There is a strong movement toward Internet-based software applications. Of this, there is little doubt. I have written on the SaaS trend in the past, and believe it is real. But sometimes market trends such as the move toward SaaS are overstated, both in terms of the speed of change, and also how much change the trend will ultimately affect a market. We have a word for this overstatement of a trend: “hype”. So, is traditional software revenue model of licensing dead? Will all software eventually be “given away” to the end user, and supported solely by advertising revenue?
If you believe many of the pundits in the computer trade press, the answer is a resounding “yes”.
What do I believe? It’s a bunch of hooey.
I’ve got a few gray hairs, and have been in the technology business for a while. In technology, this type of hype is neither unusual nor infrequent. For background purposes, let’s backtrack a bit, to few recent, major “trends”, which were heralded as the “next big thing” by the mainstream technology trade press and associated analysts.
What was predicted: Java was going to take over the world, it was a Microsoft killer. Sun Microsystems was to ascend to the position of King of the technology world.
What actually happened: There was tremendous PR hype far in advance of mature, usable technology and products. This was followed by headlines detailing the dismal failure of Java in the market, and the beginning of yet another down cycle for Sun. Java technology eventually matured and found a nice market space, although not a dominant one, and one that Sun seems to have failed to capitalize on directly. The most recent estimate I’ve seen of Java revenues for Sun is $10M annually.
What was predicted: Bluetooth was going to be the next great wireless standard, blowing past the expensive and inferior 802.l1 standard. It would extend from cable replacement all the way to “smart networking”.
What actually happened: Unlike Java, which people saw as proprietary to Sun (with good reason), no one company “owned” Bluetooth. It was backed by a large consortium and standards committee. Unfortunately, like Java, it was grossly oversold very early on, both on its maturity and its ultimate potential. The trade press once again declared this new technology a failure—far before the development cycle was even able to deliver stable, useful products. 802.11 became the dominant wireless networking standard. Bluetooth has found a small niche in short cable replacement, primarily in the market for hands-free devices attached to mobile phones. Newer emerging standards such as UWB threaten to usurp in many of the market niches that Bluetooth has been able to establish, and is the new challenger to 802.11 for the wireless networking space.
Pen and Voice Computing (take your pick):
What was predicted: Many times over the years, tech industry pundits have proclaimed that by year xxxx, Pens and or Voice Recognition technologies will have rendered the trusty keyboard and mouse obsolete. We will be able to engage our computing platforms in a more natural manner, much like we do in “real world” interactions. The Apple Newton was to be only the first generation of soon to be ubiquitous pen-based computers, which would dominate our everyday computing world. Later, Bill Gates told us during a stage introduction in 2001, that he was “already using a tablet PC as his everyday computer.” Certainly all the experts, over the years, expected these technologies to mature and become mainstream, long before the year 2006.
What actually happened: We’re still waiting. I’m guessing that Bill G.’s clunky Tablet PC is sitting somewhere in the corner of his office—gathering dust. I haven’t tried to add it up, but I’m sure that many billions of dollars have gone down the drain (along with a bunch of high profile startups, and careers), trying to bring these technologies to the mass market. In the meantime, the technologies have continued to mature, and have found important niches. Pens have become useful in mobile computing, although keyboards have recently mounted a comeback in that area. Voice recognition continues to mature and has become very useful in the market for people with disabilities. The maturation of voice recognition can also be seen when you call a company using one of the newer automated attendants, as entry points to their call centers. They are much smarter and quite a bit less frustrating to use than the earlier attempts in the market, which helped coin the phrase “voice mail hell”.
WEB or DOT COM 1.0
What was predicted: All software was going to be Internet-based, free to end users, and supported by advertising revenue. Traditional licensing of software was old-fashioned and passé. Try getting an emerging software company with a traditional licensing model funded in the year 2000. If you weren’t laughed at by potential investors, you were at least viewed as a dinosaur.
What actually happened: I doubt if I need to spend too much time reviewing what happened, unless any of you were living in a cave in 2001.
