Software services: The next gold rush?

There are an increasing number of key indicators that suggest the information technology (IT) industry is reaching a "tipping point" that will make the software services sector the focus of a new wave of industry growth.

The most recent event to reinforce this trend was the announcement in late February that Sun Microsystems' executive vice president of services, Patricia Sueltz, left the company to become president of marketing, technology, and systems of Salesforce.com Inc., the fast-growing customer relationship management software services company that is poised for a major IPO in the coming months.

The growing importance of the software services market is also being validated by Merrill Lynch's new financial benchmark, called the Merrill Lynch On-Demand Index (MLODI), that will track the subscription software service versus traditional software license revenues of publicly traded companies on a quarterly basis.

While most of the major market research firms have been forecasting double-digit growth in the software as a service (SaaS) market for a couple of years, the demise of many ASPs over the past several years raised doubts about the viability of this business model.

As I draw a line between the dots, there is a clear pattern of enterprises and consumers choosing subscription software services over packaged software products.

Now, a growing array of industry executives and VCs are echoing my views. For instance, Christopher Lochhead, chief marketing officer of Mercury, stated at Sand Hill Group's Software 2004 conference, "I believe the traditional enterprise software model is dying."

Ray Lane, a general partner with Kleiner Perkins Caufield & Byers and formerly the number two executive at Oracle, went a step further at the same conference, saying "This industry has arrived at a watershed.... If you're starting a software business today, I suggest you go to a service model."

This is a major reversal of the VC advice of just 24 months ago, when they were pushing IT service companies like LoudCloud, StorageNetworks, and Storability to dump their service businesses in favor of developing their proprietary software solutions.
Now, a new rush to riches in the software services sector is underway.

Anyone who can remember the go-go days of the Internet boom will recall plenty of bold pronouncements from VCs and numerous big-name IT executives abandoning their secure 'old-world' companies to reap the financial rewards of the 'new economy'.

Will SaaS be the next .com bust?

Like most over-hyped IT trends, SaaS won't necessarily transform our industry entirely. But, the SaaS business is gaining traction based on the real business benefits it offers enterprises. If today's leading ASPs can avoid the pitfalls of their .com predecessors the software services sector can be the focal point of the next wave of IT industry growth.

THINKstrategies

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