From this morning's WSJ.
Software Business Goes Online,
Transforming a Huge Industry
By DON CLARK
Staff Reporter of THE WALL STREET JOURNAL
WOODSIDE, Calif. -- Some of software's brightest stars met recently at
entrepreneur Heidi Roizen's home here to bestow awards on seven
industry visionaries. Many at the party, including Microsoft Corp.'s Bill
Gates, owe their wealth to the long-running personal-computer boom. Ms.
Roizen herself used part of her windfall from the sale of PC software
maker T/Maker Co. to convert a run-down mansion into a
Mediterranean-style showplace.
But the party buzz this night is about a
different business. The Internet is fueling a
fundamental shift in software development,
from PCs to machines called servers
connected to the Web. Between cocktails and
hors d'oeuvres, Ms. Roizen's high-powered
guests chatter about Web-server ventures that are redirecting careers
and creating yet another wave of digital fortunes.
"Could a company like T/Maker get funded today?" asks Ms. Roizen, now a
venture capitalist who invests only in Internet companies. "No way."
Rental Application
Software, in fact, is morphing into an online service, reshaping an
industry that has generated more than $600 billion in market
capitalization. Instead of buying and installing programs, users
increasingly can rent the same functions from Internet services -- or get
them for free if they sit through advertising.
Among the signs: Intuit Inc. says 388,000 people filled out their 1998 tax
returns on its Web site rather than by buying its TurboTax software.
More than 100,000 people log on to the site of Atlanta-based Employease
Inc. to use human-resources software; their employers pay $3 to $4
monthly per worker instead of buying and installing programs on their
computers.
Other users are storing calendars, addresses and private mail messages
at a flotilla of Web services -- and accessing the information by using
pocket-size PalmPilot devices and television set-top boxes, in addition to
PCs. In each case, servers do the heavy-duty processing, and the only
essential user program is a Web browser.
The stock market, as it is with so many things related to the Internet, is
ga-ga over online software. Critical Path Inc., a San Francisco service
that lets companies outsource their e-mail, boasts a market
capitalization of $1.54 billion -- on $897,000 in revenue and a loss of
$11.4 million for 1998. By contrast, T/Maker, which Ms. Roizen
co-founded, fetched only $20 million when it was sold in 1994, though it
was profitable and had $15 million in annual sales.
Making History
Not surprisingly, would-be entrepreneurs are hastily scratching
"software" from their business plans and substituting ASP, the acronym
du jour, which stands for applications service providers. "In the past six
months, we have not seen a business plan for a conventional packaged
software application," says James Breyer, a venture capitalist at Accel
Partners. "It's the first time in our history I could say that."
The trend is also playing a role in the landmark Microsoft antitrust trial. If
users don't need PCs with Microsoft's Windows operating system or Intel
Corp. chips to use Web-based software, the vaunted market power of the
duo called Wintel doesn't seem so unshakable.
Microsoft's lawyers repeatedly made that point in the closing days of
testimony last month in federal court in Washington, D.C. After hearing
about software being offered on Web servers, Judge Thomas Penfield
Jackson wondered aloud why programmers weren't developing such
products in droves. They are, testified Gordon Eubanks, a Microsoft
supporter and software-industry fixture.
Starting Over
He should know. After 15 years selling PC software at Symantec Corp.,
Mr. Eubanks recently moved to a start-up called Oblix Inc. that makes
programs that manage how users tap into Web servers. He testified that
few companies he knows still tailor products mainly for operating
systems from his friends at Microsoft. "I think those guys are in trouble,"
Mr. Eubanks adds later in an interview.
That may be premature. Some tasks, involving heavy-duty processing or
storing personal data may be handled with desktop software for many
years. But the trend toward online software is causing Microsoft and
Intel, and most other high-tech companies, to dramatically alter course.
Corel Corp., for instance, is using the Web to simplify the costly chore of
updating programs and finding space on retail shelves. Instead of selling
CD-ROMs full of digitized photos, Corel began using its Web site to sell
individual photos that, at $8.99 to $99.99 each, are both more current
and more profitable than $39.99 disks that stored 100 photos each. This
month, it is launching a $29.95 annual subscription for access to one
million images called clip art; Corel used to sell the same number of
images on 14 disks for $129. Eventually, Corel, based in Ottawa, expects
to deliver virtually all its products by subscription over the Web.
"With the Web, you can update your product once a month or once a week
instead of once every year and a half," says Michael Cowpland, Corel's
chief executive officer.
It is now possible, moreover, to run PC programs such as Corel's
WordPerfect and Microsoft Office on Internet servers instead of PCs.
Companies such as Citrix Systems Inc. and GraphOn Corp. have developed
technologies that allow simple terminals, old PCs and Apple Computer
Inc.'s Macintosh systems to tap into PC programs over the Internet or
corporate networks, ending the need for companies or other
organizations to run desktop software or upgrade machines.
At the middle school in Lexington, N.C., for example, students learn math
and language arts with Windows programs that run on servers operated
by a Web service called Learningstation.com. Citrix's technology has
allowed the children to use cheap, stripped-down terminals instead of PCs;
school officials are even considering buying Macintoshes or old PCs
headed for the scrap heap.
"We calculate we will save about $100,000 a year," says Larry Burwell,
director of grants management for the district. "It's quite amazing."
