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Meh, CapEx

Level 10

Do you remember the good old days when you saved up your hard-earned cash to buy the shiny thing you’d been longing for? You know, like that Betamax player, the TV with the lovely wood veneer surround, or a Chevrolet Corvair? What happened to those days?

I remember as a young lad growing up in the U.K., there were shops like Radio Rentals or Rumbelows where you could get something “On Tick.” ¹ It didn’t seem like the done thing at the time; it almost seemed like a dirty word. “Hey, have you heard, Sheila got her fridge-freezer on tick.” The look of shock on people’s faces!

Now fast forward 25 years and here we are—almost everything is available on a buy now, pay later or rental model. Want a way to access films quickly? Here’s a Netflix subscription. Need something to watch them on? Hey, here’s a 100” Ultra HD 8K, curved, HDR, smart TV with built-in Freeview and Freesat, yours for 60 low monthly payments of £200. Need a new set of wheels? No problem. Something like 82% of all new cars in the U.K. are purchased with a PCP payment plan. This is people reaching for the shiny thing and being able to get it when previously they couldn’t or shouldn’t.

The OpEx Model

So, what’s my point and how is this relevant to the IT landscape?

First and foremost, rental models can work out more profitably for the vendor selling the goods. Slap a little interest premium on the payments as the cost is spread over a longer term. A rental income is more predictable as well, the annuity is the name of the game.

Incentivizing the rental model makes it look more attractive. Look at the cost of an iPhone, for example. Each new release gets more and more expensive. My first four cars combined cost less than a new iPhone 11 Pro. But Apple (and others) are smart. Pay your monthly sum of cash and every 12 months, they’ll give you a new phone. And oh heck, if you drop it and smash the screen, no problem—it’s covered in the monthly cost. You don’t get that service if you buy an iPhone upfront with your hard-earned cash. It makes customers sticky, as in they’re less likely to move elsewhere.

Now let’s look at IT vendors. Microsoft, Amazon, Dell, HPE, you name it, their rental model fits nicely into an OpEx purchasing plan.

There’s no denying Microsoft has killed it with Office 365. This is something I’ll dive deeper into in an upcoming blog post. AWS and all public clouds allow you to pay for what you consume, on a monthly basis, although this cost isn’t always predictable. 

Even hardware vendors are at it. Dell can wrap up your purchase in a nice finance package spread over 3 – 5 years. HPE has their Green Lake program, which is, and I quote, “Delivering the As A Service experience. We live in a consumption-based world—music, TV shows, groceries, air travel and much more. Why? Because consuming services delivers a better outcome faster, in our personal lives and in business. It’s true for music, and it’s also true for IT.” ²

Conclusion

So why Meh, CapEx? In an increasingly diverse IT landscape, with more and more solutions delivered As-A-Service, coupled with the increased pace of innovation, it can be difficult to predict costs and get it right with a CapEx investment lasting 3 – 5 years. I mean, who wants to still be rocking an iPhone 11 in 2024?

¹ On Tick – To pay for something later, via Urban Dictionary https://www.urbandictionary.com/define.php?term=get%20it%20on%20tick

² HPE Green Lake Quote https://www.hpe.com/uk/en/services/it-consumption.html

18 Comments
Level 14

It's hard to argue with this model when you're constantly trying to stay up to date without breaking the bank.  Thanks for the article!

Level 12

Hey Ian

I appreciate the post, but as with all things, I think "it depends."  In my current role, I report to our CFO. What they care about is less about cash flow, and more about TCO. One way to drive down TCO is to own gear for longer. Even in a previous role at a "SaaS" provider, we had long term contracts without a lot of flexibility that didn't scale rapidly, so fairly static equipment was ok.

That being said, if you're growing, if your growth is at an unknown rate, you want to future protect, etc I completely agree.

Thanks for sharing Ian!

Level 13

Thanks for the postian0x0r​. I think your quote is bang on - 'First and foremost, rental models can work out more profitably for the vendor selling the goods.'.  That's the biggest reason we're starting to see subscription only everything.  And if we as consumers roll over and play dead, it may not be very long before it's the only purchase model we have.  We're in a very TCO/ROI sensitive industry where we have to control costs carefully, and it's almost never to our advantage as an organization to lease/rent, especially hardware.  Where we can save costs we do of course, but most vendors don't offer a product that saves the customer money.

Level 10

I think it very much depends on the depreciation of whatever we're buying. Much like the "I buy my car vs. I lease my car". Both have advantages and disadvantages. If I buy a car/SAN/software/etc with outright upfront payment I truly own it, meaning I will be able to use it beyond the depreciation term. On the downside I will have to take care of repairs, maintenance, etc myself. My capital is bound, but once paid off I can still use it and increase my ROI. If I lease or subscribe I have predictable cost, maintenance and repairs (risk) is often included, but the moment I stop payment/can't pay I am out of service / walking. Now, if having the current version/something new all the time is important then a subscription model is preferable. Also, if I cannot predict plans or strategies over several years, I may also be better off with a lease or subscription model. If I have a consistent plan or strategy for a longer term (I want to drive that car until it falls apart), then it may make sense to purchase, especially if there are no outside factors that might prevent me from continued use.

