Capex v Opex: AV as utility
The post-digital economy is opening up every aspect of AV as a service but Capex is not about to die out says Adrian Pennington.
Subscribing to services like Netflix and Spotify without owning any physical product is embedded in consumer purchasing behaviour with similar models being adopted across many industries. Rather than investing in hardware, installation and service calls, operational expenditure or AV-as-a-Service procurement models are increasingly finding favour.
In theory, AV (aaS) means that for monthly payments, companies receive all the functionality with none of the pain of upgrade and maintenance of fixed equipment and depreciating costs as a means to better serve clients with greater customisation and flexibility.
“The AV world has been preparing for this shift for some time,” says Carl Standertskjold, European corporate segment marketing manager, Sony. “The business environment in today’s post digital world is making Opex an increasingly feasible model.”
He says customers are already benefitting from more flexible options such as pay-per-use, subscription and rental models, which help to alleviate the financial burden of significant capital outlay while powering greater scalability.
“Organisations seeking to keep pace with the changing demands of their have no choice but to prepare themselves to offer these models if they are to remain competitive,” he says.
Jean Pierre Overbeek, CEO BIS|Econocom Group goes further and argues that IT and AV solutions should be considered as a utility just like gas, water and electricity (and WiFi).
“Businesses already lease cars and their buildings for a monthly fee,” he says. “AVaaS is about taking it to another level across software and hardware.”
AV as utility
For Overbeek, no element is immune. “A number of industry peers were somewhat sceptical when we first talked about this,” he says. “Although AV prides itself on being high tech, it’s quite old fashioned in adopting these business models and has come to the party later than other industries.”
He criticises AV companies considering moving to this model as thinking that aaS means a purely financial service. “That’s a huge mistake. It is not a transactional relationship but about a partnership with clients. It’s one in which suppliers should take a holistic approach which embraces the client’s entire AV strategy.”
Among its enterprise clients is Schiphol Airport where BIS|Econocom has taken ownership of all the digital signage, flight displays and AV solutions. “We put them in a replacement cycle for the future but the same applies for classrooms, hospitals – and many other corporates and verticals.”
The Global Presence Alliance, a partner network of AV and unified communications companies, is another group progressing this shift in supplier-client relations.
“Ultimately, the customer is looking for improved collaborative outcomes,” says Byron Tarry, executive director, Global Presence Alliance (GPA). “If the AV industry starts to realise that they are not technology providers but ‘human collaborative outcomes providers’, then it opens up a whole different world of what the opportunity is and the role we as AV suppliers, integrators, vendors and consultants can potentially play to support that goal.”
Under this model, AV providers will be required to work more like strategy consultants, evaluating various solutions, and function less as installers. As AV plays an increasing role in day-to-day business operations, experts need to understand the organisation’s processes and functions. This goes much further than a simple one-off project of knowing simply where to place a screen.
“I think we’ll increasingly see examples where the ownership of products remains with the manufacturer,” says Simon Hicks, CEO of SixEye. “Products will be made available under a leasing arrangement as hardware and software become part of an overall service provision rather than an end product in themselves.”
He adds, “Companies will market products not just for what they can do now, but about what a relationship with the company and its products will mean in future.”
Barix is one of a growing number of suppliers that offer this model. Its customers can get a complete background music distribution solution where the cost of operation is strictly based on a monthly fee. It offers cloud platforms such as Silence Monitor, Paging Cloud, RetailPlayer or SoundScape that are pay-as-you-go, cloud-based.
“The OPEX model is actually very attractive to AV companies in the end, especially when the service moves into the cloud,” says CEO Reto Brader. “Management is much simpler, and customers basically share the maintenance cost among all users of the platform, lowering the cost even more.
However, Brader notes, customers were slower in adopting than expected, with many preferring to buy the platform. Therefore, its latest Background Music distribution platform has a ‘buy all’ option again. “The biggest part of our business is still selling products and software, and not SaaS.”
“Time will tell if this is a passing change or the sign of things to come,” says Phil Davenport, director of sales and operations EMEA, Datapath. “The key is to offer what the market wants and to be able to provide customers with what they need based on their procurement requirements. It is therefore imperative AV suppliers can offer solutions to both OPEX and CAPEX approaches.”
Before we get ahead of ourselves, the degree of CAPEX to OPEX shift in the industry both clients and from suppliers is small.
“The percentage is very, very, low at least in what we consider traditional AV integration model which is very hardware centric,” says Tarry. “Hardware is an upfront cost. Even if companies restructure the finance portion of that some will still have a piece of metal that down the line they find they don’t want yet feel they’ve still got to recoup its value.”
Software and cloud-based products (like Zoom video conferencing), many of which are already paid for on a licence, make for a natural segue into aaS but there are greater numbers of AV companies whose businesses are geared around selling hardware for a project and then moving on.
“They provide support for those products but often at no extra cost – they are perhaps not persuaded as to the readiness of all their customers for an ongoing subscription model, and are themselves apprehensive of lower revenue in the short term,” suggests Hicks.
“A key change is to adjust the sales team’s targets so they’re motivated around selling ongoing services or subscriptions rather than aiming for short term revenue,” he advises. “The benefits include a closer relationship with customers over the long term, providing recurring revenue and valuable feedback on products.”
However, some of the smaller distributors and independent integrators may feel the strain, as they are not necessarily as geared up to provide the level of support required for a OPEX model, as larger players.
