The computer industry has had a number of interesting business models. In the early days of the mainframe, software and services were bundled into one big package from IBM and the seven dwarfs. With the advent of the minicomputer that very tight vertical integration began to dissolve with the appearance of 3rd party software for DEC’s PDP line. With the loosening of vendor integration came a new market opportunity and a new business model system integration: where you got paid for putting Humpty Dumpy back together again.
The PC dissolved the hardware/software/services monolith completely, ushering in the heyday of horizontal integration – a marketplace where customers could choose different hardware, software and peripherals from literally hundreds of vendors. Microsoft pioneered the concept of packaged software sold through retail outlets and for many years this model dominated the PC industry.
But Microsoft, from its extensive experience as a supplier of first programming languages, such as BASIC, to companies like Altair and then Apple, developed the OEM model. In the OEM model, software was back to being bundled with the computer. When you bought a personal computer the operating system was usually bundled with it, as was BASIC. Microsoft extended this model from system software to applications software – offering computer makers product like, MultiPlan, the spreadsheet that preceeded Excel, at a very low price, if the manufacture agreed to pay Microsoft a set fee for every machine they shipped. This brilliant move not only was a great way to grab market share, which was Microsoft’s strategy (in contrast to Apple, who focused on high margins) but to shut out competitors. After all, why would you even think about bundling say, SuperCalc, with any of your machines if you had to pay Microsoft for Multiplan already?
One of the next interesting business models was the packaging of applications into suites. For a time the industry was divided between the concept of buying software that was “best of breed”, suchas Lotus 1-2-3, Wordstar, and dBase II, versus buying a suite of software from a company like Smart Software, who I believe pioneered the business productivity suite. Microsoft, being the world’s greatest fast follower – another facet of their strategy along with driving for market share – quickly put together Microsoft Office and used their OEM muscle and marketing might to very quickly kill off the best of breed concept and to become the dominant productivity suite as well.
For a short time the software industry attempted the “Swiss army knife” approach of integrated applications, such as Symphony and Jazz from Lotus and Framework from Ashton-Tate, but the constraints of memory and processing power kept these integrated packages from having anything like the functionality of Microsoft Office. Today AppleWorks and Microsoft Works survive as descendents of those programs, aimed at those that don’t need the power and/or don’t want to pay for Microsoft Office.
As PCs grew more and more common in the enterprise with the advent of the IBM PC and the IBM compatible standard, IT managers started rebelling against having to buy an expensive ($495 was the standard list price) software package at retail for hundreds of computers. Thus the traditional business model of the volume discount got applied to packaged software.
However, IT managers soon became disgruntled at paying for lots of boxes and doc sets that ended up gathering dust or in the dumpster. It was the software they wanted. Vendors then responded with a new business model: the site license. By issuing a company or business unit a license to install its software on an agreed upon set of machines – or in some cases an unlimited number of machines – the software company cut their cost of goods to about zero. Instead of manufacturing thousands of boxes full of manuals, reference cards, warranty cards and such they could provide a “golden master” to the IT guys who would install the software on all their machines. The site license was a win-win business model, making life easier for the customer and cutting the cost of goods sold for the vendor.
On a parallel track the office network, in the form of Netware and Ethernet, was beginning to gain acceptance in corporations. With networks came the network license, where one copy of the software sat on a server where it could be accessed by any number of clients. The network license was a business model variation on the site license, where the customer might pay only for simultaneous users, instead of having to pay a fixed amount for every machine, whether or not the software was ever installed.
And that is pretty much where the personal software industry was until the commercialization of the Internet: network licenses for industry, shrinkwrapped retail software packages for individuals and small businesses.
Netscape invented a new and much emulated business model: giving away the client in order to sell the server. Up til then, companies paid for both a server and for every client connected to the server via the network.
The brilliance of Netscape’s model was they drove marketshare sky high in two ways: one, price – how could you beat free? And two, ease of acquisition – what was easier than just downloading a copy of Netscape Navigator to your PC? Netscape could then focus its sales efforts on selling Web servers to the enterprise.
Netscape’s model was a perfect fit for the connected world – they cut their cost of goods to zero, turned their customers into their QA department by releasing endless beta versions (thus cutting their QA costs) and created tremendous demand for Web servers.
This model looked great and it was until Microsoft counterattacked with one of their most potent business models: the bundling of applications and utilities with the operating system. This back to the future vertical bundling of system and applications software had already crushed several small companies that sold utilities that Microsoft decided to give away with the OS. But when Microsoft started bundling Internet Explorer with Windows it was the beginning of the end for Netscape. Microsoft had cut off their air supply, as they had vowed to do. For just like the OEM model, why should a customer even bother downloading Netscape Navigator when IE was sitting right there on their PC? And in fact, you could not delete IE if you tried!
Real Networks, who pioneered software to enable sound and music to be played over the Internet rolled out with the Netscape strategy only to run right into Microsoft’s counter strategy as they bundled Windows Media Player with the OS. Eventually, as we know there were a number of lawsuits, and I believe that Real actually was paid significant damages by Microsoft.
The rise of open source software engendered yet another business model: add value to the software through packaging a distribution and providing tech support services. Red Hat, with its packaged Linux distribution was one of the first companies to make money from free software. Of course this strategy had its precursor with companies like Tucows that added value to shareware and “freeware” through packaging and support.
Another new business model was pioneered by the developers of Hot Mail. They gave away their Internet email application and generated revenue from ads embedded in email messages. Hot Mail became a “viral” application and was eventually bought by Microsoft. The ad supported software model was emulated by Yahoo with Yahoo mail.
In parallel with the development of many of these new software business models, enterprise IT managers were getting increasingly frustrated by the upgrade cycle for their hundreds or thousands of PCs and the many ensuing problems, such as version control. From this problem came a proposed solution: the application service provider or ASP. While initially many hailed this model as “utility computing” it wasn’t until Salesforce.com pioneered its hosted CRM model that this ideal began to take off.
Today software as a service (SaaS) is the culmination of these business models. The business model – give away your software and make money from advertisers – is a threat to the old volume and network licensing model that is Microsoft’s bread and butter. There is a great deal of speculation that the offspring of the mating of Google and Sun will be a demon seed for, a free-ad supported competitor to Microsoft Office.
Which brings us up to the present, where Microsoft has for the second time woken up to a threat that has been imminent for some time and is now preparing to do battle with Microsoft Live. While the Justice Department might possibly have affected their business strategy, if Microsoft responds to the threat of Web services as well as they did to Netscape, Google and a lot of other companies may be looking for yet another new software business model. After all, if ads can bring us free or low cost TV, newspapers and magazines, why not software, although the idea of an ad for Victoria’s Secret embedded in Excel may not be exactly what the bean counters would be comfortable with. Well, given today’s context sensitive ads, Excel users will be more likely to see ads for credit cards and home equity loans anyway.
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