In this one-on-one interview with Acronis President, John Zanni we uncover how he mushroomed revenues at Microsoft’s hosting division with a business strategy now commonly known as SaaS–or software-as-a-service. He’s looking to 10x revenues again, now at cyber protection giant, Acronis.
John Zanni: I’m John Zanni. I’m the president of Acronis and also the president of the Acronis Foundation.
Jordan French: Great. So John, you and I, we have gotten to know each other a bit. You had a storied career at Microsoft. One thing the show’s audience is interested in is how to grow their business more quickly, certainly – and you come at it from a pretty interesting angle. One of the things that you did that you told me, was shift business models. So can you explain what you did at Microsoft?
JZ: Sure. Yes, so I was at Microsoft for 16 years. Besides some of the early part of my career, which was more about learning about how to work within Microsoft, I’ve always been in a business development or new business area – usually related to the internet in some form or fashion. One of the items we talked about was that I took over the hosting channel when it was about a $150 million business, which at the time was quite disruptive. While everyone else, including Microsoft, was selling perpetual licenses with maintenance, I was going around with my team and selling subscription services to hosters to create offers based on Microsoft technology. So that was quite a bit of difference.
Over a period of six years, we root that business to being about $1 billion of run rate and incubated also the syndication of what is now called Office 365, and other services. So it started with just software being used on a subscription model, to software and services being used on a subscription model. That was a pretty fantastic transformation and of course, seven years later, those businesses are massively bigger than they were, even when I left.
JF: So what’s the difference between selling a license and selling a subscription? Especially from a revenue standpoint.
JZ: Yeah. So the difference is when you sell a subscription, you get a little bit of money very frequently. When you sell a license, you get a lot of money up front and then you have to renegotiate the license for however long the term is – one, two, three years. The challenge there, of course, is that when you sell a subscription, you don’t get a lot of money up front. So if you have a business model that’s used to that, you can see a dip in your revenue that you have to manage very carefully. So that transition needs to be thought through regularly. The beauty about subscription is that it’s a gift that keeps on giving, and so it just keeps on growing, and growing, and growing.
JF: And for Microsoft, was this the first time that they experimented with a subscription model?
JZ: They had some other models like that – some on the consumer side, but definitely in the business side, specifically with B2B offers. This was, as far as I know, one of the first ones that they were doing it. They did it because service providers were offering a hosted service, and according to the traditional Microsoft licenses, it was not permitted – so Microsoft had to make a license that allowed this new business model to be compliant.
JF: So one of the things that you did as a consequence of this, was change the terms of service of a license. Is that what I’m hearing?
JZ: Correct. Yes.
JF: Wow. So you must have hit some resistance at some point in this change. Is that right?
JZ: Oh, of course. Well at first, the resistance mostly came from salespeople who had accounts. They were selling big deals with a lot of money up front, and then the guys would come to me and say, “Oh, I like John’s offer better because I can just pay a little bit.” And all of a sudden, they didn’t meet their quota and I was a hated man within the enterprise sales group. Over time, the resistance was more…I would just say standard, in that no matter whether you’re a $50 million company or a $50 billion company, there’s never enough money to do everything you want to do, and so I had to compete for resources just like everybody else did.
JF: On that issue, we can all intuit that it’s a matter of incentives for salespeople. If they’re selling a subscription versus license and receiving a lot of funds up front, were there any solutions that you crafted? For example, amortizing a sale to get a commission?
JZ: Yeah. We tried a number of activities. It turns out, you have to….you have to, as an executive, you just have to make the decision because the sales motion is different. One of them is more of a partnership, which has some marketing components. The other one is more transactional. If you look at companies that have been successful in transforming from being a pure perpetual license company, to a subscription or services company, they’ve made some pretty difficult decisions. Adobe, for example, who literally overnight went from no perpetual to subscription. Microsoft, if you look at its history, it has made not as extreme of a change, but over time it has made those decisions. If you go to the Office website today, I challenge you to go find a way to buy Office as a perpetual license, for example.
