Pay Me Now

Rental model proves difficult for ASPs

One promise of software as a service is to change the way companies pay for applications. So far, its just a promise, at least in the enterprise market served by legacy software vendors and their application service provider partners. Established software companies are in no hurry to move from booking fat, one-time license sales to collecting monthly rental or usage fees.

"The market isnt demanding the rental model today, and Wall Street hasnt bought it yet," says Deepak Gupta, senior vice president and general manager at PeopleSofts eCenter services business. The Pleasanton, Calif., company, which says it has a total of about 200 application service users through eCenter and its ASP partners, is pushing its only service provider partner currently renting its applications to sell licenses instead.

Software companies worry about how shifting their revenue stream would affect quarterly earnings, a key metric for stock analysts. When Citrix Systems moved from selling shrink-wrapped software to electronic licensing last year, for example, the change in revenue reporting helped torpedo the stock.

"It will change only when ASPs start to become a large percentage of sales," Gupta says. PeopleSoft currently gets about 5 percent of its license revenue from application services, a number Gupta says could be 50 percent in the next four to five years.

Oracle sells licenses for its established products, but is considering a modified pricing structure for new stuff like, possibly a one-year contract that covers the cost of license, support and hosting. "We are going to be smart and manage the transition and its effect on our top and bottom line — but its clearly preferable to us that the software industry is going to move to an annuity-based revenue stream," says Tim Chou, head of Oracles Business OnLine application services unit.

Paul Rudolph, chief executive of Agilera, an ASP that manages applications from vendors including Ariba, Oracle and PeopleSoft, says that any change is likely to happen slowly. "I dont predict a swing in this model. It will possibly be a migration," he says.

Adherence to the licensing model does not indicate any lack of support by traditional software companies for ser-vice providers. "Most are very supportive of the ASP model as an alternative distribution channel," Rudolph says. "The current [pricing] model is not a hindrance to the ASP model or acceleration."

But another ASP boss, Agiliti Chief Executive Tom Kieffer, bemoans the software industrys reluctance to move more quickly to a purer service model. "The chief financial officer doesnt like it from the revenue recognition standpoint, and that creates a problem," Kieffer says. "Dealing with newer, Web-born application vendors is easier, because they dont have shareholders and industry analysts on their ass[es]."

Rental pricing doesnt look like short-term salvation for most ASPs either, save perhaps for those aiming at the small-company market. "A revenue model that is based on accruing one thirty-sixth of a three-year contract every month doesnt put a lot of money on the bottom line until you have a sufficient number of customers to make it click," says Greg Blatnik, vice president at Zona Research, who has done research for the ASP Industry Consortium.

Another constraint on the rental models development has been a lack of adequate software tools to monitor usage for billing, but that situation is changing quickly. "There are some good technologies coming on the market now, although I still cant say they are mature," Blatnik says. "So far, thats absolutely an impediment to the evolution of the pure play."

Some users also have lingering concerns about ownership that make them uncomfortable with renting. "The ASP market not is not yet a commodity market for enterprise applications, which are still tailored for individual customers, so it makes sense to own them," Gupta says. Of course, many companies do want to avoid laying out a big chunk of change for software licenses.

"We finance it for them," he says.