Miko Matsumura’s faith in the virtues of the Java programming language is so unshakable that his Sun Microsystems Inc. business card described him as a “Java evangelist.”
For three years, his job made him Sun’s official cheerleader for Java and had him on the lookout for a “killer application” for the promising technology.
Matsumura thinks he has found it. In January, he left Sun to join BizTone.com, a maker of Java-based business software with an intriguing idea: Instead of selling its software, BizTone wants to “rent” it, shielding its corporate customers from the costs and hassles of installing and running the complex business software.
Now Matsumura is preaching a new message: “The software is not that important,” he says. “The service is important.”
In a sign that there are believers out there, that mantra is being repeated with increasing frequency in the software industry.
Think of software as a “utility.” Companies don’t run their own power source or phone system–they pay someone else to provide those services and are billed according to their usage.
Software companies ranging from start-ups to giants such as Oracle Corp., PeopleSoft Inc. and SAP AG think the utility model may work for them and their customers. They are planning to rent or sell software subscriptions to their corporate customers for functions ranging from data storage to tracking sales, purchase orders, inventories and accounting. Those software packages typically cost millions of dollars, a steep price even for the largest corporations–and prohibitive for most small and midsize firms.
“If you are a small company, building an infrastructure to manage your own business applications is costly,” says Chris Russell, president of Oracle Business OnLine, a division of Oracle. For the past several months, the Redwood Shores, Calif.-based software-maker has been running pilot programs to make its database software and business applications available over the Internet.
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“It is tracking an enormous amount of interest,” said Tom Gormley, an analyst with Forrester Research in Cambridge, Mass. He predicts the market for applications rental could grow from virtually zero today to about $6 billion by 2002.
The shift is forcing established software-makers to revisit their business models: Instead of relying on one-time sales of pricey software licenses, they have to adapt to much smaller but recurring revenues. The changes are likely to create room for new and innovative companies to carve out a piece of the multibillion-dollar business software market.
The business of “outsourcing” software is not new. In recent years, companies including IBM, KPMG and Andersen Consulting have created “services” divisions–armies of programmers who install and manage software packages for corporate customers. But in those traditional services, the customers still paid for and owned their hardware and software systems. The only thing they contracted for was the personnel to run and maintain the systems.
The new trend is to contract out the entire operation, including the ownership, maintenance and running of the software.
Take despatchNet.com. The San Francisco-based start-up is BizTone’s first customer in the United States. It is developing software for dispatch service companies for ambulances, taxicabs, bicycle messengers and trucks, using BizTone’s software for tracking financial transactions. Dispatch companies are often mom-and-pop operations that can’t afford complex business systems to track orders, invoices, payments, payroll and other critical operations, says Greg Kidd, founder of despatchNet.com. “We can develop one accounting back end for all the industries in (that) group,” Kidd says.
Internet portal Excite Inc. is also a believer. The company has farmed out its general ledger, billing, accounts payable and fixed assets software. Excite rents those services from Corio Inc., a California firm that has formed an alliance with software-maker PeopleSoft.
“I didn’t have to buy the software and pay a huge start-up fee,” says Bob Hood, Excite’s chief financial officer. “It is a pay-as-you-go service. All that is great.”
Hood would not disclose the fees Excite pays Corio. But Jonathan Lee, chief executive of Corio, says a rental package for a company like Excite could have a $250,000 start-up fee and a $15,000 monthly subscription. That’s about a quarter of what a company like Excite would spend to install PeopleSoft’s financial software, he says.
There are benefits beyond cost savings, Hood says. Excite does not have to worry about hiring and retaining expert staff to run its business applications, a task that has become increasingly difficult with a mounting programmer shortage. Hood also says a company growing as fast as Excite would typically go through three generations of business software systems before they reach $1 billion in sales. Typically they would expand from a PC-based infrastructure to mid-size programs to full-size “enterprise” scale systems used by the largest corporations. “What this has enabled us to do is to avoid one generation,” Hood said. “We will never have to go through another (software) package for the rest of our lives.”
It is this kind of response that has software-makers scrambling to adapt. Earlier this month, Germany’s SAP, the largest maker of packaged business software, announced it would rent its products in partnership with Electronic Data Systems. It joins Oracle, PeopleSoft, and others that have already jumped on the trend.
The new players, who some say are driving the software rental market, include companies like Corio and BizTone, as well as a slew of Internet service providers and telecom companies looking for new sources of revenue. They have coined a term, “applications service providers,” and are going beyond Web portals that provide e-mail and calendar software over the Internet. And they are delivering more critical services than companies that simply host Web sites for corporate customers.
“What is interesting about the aggressive young companies is that they are challenging us to work through the issues and really solve some of the problems,” said John Haworth, PeopleSoft’s director of outsourcing.
Analysts say the transformation may have one unintended benefit for established software companies. Currently they depend on relatively few sales of expensive software licenses and a small quarterly shortfall can have a big, if temporary, impact on their bottom line. That can send their stock into a tailspin. Renting or subscription fees would help stabilize earnings over time, making revenue projections, and stock prices, more predictable.
Still, there are hurdles. If software is going to be like a utility, it has to be reliable–no network problems, no software or hardware crashes. If an order tracking or billing system is down, a company could be crippled.