How to Get Out of the Hardware Business

Whether you're an I.T. entrepreneur or you lead an established IT business, just about everybody is trying to diversify beyond the hardware business, where thin margins and commodity products dominate the landscape. Even if you don't want to abandon hardware, you can still shift to a recurring revenue approach. Ironically, the evidence comes from IMAX -- yes, the movie "entertainment experience" company.

In IMAX's early days, the company sold high-end projectors and other equipment to theater operators. Similar to how Cisco Systems or IBM sell hardware to data center providers, IMAX was selling its specialized gear to companies that wanted to build out high-end theaters. The challenge: Each build-out involved about $5 million to $7 million worth of expenses.

The model suffered from considerable friction: Many theater builders couldn't afford such expensive, specialized "hardware" -- high-end projectors, speakers, and other infrastructure. At the same time, IMAX struggled because revenue would potentially arrive in bursts -- a big sale here, a big sale there, but the spikes (and potential dips) were difficult to predict.

Business Model Shift

So how did IMAX change? During a fireside chat at Stony Brook University this week, IMAX CEO Richard Gelfond explained how the company shifted from lump-sum equipment (i.e., hardware) sales to a recurring model. In IMAX's case, the company designed better, lower-cost equipment and then gave the equipment away to movie production houses and theater operators.

In return, IMAX earned a percentage of every movie ticket sold. "We're getting 33 cents on the dollar -- 20 cents from the theaters and 13 cents from the studio" for every ticket sold, Gelfond told the Stony Brook University audience earlier this week.

Instead of a one-time hardware sale, IMAX started earning perpetual recurring revenues from theaters and movie studios that use its brand and equipment. Impressive, but Gelfond isn't resting on his laurels. The company is now launching a range of at-home entertainment services and solutions, since entertainment content increasingly get pumped directly to consumers.

Lessons Learned

So how does the IMAX subscription move potentially apply to the I.T. hardware industry? Yes, companies like Great America help hardware vendors and customers with hardware leasing programs. And some companies promote "hardware as a service" -- a flat monthly fee for the use of hardware, completely refreshed once every three years (one-third annually in a three-year cycle).

But I wonder if the other shoe is set to drop, especially as IBM, Cisco and others try to cope with Amazon Web Services, Microsoft Azure and Google Cloud Platform. In the case of both IBM and Cisco, it's easier and easier to imagine financing plans that allow customers to pay monthly fees for converged on-premises data centers. Or, we may see IBM set up and operate its own mainframe farms, renting out compute cycles to customers worldwide.

Software has already shifted to the monthly-subscription/service model. Hardware, in some cases, is next. IMAX proved it in the theater equipment business. And in some niches, we'll see the model repeat itself with on-premises data center hardware...

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