There is a great interview up on cio.com March 16 concerning enterprise software licensing trends. The interviewee is Amy Konary of IDC and, truth in advertising, we were co-workers and worked for Claire Gillen at IDC back when Claire was doing the seminal thinking on application services provision in 1997. If that term is not familiar to you, plug in "software as a service" (SaaS) or "cloud computing" or "on demand" or "subscription-based" licensing. Or go back to 1965 for the granddaddy of all these buzzwords for the same thing, "utility computing."
The interview led me to ask myself three questions related to investing in enterprise software suppliers as they embrace or re-embrace these licensing concepts:
- IBM, Oracle (NASDAQ:ORCL), SAP and other leading enterprise software suppliers already receive most of their revenue via a subscription model. It's usually called maintenance revenue and is much maligned by CIO advisors and numerous bloggers. Yet those "ignorant" CIOs keep buying software that way rather than via than all these new old methods. Go figure (the reason that the "ignorant" CIOs do this is because maintenance is more about constantly changing content than bug fixes)!
- I thought salesforce.com (NYSE:CRM), Netsuite (NYSE:N) and RightNow (NASDAQ:RNOW) had all the issues Amy identifies as CIO challenges figured out already. Why is her research indicating that the concept is so difficult for CIOs to implement? Maybe it's because Fiserve, Shared Medical Services (now part of Siemens), HBO (now part of McKesson), ADP, Sabre and dozens of others have offered the concept for years and have figured out that there are some enterprises where it makes sense and some where it doesn't (see Amy's example of an obviously large business with 1400 applications.
- What does this concept do to the now 30-year-old personal computing trend, of which Microsoft (NASDAQ:MSFT) was the greatest beneficiary but which also drives growth at Intuit (NASDAQ:INTU), Sage (LSE: Sage), and many other public companies? Not much. They generally license software in a way unlike both the software market leaders and the "I don't know what I wannabe when I grow up" pretenders. They get most of their revenue totally upfront. This trend is real but additive to, rather than a replacement of, personal computing. And of course all the enterprise software companies that benefit from this upfront revenue model have plans to adapt to whichever way CIOs want their software.
Author's disclosure: no position in mentioned companies.