Software margins choked by the cloud?

Microsoft expects to lose margins as "cloud" competitors start to eat away at its core businesses.

Kudos to Microsoft for calling out the obvious. But the software maker still has a lot to learn, if it thinks it can charge more under its own cloud model because "the customer will pay Microsoft a larger fee, since Microsoft also runs and maintains all the hardware," as Nick Carr notes:

Capossela's assumption that Microsoft will be able to charge companies more under the cloud model seems optimistic, given the different economics of providing software as a Web service and the aggressive pricing strategies of cloud pioneers like Google, Zoho, and Amazon.

Put more bluntly, there's not a chance in Hades that Microsoft will be able to charge more for its cloud-based offerings--not when its competitors are using the cloud to pummel its desktop and server-based offerings. This is something that Microsoft (and everyone else) is simply going to have to get used to. The go-go days of outrageous software margins are over. Done.

Open source and the cloud (or software as a service, if you like) are still plenty profitable, but the software model for writing once, then digitally copying and charging everywhere is out the window.

Those who desire outsize margins, as Google still gets, need to learn to charge for something other than the software. Pure software businesses will be less profitable, going forward, because the software industry has matured and will increasingly look like other industries that depend primarily on service.

Is this cause for mourning? Of course not. It's just what has always happened to technology-driven industries. Anyone wanting to see where software is going needs only to study the railroad. Or, in Google's case, the billboards along the side of the road. ;-)

Open-source and cloud-based computing are focusing the software industry on customers and service thereof, not on software. It is a highly profitable future, but perhaps not as profitable as it has been.

That's not a bad thing. It is, in fact, a very good thing for customers, who get more value and pay less for it.

[tvoneicken]

Matt, having been in the SaaS business for 9 years I couldn't agree more. With respect to the cloud I think one of the most difficult challenges is the pricing model. If monthly subscriptions have already been difficult to grok for traditional software vendors, just imagine the hourly "utility" charges that Amazon has put forward! What we have observed at RightScale (http://www.rightscale.com) in managing many customers' deployments in the cloud is that the convenience of the cloud increases consumption. So even if the prices are cut dramatically to license software (whether as traditional license or in the form of a service) the revenue doesn't take the same type of hit because consumption increases. What this shows is that many businesses have significant compute needs that are not being met because of the traditional cap-ex or hosting contracts and lead times. Often businesses can also save work by throwing more hardware resources at the problem and the cloud model really facilitates that.
In summary: I wholeheartedly agree, the service around the software is where the value lies, and companies that understand the new pricing and consumption dynamics are the one that will win in the end.

[tvoneicken]

Matt, having been in the SaaS business for 9 years I couldn't agree more. With respect to the cloud I think one of the most difficult challenges is the pricing model. If monthly subscriptions have already been difficult to grok for traditional software vendors, just imagine the hourly "utility" charges that Amazon has put forward! What we have observed at RightScale (http://www.rightscale.com) in managing many customers' deployments in the cloud is that the convenience of the cloud increases consumption. So even if the prices are cut dramatically to license software (whether as traditional license or in the form of a service) the revenue doesn't take the same type of hit because consumption increases. What this shows is that many businesses have significant compute needs that are not being met because of the traditional cap-ex or hosting contracts and lead times. Often businesses can also save work by throwing more hardware resources at the problem and the cloud model really facilitates that.
In summary: I wholeheartedly agree, the service around the software is where the value lies, and companies that understand the new pricing and consumption dynamics are the one that will win in the end.

[kiwibuntu]

This is really quite ironic. When PC-DOS was released it set the expectation for OS pricing at $40. CP/M-86 cost 6x that and the market decided it wasn't 6x better. Which is why DOS became the ancestor of most desktop computer OS's and CP/M is ancient history. Once a low price point is set it is hard to argue the price back up again, even if you think your offering is better. Source: In Search Of Stupidity - Over 20 Years Of High-Tech Marketing Disasters 2nd Edn, p.31.

[jabailo]

The cloud will eliminate almost every argument for not using Linux and OpenOffice. If it's installed and run on the server side, with only a "terminal" client connecting via WiMax then it's pretty much over. Oh, and Google isn't any safer -- since almost anyone will be able to become "a Google" and do it with much better search algorithms. Also, their advertising model is based on people only having access to the lowest and most ignorant forms of Boolean search...with the cloud, I can lease server space and set up hundreds of "googles" by the hour with better algorithms.