Does Anyone Buy Software Anymore?

Friday Dec 8th 2006 by James Maguire
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Plenty of disrupters are shaking up the software business, from open source to wireless to SaaS. But key facts about the vendor-buyer relationship appear to be timeless.

Big shifts are taking place in the software industry. For most of its history, software has been bought much like a load of bread: you buy it, consume it, then at a later date you buy some more.

But this model is fading. Large companies, who get some (or much) or their software on a license basis, are moving away from purchasing software. Models like software as service (SaaS), renting rather than buying, are fundamentally altering the software business. Also tipping the apple cart are open source and wireless applications. (More on that in a moment.)

Add it all together, and several years from now the software industry is likely to look far different from its current incarnation.

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Among the key questions facing the software business is: Have we seen most of the changes we'll see for a while, or are still bigger shifts coming up?

The answers depends on whether you’re a consumer or an enterprise, says Joanne Correia, a vice president at Gartner and the lead analyst in the firm’s Software Industry group.

Consumers, she notes, use their PC with a browser to visit sites like Google and AOL, getting a lot of their functionality from online tools. Yet however many of their apps are Web-based, “The PC is still sitting there with software on it. So you still need an operating system, and something that connects – that’s not going to go away.”

But the question, she says, is: "How thin can you make it?"

How bare bones can the consumer’s at-home software infrastructure be, with the rest residing online? How close can that user experience come to, say, accessing the Web from a TV in a hotel room, in which virtually no software resides on a user’s box?

Whatever the exact answer, one trend seems clear: given the current direction toward Web-based apps, the idea of trooping out to the store to buy boxed software will someday be a quaint memory.

Mission Critical Apps

In the enterprise world, until the late ‘90s, “We had an ‘occasionally connected’ model,” Correia says. “We didn’t have a lot of bandwidth. We did a lot of dial-up – things were pretty slow.”

Today, of course, enterprise workers are connected at every moment. And many of the array of applications they use have been outsourced, or otherwise reside outside the enterprise. They’re rented or licensed, not purchased.

The exception to this are e-mail and IM tools, which still tend to be owned by the enterprise. “One of the reasons for that is that people believe e-mail is a mission critical app,” she says. “And secondly, a lot of the data that’s stored is really sensitive, particularly with Sarbanes-Oxley.”

The software most likely to be removed from the “must buy” list are apps that aren’t highly customized (or customized at all). “The first thing that went is payroll,” Correia notes. Following that was travel-booking apps and other non-critical tools.

“The next thing that goes is global account management, so that’s why you see a lot of Salesforce.coms, or people who sell account applications, like SAP, Sage in Europe, and Oracle, offering software as a service on the front end, then having it reconcile to the [in-house] back-end stuff.”

“Remember, we’re in a software transition right now,” she says. Many companies spent heavily in the late ‘90s in preparation for the supposed dangers of Y2K. “Every single enterprise system was rebuilt, pretty much.”

And now the cycle is ready for renewal. “Enterprise systems last, on average, seven to twelve years – though some of them are twenty-five years old. And we are just coming into that seven- to ten-year,” cycle end, she says.

The most advanced, competitive-edge companies are actively rebuilding their front-ends and back-ends. In the process, more and more software functions are being displaced from actual enterprise ownership. Over time, we’re headed toward a world where businesses don’t want to own software – or as little as possible.

Next page: Open Source and Wireless

Open Source and Wireless

Another disrupter in the software business is open source. Open source vendors have led the charge to a model in which the original product is very inexpensive (sometimes virtually free), but the vendor earns revenue through maintenance or licensing fees.

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And open source has come a long way in the last few years. “You see a lot of open source in middleware, in operating systems, you’re starting to see a lot of it in databases,” Correia says.

“There’s a lot of open source outside the United States. And those communities are continuing to add value to that.”

Open source’s culture of sharing code turns the traditional software business on its head. This culture of sharing isn’t new, she notes, pointing to the tradition of Unix. “But now it’s enabled by the Internet.”

However, open source faces its own challenges. “We see open source as an environment that people are actually starting to look at, because it reduces costs – but it increases risks sometimes.”

In particular, lingering questions around intellectual property may cause buyer hesitancy. Correia notes that as companies build their own custom apps using open source code, they wonder, “Where’s the line between the enterprise’s IP and open source’s IP?”

At a recent open source conference, Correia spoke with a number of companies about their concerns regarding this emerging software model. One of the more prevalent concerns they voiced was “’How do I provide governance that protects my corporation’s IP…and keeps the open source community going?’ – that’s the challenge going forward.”

Still another disrupter of the software business is the burgeoning wireless world. Not that complex enterprise-level apps are likely to reside on our cell phones anytime soon. “But for the average person, who just surfs the Internet and uses e-mail, as those devices get more smart,” they move the industry toward a Web-based model, Correia says.

The cumulative effect of all these industry disrupters adds up to a certain unpredictability. “The mobile [factor], plus open source, plus software as a service, makes things very interesting,” she says.

Next page: Certain Things Don’t Change

Risk and Tight Budgets

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The rental model changes the business risks in the software industry. “It’s lower risk for the buyer because you have the right to cancel. It’s higher risk for the software vendor because they have to become a farmer instead of a hunter in the long run. They have to continue to add value so they don’t lose that contract every year.”

Causing a further squeeze: budgets are tight. While the software industry is growing (in fact it’s the fastest growing segment in IT) and the overall tech industry is growing, budgets don’t seem any more flexible.

“People are getting smarter,” she says. “It’s not the end of the ‘90s – there’s not money out there where I can just throw it against the wall and hope it sticks. People are being held more accountable.”

Certain Things Never Change

As the software industry changes, “There’s not going to be a winner and a loser,” Correia says. “It’s going to be an evolution rather than a revolution.”

Furthermore, it’s not likely that today’s established vendors – whether they rent or sell or do some combination – are about to disappear.

“There’s nothing forcing people to rip out their old systems,” she says. Established vendors have a powerful toehold. “Once they own your marketplace, and your vendors are written around it, and your data’s out there, it’s hard to rip it out – even if it’s rental.”

In other words, inertia is powerful force. Not to mention the cost of training staff on a new package.

Still, customers have to be happy. “What happens is that service level agreements become really important, and back-up plans become really important,” Correia says.

“I know of companies in that space – I’m not going to name a company – where the service is really, really lousy. But the reality was, we talked about moving to another vendor, and [my colleagues] were like ‘Man, ripping this stuff out is painful.”

So massive changes are overtaking the software industry, yet the old basics of quality and customer service are still major factors. But a desire to stick with the known and established might be the most powerful force of all.

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