November 17, 2005 12:27 PM PST

Software: No longer business as usual

The software industry, already reeling from consolidation, is grappling with a new problem: finding the right sales model.

The old, traditional model of selling software, either through up-front fees or long-term licenses, is increasingly under strain as both consumers and big businesses demand change.

The latest sign of turmoil: an admission by Microsoft's top executives that ad-supported Web-based services pose a risk to the company's traditional business. Other internal memos show that Microsoft is worried by the growing reluctance of consumers to spend money on software.

The business software market has been wrestling with changes for several years now. Many companies, like PeopleSoft and Siebel Systems, have been acquired. Some have simply gone out of business. And all of the big software makers acknowledge that it has become harder to sell new software licenses. Oracle, SAP and others now rely on selling ongoing maintenance contracts.

"There are some seismic shifts happening" in all areas of the software industry, said M.R. Rangaswami, an investor and software industry consultant. "It's not going to be a complete shift to open source, software-as-a-service or build-your-own. Will (this) have a major impact on the market? Absolutely."

The growing popularity of open-source software, particularly for server software like databases, has shifted strategies at Microsoft, Oracle and other large companies, which now offer free or low-cost products.

Similarly, hosted applications like Salesforce.com that allow companies to switch to a recurring monthly charge instead of a large capital outlay have forced Microsoft, SAP and others to offer similar products.

The confluence of these factors and others is causing dramatic changes in how software is bought, said analysts and company executives. Rather than just charging customers for a CD stuffed with code, providers are increasingly turning to the Web, and to new licensing models, they said.

"Finding new revenue streams is really important so (vendors) are looking at all kinds of contract models," said Joanne Correia, an analyst at Gartner. "When markets become really mature, what happens is people fight for customer control, and that is done via contracts."

In particular, big companies are demanding the ability to buy on an annuity basis, where they pay in smaller increments rather than shell out large sums up front, analysts said.

"It's not going to be a complete shift to open source, software-as-a-service or build-your-own. Will (this) have a major impact on the market? Absolutely."
--M.R. Rangaswami, investor and software industry consultant

With tight IT budgets and slim increases projected for the coming years, corporate customers are eyeing shorter-term contracts--or no contracts at all--rather than pay a perpetual license fee and maintenance costs.

For instance, Joe Drouin, the global chief information officer of TRW Automotive, is taking a look at Salesforce.com, which delivers its product as a Web-based service, in part because of the economics. Drouin said TRW is already an SAP customer. But for new applications, he's looking to cut costs.

"You know, you go in and you spend millions of dollars in software and hardware and you put a big beast in place...The idea (with software-as-a-service is) that you wouldn't have to do that right up front. You can pay as you go," Drouin said. "It's a very compelling model."

Microsoft faces big changes
Customers like Drouin are pushing software makers to keep pace with a rapidly changing industry. One of the most visible transformations is taking place at Microsoft, the world's largest software maker.

Bill Gates, the company's chairman, sees the shift to online services as a "sea change" on par with the company's embrace of the Web more than a decade ago.

The recent launch of Microsoft's Live.com Web-based service, along with a major reorganization in September underscored the company's stepped-up commitment to deriving revenue from services, rather than strictly software licenses.

In addition, the company has mulled the introduction of free, ad-supported products, such as Works and Money. According to an internal strategy paper, consumers' unwillingness to pay for desktop programs is forcing Microsoft's hand.

"The outlook for the packaged consumer retail software market is poor," the authors of the paper, seen by CNET News.com, wrote. "The size of the market is shrinking, and consumers appear less willing than ever to buy software applications off the shelf."

Meanwhile, Google is expanding its array of Web-based products funded by advertising. Although Google's applications are limited to e-mail, photo-sharing and consumer-oriented services, George Colony, CEO of Forrester Research, expects to see much more.

