O'Reilly Network Weblogs: Software as a Service Alive and Well

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http://www.oreillynet.com/pub/wlg/2248

Software as a Service Alive and Well

by Tim O'Reilly
Nov. 3, 2002

A report last month in Windows and .Net Magazine describes the failure of Microsoft's pilot in Australia, New Zealand, and France for Office as a subscription product.

The article reports that:

Microsoft blames the failure on consumer confusion. Although the company sold 10 million Office XP licenses in Australia, New Zealand, and France, only 10,000 customers signed on for the ESL version of Office XP.... "The consumer market just isn't ready for subscription-based software yet," [Office product manager for Microsoft Australia Tony] Wilkinson said. "The concept of software delivered as a service is new to consumers and right now the target market just didn't understand." What puzzles me about this report is that no one is stating the obvious. Software delivered as a service is not only not new, it has hundreds of millions of subscribers. What is an internet service provider but a company that provides "internet dialtone" -- in short, access to a TCP/IP stack, and open source software such as sendmail for mail routing and apache for web hosting? And not to give all the credit to open source, what about proprietary software such as AOL's Instant Messenger, or even Microsoft's own MSN messenger and other MSN services?

Rather than claiming that consumers don't understand software as a service, Microsoft (and other developers) ought to be thinking more about what kinds of software lend themselves to being viewed as a service. At least in its current incarnation, Office is primarily a local application. Of course users feel resentment at the idea that it would stop working if they stop paying, since that would be an arbitrary end to its functionality. But if software includes a remote service component, people are very used to the idea of paying a subscription fee.

Fortunately for Microsoft and other vendors who want to move software towards the subscription model, time and technology are on their side. Increasingly, all the interesting software has a networked component. Sometimes that software as service can be funded by another business model, as google, for instance, is funded by advertising. But it seems inevitable that there will eventually be many paid software services, providing useful functionality that people will gladly pay for.

But for the head-in-the-sand behavior of the RIAA, music on demand would already be one of those paid services. Instead, users are forced to piracy because, as one computer industry executive remarked, online music is like a great superstore without any checkout counter!

I'm confident, though, that even online music will get over its Napster/Kazaa phase. After all, just look at television. It used to be free over the airwaves. Now almost everyone pays a monthly subscription fee for cable, because of greater quality, selection, and other features of value. Not only do people pay for basic cable, they pay extra for premium channels.

Right now, we've made the transition from the early "free" internet to the internet equivalent of basic cable. Now it's time for the premium channels. (And if you scratch the surface, you'll find more of them than you might expect. You need look no further than O'Reilly's own Safari books online service for an example.)

The key to software as a service is the same as software delivered any other way: added value that people are willing to pay for. So software vendors, don't try to turn your software into a subscription product unless you add some new features worth subscribing to. Don't try to force users to subscribe by limiting current features-- let the software keep working as is -- and add the networked components that will make people glad to subscribe.

Tim O'Reilly is the founder and CEO of O'Reilly Media, Inc., thought by many to be the best computer book publisher in the world. In addition to Foo Camps ("Friends of O'Reilly" Camps, which gave rise to the "un-conference" movement), O'Reilly Media also hosts conferences on technology topics, including the Web 2.0 Summit, the Web 2.0 Expo, the O'Reilly Open Source Convention, the Gov 2.0 Summit, and the Gov 2.0 Expo. Tim's blog, the O'Reilly Radar, "watches the alpha geeks" to determine emerging technology trends, and serves as a platform for advocacy about issues of importance to the technical community. Tim's long-term vision for his company is to change the world by spreading the knowledge of innovators. In addition to O'Reilly Media, Tim is a founder of Safari Books Online, a pioneering subscription service for accessing books online, and O'Reilly AlphaTech Ventures, an early-stage venture firm.