ASPs: Future is MS, Oracle

"Our company, our entire support organisation is undergoing a wholesale transformation," said Tim Chou, president of Oracle.com. "We are changing the economics of the software business."

At Microsoft, "This is about the 'servicification' of all our software," said Sanjay Parthasarathy, vice president of strategy and business development for the .Net program. "It may not all touch the Web or be delivered as a service, but it will all be tied into services that are available any time, anywhere, on any device."

The two software giants promise that companies will be able to access software and related services on demand. Enterprises will be able to use new applications without installing and tightly integrating them by, in effect, renting - rather than buying - the management skills of a presumably more knowledgeable service provider. How this will ultimately impact price, security, service levels and bandwidth remains to be seen, but the leaders insist it is the future.

Microsoft is trying to leverage its desktop hegemony into leadership in the new era with its .Net services platform. Oracle is pushing managed services for its enterprise suite as a way to cut costs and improve the customer experience.

Although we've been hearing the buzz about software services for more than a year, a close look at what's going on at ground zero at Microsoft and Oracle indicates that software services are much more than just another option the vendors plan to offer down the road: They want to be the gatekeepers of new operating systems for the "supernet" - the interconnected network of networks that will allow enterprises to link every facet of their businesses.

"We're 100 percent convinced that all software will become a service someday," said Jeremy Burton, Oracle's senior vice president of product and services marketing. "Just like water, electricity and every other network, the computer network is maturing to allow that to happen."

Across the industry, the story is much the same as the biggest software companies get down to the serious work of changing the way software is sold, delivered and used by corporate America. IBM and Sun Microsystems have announced their own plans to create service platforms, and major vendors such as Computer Associates International, SAP and Siebel Systems are also increasingly offering hosted services.

Even accounting for the blue-sky quotient of many software industry claims, it's tough to reconcile the grand proclamations by leaders such as Oracle Chairman and CEO Larry Ellison, Microsoft Chairman Bill Gates and Sun Chairman and CEO Scott McNealy with the performance to date of the most visible early entrants in the software services market, the application service providers (ASPs).

"It's the ASP paradox," said Ben Pring, principal analyst at Gartner. "The first-wave companies are struggling, yet everyone seems to buy the idea that this will be a no-brainer." Gartner estimates a US$11.6 billion global ASP market in 2004 - less than its previous projection of US$25 billion, but up sharply from about US$2.1 billion last year.

The key to the paradox is that growth will be driven not by the start-up ASPs - which have gained mind share but not market share - but by the folks that already sell software by the ton. "Look at sales of records by the Sex Pistols as opposed to Nirvana - yet without one you wouldn't have the other," Pring says. "It's going to be the big guys who commercialise it."

In fact, IBM is expected to announce this week that it is formally getting into the ASP business with a hosted and managed offering from Ariba. Until now, IBM has operated a substantial hosting business and has managed applications for clients on a one-off basis. However, with its AribaBuyer application service, IBM will be getting into the business on a large scale.

"We think this could develop into a really big opportunity for us," said Paul Boulay, program director for application hosting service at IBM. "There is a big market of small and midsize companies out there that would like to be able to take advantage of e-procurement, but aren't prepared to make a multimillion-dollar investment."

The potential benefits to customers and the software companies themselves are too big for the vendors to leave services to anyone else. Software as a service promises businesses a new level of interconnectedness and access to a broad spectrum of applications. "The integration possible via services will provide flexibility and speed that will make the CIO's [chief information officer's] life easier," Parthasarathy said. Universal interoperability is an oft-broken promise, though, and not everyone relishes the possibility of another generation of market leadership by Oracle or Microsoft.

Vendors, meanwhile, see a chance to enter new markets, smooth out earnings flow and establish their services as the standards of a new era.

ASPs - or companies such as Electronic Data Systems and IBM that are muscling onto their turf - may prove a viable channel for the delivery of some software services, but hosted application software is only part of the change in how businesses will use software and the Internet.

Microsoft, for example, doesn't mean for all software to be delivered as a hosted service - though it plans to sell plenty that way. Its goal is for all software to be able to instantly access that interconnected service environment on demand.

"It's a misconception that people will get [Microsoft] Office off a Web site," said Dwight Krossa, director of emerging business product management at Microsoft. "What is Office in a software-as-a-service world? A client, a way for people to access some services. The same with Windows. It's an experience you go into."

Said Ian Rogoff, vice president at Microsoft's worldwide partner group: "It doesn't matter if the next-generation business application is hosted or on-premises - software as a service is less an objective than an enabling factor." Southwest Airlines, for example, can use Dollar Rent A Car Systems' reservation software to assemble travel packages on its own Web page, with the disparate back-end systems tied together on a Microsoft platform.

That's what the whole .Net strategy is about: making the functionality of software accessible on demand, and in the process establishing Microsoft as the platform on which it runs best.

".Net is our strategy for embracing an XML [eXtensible Markup Language] Web services architecture for everything we do," said Barry Goffe, group manager for .Net enterprise solutions at Microsoft. "SQL [Structured Query Language] itself isn't going to be shoved out onto the Internet as a Web service, but people who want to build an XML service with a persistent data source on the back will use it as the foundation on which the services are built." .Net also undergirds Microsoft's bCentral small-business applications and its ASP strategy.

Oracle has its own vision for the world of integrated applications.

"We are headed toward a standard e-business platform and infrastructure," Chou said.

But even the enthusiasts admit the ultimate goal of seamless Web services is still years away. "Major technology work needs to be done to get it all tied together," said Chou, who noted that customer awareness, network reliability and bandwidth are near-term challenges.

How long the transition will take is unclear. "I think that a three- to five-year time frame for a financial impact is reasonable, but everything depends on the market uptake," Parthasarathy said. "This has to go through three phases: access, integration and personal relevance. Today, we're in the access phase of hosting software. The next step is a loose federation of Web services, coupled by XML. The key then is relevance to the user. If you are a CIO, you have to think about different audiences, such as employees, partners and customers. HailStorm may be more relevant for end users, Active Directory for employees, and some federation of HailStorm and Active Directory for partners."

There's no guarantee that the specific business plans envisioned by Big Software will pan out. Oracle's strategy depends on customers' buying a suite of software instead of best-of-breed applications, while Microsoft's .Net faces competition from other would-be service platforms, including offerings from IBM and Sun. In addition, a new wave of vertical service providers could take market share away from established companies for some applications. Still, there's no question the software industry is changing for good.