“In many ways, clients will see this as leasing or aaS contract, which will mean higher demand of SLAs and support from both integrators and manufacturers,” says Daniel Watson, senior consultant, PTS Consulting. “As businesses reduce their capital investment and shift to OPEX it has potential to catch AV channels out. Mark-ups on equipment by both distributors and integrators may become less competitive.”
Another key stumbling block for smaller integrators is the shift in accountability that OPEX brings.
“Procuring AVaaS means shifting risk from the consumer of the service to the provider,” says Tarry. “Basically, it’s putting the onus on the provider to deliver results. That’s opposed to CAPEX where the industry sells customers millions of dollars of kit with a service wrapped around it and if the customer doesn’t get what they want then the industry gets them to buy more kit and services.”
Workplace technology solutions that generate data on device usage, such as TEOS Manage, are making an impact. “Facilities managers, corporate communications, and procurement managers are all using this technology to better serve their employees and business,” says Standertskjold. “Procurement want to ensure that employees have fit-for-purpose technology that enables them to work productively. However, they also need to make sure that these technology solutions are cost effective – in both their initial cost, and in their running costs.”
Arguably it is client company culture which is the biggest sticking point when it comes to AVaaS. “It’s the most challenging part for us,” says Overbeek. “Many companies still think transactionally - that a project is finished when the last screw is the wall. Greater education is needed by the AV industry to inform customers of the benefits of an OPEX solution.”
This demands a relationship with the C-level suite in which the AV supplier consults on the client’s multi-year ambitions including plans to grow or downsize the organisation.
Watson warns organisations to be careful about the frequency of change. “Future proofing from a technology point of view can only go as far as people and processes allow,” he says. “Sure, businesses can invest in infrastructure to cater for changes in technology within an organisation, architects can design rooms and buildings to allow the swap out of hardware, but the adoption of technologies among a workforce takes time. If there is a constant change in technology, users will never get any work done as they will require constant training.”
He continues, “There is a danger that organisations will react to changes in technology just because they want the latest and greatest and want to be seen as a leader and this could be highly disruptive.
Under a CAPEX model where technology refresh is budgeted ever 3-5 years, organisations are proactive,” says Watson, and will workout what users really need often producing a better or higher RoI. “That said, an OPEX model will allow organisations to adapt to the changing workforce, attracting new talent and increasing retention. This could also produce higher ROI.”
So, it’s horses for courses. “There remains no universal truth when it comes to customer needs, so engaging with the market to understand the procurement models that work for different businesses and testing new methods and models is vital,” says Standertskjold.
Upgrades and refreshes can be a great advantage of an OPEX approach - something more relevant in anything fast paced and public facing, such as digital signage.
“Control room and medical markets, however, will likely keep an approach of buying the highest quality products with a long-term use case,” notes Davenport. “It is all about budgets and approvals. Capital investment can often be a longer process with more people involved in the decision process. A shift towards operational expenditure allows some organisations to remain flexible and procure the products and services they require to keep up with demands.”
“Large corporate projects with high levels of investment will take longer or may struggle to adopt this approach, while the OPEX /aaS model may appeal to higher education establishments,” says Watson.
Some companies would argue for the benefits of CAPEX, “where you have a clear go/no go decision point and you’re not liable for continual outgoings to maintain service provision,” says Hicks. “The counter argument is that there’s a huge benefit in being able to switch provider in an OPEX model without writing off previous investments. This also increases competition in the market for companies offering AV services under an OPEX model and provides opportunities for new entrants.”
Few would argue against a shift that focuses on the long-term support of projects and products, providing new capabilities to the consumer over time.
However, there will be cases where relying on a third-party provider to “keep the lights on” will cause friction if that third-party provider “isn’t seen to be responding quickly enough,” warns Hicks. “In the ‘old’ way of thinking, the onsite maintenance team might have had more chance of fixing the problem themselves.”
Brader agrees; “For the provider, maintenance and solution improvements are much easier to deploy if they own the solution. The key is that equipment is network-accessible or, even better, network-managed. That is where the hurdle rests today: Access to the system by a third-party company is considered a risk, and many customers don’t like that.”
Tarry points to a desire in the industry for change that will eventually overcome inertia. He says two trends will converge to see this happen. “The first is that the relative cost of hardware is going down. A few years ago, the cost of a room installation would be 80 percent hardware and 20 percent labour. Now with PCs, webcams and flat panels, the labour to hang kit on a wall is the same but the hardware costs have diminished.”
The second piece is that everyone in the industry is trying to shift to more virtualised or professional managed services that wrap around the equipment. We are starting to see customers looking for broader requirements of AV such as training and managed services.
For example, what was until recently a U$50,000 room of which 80 percent was hardware and made as capital investment, is now a U$50k room spread over the whole lifecycle of 3-4 years of which 25 percent is hardware. The value is in the service.”
Tarry feels the industry doesn’t lack demand for this change, but it does lack maturity. “We are at the innovator stage and not yet the early adopter stage,” he says.
Davenport believes, “Simply selling hardware as a one-off transaction will become a thing of the past.”
For some it may already be too late. “AV is not setting the trend. It is following the trend,” says Overbeek. “While companies still question whether AV should be embraced as-a-Service the next generation of recruits to the industry who have grown up with instant subscription access have already made the decision. Any AV company that does not act will miss out.”