Tech Views |
The changing face of software business
Recently an internal memo from Microsoft CTO Ray Ozzie was leaked to the Wall Street Journal. This memo talks about coming fundamental shifts in the software business and what Microsoft should do about it.
The significance of this memo cannot be overemphasized. Similar memos have appeared from Microsoft around the emergence of Graphical User Interfaces and the Internet.
The memo mentions several companies which are changing the face of the software business. These are larger companies such as Google and Yahoo as well as smaller ones such as Flickr and GoToMyPC (Citrix.)
So exactly what is changing in the software business?
The software business has always been amorphous. Some companies package their software as tangible products and sell them (eg, as nicely boxed CDs). Adobe is a good example of this. Microsoft, on the other hand, bundles Windows into all PCs, and the price of Windows is included in the price the customer pays for the PC.
The traditional models of software products came under attack after the dot com bubble burst in 2001 when customers tightened tech spending. Thereafter, software vendors had to search for new, creative ways to make money.
The most successful of these vendors is Google, the provider of a Web search engine. Google's asset, an elaborate hardware-software system based on Larry Page's PageRank algorithm for ranking web pages, allows users to search for web pages containing a certain word or words. The resulting pages are ranked according to their relative importance, as measured by how many other web pages link to them. Thus, a Web page with high Google ranking means that this page is referred to by many other pages.
Google stock floated at $100 15 months ago - today it trades at over $400.
But Google search is free. So how is Google so successful?
Google's software is available to customers as a SERVICE. This is one fundamental shift that Ozzie's memo refers to. Google makes money from advertisers who pay to advertise on Google during the search. For example, when I search for "water purifier", Google prints out web pages on water purifiers on the left side of the page. Appearing to the right on the same page, under "Sponsored Links", are names of businesses which sell water filters and who have paid Google to advertise on this page.
This is contextual advertising. The company selling Water Filters will have a high likelihood of making a sale to the customer who is searching the Web for water purifiers.
Google also offers several other creative ways to advertise on the Web, including tools that enable authors of any web page to easily set up their pages for advertisements. The revenue is shared with Google. More notorious is Google Mail, where Google's artificial intelligence software scans emails of the sender and inserts advertisements fitting the context. For example, when I write an email from my Google Mail account to my friend about a camping trip, Google appends an advertisement from a Camping Goods store before sending that email to my friend. The Camping Goods store pays Google for the ad.
Many software companies are now offering free services like Google, while making up the revenue in advertisements. Others such as Yahoo use combinations of paid services and advertisements.
Most significant is that startup companies with ad-based revenue models are once again attractive to Silicon Valley's Venture Capital community, resulting in large financial backing of these new companies, such as Rojo, Deli.cio.us, Meebo, Sixapart, and numerous other ones. These startups (mostly) give away their service free of charge and make revenue through ads.
Another change in software business is the way in which software is delivered to the customer. For example, in the ASP (Application Service Provider) model, the software vendor rents out usage of the software from its own web site, and charges the customer a monthly rental.
For example, salesforce.com, maker of a CRM (Customer Relationship Management) software vendor, is a very successful company, because it can offer CRM to its customers for say $500/month whereas the competitors such as Siebel which do not have an ASP model (and thus cannot rent out their software) have to sell their software for many thousands of dollars.
Another business model, offered by Sun Microsystems, offers customers all the company's software bundled together at a (low) fixed monthly rate. Recently Sun has also started selling Utility Computing hours: Compute power is sold much like electrical power. Those customers who need a lot of computing power to solve difficult problems can plug into Sun's Computer Grid (akin to Power Grids) and buy Compute Power at hourly rates. How about a "Grid Exchange" where Compute Power is bought and sold like stocks in a Stock Exchange?
While business models change, so do the technological underpinnings of many types of software. Due to the wide availability of open source software on the Web, many software developers use the Web as a natural starting point for their work. They use tools, libraries and references from the Web and build their own work on top of existing open source work. Ozzie points this out as another fundamental shift in software technology.
The Web itself continues to change in big ways. Personal web pages have given way to Blogs which have revolutionized journalism. Wikis have enabled large collaborative efforts such as wikipedia.org, which houses over a million articles in over 20 languages written by thousands of authors. The increasing use of Meta-tagging - witness the popularity of rojo.com, deli.cio.us and Flickr - is giving way to the holy grail of the Semantic Web - a Web of computers which understand the meaning of
the web pages they contain.
All of this software "just works" for the user. As a user you don't have to scratch your head or try 15 things to make it work - it just works! Try going to wikipedia.org and edit any article. It is a smooth and painless user experience.
The author is the CTO of DataSoft Systems Bangladesh Ltd.