concern themselves with the technology inside your appliance’s “black box,”  many of them WILL in fact be concerned and will demand extensive technical details.  And if they don’t like what they hear , expect to be eliminated from consideration. This scenario is more common with larger companies and those that put a high priority on security. They’ll want to make sure that your appliance’s O/S kernel is hardened with the latest patches, that you aren’t running software with known vulnerabilities, etc.  These organizations will often have a “do not deploy” list and if your appliance embeds one of those black-listed components, well, you’re S.O.L.
  11. Appliances are counter to data center trends of virtualization and cloud deployments. It’s the pendulum swinging back, to the furthest extreme, in fact.  Virtualization and the cloud are all about separating hardware from software so you can add/remove capacity on the fly and have multiple applications more efficiently share hardware.  In contrast, appliances completely meld the hardware and software together.  If you need more capacity, you need to wait until you can buy another appliance.

There are many other pros and cons to consider in the product decision of offering software-only versus integrated appliances. These are just the ones I thought of off the top of my head, so please feel free to add more in the comments.