Magazine

Software: Pay-As-You-Go Is Up And Running


It's back to the future for Siebel Systems Inc. (SEBL

), a maker of customer-management software. On Oct. 1, Siebel announced it would start selling a version of its software as a monthly rental service delivered via the Internet. Strangely enough, Siebel killed a similar effort three years ago because it couldn't figure out how to make money. Today? That software is one of the keys, Siebel executives believe, to turning around a two-year, 25% slide in the San Mateo (Calif.) company's revenues. "At the time, this wasn't really a market," says Ken Rudin, vice-president of Siebel CRM on Demand. "Times have changed."

Look for more of the software industry's heavy hitters to jump on the software-as-service bandwagon. In the late 1990s, a host of startups began offering applications delivered over the Web. Most of them went out of business, mainly because large corporate customers balked at the idea of allowing untested outsiders to run their most important applications. But in the past couple of years, both corporations and smaller businesses have become more comfortable with this way of buying software.

Analysts now estimate that over the next half-decade, as much as half the software sold to corporations will be paid for on a monthly basis, as part of a long-term contract or a monthly rental fee, or even on a pay-per-use basis. So rather than paying millions of dollars for software they might not get much use from, businesses can pay by the drink. "It is a much more financially reasonable model for customers," says Joanne Corriea, a vice-president at market researcher Gartner Inc. (IT

).

The software-as-service trend won't be enough by itself to revive the sluggish software industry. That's in part because this new way of using programs stretches out revenues for the software suppliers into the future. But a strong economy will help perk up the industry -- and now that seems to be happening. While analysts don't expect software sales to return to the double-digit growth of the late 1990s, worldwide sales in 2004 should rise 6.7%, to $148 billion, according to Gartner.

Stocks are another matter. It's doubtful that relatively healthy sales growth can justify the runup in the prices of software stocks that has already occurred. Goldman, Sachs & Co.'s (GS

) index of software stocks has increased more than 40% for the year, almost double the increase of the Standard & Poor's (MHP

) 500-stock index. Investors, it seems, have already gotten ahead of next year's growth prospects. Stocks may face a correction, or at least stagnation, in prices before profit growth picks up and justifies further stock-price upticks.

There are no surprises at the top of priority lists for software spending. Due to a midsummer outbreak of computer viruses, spending on security software for both consumers and businesses grew an estimated 9.6%, to $5.62 billion, in 2003. This year, security spending is forecast to increase another 10.2%. Once again, security specialist Symantec Corp. (SYMC

) is expected to shine.Leading the Pack

Other high-growth segments include design-and-engineering software, which will increase 11.7%, to $10.7 billion; software for integrating one application with another, which will grow 10.1%, to $9.4 billion; and storage software, which will increase 6.2%, to $7.5 billion, according to Gartner. The fastest-growing market of all -- though still very small -- is software that helps corporations manage big projects, such as product development. Led by companies such as Mercury Interactive Corp. (MERQ

), sales are expected to jump 15.4%, to $570 million in 2004.

A wild card is the emerging market for software that helps corporations comply with Sarbanes-Oxley record-keeping rules -- which go into effect this year. A handful of startups have created specialized software packages. And these small fry are understandably bullish. But it's unclear to analysts just how big the market will be and how fast it will grow. Many corporations could end up buying some new software tailored for this process, but they could also use existing accounting, performance-monitoring, and document-management-software packages.IPOs on the Way

The surprising laggard in 2004 will be business-intelligence software, which helps executives analyze their businesses and make better decisions. It was one of the fastest-growing segments over the past three years. Because companies are starting to shift priorities to new projects and security, business-intelligence-software sales may actually drop 4.7%, to $2 billion, says Gartner's Corriea. Also, don't expect much sizzle in mature markets such as databases and operating systems. None of those markets should grow more than 5% in 2004, predicts Gartner.

As Siebel is demonstrating, the real sizzle may be in the software-as-service business. Surprisingly, it was the success of a software upstart that brought this business model into vogue. San Francisco-based Salesforce.com Inc., which offers software for managing sales and marketing as a monthly subscription over the Internet, is doing an estimated $100 million in annual sales. On Dec. 18, it filed notice of its intention to make an initial public offering in 2004. Other small software companies with similar business models, such as NetSuite Inc. and RightNow Technologies Inc., may ride Salesforce.com's coattails and also file to go public this year.

The software-as-service trend seems to be finally taking off with some of the well-established software companies, too. Oracle Corp. (ORCL

) , for instance, announced on Dec. 15 that revenues for that business increased 82% in the second quarter. The business was launched five years ago and grew slowly until now.

While this nascent delivery method may give the software industry a boost, 2004 may be the rare year that Microsoft Corp. (MSFT

) doesn't drive growth in PC software. The next version of Windows, code-named Longhorn, probably won't see the light of day for two more years. A new version of the other cash cow, the Office desktop suite, was released in October, but surveys of corporations show that it won't cause an immediate upswelling of demand. Without Microsoft driving major changes, PC-software sales will stay about flat next year.

Aggressive as ever, though, Microsoft is moving into new businesses to generate growth later. In 2004, it will pump $2 billion into research and development to gin up new products designed to manage small and midsize businesses, a market that's largely untouched by high-powered corporate software. And after years of accusations that Microsoft develops shoddy programs that are easily exploited by virus writers, the giant now plans to jump into the antivirus software market. It's unclear when Microsoft will ship its antivirus technology, but when it does, analysts believe it'll be bundled with the operating system, causing major problems for incumbent security companies and presenting barriers to startups. Trends may come and go, but the threat to others from Microsoft never seems to go away. By Jim Kerstetter in San Mateo, Calif., with Jay Greene in Seattle


Later, Baby
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus