Supply & Demand: Software Pricing

Supply & Demand: Software Pricing - ' ASP is Back '
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The ASP Is Back

The growing popularity of subscriptions for traditional software has created a tipping point for a software-delivery method that until recently was struggling for customer interest: Web-based, hosted applications, sometimes known as applications-service providers, or ASPs. Just a couple of years ago, customers ignored companies like Salesforce.com, which offers a Web-delivered CRM program, primarily because much of the software was not as fully developed as licensed software and did not integrate well with programs from other vendors. Also, there were fears that the Internet-delivery approach would be full of bugs, and that the companies providing these programs would be unreliable or suddenly disappear.

But, as large vendors began to switch over to the subscription approach, customers grew comfortable with the idea that they could successfully purchase software just as they do magazines, and they began to give ASPs a second look. One advantage is lower cost: ASPs typically charge less than $100 per user per month for a CRM or ERP program, compared to hundreds of thousands of dollars for an installed perpetual license. Another advantage is that installation and training are simple, usually taking days rather than months. And just as the interest in ASPs blossomed, the Web-based software providers that survived the dot-com bust were introducing some of their most reliable and feature-laden programs. Although not quite as powerful as the more expensive programs, they are easier to use. The merging of renewed customer interest with better products has resulted in one of the few growth sectors of the software industry.

This is illustrated by the rivalry between Salesforce.com and Siebel, the latter an old-school CRM provider. In 2002, Siebels revenue dropped to $1.6 billion, down 22 percent compared with the year before, and fell still farther, to $1.3 billion, in 2003. Meanwhile, although its revenue is just 5 percent of Siebels, Salesforce.coms sales nearly doubled in the nine-month period that ended Oct. 31, 2003, compared with the same period in 2002. These numbers are punctuated by an Aberdeen Group study conducted in 2003, in which CIOs were asked whether they would consider using an ASP as a CRM provider. In the first half of the year, about half the respondents said yes; in the second half, 85 percent responded affirmatively. Siebel has taken note of Salesforce.coms success. After deriding hosted applications as a misguided idea and shutting down a fledgling ASP two years ago, Siebel announced a joint venture with IBM in October to offer CRM programs via the Web at subscription rates of as low as $70 per month per user. Other established software companies, such as PeopleSoft Inc., Oracle and Hewlett-Packard Co., have also begun to sell enterprise software as ASPs.

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