The softwareless software company

David Hornik of August Capital wrote a fascinating blog "The Softwareless Software Company" which contends that the software business is moving to services, or software delivered as a service.  Jeremy Wagstaff, a Wall Street Journal writer has a similar story "It's not the "death" of Microsoft, it's the "death" of Software". In both cases they mean "software" in the traditional packaged software sense.  I agree. The transition to software as a service has already started.

Jeremy Wagstaff sees the trend but argues it will be a while before web based apps can compare to traditional client based software. He says;

The problem: Most web applications are broken, and if we were paying for them, or Microsoft were making them, we’d be howling. Google Docs’ word processor, for example, quickly breaks down on bigger documents (weird artefacts appear in the text, keyboard shortcuts stop doing what they’re supposed to.) Its spreadsheet program mangles spreadsheets. The functionality in both is extremely limited for anything more than the most basic tasks.

All this takes us to a weird place: We somehow demand less and less from our software, so that we can declare a sort of victory. (for Web 2.0)

Salesforce.com is the usual example. Google is another. Most of their employees are software engineers...but they don't sell software. They both provide software solutions delivered as web based services. Microsoft Live is a move in the same direction. Check out Xbox Live to see the integration of Live Services with packaged games. But read on, it gets much more interesting and complicated.

Listen to what David Hornik says about Microsoft's moves and the ultimate key to the success of software delivered as a service.

Perhaps the best evidence that we are entering this era of Softwareless Software Companies is Microsoft's "Live" push. At a recent VC Summit, numerous Microsoft execs, including Steve Balmer himself, talked about Microsoft's focus on rolling out service offerings under the moniker of "Live." They are now offering LiveDesktop, LiveSearch, OfficeLive, LiveExpo, LiveMeeting, etc. And in support of their massive push into the services space, Microsoft has just opened a new datacenter that will ultimately span just shy of half a million square feet (I hope to write more specifics about this some time soon).

In the era of the Softwareless Software Company, in which value is measured by utility, simplicity and reliability, the greatest asset may ultimately be the near infinitely scaling data center. It will certainly be important that the new computer company deliver great utility through its software-delivered service. But the most significant differentiator may ultimately prove to be the capacity to scale with massive demand. And those companies best situated to deliver that scale will be the winners. Thus, it is no surprise that just up and down the river from Microsoft's new datacenter in Quincy Washington, both Yahoo and Google are contemplating building their own gargantuan datacenters. The Softwareless Software Company may have come full circle from the Computerless Computer Company and be more about hardware and infrastructure than about software after all.

Microsoft has been delivering software as a service for a long time. Windows Live Hotmail has 260 million consumer users. By comparison, Microsoft Outlook has over 500 million business users. Both are valuable businesses for different market segments. Mr. Hornik alluded to five different Live Services above. Expect to see more Live Services announced in the future, perhaps later this month at MIX 07.

David Hornik makes another interesting point that huge data centers may be the key to successfully delivering software as a service.  A year ago I wrote about Microsoft and Google building huge $500M data centers calling it "A Battle of the Titans". There are very few companies in the world that have the vision, capability, and financial resources to build the data centers, infrastructure, and bandwidth necessary. Microsoft is one of those companies.

Paul Graham recently wrote a provocative and off base blog "Microsoft is Dead". I responded with "Since when does growing $4 Billion a year = Dead?" Paul lives in the Web 2.0 world building web based applications for consumers. From his perspective anyone who isn't building web based consumer apps is, well...Dead. Paul failed to see three things.

1. Microsoft is already delivering software as a service with Live Search, Xbox Live, Office Live, Windows Live, Live Meeting, and lots of others.
2. Building the software services is important, but the real important determinant of success is the ability to deliver the services in a scalable, secure, reliable, and cost effective way. This requires big data centers and experience managing web scale services.
3. Microsoft's enterprise customers want their web based services to seamlessly integrate with their server based applications and client PC based productivity tools. Sorry, stand alone web apps don't cut it for business customers. This is where Microsoft is spending tons of time and resources, and will ultimately be the key to success for software delivered as a service.

The transition from packaged software to software as a service has already started. For consumers it happened a long time ago. For business it has started as well, but it will take longer because the problems are more complex and expensive. The existing systems must seamlessly integrate with the new services. This is precisely what we call the Client/Server/Services continuum. It is why we have been working on Live Services, and why we have been busy building huge data centers. The pieces are in place and the picture will become clear for all the world to see very soon.

Microsoft is not dead...or irrelevant. Sorry Paul, I couldn't resist. :-)

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Comments

[Dennis Forbes]

>Microsoft has been delivering software as a service for a long time.

And it has contribute extremely little to the bottom line (and generally has been a money loser).

Even if Microsoft could transition to being the dominant provider of web services, and conquered the online industry, it still has nowhere to go but down -- the sort of lucre that Microsoft historically managed to coerce from customers tied to their platform just doesn't exist in the highly competitive online services industry (as many have mentioned derisively of Paul's article: a small part of Microsoft dwarfs the entire Web 2.0 industry, yet in actuality they're unintentionally validating Paul's argument, not yours).

And to the increasing revenue, with all respect I see that as the last gasps of dominance as Microsoft monetizes previously unrealized revenue streams.

[Mukund Mohan]

Don
Microsoft is not dead, not irrelevant, not small, not growing too fast, not ....

Microsoft is just plain boring.

I just got outlook 2007 and its boring, have a live site with live crm & live meeting (switched to gotomymeeting) - boring.

I know this may be a passing fad, but a lot of the web 2.0 stuff we try is just cool and fun.

