Industry Pundits: Move to SAAS Is Permanent

MOUNTAIN VIEW, Calif.—The move away from the traditional packaged software model toward software as a service, with all its associated new business and revenue models, is a permanent one, speakers said at the New Software Industry conference here on April 30.

"Prices will likely eventually go to zero for any standardized software product but, fortunately, the industry has found other ways to make money off software, Michael Cusumano, a professor at the MIT Sloan School of Management, said in a presentation titled "The Changing Business of Software."

While software product companies tend to have a given life cycle, there is now a different evolution curve, from product and process innovation to services. "Product platform disruptions are generating new services and business models," Cusumano said.

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There are currently 200 software firms listed on U.S. stock exchanges, which is half of the 400 peak in 1997. The number of publicly listed IT services firms is also sharply down over the past five years, indicating more maturity in these markets, he said.

Click here to read more about how interest in SOA and SAAS is expected to grow in 2007.

While only 20 percent of Web-based enterprise software vendors are publicly listed, Cusamano noted that the number of companies offering Web-based software is on the rise.

"There are also new business model dimensions, with all sorts of new revenue models, including subscription and advertising based ones. So, is this rise in services and business models temporary or permanent?" Cusamano asked.

"The temporary argument goes that we are in a transition phase between the platform and business model innovations, while the permanent argument says that software is not commoditized and prices will fall close to zero and the future is SAAS [software as a service], where it is free, but not really free as it is supported by advertising or indirect revenues, and that other commoditized high-tech industries will follow," he said.

Cusamano told the audience that the answer depended on the time frame being considered going forward, but that he believes the change is permanent.

SAAS: More, not less, channel. Click here to read more.

But he also pointed out that while services contributed to the profits of software product companies, this contribution is not linear, with sweet spots at the low and high ends of the spectrum.

"Services at the lower end make products attractive, but also have lower margins and can hurt profits when they become too important," Cusamano said.

Investors also placed too much value on products over services at product companies, Cusamano said, adding that "they [investors] dont seem to fully understand the value of services. There are sweet and sour spots where and when services increase the performance of most product firms, but the benefits and negatives vary by product category."

But Cusamano said that most software product firms could, and should, exploit services. Managers should plan to take advantage of the sweet spots and not let services just happen to them over time.

Next Page: SAAS here to stay.