So here we sit in 2006, in an era that the press been dubbed “Web 2.0”. Google is the hottest company on the planet, supported almost exclusively by advertising revenues. They are buying software companies left and right with inflated stock, eliminating license fees, and rolling the acquired products into their wildly successful advertising-supported model.
Once again I’ll pose the questions: So, is traditional software revenue via licensing dead? Will all software eventually be “given away” to the end user and supported by advertising?
Doesn’t Web 2.0 sound a lot like Web 1.0? My thesis is that it does, with a few obvious exceptions. Google has shown that in some cases, the advertising-supported model for software can work EXTREMELY well. And people aren’t in quite the crazy mood that they were in the late 90’s, when otherwise perfectly sane, experienced VCs and other business people appeared to lose their collective minds. Statements like “it’s not about the revenue, it’s about attracting the most eyeballs”, and “we’ll figure out how to monetize it later” were NORMAL. And let’s not forget my all time favorite “Your not spending money fast enough”.
I’m not suggesting that craziness is returning; because not enough time has past to forget the resulting pain wrought on the high tech industry. But I do believe, that in terms of ultimate effect and rate of change, the pundits once again are viewing a molehill, and proclaiming a mountain. Google is hugely successful. They’ve hit on a great formula that works for the Search Engine software business. The formula that they’ve created has allowed a great many people to build websites with excellent, useful content, and monetize that content, in whole or in part, with online advertising.
But I strongly disagree that this is the future of all—or even most—software applications. If you look at the Google phenomena closely, I believe it is a special case. The Search Engine business is a mass market; nearly everyone uses one these days. It is also a large market with almost an infinite number of identifiable submarkets of customers, which is what allows Google to sell so much advertising, to so many different customers. When you do a search in Google, you are essentially joining one of those submarkets, making you identifiable to the vendors in that space. There is also the wonderful fact for Google that their version of online advertising looks a lot like their “free product”—the search results, and their ads are reasonable direct replacement alongside those results. In fact, a large number of (even sophisti
cated) people don’t even realize they are responding to advertising when they click on a “Sponsored Link” result. There are probably a number of other mass market applications that will provide a similar opportunity, for using an advertising-only revenue model.
But for most software applications, I don’t believe that this model will be work. Most software applications are focused on a smaller market. In many cases, the ongoing R&D; to support these important—but not universally needed—applications, may be nearly as high as developing a Search Engine. There may be advertising opportunities available to online version of these applications, but the revenue in most cases may be far less than what is required to fund R&D;, marketing and sales—while still make a reasonable profit. I also don’t believe that clicking on advertising will be nearly as “natural” while working on a spreadsheet, writing a letter, or doing your online banking. I think that even Google is making a mistake by eliminating license fees for many of the applications they are acquiring, in their recent M&A; frenzy. Everyone gives them a pass on their strategy, because of the wave they are currently riding. But that doesn’t mean that it’s the right one. Only time will tell for sure. I remember a similar point in the development of Netscape (one of the Google’s of the past) where everyone thought Netscape could do no wrong. In the end, their strategy looked very flawed, and of course they failed to execute—which is generally even more important to success.
Certainly advertising form factors and technology may adapt to these newer online applications—but that’s a big if, and counts on innovation. I’m sure many software companies with advertising-only business models are being funded TODAY. Sounds a lot like “we’ll figure out how to monetize it later”, to me.
Another interesting point to consider that in other forms of media, advertising as a revenue source is taking a beating vs. user fees. High Profile examples include television (cable & pay per view vs. traditional free networks with advertising), and the emerging Satellite radio.
My expectation is that there will be a few major successes, like Google, that rely exclusively on Advertising for revenue. There will also be a larger number of companies that augment their licensing revenue with advertising. But for the foreseeable future, I see licensing revenue remaining as the backbone of software business models.
The moral of this story is, don’t always believe what you hear. It’s very hard to predict what will really happen in High Tech. Sometimes what is shouted the loudest in the technology business, turns out to be laughably wrong, in hindsight.
That’s my unvarnished opinion—go ahead and shoot holes in it! I’m curious to hear other opinions and supporting facts.