JF: It sounds like it’s had a profound mark on the industry. Let’s look at the reasons why you would do that in a business. Why switch from what otherwise seem like sufficient revenues, from a license to a subscription model?
JZ: Oh, that answer is easy. It’s the customer who wants it. Businesses would never make such a change unless there were some external factors that drove it, and the reality is that the internet and cloud brought two major changes: consumers got used to getting a lot of quality services for free – basically advertiser-funded, and then businesses saw they were able to reduce capex and start their business with a much, much, much smaller investment through subscription. That’s the way it goes. And now, it’s really ultimately driven by customer demand and request. Yeah.
JF: Yeah. Today it would seem that the status quo is a subscription model. In fact, it seems like there are whole crops of tech companies every year that pride themselves as being labeled SAS companies.
JZ: More and more. I mean, I’ve been…how should I say, waiving the subscription flag for 15 years. But what I’m seeing now is we’ve definitely passed the point where the default is subscription, and the backup is perpetual. Now of course there are still a lot of companies who buy perpetual licenses, but that’s becoming less and less.
JF: And you’re now president of Acronis. You’ve moved on from Microsoft. For those of you in the audience who don’t know, Acronis is a leading cyber protection firm best known for its backup software, largely on the internet price side. Why were you brought into and hired by Acronis?
JZ: Sure. So we actually prefer the term cyber protection because it’s more than just security. It’s about really protecting all aspects of data, including authenticity and access. The reason I was brought in was that we, too, had made that transition from a traditional, on-premise software company to a software and services company. We also wanted to build a service provider channel, which I did in the past. So that’s why I was brought in. In the first year or so at Acronis, the only thing I was focused on was jumpstarting our cloud business, and specifically, our cloud business as sold through service providers: telcos, hosters, and managed service providers.
JF: Fascinating. And was there a reason articulated why? Why move from the license structure?
JZ: Oh yes. So there was….well first, the industry was moving there. I mean, you’ve got companies like Carbonite who are 100 percent subscription, right? And the other part, though, is our heritage. Acronis and its founder, has always been channel-based and service provider channel base. So this is a motion we deeply understood, or at least the people brought into Acronis when Serguei came back. And so we made a bet that this was a way to uniquely grow the company, and frankly, leave the competition in the dust.
JF: Sounds like it. And for the analysts – the financial analysts in the audience, c-suite executives who are running public companies – to what degree do you see an impact on earnings multiple, or from feedback from investors, when you pivot to this model?
JZ: Okay. So I’ll add a caveat that I am not a finance person. I’ve seen two items that have been consistent when I’ve talked to investors and finance people and analysts. One, at the early stages of your investment of moving into this kind of service, especially leveraged subscription service. What I mean by leveraged is that the way we grow is we have four factors: number of service providers, number of customers for service providers, number of devices per customer, amount of storage per device. They all multiply, and because they all multiply into…oh, and of course, the fourth one is price per storage. Because they’re all growing, and one sort of flat lowering a bit, you get this accelerator effect.
Getting an investor or analyst to understand that at the early stages is very difficult because it’s an exponential growth curve that, of course, is relatively flat in the beginning. The second part is once you hit a certain threshold, they start understanding that this thing has its own momentum and just won’t slow down. I can tell you that even during some of the downturns while I was at Microsoft, the subscription business was still growing at strong double digits.
JF: Fascinating. So something for the audience to look into for sure. This is John Zanni with me, president of Acronis, formerly with Microsoft, who built up Microsoft’s hosting business. John, for those who want to get in touch with you, how can they find you?
JZ: It’s very easy. I’m always on, but firstname.lastname@example.org. (No relation to the DJ), is the easiest way to reach me.
JF: Great. Well thanks, John. I appreciate your time.
Jordan French is the managing editor of Grit Daily. He is a multi-media tech journalist on the editorial staff at TheStreet.com and a Fast 50 and Inc. 500-ranked entrepreneur. He is the founder of Notability Partners and the co-founder of BNB Shield, Lisbon Hill Farms, Status Labs, BeeHex, and Grit Daily. A biomedical engineer and intellectual-property attorney, French is the author of upcoming book, The Gritty Entrepreneur.