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| Home - Industry Article - Nov 05 Issue |
Open Source, Software-as-Services Threaten the Software Industry
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- Scalability: Open source systems support a wider range of hardware and software systems than any other operating system. Likewise, open source systems are better suited for smaller deployments that may need to scale or be otherwise adapted for future needs.
- Security: The debate rages on, but there is no evidence that open source systems are more vulnerable to security breaches than their proprietary counterparts.
- Total Cost of Ownership: TCO includes sale price, upgrades, maintenance, tech support and training. Open source is cheaper and will only become more cost-effective to deploy and maintain as its footprint spreads. And because Linux meets or exceeds proprietary software in reliability, performance, scalability and security, its long term TCO figures to be lower.
- Increasing prevalence/market share: There's no question open source remains the biggest threat to proprietary vendors in terms of both short-term revenue and long-term market share. This is why Microsoft is as contentious with its open source brethren as it is with any other entity it deems as a threat.
- And more: Open source gives customers greater access to best-of-breed solutions and keeps them from being locked in to a single proprietary vendor good, bad or indifferent.
Extracting Value: Software as a Service
If 1995-2000 was known as the tech economy, the years immediately following will undoubtedly be known as the value economy. That is, the era when companies were tasked with doing the same work with far fewer resources.
The bursting of the tech stock bubble can be traced directly to the goings on in the IT department. IT departments have been forced to retrench and have only been making investments in those technologies that can be easily paid for and deployed, and deliver a compelling ROI.
Unfortunately for the software industry, its monolithic platforms and applications are neither cheap nor easily deployed. Instead, they require tons of customization, maintenance and training. And even then, there is no guarantee of the return on investment.
As a result, the Software as a Service model (SaaS, where a vendor provides customers access to software that is hosted, managed and maintained by the vendor) has grown considerably.
In fact, IDC recently forecasted that worldwide spending on software as services will reach $10.7 billion by 2009. Some have even asserted that you could construct an entire data center from hosted applications, including the back office (ERP, supply chain, back office), messaging, integration, CRM and SFA.
You might argue that SaaS already failed once when the market was known as 'Application Service Providers" and the companies in the market blew through $10 billion in venture capital. But the first generation of ASPs took traditional software systems, provided a web front end, and provided the service in a data center. The new generation of SaaS consists of software written to be run in a multi-tenant system architecture, where one software system running across hundreds of systems can scale to serve millions of users; the resulting economics of service are mind-boggling; the cost per user is a fraction of traditional deployments.
First of all, front- and back-end infrastructures have improved dramatically. Consider that virtually every business and the majority of households now have access to high-speed data connections. This certainly was not the case five years ago. At the same time, web interfaces have dramatically improved.
All the while, the business world continues to become more flat, with companies becoming more reliant on global offices for design, manufacturing and fulfillment. Likewise, companies are doing more in the way of distance learning, online meetings and collaboration. All of these applications call for a browse front end.
The last five years proved that while many small businesses have the same business problems as the big guys, they don't have access to the same solution set. A small business can't go out and buy Siebel. But it can afford a monthly subscription to Salesforce.com.
Therefore, SaaS addresses a vastly under serviced and lucrative market- The SMBs. It's for these reasons that the future is quite bright for SaaS.
Some of the benefits of SaaS to businesses of all sizes include:
- Easy to get started/deploy
- Limited - if any - customization
- Flexible licensing and fixed costs
- Easy to switch vendors
- Mobility provided by web-based applications
- Reduction of IT costs when applications managed and maintained by the vendor
It's clear that there's a dramatic transformation disrupting the software business. The underlying need for change exists, and there are companies beginning to fill the market with solutions. The real threat is those software vendors that are unable to adapt their models to seize the opportunity and compete with the upstarts. The good news for customers is that competition will breed innovation and decrease costs. And the new generation of software systems-both open source and SaaS-give customers the opportunity to take back control of their systems and deliver the real business value they get paid for.
As Managing Director of General Catalyst Partners, Larry Bohn focuses on the software infrastructure, enterprise software applications and information technology sectors. Larry is a board member of Advanced Electron Beams. Inc., Demandware, Inc., Black Duck Software, Inc., ChoiceStream, Inc., Optaros, Inc., OzVision Global, Inc., and QUMAS -- all are active General Catalyst investments. Prior to joining General Catalyst, Larry was the chairman, president and CEO of NetGenesis, a market leading software and analytic solutions provider. Larry has been a board member and advisor to a number of private technology companies, including Enigma Inc., Metreo, and Bidder's Edge. He is also a founder and the first president of OASIS, the industry consortium promoting XML adoption. For article feedback, email him directly at lbohn@generalcatalyst.com
 
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