The On-Demand Software Scrum

Oracle, Microsoft, and SAP are battling each other—and smaller players—to gain a bigger slice of a fast-growing pie

by Sarah Lacy

In 1999, the idea of renting software over the Internet was dismissed by many in techdom as little more than a marketing ploy cooked up by Salesforce.com Chief Executive Marc Benioff. At the time, the outspoken exec was operating in the shadow of software giants Oracle and Microsoft and fighting to get his nascent company some attention.

After all, Benioff was already famous -- or infamous, depending on who you spoke to -- for attention-grabbing stunts like hiring out-of-work actors to picket sales meetings at Siebel Systems, which was the biggest supplier of customer relationship management software.

Benioff may have the last laugh. Oracle acquired a distressed Siebel last year, and now all the software giants are grappling with how to come up with a software strategy similar to the one championed by Salesforce (CRM).

SIMPLICITY.

Why all the fuss? Renting software over the Web, a concept known in the computer industry as on-demand software or software-as-a-service, solves a lot of big problems companies have had with business software.

For starters, the applications are hosted and maintained by the software vendor -- not an internal IT staff -- and then delivered over the Web like a service. The software is less expensive and easier to get up and running.

What's more, customers typically buy a monthly subscription rather than pay a huge up-front license fee that can easily run into millions of dollars for big corporations and require board approval. Even better: If the software isn't to customers' liking, they just stop paying.

In the old world, software was expensive and took years to install. The chances of just ripping it out were about as likely as Windows going open-source.

This year, on-demand software vendors are expected to rake in just under $2 billion, up from $1.5 billion last year, according to AMR Research. That's still less than 10% of the overall software market, but it's growing more than 20% a year, compared with single-digit growth in traditional software. And though there's widespread disagreement on how pervasive this change will be, on-demand is a powerful enough trend that the incumbents have been scrambling to come up with a strategy.

CHASING THE BANDWAGON.

Consider the fate of Siebel, one of the rockets of the dot.com era. The company got squeezed by SAP (SAP) selling large all-in-one suites on the high end and BY Salesforce on the low end. After years of pooh-poohing Salesforce's software as insufficiently feature-rich, Siebel finally launched an on-demand strategy in 2003. But by then it was too little, too late.

The software Establishment doesn't want to be "Siebeled." Right now, the bulk of on-demand software is still in the customer relationship management realm, but should it spread, Oracle (ORCL), SAP, and Microsoft (MSFT) say they will be ready.

The biggest -- and most recent -- strategy shift came from SAP. It's the No. 1 seller of software applications that run everything from a company's back-office accounting to its sales teams. Earlier this year, SAP made a big about-face when it announced its on-demand strategy, which for now is limited to CRM (see BW Online, 2/02/06, "SAP Gets On-Demand Religion").

Microsoft also endorsed on-demand last November at an event many likened to the moment when the company jumped into the browser wars. According an internal memo obtained by BusinessWeek, the company acknowledged that it is once again late to a market but is trying to move quickly to catch rivals (see BW Online, 3/10/06, "Memo Outlines Microsoft's Plans").

And when Oracle shelled out $5.