My colleague Tom Austin, in his post Applications for a buck…or even less, explores the potential impact of cloud computing on traditional software business models. In considering Microsoft’s recent patent application for a metered pay-as-you-go computing experience Tom says:
“Microsoft’s patent application describes how it could sell software functions to users – they need not buy “the whole application” – and the users could pay by the function and how much they used the function. This would give the user the chance to only pay for what they used. So, I’ll conjecture that one might have to only pay $0.10 to use an Excel pivot table (or $0.01 to use a simple date series calculator) one time.”
First off, I am in complete agreement that there is a trend towards delivering discrete function points via a specific URL, as Google has been doing for years. But I think there are significant dangers for traditional software vendors to assume they can decompose an application into specific, pay-as-you-use functions. The problem is open source.
An oft-stated objection to open source projects is that they don’t match proprietary software in functional parity. Oracle, for example, would argue that a significant problem with mySQL is that it simply can’t do as much as Oracle 11g. They believe that this is a major reason why organizations pay the premium for their product. The same argument has also been applied to Windows over Linux, Office over OpenOffice, Exchange over Zimbra, Siebel over SugarCRM, SAP over Compiere, etc. etc. etc.
I’m not about to validate this view – there’s a lot more nuance to functional fit then the sheer number of features in a product. But if these vendors think that they can re-purpose their products as function-specific cloud services then they need to realize that they’re destroying a fundamental defence they have against open source competition. Should Microsoft want to deliver an Excel Pivot table feature for $0.10 they can rest assured there will be an equivalent open source cloud service for $0.00. By granularizing the features they reduce the programming effort needed to create competitive open source alternatives.
Tom also points out:
Someone could establish themselves as “the distribution point” for software (think iTunes for the universe, not just iPhones and iPods and other Apple gear).
And this is the crux of the challenge for traditional software providers. Excel, Word, Office, Oracle 11g, SAP 2007 – all of these are simply packaging constructs. They are the distribution points for an arbitrarily defined set of functional capabilities.
That’s why traditional software vendors are caught between a rock and a hard place. They have no choice but to embrace the cloud. But they can’t do it in a way that undermines the very packaging constructs that function as lucrative distribution points. However they leverage the cloud they have no choice but to maintain their functional herding instinct. If they let individual features start wandering off as unique services they will get happily picked off by hungry competitors whose business models and cash flows have been built in the cloud.