Last week I mentioned a white paper I wrote a couple of years ago that addresses some of the changes we can expect to come from the on demand development and deployment paradigm and I thought it would be interesting to examine some of the main points here.
The title of the piece is “The New Garage” for a very specific reason. I believe that on demand development and deployment will significantly reduce the investment required to build a software product and the company around it. With the capital requirements greatly reduced, we won’t likely again see a situation like the one that existed in 2001 where venture capital firms were pouring money into businesses that were at best questionable.
The garage is where many entrepreneurs have historically gotten their ideas off the ground and with on demand tools and infrastructures, we could again see developers creating software in their garages or spare rooms without all the trappings and pressure of 1999. That was the idea behind the title and the paper.
While I don’t see The New Garage as a zero sum game in which for every winner there is a loser, I do believe that it has the potential to shake everything up and in the process leave us with a very different paradigm for the business software industry. There are many different players who will be affected in this scenario, some for the better, some not. Here’s my rundown of some of the more obvious groups.
Developers and Publishers
First, I believe we will see two types of software houses emerge and I call them developers and publishers. Developers will retain many of the functions of traditional software companies, but they will standardize on a small number of platforms to deliver their wares on. For my purposes, a platform will include a typical stack of services and tools such as operating system, database, middleware, development tools, etc. Developers will use these stacks or platforms and be more or less committed to working with the stack owner which I call the publisher.
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Publishers will not only own the stack and the on demand delivery system, they will also be the primary face to the end customer. They will own the delivery mechanism and will sell and market software titles in their inventories. This represents a much lower cost sales and marketing model. Since the publisher will also understand aggregate use patterns, it will also consolidate demand and be in a great position to know what customers will want in the way of enhancements or whole new products.
Developers will want to work with more than one publisher for the simple reason that with multiple outlets to the market it will be hard for a publisher to set prices to the detriment of the developer.
Similar to the Publishing Industry
I use the word “publisher” in the same sense that I think about book publishers. Publishing houses own a distribution channel, and that’s what authors look for when trying to sell a book. Publishers look for salability of an idea, and a good acquisitions editor knows what subjects are timely in the industry and what subjects to stay away from.
Let us then suppose that the software industry evolves that way — publishers with platforms and developers using on demand tools and infrastructure to make new applications — who benefits and who stands to lose out?
If the industry does indeed go in that direction, any vendor caught in the old licensing paradigm will find it hard to make a living if only because over time the new paradigm will disrupt the old pricing model by one or two orders of magnitude. I believe there is an inherent economic bias which will help the new model to succeed. This won’t happen overnight, but just as there are almost no new applications for mainframes today, the market for traditional applications will dry up.
Already there are very few new software companies operating within the old licensing paradigm. Virtually every new company I see is building itself around the hosted delivery model, the primary difference is that I see these emerging companies beginning to cluster around platform providers.
If there are more companies forming around the new paradigm, the individual needs for capital might also be greatly reduced. This idea is based on the implicit assumption that publishers will take new products to market which will obviate most of the need to build large sales forces and generate massive marketing campaigns. The publisher will, by definition, have a more direct and lower cost route to the customer.
With lower capital requirements in the emerging companies, venture capital will have less leverage meaning that entrepreneurs may in some cases avoid VC money entirely, preferring to self-fund and retain all voting interests in the future direction of the company. I have seen companies taking this route already and the trend should accelerate. Venture capital will not go away but it will most likely look for bigger opportunities in biotech and alternative energy sectors.
By definition, SIs live for complexity. Their world is the complex systems model; they take big undifferentiated systems and customize them for the unique business processes of large corporations for which they are paid handsomely. That world is ending at least in part due to the success of the on demand model, but also because there are very few green fields left to exploit. In its place a model based on volume operations is growing and this model is what the New Garage is all about.
Like VCs, integrators face some tough decisions. While there might still be work for integrators as the volume operations model takes hold it will be vital to their survival for SIs to identify potential products within their intellectual property. The most successful integrators will transition to become publishers in their own rights or they will team up with a few significant independent publishers. Regardless of the path each chooses, it is likely they will have lower labor requirements.
Good Time to Be a Customer
There has never been a better time to be a software customer and that situation should only improve. Today there are on demand versions of word processors, spreadsheets, contact managers, e-mail and more available for free so there is little reason to buy shrink-wrapped versions. The big fly in the ointment is how all this software gets paid for. Right now, many software companies are using an advertising model and that might work, but the danger is that the customer gets fed up dealing with the ads and reverts to a license. The key for both vendors and customers will be creativity in ad development and deployment. Then too, most of the ads are not aimed at people like me, they are targeting the iPod generation and they don’t know any better.
Denis Pombriant runs the Beagle Research Group, LLC, a CRM market research firm and consultancy. Pombriant’s research concentrates on evolving product ideas and emerging companies in the sales, marketing, and call center disciplines. His research is freely distributed through a blog and Web site. He is working on a book and can be reached at [email protected]