I am from the generation where owning something is important and creates a sense of security. I don't like ongoing dept or payments for things. So I may be leaning more towards the CapEx, while my kids prefer to rent or subscribe to just what they need and rather not get into the long term commitment of owning. It allows them more flexibility to use whatever funds they have to travel or have other experiences, while I would have focused on buying a house or tangible. So newer generations are more used to the pay as you go model.

In the end it's really just a financial question; one has to consider all the factors above and then compare TCO for all realistic options. If there is only little difference in cost the flexibility of a subscription model may make sense. Example: Office365 subscription with automatic updates and all the additional perks of cloud storage, tools etc vs. a shrink wrap version of Office? O365 is the winner for me. iPhone subscription vs. getting a new phone every few years? I don't need the newest phone all the time, so buying every few years is my choice there.

CapEx vs. OpEx is not a one or the other, it is always a case by case decision after looking at all factors.

MVP
MVP

Thanks for the article.

MVP
MVP

its all too easy to forget the ongoing expense of maintaining the capex funded widget and keeping it fed and watered.

I don't think there will ever be only one way of doing things, the pendulum will swing back the other way at some point

Level 12

thanks for the post

Level 10

Thanks for the input Scott. I get what you are saying. I see a lot of companies "sweating assets" to drive that TCO down. From what I have seen though, ti comes to a point where everything becomes unsupported and you end up where everything should ideally be upgraded in one go. I guess if you factor that cost in, then you are onto a winner. Full lifecycle of MS software seems to be 10 years for example, if you get 10 years use out of something, thats going to work out pretty cheap on a perpetual license.

Level 10

I fully agree. I often have discussions around TCO of hardware VS say a cloud consumption model for IaaS. More often than not, you are saving money after the 18 - 24-month mark after the initial investment has been paid for on hardware VS the ongoing rental cost for IaaS.

Level 10

Fully agree, everything seems to go round in 10 to 20-year cycles. Just look at being an IT specialist, the market seems to be demanding good generalists now

Level 10

Thanks for the detailed reply and I wholeheartedly agree. I miss the days when I owned my own car, but then I don't miss having to pay out of warranty repair costs even if I was performing the repairs my self.

You are right, it is a choice depending on what the purchase is. It just seems more and more people are choosing to lease these days, or at the very least, looking at the cost breakdown for TCO of CapEx VS OpEx and the advantages of both.

MVP
MVP

The subscription model for many is great because it is just a low monthly fee so it doesn't look like much.  Meaning who can't afford $10-20 a month for a streaming service or $15 a year for an ad free app on their phone.  Yes much of what the OP mentioned is purely marketing and trying to retain the residuals while keeping the customer captive and invested in their products.  While much of the phone payment plans are via the cell phone companies here in the US, it ties you to both the phone platform for a period of time as well as the cell phone vendor.  Again it is regular monthly income for the vendor which is what they like to see.  Even with the no interest on cell phone payment plans they are still making money since they didn't buy the phone to resell to you at the purchase price you get.  In the end they are trying to elicit brand loyalty while keeping you captive and not wanting to re-invest in all the apps you currently pay for on a new phone platform, at least in the cell phone world.  In other product markets it is different as they may not lend themselves as well to the subscription model.  Just think, software companies have been doing the subscription model for decades, at least in the corporate world with annual licensing and maintenance fees.  Just in the last decade has it become more common in the consumer world like mentioned with Office365.  Maybe some day we will have a true a la carte offerings for only the bits and pieces of a software suite we actually use.  I know many would like that for TV services so you don't have to pay $$$ for package levels with hundreds of channels you don't watch  in order to get the 1 to a dozen channels that do matter to you. 

Back to the topic, subscription/lease vs. purchase, it is a matter of what makes better business sense.  Each person and company is different thus the benefits of either will vary. 

In my case I wouldn't lease a vehicle since my daily drive would eat up the allowable miles in just a few months.  So it comes down to buying used to not take the hit on a new vehicle driving off the lot or if I can get enough of a deal to benefit on the newer vehicle. Here in Texas the used truck market is crazy in that used trucks only a year or two old command prices very close to that of a new truck which makes the comparison pretty close.  But just because the market is like that, the banks see it a little different with regards to loan rates which all become part of the equation. 

So do your homework and put pencil to paper and figure out the math....

Level 11

Thanks for the article.

Level 10

Hysterical but spot on and hard to argue!

Buying used and being happy with it, and paying it off immediately, or quickly, is a path to remaining financially solvent.  I'm shocked when I see car & boat & RV dealers offering 20-year loans on their products, just to keep their monthly payment down to where a consumer can manage it.

I love the latest bells & whistles as much as the next person (as long as IoT isn't involved--what a security disaster!), but I'm also cognizant that I only "want" those things due to artificial influences; I don't "need" them.

Being happy with what a person has is a great philosophy for contentment, since there'll always be someone with newer, more, bigger, "better" stuff than me.  Having no debt is a wonderful goal my family achieved about twenty years ago when we paid off our home, and while I really enjoy cool new tech, I keep my Pavlovian reactions to advertising and product under control.

Level 12

Scott, that's one of the best comments I have seen in Thwack. Thanks for your input!

MVP
MVP

Applies to me

Level 16

Thanks for the write up. I still tend to want to save up for an item then purchase it outright -vs- purchasing it on credit.