The New Software Industry – Forces At Play, Business In Motion
by Claire Schooley.
I attended a conference sponsored by Carnegie Mellon West; The Fisher IT Center at the Haas School of Business, UC Berkeley; the Software Industry Center at Carnegie Mellon University; and Services: Science, Management, and Engineering Program at UC Berkeley. The one-day event was held at the Microsoft Campus at Moffitt Field in Silicon Valley. The goal of this conference was to discuss where the software industry is going. Ten sessions including individual speakers and panels from university and business communicated the strong message that software is at a crossroads and will dramatically change in the future, and . . . the change has already begun. To access slides of the speaker presentations go to http://west.cmu.edu/sofcon/postcon.
The changes are around growth of software-as-a-service, new roles of services as a value- add to commoditized software, and new businesses and pricing models. The overwhelming consensus was that software-as-a-service is where the growth is today. Speakers pointed out some of the most successful companies in terms of generating revenue like WebEx, Amazon, Google — all service-based. At the same time they do not see companies that have built their business around software like Oracle, SAP, and Microsoft going “down-the-tube” just yet. In fact Oracle already has Oracle On-demand, a very successful service solution while supporting their enterprise installed customers. Companies that have these installed applications will not find it easy to change to a service-model, even it they wanted to. It requires architectural, economic and cultural changes and requires a ten-year time table to move from an installed software model to a services model. It seems much easier to start from the ground up like Salesforce.com.
The research of Professor Michael Cusumano, MIT Sloane School of Management shows a strong movement toward service innovation. Companies are looking for ways to add value to their existing products. CRM and ERP software has much the same functionality so it’s up to the services to make the difference. Software providers should ask themselves:
How do we make services count?
Where are the special value and revenue opportunities?
How can we use innovative services to make product less commodity-like?
Because profit margins on services are lower, companies must work to find the best mix of product and services. Cusumano showed data on the movement toward services by large mature companies like IBM, Sun, EMC, and Cisco. When software companies have provided product for about 20 years, they hit the 50/50 crisscross of services and product. From that point on, services and maintenance grow faster then product. He sites SAP as having revenue of about two-thirds services and one-third product. Even younger companies like Google that have relied on the ecosystem to support their product will be forced to add services as they move toward becoming an enterprise solution.
The cost of software is dropping and the cost model is in transition. Timothy Chou, former president of Oracle On-demand and author of The End of Software gave an example of traditional software costing about $100/month; SaaS, at $10 a month; and Internet, like Google at $1 a month. Today the research lab is really the consumer using the Internet, YouTube, MySpace, Skype, and Wikipedia. Industry picks up the consumer innovations for future development. In the past it was just the opposite with companies as the innovators of new products. Personalization also plays an important role—who you are, where you are, what you like, etc. This context-awareness capability can be a bit intimidating. However, many people will delight at going to hotel registration and having the clerk recognize who they are, when they were last at the hotel, what their room preference was, and what amenities they liked. What about going to an upscale restaurant that has taken pictures of food you selected during previous visits, stored the data, and now provides you with your own personal menu! Is somebody doing your thinking? Yes, it’s Web 3.0!