"Google is also leading a pricing revolution," Colony wrote in a recent column. "Google's programs are free, funded through advertising and syndication. This is a prescient move. I foresee a world in which even enterprise applications like financials, ERP (enterprise resource planning), and supply chain software will be advertising-funded."

The growing viability of open-source products is already accelerating a shift in pricing models for businesses, analysts noted.

IBM, Oracle, BEA Systems and other infrastructure software providers have each shifted from a completely closed-source business and increasingly embraced open-source infrastructure software products. IBM even bought Gluecode, an open-source alternative to its WebSphere Java application server, and adopted its business model of monthly maintenance fees.

Open-source advocates argue that open-source software, such as databases or business intelligence tools, is cheaper than existing products. Also, by giving away software--at least, initially--open-source companies do not need to invest as much in sales and marketing, according to analysts and industry executives.

CONTINUED: Power shift…
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13 comments

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That's the problem right there...
"...people fight for customer control..."

That's the problem right there.

Instead of "customer control" maybe some customer satisfaction would work better. Give the customer what they want. It usually starts with the product, but these days people are more concerned with getting money than the actual product.
Posted by ordaj (338 comments )
Reply Link Flag
Translation:
I ran this through the MS Bulls**t and Translation Mechanism (TM, patent pending) and it came out with the following:

"We can no longer use our monopolistic powers to force people to pay $150 for an operating system that is not much of an upgrade from the previous verison. We also can no longer use our monopolistic power and FUD generator to make people want to pay $299 for an office suite with annoying, animated characters just so people can write letters to their Aunt Bertha in Sheboygan.

"Rather than try to increase the value of our software or lower our prices in order to sell more units, we need to use even more nefarious tactics than we've used in the past to generate our revenue, even if it means futher pissing off our customers. We'll wrap Claria around a new version of Clippy and people will love it!"

Go ahead, Microsoft. Put adware in your software. Then sit back and watch people run in droves to OpenOffice, Linux, and numerous other open-source/freeware options that do everything that they need it to do for free without advertising. Throwing adware/spyware with MS apps is the best possible thing that could happen for Linux, Solaris, Mac, and open source software.
Posted by JLBer (100 comments )
Reply Link Flag
While, as it is reported....
... that "Open-source advocates argue that open-source software, such as databases or business intelligence tools, is cheaper than existing products. Also, by giving away software--at least, initially--open-source companies do not need to invest as much in sales and marketing, according to analysts and industry executives"... then just what are the obstacles being confronted by companies such as Microsoft and others -- the fool hardy approach and belief that they can sit in Redmond and elsewhere and push all variants of non-functioning products to the consuming populace around the world; not so any longer; time for change, the answer -- develop and present products and services that make plenty of sense to users (better business "analytical" tools and consumer products et cetera) and we all can live happily ever after!
Posted by Captain_Spock (894 comments )
Reply Link Flag
Software prices and software profession..
I think the problem with the software industry is two fold..

First, every software maker tries to rush new versions through the door while leaving the code full of holes and exposing customers to horrendous cycle of patches and updates. If GM or Toyota release new car model they do their best at the design and manufacturing level to avoid all flaws, which otherwise might result in extremely expensive recalls. Software industry knows, they can getaway by releasing fixes. After all this, how can they expect the customer - whether individual or corporate - to go through the same ordeal by upgrading to a new version which again is full of holes.

The second problem is, IMO, software professionals are overpaid. I am not a software or computer engineer. But, I do know that in my profession, which is chemical scieces, people with advanced degrees (Ph.D. + few years of academic training) get paid around 80K when they join Biotech or Pharma industry. In complete contrast, a guy with a bachelors degree and and couple of years of training writing code is paid much more. Consider that software companies do not have to establish expensive laboratory and production facilities.

