Copyright 2006 PJM Consulting

How should Software be delivered to users? Via traditional licenses? As 'free' services supported by advertising? Or using a rental model referred to under several different labels such as Hosted, ASP, On Demand or SaaS. This has been very much in debate over the last few years. Back in the dot-com boom, the selling of software licenses was proclaimed to be dead. Everything was to be a service on the Internet, and much of it was going to be advertising-supported instead of paid for by the user. We all know how that turned out!

Of course, while that model failed at that time, that doesn't mean that it eventually won't happen. Hype has a way of getting in the way of reality. Hype can lead to retardation of the market for great ideas, when the inevitable disappointment in the early stage of a technology sets in. But there have been some very notable major successes that came out of the dot- com era. Search Engines are the most notable, and have actually succeeded while staying true to the advertising-supported model. Search engines are nothing more than hosted software, delivered 'free' for use by end-users'and supported primarily by advertising revenue from services like AdWords and Overture (recently renamed Yahoo Search Marketing). The search engine companies are arguably the hottest segment of the software industry at this point. But while they broke through in a major way, thousands of companies (and billions in Venture Capital) went down the drain attempting to follow essentially the same model.

On the ASP side, there have also been successes as well. The most notable today is salesforce.com, which has gone along way toward transforming the way CRM is delivered to companies. Salesforce.com and its direct competitors have delivered great benefits in this space, and have gone a long way toward legitimatizing the ASP model for business customers. Marc Benioff, Salesforce's CEO, is very visible and colorful. He has made a big splash by proclaiming traditional software licensing to be dead, that the era of On Demand software is upon us. Is this true'or bluster?

Like anything else, I think it's a bit of both'but mostly bluster at this point. My take on this issue is one of market segmentation: there are customers who will embrace the ASP model for concrete business reasons as well as their psychographic profile, and on the other end of the spectrum there are conservative clients who will profess to never embrace it. Let's look at some of the pros and cons of the ASP model vs. Traditional licensing:

TRADITIONAL LICENSING

PROS - Customer owns a perpetual license to the software--positive for many reasons - Data resides within the company'don't rely on outside vendor for mission-critical data - Somewhat protected if SW vendor goes out of business - Greater ability to integrate with other third party and in-house applications

CONS - Must support the software internally - Keeping up to date on releases and rolling them out can be a complex headache - IT is constantly overworked and unavailable for support, costing users productivity - Increased hardware budget and systems complexity - Cost of software must be capitalized

ASP MODEL

PROS - Back office support is offloaded to ASP - Less hardware to buy and maintain - Cost of software can be expensed - Software updates are transparent and automatic - Great for independent operations and branch offices - Familiar Browser interface reduces training costs - Appeals to users who don't have huge capital budgets or are more comfortable with smaller bets

CONS - If something goes wrong, less ability to fix it quickly internally'you're at the whim of an outside vendor - Mission-Critical data is in the hands of a supplier, which scares a lot of people - More susceptible to price increases by the vendor - Less integration potential and control by the customer, particularly with in-house apps.

One of the most important factors, cost, really can't be put in the favor of either model. There is no inherent cost advantage to either model'the lowest cost solution will be determined by the relative efficiencies of the customer's IT department vs. the ASP, and the pricing aggressiveness of the ASP and traditional software vendor.

So what will happen in the software market? Will everything quickly be converted to an ASP model, or is this a fad that is going to quickly pass once again? I believe that for a very long time both models will be important, with a slow shift toward the ASP model. The early shifts will take place in the apps where it is most compelling. CRM fits into this category because the desirability to have it available to people in the field anywhere via a browser far exceeds any negatives. Accounting Software? Engineering Software? I don't believe that the case is very compelling at the moment in these categories. After an initial shift toward the ASP model, it's my forecast that for a long time these two delivery schemes will co-exist, as different market segments based upon unique business needs and psychographic preference within the software user community.

So what to do if you're the VP-Marketing or CEO of a software company looking at this issue? Don't just look at it on the surface and embrace the ASP model as the wave of the future or simply reject it as a fad. Analyze your particular market to see if this new model makes sense for your product family. In many cases it will make sense to offer both an ASP delivery option and traditional licensing. If it is practical to offer both, you will most likely maximize the financial return on the IP of your company using this strategy. That's my view'I'd like to hear yours.