Still strongly under the impression of this great NASSCOM conference in Mumbai, I made up a couple of thoughts about the presentation which Prof. Michael Cusumano from the Sloan School of Management at MIT had held on Thursday.
Empirically, Mr. Cusumano made the case how over time the business model of software companies has evolved from a license-driven product to a mix of licenses combined with revenues from maintenance and services. He calls this a “hybrid model” which leads to higher market evaluation and generates incremental and more robust profits. See one of his charts where - at a certain stage - the crisscrossing takes place and the revenues for services overtake those for licenses.
For example, both Siebel’s CRM and Peoplesoft have been affected by this development. In combination with not being able to scale sufficiently, they fell prey to the acquisition hunger of Oracle.
Obviously, the two main drivers for this development are commoditization of software and, what product companies call the “death of software”: Open Source. In this context, making money purely by licenses is a risky, if not impossible, game. Ray Lane from Kleiner Perkins, a venture capital firm, seconded this view when he explained two weeks back in Bangalore: “If you as an entrepreneur today call a VC in the Valley and present a pure license-based software model, expect the guy to hang up his phone.”
What the market demands is software at a low price, maybe even for free. But software is usually not something where “one size fits all”. Therefore consulting, process-redesign, implementation and maintenance bring the main chunk of value addition. Let’s get a step further and look at a “software-as-a-service” pureplay like Salesforce.com which is a web-based CRM-platform, based on a subscription model and with it’s slogan “No Software” a cheekily established brand. What salesforce.com had wisely done is leveraging the power of its own platform by building a tool-agnostic sister-platform Appexchange which allows other developers to host their own software-service and easily make money with it. In addition, this again allows for a whole eco-system of consulting and service providers who would be able to tweak and customize Salesforce.com and the other tools on the Appexchange platform for tailoring it specifically to the requirements of a customer.
Looking at software-as-a-service for B2C platforms like LinkedIn or openBC, these social networks often run a pyramid-like business model. Basic features are free, which is important to bring such a network over critical mass, whereas the whole array of features will be charged at a price X. What I strongly believe will be a huge opportunity of these services for both locking-in their members and rise in the value chain, is adding services in the real world to its portfolio and charging extra for it. Tying up with companies in the brick-and-mortar world with a strong brand and a value-added service could be one. And of course, me being 100 percent bullish on India, adding some services from an Indian BPO would be another. There is literally no limit to imagination what bundles could be designed from a secretarial service to research to your personal networking officer. I don’t believe that such an extension is yet on the radar of the management of these platforms, but in my view this is clearly a very, very attractive path to explore. What will matter, as usually, is building a neat, clear and easy-to-use package for the customer which he will gladly accept.
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