I think when these companies wake up, spend more time on code in the first place, and are willing to sacrifice part of their bloated paycheck, then the things will get better.
Posted by indrakanti (90 comments )
Reply Link Flag
Not true of programmers...
Anymore. That used to be the case but thanks to outsourcing the salary a computer programmer brings in is now in the $40's and low $50's per yer.
Posted by ballssalty (219 comments )
Link Flag
M$ Office is dead...
I never thought I'd say this, but the open source market will be the deathblow to M$ applications such as Office. An office suite is a must have to any student such as myself, but I'm not in a position to pay a few hundred dollars just for a word processor or a spreadsheet application. I say check out openoffice.org. You will find replacements for all the applications in M$ office for almost 80% qulaity.
Posted by AimsAlpha (21 comments )
Reply Link Flag
Maybe....
... but what about the S-E-R-V-I-C-E-S offerings that is soon likely to be touted by Redmond! The big question is -- how soon will the world see a reduction in the present 90% market share Microsoft is reported to control in the desktop space!
Posted by Captain_Spock (894 comments )
Link Flag
Not so fast...
You're not the target customer for MS Office. Enterprise customers are (though they sell a reduced price student version). It makes perfect sense that you would find your needs met by free software, but by catering to people who would not normally buy MS anyway OpenOffice doesn't impact MS marketshare.
Posted by Betty Roper (121 comments )
Link Flag
MS Office
You can purchase the programs included in Microsoft Office individually.
Posted by Yuhong2 (27 comments )
Link Flag
Nothing is without reason...
Microsoft can be seeing some market changes about people struggling to pay for software as we do these days.

But the same changing can be nocive to MS but at same time, profitable. Why? The piracy risks will be dramatically decreased. Or....someone will do a copy of hotmail and sell or give away? Someone copied gmail already and sold it?

This is not a new subject, if movie industry (or study groups) say DVD's will die when they improve "Video on Demand", "software on demand" is not so new, but a predictable step.

We just need a faster web. But seems the future is not so far.

And meanwhile, Uncle Bill does his marketing, posing as saint, saying windows will be free, and so on. A positive marketing strategy. It's almost 15 minutes of being saint.

Talking about being saint, if MS is the evil empire, why Apple wants to be the new Microsoft? And why Google wants to be the new Microsoft? Trade/marketing/commercial strategies can change from company to company, but the final result is the "Bill Gates'syndrome" or "It's mine, I control, sit down, lay down, bark!"
Posted by Mark_Smith (85 comments )
Reply Link Flag
I thought...
Some 8 years ago, i thought the best job that someone could have would be a software programmer. Why? Its simple, but dont think im being "against the computers" as the industrial revolution began centuries ago. But since this computer stuff thing, i saw many jobs and professions disappear.

The programmer is always on top, restructuring in some way the work and the way the world works.

Some time s i think, the computer will eat itself. And thinking in an apocaliptical science fiction, if the jobs are disapearing, and the software remain expensive, who will buy software?

And now Microsoft says theres a software crisis out there.
Posted by Mark_Smith (85 comments )
Reply Link Flag
cant stand msn.com
i cant even read the articles without "lower my bills" flashing in psychadellic colors trying to give me a sezuire , in the middle of the article, this tells me that MS is going down hill if they have went to this level
Posted by digitallysick (103 comments )
Reply Link Flag
Blasts From The Past!
"Ahh, the opportunities missed"......

<a class="jive-link-external" href="http://www.theinquirer.net/?article=18420" target="_newWindow">http://www.theinquirer.net/?article=18420</a>

"OpenDoc was invented to solve this and quite a few other problems. OpenDoc is a way of building compound documents with collections of small, portable components called Parts. These parts reside in Containers, and you can put any type of part into any kind of container. Learn only one text-editing part and you can put it into any document container you please. The same goes for spreadsheet parts, or graphics parts, spellchecking parts and so on".

<a class="jive-link-external" href="http://www.os2ezine.com/v1n13/opendoc.htm" target="_newWindow">http://www.os2ezine.com/v1n13/opendoc.htm</a>
Posted by Captain_Spock (894 comments )
Reply Link Flag
 

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