Conclusion
Micro Focus is facing the same challenges as its customers, and must respond to the changing internet business environment in order to remain competitive. Not only has choice for customers dramatically increased, but expectations for services have also risen, so complacency is not an option. Also, as development cycles for large applications can be as long as three years, time is critical.
These are the steps we recommend for application providers:
1. Take a fresh look at the value proposition and decide which business model, or combination of models, will work best in the future. If change is necessary, this will take time and great care to avoid impacting existing business, so an early start is imperative. This is the decision that should drive the strategy.
2. Determine the go-to-market strategy for the offering. If a license-based model is chosen, should a customization service be provided to deliver competitive advantage? Is an open source approach applicable? Can a single, fixed version of the application be produced for all users?
3. Having decided the business approach, what are the technical implications? Can the application run in a Web 2.0 world? Can it be run anywhere and be used concurrently by users from different organizations? Will it scale? What user interfaces are needed? Again, development takes time and any delay increases risk.
The internet business world is poised for a major leap forward and this presents a tremendous opportunity. Micro Focus is committed to providing all the technology needed to enable application providers to fully participate in the new internet world, but choosing the right business models is crucial.
The challenges for application providers
It is clear that a major revolution is under way in the way applications are delivered, but what does this mean for both established software providers and new entrants to the industry, what are their choices for business models and which will be effective? The main models available to application vendors include conventional software licensing, Software as a Service (SaaS), open source and advertising, where application user interfaces display paid for ads.
The software license model
How can vendors of large, complex business packages continue to justify high license fees plus ongoing support charges? Customers will pay for competitive advantage, but how can that be achieved with a packaged solution in a cost effective way? Can other models be used in parallel? Is some form of advertising revenue out of the question for this type of application?
Powerful business solutions will only have a market if they play to their strengths and deliver competitive advantage. Customization services can play a key part. At the least, software vendors will have to ensure their offerings can be run anywhere, as even large corporations are moving from dependence on dedicated data centers. In addition, they must offer the rich user interfaces and variety of access that users have come to expect, plus the ability to integrate with external services in a standard and seamless manner.
The SaaS model
Later entrants to the web software arena, such as Salesforce.com, have architected their solutions for the internet with flexible access from anywhere. They have moved directly to the SaaS model, charging subscriptions for usage. But how will this type of business fare if a competitor with a well executed advertising based model moves into their space?
Although it clearly has enjoyed some success, the SaaS approach is vulnerable to being squeezed by more heavyweight, license based solutions from above, that can afford greater functionality, and simpler but license free offerings from below.
Probably the greater risk is from advertising funded competition, as a major challenge for the SaaS vendor is controlling incremental costs, particularly for customization. Incurring high development costs to attract customers and justify subscription rates soon results in a business that does not scale. Of course, the advert-based approach also constitutes an opportunity for a new direction for SaaS vendors.
The open source model
The open source approach has enjoyed surprising growth in recent years, especially in the software tools sector. It is not intuitively a model for financial success – for example, how does development get funded? Closer examination shows that there is actually more than one model at work. In some cases it represents a shift by an established supplier, removing upfront licenses but leaving customization, consultancy and support services intact. Other suppliers rely on collaborative development, with income from subscriptions for support and sometimes, advertising. Open source is, therefore, more a marketing strategy than a business model.
The advertising model
Paid for advertisements is the internet business model that has been making headlines, with social networking sites in particular achieving tremendous participation. The approach has been highly successful - who would have predicted the dramatic rise of Facebook or Classmates.com? But the bulk of advertising revenues generated via web applications understandably go to the major sites that attract the most hits. So how does a small software startup compete and generate enough income to grow?
Advertising, in a variety of forms, will be the model that sees the greatest growth over the next few years. The revenue generating options will need to be broadened significantly to maximize the number of providers, especially new entrants. But the required infrastructure will be put into place, because this growth is in the interest of the organizations with the greatest stake in the future of the internet – the major players need the content and functionality to drive traffic.
“In the near future, we are going to see an upsurge in advertising based business models on the internet, mimicking the television industry. But unlike television, internet advertising can be tuned to focus on each individual, making it a much more powerful proposition.” Stuart McGill, CTO, Micro Focus.
New ways of doing business
