Coming Back to Earth

Software business model in question as Divine and others grapple with uncertain future.

On paper, Divine Inc.s plan made all the sense in the world. Buy young or failing e-business software and services companies on the cheap and mold their products together into integrated suites of content management, collaboration and CRM applications with associated services under the "extended enterprise" moniker.

But after nearly two years in which it acquired more than a dozen companies to build this model, Chicago-based Divine has had only mounting losses, a shrinking cash position and a dwindling market capitalization to show for its strategy. Last month, Divine announced plans to stop the bleeding once and for all by selling assets, closing business units or declaring bankruptcy.

Divine was formed in 1999 as Divine InterVentures Inc. after Chairman and CEO Andrew "Flip" Filipowski sold his previous venture, Platinum Technology International Inc., which itself had acquired more than 70 companies, to Computer Associates International Inc.

Divine InterVentures originally set out to form a network of startup companies that it had invested in, all centered on business-to-business e-commerce. As the high-tech market soured and stock prices plummeted, the company shortened its name and began to buy companies at fire-sale prices.

As the company was in the midst of its buying spree about a year and a half ago, Filipowski said he was doing for the Internet what "the Vanderbilts did with the railroads, the Rockefellers with oil, the Morgans with the financial industry," that is, consolidating and expanding.

Filipowskis company now appears destined to go the way that most of the companies it acquired were heading. The potential failure of Divine, along with other recent flameouts of Internet software companies, has some questioning the viability of software as a business.

Filipowski declined to be interviewed for this story. But Reagan Lancaster, founder and CEO of Titan Ventures LP, which took a tack similar to Divines, buying intellectual property rights from 19 failing Internet software companies to form a new company called Telluride Technologies Inc., said his own experience at trying to pull together a new software company from the flotsam and jetsam of the Internet has made him reconsider the software business model.

Telluride is now converting its enterprise application software to open source. The company will give away the software to customers, then sell consulting, implementation and maintenance services, rechristening itself as a new company called SourceTap, which is due to launch later this month.

Lancaster said the new business model is similar to what Red Hat Inc. and VA Software Corp. have done. In fact, he said the software industry is going through the same changes now as the recording industry is with downloadable music.

"The software industry is in such dire straits," Lancaster said. "The only model that can work is one that gets away from big upfront commitments [of license agreements]," said Lancaster, in Dallas.

Lancaster said that while hosted application services such as Inc.s namesake offering have built large customer bases, the application service provider model is too costly to maintain to be profitable. Instead, Lancaster said he hopes to ride on the momentum that tech behemoths such as IBM, Hewlett-Packard Co. and Dell Computer Corp. have built for open source.

SourceTap will make available products for CRM (customer relationship management) and e-commerce at first, then eventually move into enterprise resource planning and supply chain management. Lancaster said the new business model will have wide appeal to small-to-medium-size businesses and large enterprises.

"There are still a lot of productivity gains to be made in a lot of areas from new products, but those new product implementations have been stopped because the [chief financial officers] are the gatekeepers now," said Lancaster. "If we provide open-source software, a lot of new product implementations can get started with low dollars upfront."

The CRM space in particular has been hard hit by the tight spending climate. Just last month, marketing software developer Xchange Applications Inc. closed its doors after failing to secure new financing. Web personalization pioneer NetPerceptions Inc., like Divine, announced that it was evaluating its options, including selling assets or bankruptcy.

Lancaster said he expects many struggling or failing software companies to join the SourceTap network.

"Just a few years ago, if you were starting a software company with two people and a dog, you got funded," said Lancaster. "Now a lot of those companies are going out of business. Its not that their intellectual propertys bad or that people wont use it; its just become a losing business model."

Customers using products that they like and that work from companies that cant stay afloat just may buy into Lancasters vision.

Deborah Gallen, vice president of operations at Nutri/System Inc., in Horsham, Pa., praised Divine for the support and development of the NetAgent and Expressions products Nutri/System uses for customer service and online chat sessions, both of which Divine acquired. But Gallen emphasized that Nutri/ System is loyal to the products, not to whatever company currently owns the intellectual property rights to them.