Just reread your post and see the words you use - seamlessly integrate, bility to deliver the services in a scalable, secure, reliable, and cost effective way. "blah blah" - all IT enterprise stuff.

BORING.

BTW my comment is not a reflection on you, your blog or your content. I think Microsoft is boring.

[DonDodge]

Dennis, Time will tell who is right. I see Microsoft taking the right steps now and the payoff will be years down the road.

Mukund, Yes, doing all this boring infrastructure, integration, and making it all work with existing apps is hard work...and boring. But solving tough problems for business users is where the money is. That is what Microsoft does very well. Boring perhaps...but very profitable.

[Brian Despain]

Don if the ability to scale a platform is the key to making services work (and I think you are right) then this is advantage Google. Why? Because of the approach that Google has taken with their platform and the custom file system allows them to rapidly scale web applications. Microsoft tries a lot of different things but they haven't built a platform that is designed to scale in the same way as Google's. Quite frankly Google's hosting platform is it's most powerful feature and you never see it because it operates behind the scenes. I wrote about it two years ago.
http://www.thinkingmonkey.com/2005_09_22_archive.shtml

[mathew]

i just stumbled on this great respectful, yet critical 'review' of paul graham:

http://www.idlewords.com/2005/04/dabblers_and_blowhards.htm

[Dean]

The internet is not Windows.
If Microsoft takes Office apps off Windows and puts them on the internet, then the Microsoft advantage is gone, and huge data centers are not going to make a difference. There will be no need for businesses to pay a premium for word processors and spreadsheets when there is so much competition out there producing this software. Microsoft has no advantage writing apps for the internet like they do writing apps for Windows, and they know it. Why do you think Internet Explorer was left to stagnate for so long? Microsoft can't afford to make the internet a viable platform for applications.

"Most Web applications are broken"
Don't pin your hopes on this one. The technology is already good enough for many and will only get better. And once broadband is ubiquitous and a bit faster, users won't be able to tell whether their app is running on the desktop or on the web. (Jacob Neilson is seeing this already: "Most users don't distinguish clearly between the operating system, applications, and content or websites." http://www.useit.com/alertbox/breadcrumbs.html

The market is shrinking.
All this competition will shrink the market, in dollar terms, for office apps, which plays into the hands of the hungry web 2.0 startups, but might not be worth the trouble for a behemoth like Microsoft. In other words, it won't be a $40 billion market anymore (or whatever part of that comes from Office).
See "Shrink a Market" for an interesting analysis of the encyclopedia market. http://redeye.firstround.com/2006/04/shrink_a_market.html

Data centers won't help either. Large and scalable data centers are not the software business. Data centers are an entirely different business. They require a wholly different skill set. Programmers write applications and they innovate with their applications. And data centers will be a service in themselves that companies specialize in. Look at Amazon. Look at EC2 and S3. Companies don't need to build the data centers themselves to take advantage of all they offer. I can tap into Amazon's world class data centers today for my web 2.0 app and all I need is a credit card.

Google's data centers are built around their search engine and are integral to the way that application works. Data centers to run a spreadsheet and store the data don't need to be that complicated, hence there's no real competitive advantage here for Microsoft.

On the web, Office doesn't matter. Windows doesn't matter. There goes Microsoft's competitive advantage. Will they die? I doubt it. But the market just shrank to a fraction of what it was. In other words, you won't be writing about $40 billion revenue increases for too many more years.

Speaking of which, $40 billion in revenue is impressive. However it's only about an 11% growth rate year over year (according to Morningstar), which normally is not too shabby, but is nothing special for a giant like Microsoft. That is why their stock price has gone sideways for 5 years. I'm impressed by $40 billion, but obviously Wall Street isn't.

Microsoft's best hope is to somehow convince users to stay on the desktop. And that will be an increasingly difficult sell.

[Franck]

This debate reminds me the "end of the mainframe" or "death of Cobol" discussions. There is a lot of activities done beyond the web & services area and it will take a very long time before theses forms of software development will disappear.

[Tim Matthews]

I think another interesting topic (blog title?) is "The People-less IT Department." Perhaps more to the point, will IT staff all just become employees of Google, Microsoft and Salesforce.com et al in ten years?

And perhaps when the developers and IT staff work for the same company they will finally understand each other...

[Vijay Chakravarthy]

Hi Don,
I completely agree with the comments about the statement regarding most web applications being broken. If anyone has tried to create a serious document in any of the online web 2.0 versions of word, they would see its not really possible to do so without a lot of heartache. So given that its much easier to use Word, Excel etc., what market do these product address? People who dont have Word or Excel, but have excellent internet connectivity?
Our approach has been slightly different - take desktop applications, and enable them to work more efficiently with the web 2.0 world. We think there is a lot of potential in this area.

I do disagree with the data center being a source of competitive advantage..the scaling doesnt need to happen overnite. Furthermore, as you probably realize from your experience at Groove, its more efficient to build P2P models, and have the central system serve as the unit of coordination. Imagine how poorly VoIP would scale if the codecs ran on the server, rather than just the SIP part...

Vijay

[mindmarc]

>> The Softwareless Software Company may have come full circle from the Computerless Computer Company and be more about hardware and infrastructure than about software after all.

Software makes the hardware scale. Anyone with $500M can make a huge datacenter. But the question is, can they make software than can take advantage of this huge parallelism?

[Webinar Consultant]

Have been using salesforce.com for the past 3 years. Software as a service, allows everyone to get access to software, which might have only been available to large corporate customers.

Plus you don't have to worry about upgrading to a new version....which really sucked! "Hmmm...let's take the feedback our users gave us, improve the software, then charge them to upgrade".

Cheers,
Dave
http://www.batipi.com