Secure Enough to Give Away Free Hardware
By making our appliance a free part of our managed security services, Network Box is seeing growth. Our reseller partners are inking three-year commitments with customers that don’t want to worry about hardware upgrades or replacements.
By Pierluigi Stella
Managed security service providers are not unlike telcos. That may sound strange, but in one very important way, it’s true. Just like telcos, managed security services providers (MSSPs) require their customers to have some very specific hardware.
Think of a triple-play telecommunications package that bundles Internet, telephone, and TV. In order for the telco’s customers to enjoy those services, some hardware has to be installed.
The question is: Should customers really be charged for the equipment? After all, as much as customers need the equipment to surf the Web, the telcos need the equipment, too. Without it, there is no service to sell, is there?
Our company, Network Box USA, crunched some numbers, and we decided the answer to that question is “no.” Not only is it better for our customers to be given the equipment that we need them to have, but it’s also better for our bottom line.
FIXING THE HARDSHIP OF HARDWARE
We decided that eliminating customer cost for our appliances solves a few key problems. For one thing, it made our offering strictly a service. So, in the cases where hardware would be approved by one purchasing manager and services by another, sales of Network Box security was streamlined.
Another big benefit pertains to upgrades and refreshes. In the past, some SMBs wouldn’t want to upgrade to a new appliance because that meant spending more money. Just as they got into a predictable pay cycle, something would become obsolete. As a result, customers were not upgrading, and we were running into some maintenance issues. We had some customers running the same hardware they received seven years ago. Providing new boxes free of charge eliminates that hesitation to refresh.
Finally, the biggest benefit is predictability. The companies and agencies that employ our managed security services now sign a three-year agreement in lieu of paying for a box. For our resellers, that means a lot.
With customer rates locked in for three years (which is a sales tool in and of itself), our resellers can now go back to their business plans and pencil in that recurring monthly revenue. They know that for 36 months, 30 percent of whatever Network Box is charging their customer is coming back to them.
LIFE WITHOUT HARDWARE MARGINS
Not all MSSPs will be able to do what we did. This is our first year without hardware margins. So, there has indeed been a cashflow reduction. Based on our financial calculations, though, this will all even out next year. Then, we’ll have regularly recurring revenue under three-year commitments.
For some in the channel, the loss of margins on the hardware seems daunting. But how much do you really make on hardware? I haven’t seen anyone make money on hardware unless there’s volume.
THE TELCO ANALOGY
Indeed, we have decided to copy the telco model. We’ve decided that our customers shouldn’t have to pay us for the hardware that we need to provide the services we’re offering. Just like many cell phone companies and triple-play providers, we have also decided that three-year agreements would offset hardware loss. Morever, like many telcos, we also enable our customers to end those agreements prematurely—the difference, however, is that we only assess a very small penalty to do it while they often charge an arm and a leg.
There was lot of back and forth among our lawyers and accountants going into this change. One of the things we’ve had to be very careful about, for example, has been taxation. Some customers (mainly banks) wanted to own the box for amortization purposes. That took some legal problem-solving. Also, there are differences among the states and between countries regarding taxation, and those differences had to be addressed.
Now that our commitment-based recurring revenue model is in place, we’re off to a strong start. In just the first two months of the new model, we’re growing. This year we’re taking a bit of a hit for the hardware, but based on our careful calculations, next year new customers will even that out.
Profile: Pierluigi Stella
CTO, Network Box USA Inc.
Established: 2000 (Network Box Corp. Ltd.), 2003 (Network Box USA Inc.)
Number of employees: 200
Company focus: Network Box USA was formed in response to the escalating danger posed by security breaches, virus attacks, and similar threats arising from widespread use of the Internet. It is the American arm of Network Box Corp., a global managed security services provider (MSSP) that delivers a unified gateway security solution. The company’s mission is to make effective Internet security available and affordable to companies of all sizes.