The last big shift in the software business, known as client-server, relied
on servers and corporate networks. But companies still had to install and
update application software on each PC, a huge maintenance headache.
Rewriting such programs to run on servers through a Web browser eases
that problem, making it easier to tap into corporate information from any
external machine -- including those of customers and suppliers.
Many companies don't want to run servers or hire technicians at all. So
companies from International Business Machines Corp. and Oracle Corp. to
startups such as USinternetworking Inc. and Corio Corp. are hosting
software on their servers, then charging companies fees to tap into the
programs.
Besides offering more predictable revenue than packaged software,
venture capitalists argue that Web services tend to get more useful with
each new user, like the phone system. That's one reason investors are
placing stratospheric valuations on Web-service pioneers. E-commerce
software start-ups Ariba Inc. and Commerce One Inc. have set up
networks to link buyers and sellers. Both companies recently completed
hot stock offerings; Ariba, which has never made a profit, is now valued
at a cool $4.6 billion.
For users, employing the Web for nuts-and-bolts functions such as filling
out tax returns or managing personal finances can offer many
advantages, allowing people to see information from multiple machines
and to share it with others. Some consumers still have concerns about
how secure their personal data might be over the Web, but online
software backers say their systems shield information from prying eyes,
and offer unmatched convenience. The Web is "anytime, anywhere and
anyone access," says Bill Harris, chief executive of Intuit, which is making
Web equivalents of most of its PC finance programs.
The changing tide has swept entrepreneurs in other surprising directions.
Three years ago, a start-up called Netiva began developing a database and
related tools for building corporate business software using a new
software language called Java. It soon found it was spending more selling
its programs than it got from each sale.
The company last year remade itself into a Web site that runs tasks such
as document management and resource planning for consulting firms.
Renamed Portera Systems, the Campbell, Calif., company even plans to
offer Web-based secretarial services through an operation in Memphis,
Tenn.
"We changed to 100%" Web services, says Gary Steele, Portera's chief
executive officer. "We bet the whole company."
Microsoft and Intel also faced big decisions. According to documents
released as part of the antitrust trial, Microsoft's Mr. Gates anticipated
the server-software movement at least two years ago and began
maneuvering to co-opt it, causing friction with Intel.
At that time, Oracle Chief Executive Lawrence Ellison and his allies were
trying to weaken Microsoft's power with so-called network computers, an
alternative to Windows PCs that would run Java software. Companies
weren't eager to switch from PCs, but saw centralized computing as
better than maintaining software on each desktop. NCs were also a threat
because they were managed by servers using the Unix operating system,
rather than Windows NT, Microsoft's network operating system. "Most
applications will have very little [desktop] code in the future," Mr. Gates
predicted in e-mail to a lieutenant in February 1997.
Citrix's technology seemed less threatening, since it uses Windows NT
server software. So Microsoft cut a deal that May to collaborate with
Citrix to offer terminal-style computing.
Intel was not amused when its biggest partner promoted PC alternatives.
Andrew Grove, then its CEO, angrily complained that what Microsoft was
doing "is bad for all PC makers, and they are going to fight this tooth and
nail," Mr. Gates told subordinates in an e-mail message.
Mr. Gates and Mr. Grove, now Intel's chairman, decline to discuss the
episode. As it turned out, NCs failed to take off, partly because Windows
PCs became so inexpensive. Lately, however, small start-ups and giants
like America Online Inc. have been trying to revive the idea of low-end
machines that use alternatives to Windows.
Microsoft and Intel executives insist that Windows PCs have a healthy
future, but they are hedging their bets. Microsoft has invested more than
$8 billion in communications-related businesses. Meanwhile, Microsoft
services such as the free e-mail site Hotmail are adding features to
exploit the Web and benefit users of Microsoft desktop programs such as
Office. The latest version of Office, for example, makes it easier to
centrally store documents and view them with a simple browser.
"Server-based computing is great. It's happening. It's part of our
strategy," says Steve Ballmer, Microsoft's president. "I don't think we
should fear that world."
Microsoft still gets paid when PC programs are run on servers, but pricing
is under pressure. In January, customer complaints led Microsoft to drop
a requirement that they buy a $250 copy of its Windows NT desktop
operating system for each terminal tapping into Windows programs on a
server; many of those terminals don't need any operating system.
Microsoft also recently launched a pilot program to let service companies
offer subscriptions to use Windows NT and other server programs. Fees
haven't been disclosed, but are less than the cost of buying licenses for
each program up front.
Intel, meanwhile, is even setting up its own computer centers to run
Web-based services for other companies. Though optimistic, Mr. Grove
admits it remains an open question whether Intel's new ventures will
counteract falling profit margins on PC chips. "It has never been more
turbulent," he says.
That's just fine for the new Web entrepreneurs. Marc Benioff, 34 years
old, is rich from stock received during 13 years at Oracle. He just quit to
start a Web service called Salesforce.com to automate
sales-management functions. He swiftly raised $4.2 million for the
company, partly from Oracle's Mr. Ellison and CNET Inc. founder Halsey
Minor. Mr. Benioff, who lives in a posh apartment near San Francisco's
Coit Tower, didn't hunt far for office space; he rented the unit next door
for $4,500 a month, offering his development team some of the most
spectacular views on the planet.
"My material desires were satisfied long ago," says Mr. Benioff. Now he's
driven by a chance to make high-tech history. "This will be the spawning of
a new industry."
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