The Information Utility
Excerpts from Briefing.com ... just as we've been saying.
The Software Business Evolves
Some thoughts on where the computing world is headed, including: The Information Utility concept, A Brief History of Computing Architecture, The Thin-Client Model, and The Trend Towards Free Software and Rented Benefits. The Internet is a catalyst for all of these trends and will have an effect on all software companies, whether they develop internet products or not.
The Information Utility
In the late 1980's a Digital Equipment Corporation Vice President named David Stone began pushing internally for the development of the "information utility." This service would provide computing power to corporations on an as-needed basis, with a charge for usage, much the way electricity is purchased on an as consumed basis.
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A Brief History of Computing Architecture
Computing architecture can be divided into four "eras" based upon the following four architectural models.
1) The Timeshared Mainframe Model ...
2) The Minicomputer Model ...
3) The Networked PC: Client-Server ...
4) The Internet Thin Client Model ...
How processing capability will be sold in the internet model is the single most important issue in computing today.
The Trend Towards Free and Rented Software
Sun Microsystems (SUNW) last week purchased Star Division, a maker of an productivity suite that runs on Solaris, Windows, OS/S, and Linux.
But Sun has no intention of selling these products in the traditional software business models or even the client-server model. Sun intends to migrate these products to the internet model of thin clients.
The software business model of the client-server era is a license/maintenance model. An upfront license is paid (ownership is never transferred for software), often with a per-user component. An annual maintenance fee providing service and upgrades provides a recurring revenue stream for the vendor.
But Sun's direction hints at the future: the processing capabilities for basic, non-proprietary computing features, such as word processing, email, scheduling, spreadsheets, and other generic functions, will be outsourced!
Sun CEO Scott McNealy proclaimed this new era in an article published in the September 1, 1999 Wall Street Journal, entitled "Why We Don't Want You to Buy Our Software."
But other companies are developing software business models in this new era as well. Critical Path is an example of a company that has successfully built a model on outsourced email.
Oracle is promoting its new server, the Oracle 8i server. This "NT-killer" server has no operating system in the ordinary sense and solely runs an Oracle database with a Java-based programmable engine. Control of the server and access to the server is completely done over the internet, with a browser.
The software business model for the internet era is still being established. But every indication right now is that everything except proprietary software will be outsourced. Fees are likely to be based on either actual usage, or flat "leases," not by users, which will put an end to "shelfware" revenues. How many preinstalled, and therefore prepaid, copies of Microsoft Excel have never been used?
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The Implications
The internet is now the driving force in the world of software business models. First, it is driving the network architecture back towards the centralized data/processing model of the mainframe and minicomputer.
But secondly, the internet is bringing David Stone's 15 year old vision of an information utility closer to reality. The need for computing power will be met by purchasing computer power, not computers.
If this global trend is accurate, and we are really heading in that direction, investors should ponder the consequences. Here are a few.
___Expect to see a slew of new companies with business models based on outsourced IT functions. The new business models will permit significantly lower costs to corporations.
___Enterprise client-server software which has a per-user component to the business model is threatened. Stocks whose revenues streams are based on the license/maintenance fee should be viewed with caution. This includes Microsoft.
___Because of this threat, any software company relying solely on the old model of a license/maintenance fee may find themselves unable to get high valuations on their stock. Their business may continue to grow and even be profitable, but the market is likely to focus on more leveraged models as the next growth stocks.
___As applications become web-centric, PC hardware becomes less important. This will have serious implications for companies heavily reliant on sales of powerful PCs, such as Dell (DELL).
David Stone has been forgotten by most in the computer industry. His vision of the information utility never was really developed in a way that the industry could tangibly see. But the internet now makes an open information utility model possible.
Sun Microsystems appears to be the first major computing company to embrace this change, but it is very possible that new companies, currently unknown, will be the ones that really make it happen. Those companies, when they appear, are likely to be great investment opportunities.
Comments can be emailed to the author, Robert V. Green, at rvgreen@briefing.com.
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