Software sales model shifts
Published: 18 Nov 2005 11:20 GMT
...strategy paper, consumers' unwillingness to pay for desktop programs is forcing Microsoft's hand.
"The outlook for the packaged consumer retail software market is poor," the authors of the paper, seen by ZDNet UK's sister site CNET News.com, wrote. "The size of the market is shrinking and consumers appear less willing than ever to buy software applications off the shelf."
Meanwhile, Google is expanding its array of Web-based products funded by advertising. Although Google's applications are limited to email, photo-sharing and consumer-oriented services, George Colony, chief executive of Forrester Research, expects to see much more.
"Google is also leading a pricing revolution," Colony wrote in a recent column. "Google's programs are free, funded through advertising and syndication. This is a prescient move. I foresee a world in which even enterprise applications like financials, ERP (enterprise resource planning) and supply chain software will be advertising-funded."
The growing viability of open source products is already accelerating a shift in pricing models for businesses, analysts noted.
IBM, Oracle, BEA Systems and other infrastructure software providers have each shifted from a completely closed-source business and increasingly embraced open source infrastructure software products. IBM even bought Gluecode, an open source alternative to its WebSphere Java application server and adopted its business model of monthly maintenance fees.
Open source advocates argue that open source software, such as databases or business intelligence tools, is cheaper than existing products. Also, by giving away software — at least, initially — open source companies do not need to invest as much in sales and marketing, according to analysts and industry executives.
Commercial software makers spend on average 82 percent of new licence revenue on sales and marketing — that is, finding new customers — according to a Goldman Sachs report. That's up from 66 percent in 2000.
Open source sales application SugarCRM, for example, does not employ direct salespeople, who are typically highly paid. Instead, the users of its open source product are the primary source of sales leads, according to SugarCRM chief executive John Roberts. A smaller sales and marketing budget allows it to divert its resources towards engineering, he added.
Larry Augustin, the founder of VA Software who sits on the board of a number of open source companies, said that the rising cost of sales and marketing business software is driving up prices for customers.
"The traditional enterprise software business model is broken," Augustin wrote in a recent column. "A rabid search for new customers and revenue growth has caused sales and marketing costs to spiral out of control... We're charging the customer more to sell to them."
Still, some corners of the software world have been able to maintain the status quo.
Adobe, which sells popular desktop software like Photoshop and Illustrator, has stuck with the model for consumers and has even been able to raise prices in recent years, noted Gene Munster, a financial analyst at Piper Jaffrey. But Adobe is likely to explore different models, he said.
"I think you'll see companies move to different (pricing) models over time," Munster said. "I could see Adobe, like Microsoft, look at ways of charging less up front, have a subscription fee and (have) products supported by ads."
Gartner's Correia said that the products that are most likely to be funded by advertising are those that are sold in high volume, such as consumer products. A subscription model, where customers pay a regular fee in place of one upfront purchase, are best suited for applications such as email or customer relationship management, rather than custom-built applications, she said.
Rangaswami said that alternative pricing models and other larger industry changes, notably less-expensive offshore development and modern service-oriented architectures, ultimately benefit an increasingly demanding customer.
"The power has shifted to the buyer," Rangaswami said. "Five years ago, (vendors) could sell a million-dollar piece of software and run off to the next deal."
ZDNet UK sister site CNET News.com's Mike Ricciuti contributed to this report.
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