In an age where business is conducted through many different
channels - and companies need to adjust to the latest industry
standards and protocols - the concept of delivering software as a
service is starting to make sense.
Although the industry trend of "renting" applications has suffered
from unrealistic short-term expectations, this is clearly the
direction in which the software market is headed.
The three largest software vendors, Oracle, Microsoft and Computer
Associates (CA), are all clearly positioning themselves for the
e-services revolution - albeit with different strategies. They have
all adjusted their business model to incorporate the rising trend
of software being delivered as a service.
The 'Big 3' get ready
The Big 3 are positioning
themselves for the rise in e-services, but in different ways. One
clear way to differentiate the strategies employed by these vendors
is to evaluate differences between pricing models. Another way to
examine these differences is to consider whether the vendor
distributes through resellers, or offers a hosted version of its
software directly to its customers.
Computer Associates
CA does not "rent" applications
directly to its customers, but it does work with ASPs who, in turn,
resell CA products. CA has identified some "hot" segments of the
e-service industry as potential users of CA software. However, if
CA is truly keen to harness the business of these e-service
providers, the company must adjust its pricing model towards a
per-user basis.
CA has recognised a great deal of interest in Unicenter, its
flagship product, from the newly-emergent managed service provider
(MSP) industry. Companies that operated
 | | Microsoft believes that the right
business model for the e-services delivery channel does not yet
exist, because the market is still too immature to determine
it. | | | | | |
| | Source: Ovum | | |
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as traditional value-added resellers (VARs) five years ago are
currently moving into the MSP space. They are providing their
customers with remote online network and Web infrastructure
management, as well as remote online storage and security services.
CA has no interest in becoming a direct provider of e-services, but
it does want to channel its product through e-service companies -
thus, CA works with ASPs and MSPs that are interested in reselling
CA software. CA resellers must pay an up-front licence fee if they
want to resell software licences. CA also charges a one-time
central site fee to install CA software at a reseller's hosting
centre.
Channelling its software through resellers as opposed to trying to
become an ASP is a good strategy in itself for CA. However, if CA
is serious about offering its products to resellers, it must become
significantly more progressive with its pricing model. There is a
contradiction between CA's marketing direction of pursuing ASPs and
MSPs and its pricing model, which allows little flexibility for
these companies to resell to end users. By moving towards a
per-usage revenue model or, more radically, a revenue sharing
model, CA will be able to attract more clients, who will then stick
to the Unicenter solution.
Oracle
Oracle is the most bullish on the future of
software being delivered as a service, and is aggressively
fine-tuning its online service offerings. However, the simplicity
that Oracle's pricing model is built upon compromises the
sophistication and flexibility that the e-service market demands.
Oracle's ability to implement its software solutions to enterprise
customers is unparalleled - for instance, the company set up an
enterprise solution for Cigna Insurance that spans 18 countries and
multiple languages. Additionally, the company is the only of the
Big 3 to deliver its software directly to end users in an online
format. However, despite optimism over its e-services market
strategy, Oracle must revise its pricing model, by offering some
licensing options that embrace the per-usage model.
Oracle Business Online (OBO) delivers all Oracle business products
over the Internet to end users. The only difference between online
and traditional licence fees is a fee for hosting the application.
Oracle's hosting fee is 5% of the total cost of the software
licence - but is charged monthly. Therefore, if Oracle sells an
online perpetual licence for one of its products for $1,000, a
monthly charge of $50 would be applicable for as long as Oracle
hosts the application. This means that, in any given year, an OBO
customer will end up paying more than 50% of their contract to a
hosting fee that does not entail any additional service offerings!
This fee is excessive for a company that prides itself in being on
the cutting edge of the e-services market.
Microsoft
Microsoft has been careful to craft a policy
that preserves manoeuvrability for future developments. The company
believes that the right business model for the e-services delivery
channel does not yet exist, because the market is still too
immature to determine it. Microsoft is currently preparing for the
e-services market to develop further, so that when the dust
settles, the company will be well positioned.
Although Microsoft has no formalised plans to enter the service
provider space, we expect that Microsoft will enter the market
forcefully once the market has developed. Presently, the only
application Microsoft "rents" directly to its customers is its
bCentral product, which is targeted at very small businesses.
Microsoft is experimenting with other service provision business
models. For instance, it has made substantial investments in a
variety of ASPs, including Futurelink and Corio. Microsoft is also
active in the Web-hosting market, with partnerships with Qwest and
Exodus among others.
Another important development from Microsoft was the announcement
of a recent partnership with the Internet café chain,
EasyEverything - Microsoft provides its Office suite to
EasyEverything customers for a flat rate of $1.50 per customer. The
use of the software will be an additional one-off payment by
customers on top of paying for normal Internet access. The two
companies will share the revenues generated from the new offering -
an unheard of business practice for the software industry. By being
at the forefront of these developing markets - through partnerships
with ASPs and Web hosts, and business deals with ISPs - Microsoft
is accumulating invaluable intellectual capital that will feed its
future business strategy.
Microsoft also has a business model for conducting business with
resellers. The company embraces relationships with ASPs, and has
even developed an ASP certification programme. The pricing model
Microsoft uses offers more flexibility for resellers than the CA or
Oracle models, because it supports a per-usage model - where ASPs
only pay for software licences used. ASPs are not forced to
purchase licences up-front. Instead, they offer their services to
end users, and at the end of the month the ASP pays Microsoft a fee
based upon licence utilisation. There are no discounts based upon
volume for this model. According to Microsoft, the licence fee is
typically only about 10% of what the end user ends up paying back
to the reseller, as Microsoft resellers normally add a great deal
of service offerings onto the application.
Put your (business) model where your mouth is
Although
all software companies are "talking the e-services talk", few are
"walking the walk." It is unreasonable to expect a fledgling ASP to
pay up-front for costly enterprise licences in the hope that they
will then be able to find the customers to resell the licences. If
this business model is to work, ASPs and MSPs need the flexibility
to figure out what the demand is on their end, and turn to
suppliers and get that demand. Or, to put it differently, if ASPs
and MSPs are expected to deliver "software on tap", they cannot be
expected to buy the reservoir where the water comes from.
Of the Big 3, Microsoft is currently the best positioned for the
e-services market because:
1. Its business model is the only one with a per-user
emphasis.
2. It is clearly experimenting with different models and is poised
to adjust and reposition itself as the market dictates.
Although the e-services market as a whole had a punishing year in
2000, the market will rebound. Software as a service is the future
of the software industry, and the simple fact that the Big 3 are
attempting to position themselves for its development is
significant in its own right.
Ovum, the analyst and consulting company, is a global leader in the
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