Fortune article part III
Webware for Rent
Part 3
Eric Nee
Blue-chip software firms have gotten the message too. The week before Norwest's gathering, $7.1-billion-a-year Oracle held a similar event, dubbed "e-Business Day," at its Redwood City headquarters. It was a coming-out party for Oracle's new Internet-based software and services. Among these is Oracle Business OnLine, a service allowing customers to use Oracle applications over the Internet instead of installing the applications on their own machines. CEO Larry Ellison is wildly enthusiastic about the change. "No [customer] wants this complexity in their shop any more," he says. "Running computers isn't fun." Offering software services via the Internet also helps Oracle reach small businesses, which in the past would not buy costly enterprise software. Oracle is a bit unusual because it rents the software to clients itself rather than contracting out to an ASP. "No one knows the application better than us," says executive vice president Gary Bloom. "We think customers would rather rent the application from the application developer."
Meanwhile Qwest and EDS have made themselves into combination ASP and CSPs for SAP, the $5-billion-a-year German enterprise software giant. (Enough acronyms for you yet?) Each licenses SAP's software and runs computers operating the program, enabling customers with Web browsers to tap in. Like Oracle, SAP embraces Web services as a way to reach the small business market. Says Kevin McKay, CEO of SAP America: "These are customers that didn't consider SAP before."
Even as big players enter the ASP business, it will trail traditional software licensing for the foreseeable future, largely because conservative business customers want to make sure such arrangements work before they farm out crucial business functions. That is, if they ever do. "Many companies are simply unwilling to risk having their most sensitive data outside their control," says Tom Siebel, founder and CEO of Siebel Systems, a San Mateo, Calif., supplier of sales-force automation software. He is one of the few software executives openly skeptical of the ASP approach. "There are true believers out there; I don't happen to be one of them," he says. Siebel Systems has a 5% equity stake in USinternetworking, a combination ASP and CSP that offers Siebel software for rent, but, says Siebel, "quite honestly, it's not something that our customers are asking for." USinternetworking has signed only a handful of customers since January, when it began offering the software, vs. 1,000 customers that have purchased the application.
Siebel's skepticism is understandable; there are major--and valid--concerns about the ASP business. However, a glimpse at the computer industry's past hints that ASPs may well become wildly successful. Just 25 years ago, many business customers used to rent time on computers and programs rather than buying them outright, in a practice known as time-sharing. The computers, operated by third parties and located at remote locations, could only be accessed through special dedicated terminals. Talk to industry graybeards about ASPs or BSPs, and they inevitably say they're reminded of the early days of computing. "It's back to the future," says Nick Earle, senior vice president and chief marketing officer for Hewlett-Packard's enterprise computing division.
Time-sharing helped spawn the first generation of BSPs, data-processing companies like Automatic Data Processing, the $4.8-billion-a-year leader in payroll check distribution. It and other first-generation BSPs are thriving today and adapting to the Internet. Gelco, which handles travel expenses for 2,000 companies, has licensed Internet software from Extensity of Emeryville, Calif., that manages travel and entertainment expenses.
Web services will have wide-ranging impact on the software industry. The biggest effect will be on the way software companies accrue revenue. If you want to know what the business version of hell looks like, just hang out at a software company during the last few weeks of a quarter. Customers often wait until the end of the quarter before signing a deal, which gives them a bit more of an edge when negotiating prices; the end-of-quarter heat on the sales team to close the deals is intense. Renting software to ASPs relieves some of the pressure; such arrangements generate recurring revenues that are easier to predict and manage. Software companies like that--as do investors. "We'd love to see more of an annuity model," says Charles Phillips, Morgan Stanley Dean Witter's top business software analyst.
That's great for software companies but brings enormous risk to the ASPs. Though they try to tie in customers with multiyear contracts, the generic applications they provide--e-mail, for instance--can be easily replaced, says Pehong Chen, founder and CEO of BroadVision, an e-commerce software company in Redwood City. Here BSPs may have an advantage, since their systems often become so tightly integrated into a customer's business that they're difficult to change.
With customers wielding newfound power, software companies will be forced to pay much greater attention to customer satisfaction then they ever have before. In the past, once the salesperson sold the software license, he was on to the next deal. The customer had paid out so much money it was not about to switch vendors unless the software failed completely. In practice, this meant that software companies often shipped applications knowing that they had significant bugs. Now the poor level of service in the software industry will have to end. "Things that used to be a bug are now reasons to leave," says Bo Holland, founder and CEO of Works.com, a procurement service provider in Austin, Texas. "[The advent of ASPs and BSPs] is probably good medicine for the software industry."
If this is medicine, it must be pretty potent, because the business software market is alive as at no other time in its history. Only a couple of years ago there was concern that the industry would stagnate as it became dominated by large firms like Microsoft and SAP. Instead, the Internet has unleashed a surge of activity as new companies pursue a wide range of opportunities. "There's going to be a reshuffling of revenues [in the business software market] on a large scale," predicts Dalal of the Mayfield Fund. That's good news for venture capitalists, and even better news for business software customers. |
