Subscription switch a battle for software companies

By Michael Liedtke AP Business Writer
Monday August 06, 2001

SAN FRANCISCO – Oracle Corp. built an $11 billion dollar a year business selling and installing software on computers, but CEO Larry Ellison thinks those days are ending. Five years from now, Ellison believes Oracle will generate most of its revenue renting its products in a world wired to the Internet. 

Under this scenario, businesses and eventually consumers will go online to log on to a Web site and pay a monthly fee for access to a wide variety of applications, instead of buying a disk and installing the software on a single computer’s hard drive. 

The transition is a no-brainer in Ellison’s mind because businesses will save money hiring consultants to handle the tedious process of installing software on in-house computers and their employees will have the flexibility to access applications from just about anywhere, using laptops and handheld devices. 

Meanwhile, Redwood Shores-based Oracle will build a more reliable revenue stream akin to a cash-rich cable TV company that collects subscriptions from a captive audience month after month. 

“I believe all software companies will transform themselves into online service companies. We have no choice,” Ellison said earlier this summer. 

Even longtime Ellison nemesis, Microsoft Corp., is heading down the same path as Oracle. As part of a new Internet initiative unveiled last year, the Redmond, Wash.-based company is introducing a new service called “HailStorm,” which will enable businesses and consumers to rent a variety of online applications for a monthly fee. 

Despite the resolve of the world’s two biggest software companies, online software rentals seem like a pipe dream to many industry executives and analysts. 

“Large companies are never going to trust someone else to run their software. If you believe technology is your most precious asset, you are not going to let go of it,” said PeopleSoft Inc. CEO Craig Conway. “Every year, it seems like there is some major paradigm shift predicted for the industry. Sometimes they actually happen, but most of the time they don’t.” 

Ellison certainly missed the mark with one of his most heralded predictions of sweeping technological change. In the mid-1990s, Ellison made worldwide headlines by unveiling a network company that would draw upon online resources and make Microsoft’s Windows-based operating system obsolete. Ellison’s vision hasn’t panned out yet and most analysts believe he is shooting too high again with his ambitious predictions for online software services. 

“It’s going to be a very gradual evolution, if it occurs at all,” said industry analyst Charles Phillips of Morgan Stanley Dean Witter in New York. “People like to have control over their own technology. They like to build it themselves. They want to be able to see it in a room.” 

Security concerns and worries about system outages also might discourage online software subscriptions. 

Software companies like Oracle and Microsoft are pushing to build online subscription businesses because they are beginning to recognize the growth limitations of their traditional sales approach, Phillips said.  

Both companies say they are reaching such a saturation point with their software that they realize there is only so much more money they can make from one-time fees for new products and upgrades. 

A breed of companies known as “application service providers” have been struggling terribly in their efforts to rent software online. The most prominent pure ASPs include Annapolis, Md.-based USinternetworking Inc. and San Mateo-based Corio Inc., which have lost $408 million and $186 million, respectively since their inceptions in 1998 while attracting fewer than 500 customers combined. 

Reflecting their grim outlook, the stocks of both companies are stuck under $1 per share. USinternetworking went public in April 1999 at $21 per share while Corio made its stock market debut in July 2000 at $14 per share. 

Despite the early troubles of pioneering ASPs, the research firm International Data Corp. sees a bright future for the concept. In a recent report, IDC predicted total ASP revenues will swell from $986 million last year to $24 billion in 2005. 

Proponents of online software rentals say the ASPs have flopped because they are leasing applications made by outsiders, such as PeopleSoft, SAP and Siebel Systems. 

“The only companies that will be successful in delivering online services will be the software companies themselves,” Ellison predicts. “Everyone else that tries to deliver online services will fail.” 

Marc Benioff, one of Ellison’s former lieutenants at Oracle, says his San Francisco-based start-up is proof that online software subscriptions are the wave of the future. Since going online in March 2000, Salesforce.com has signed up 50,000 employees at 2,800 companies that pay $65 per monthly subscriber. 

“We are going great guns,” Benioff said. “The Internet has matured to the point that it is more than capable of handling this kind of model.”