Some interesting info on the "explosive" ASP business
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 Hedi 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 machine servers connected to the Web. Between cocktails and hor d' oeuvres, Ms. Rozien'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 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 buying its Turbo
Tax software. More than 100,000 people log on to the site of Atlanta based Employease Inc. to human resources software;
their employer 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 flotilla of Web services and accessing the
information by using pocket size Palm Pilot 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 gaga 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 an 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 application service providers. “In the past six months, we have not yet seen a business
plan for a conventional packaged software application,” says James Berber, a venture capitalist at Accel Partners. “It's the
first time in 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 that in closing days of testimony last month in federal court in Washington,
DC. After hearing about software being offered on Web servers, Judge Thomas Penfield Jackson wondered aloud why
programmers weren't developing such product in droves. They are, testified Gordon Eubanks, a Microsoft supporter and
software-industry fixture.
Starting Over
He should know. After 15 year selling PC software at Symantec Corp., Mr. Eubanks recently moved to a start-up called
Oblix Inc. that makes programs that manage hoe users tap into Web servers. He testified that a 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 site to sell individual photos that, at $8.99
to $99.99 each, are both 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 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 a 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 grant 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 eased that problem, making it easier to tap into corporate information from any
external machine—including those 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 capitalist 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 to sellers. Both companies recently completed hot stocks 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
customers 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 that it got from each sale.
The company's last year remade itself into a Web sit 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 the 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-ail sit
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 the 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 but 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 chance to make high tech history. “This
will be the spawning of a new industry.”
_______________________________________________________________________________
July 23, 1999
Microsoft Broadens Vision Statement
To Go Beyond the PC-Centric World
By DAVID BANK and DON CLARK
Staff Reporters of THE WALL STREET JOURNAL
SEATTLE -- Microsoft Corp., describing what it called serious threats to
the company's future, is making plans for an industry no longer dominated
by the personal computer.
Steve Ballmer, Microsoft's president, told analysts that the company has
formally abandoned the PC-centric motto espoused by Chairman Bill
Gates in 1975: "A computer on every desk and in every home." The
company's new vision statement, crafted by Mr. Ballmer, has been
broadened to include Internet-based software and services, non-PC
devices such as handheld computers and TV set-top boxes. It reads:
"Empower people through great software anytime, anyplace and on any
device."
"We had to step back and say, 'With all this flux, new risks and changes in
the market, was this vision still appropriate to the company?' " Mr. Ballmer
said during the company's annual gathering for securities analysts here.
"We decided it wasn't."
The company, known for its PC operating
systems and application programs, is already a
major player in Web services. In a move
announced separately, Microsoft Thursday
fired a new shot at rival America Online Inc.
with a long-awaited Internet instant-messaging
service. AOL makes an extremely popular
version of this service, which allows users to send each other messages
that pop up on their computer screens. But the new Microsoft service
allows users who are also AOL customers to send pop-up notes to users
of both services; AOL users now can only send messages to each other.
Perhaps the most serious threat to Microsoft, however, is the trend among
software developers to write programs that are stored on central server
computers and used via Web browsers, reducing the need for customers
to buy Windows PCs and Windows software to get access to the latest
computing features. The company's internal surveys say that while the
number of software developers writing Windows programs hasn't fallen,
the percentage that say they are targeting the Web is exploding, from 21%
in the past year to 38% in the coming year.
"If we don't get our act together, we are at risk," Mr. Ballmer said.
Microsoft, of course, has often used the analysts' meeting to try to temper
overheated expectations. The notion that the company faces potent
competition also serves its interests in its pending antitrust trial in
Washington.
Toward the end of the briefing, Mr. Gates predicted that the PC would
remain a hub of the digital universe, offering new capabilities in areas such
as digital photography, music and video. For example, he said, Microsoft
is recommending to PC manufacturers that telephone services become a
standard part of personal computers in the next year.
Mr. Gates also highlighted investments in two
major areas. First, he said Microsoft has
thousands of developers working on what he
called a "Web-centric" platform for software that
exploits both the power of PCs and networked
server machines. Second, Microsoft is committed
to revolutionizing the way people interact with
computers, adding greater abilities to recognize
speech and visual cues from users, he said.
Mr. Ballmer, in his earlier presentation, used the
term "crazy" to describe some analysts' estimates
that Microsoft's revenue will grow 25% in the
current fiscal year ending in June 2000. With Microsoft's revenue in the
year just ended near $20 billion, that would require the company to add
$5 billion in new revenue. "We're fighting the law of large numbers," Mr.
Ballmer said.
Microsoft's stock declined $3.625 to $91.0625 in Nasdaq Stock Market
trading Thursday.
Analysts said they are eager for more details about Microsoft's efforts to
sustain its growth in the face of slowing growth in PC sales and a shift to
software hosted on Web sites rather than on stand-alone PCs.
"The most pressing issue for me is how does Microsoft adapt to a shift in
the center of gravity to a more Web-centric form of computing," said Rick
Sherlund, an analyst with Goldman Sachs Group.
Greg Maffei, Microsoft's chief financial officer, told analysts that the
company faces the worrisome prospect of sub-$600 PCs that don't come
with Microsoft applications, and eventually might use an alternative to
Windows or have no operating system. PC makers "are clearly going to
use this to push the average price of Windows down," he said.
Mr. Maffei for the first time broke out revenue for its Consumer and
Commerce Group, which consists mainly of the Microsoft Network Web
sites, putting revenue for fiscal year 1999, ended June 30, at $800 million.
Mr. Maffei didn't quantify the group's losses, but said they would increase
at least through the coming year. He said the company was committed to
investments and acquisitions to bolster the operation, and also would
spend heavily to overtake 3Com Corp.'s Palm computing division in
handheld devices.
Mr. Maffei said Microsoft executives continue to be divided about
whether to create a "tracking stock" to reflect results in its Web and media
operations, though gave no timetable for a decision. In particular, he said,
such a stock would help Microsoft in any initiative to acquire smaller
players in the Internet-access market. "We certainly see strategic reasons
for wanting to do it," Mr. Maffei said.
Microsoft had long been expected to enter the instant-messaging arena,
which has grown at an astounding rate. AOL, for example, says its
customers each day send 750 million of the pop-up messages -- 12 times
more than AOL's conventional email traffic.
Microsoft's new MSN Messenger Service is designed to complement
AOL's service, as well as Microsoft's popular Outlook software and its
free e-mail service known as Hotmail. The new Microsoft service relies on
a Hotmail account and a free piece of software that users download from
the company's Web site.
AOL messaging users who download that software are asked to enter
their screen name and password, and asked if they want to import their
existing "buddy list" of AOL users with whom they correspond. After that
process, those users may use Microsoft's software to send instant
messages to other AOL users or to people who use only the Microsoft
service.
Ann Brackbill, an AOL spokeswoman, said the Microsoft service raises
some "serious" privacy and security issues. "They are violating the cardinal
rule of the Internet by asking users for their screen names and passwords,"
she said, arguing that Microsoft's use of AOL's naming system is "akin to
hacking."
But Deanna Sanford, a lead Microsoft product manager for the service,
said the user data never goes to Microsoft and so poses no privacy
problem. It is only stored in Microsoft's software on the user's PC to
streamline the process of logging on at AOL, she said.
Ultimately, she added, Microsoft would like to see all of the
instant-messaging companies adopt standards that will work together. |
