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Services will prevail over software

Services will prevail over software

The shift in the market from technology to services is not only gathering pace but also becoming inevitable.

I have a friend in the UK who is probably more of an idol to me than a friend. He has been publishing financial research on the UK software and services market for more than a decade. He's widely recognised for his controversial predictions and stinging criticism of certain sectors of the market and, more significantly, for his dogged attention to detail - and his uncanny accuracy.

For the past three years Goldman Sachs has hosted a European computer-services conference. My friend, Richard Holway, was invited to speak to Goldman's clients as the guest luncheon keynote this year. Holway measures IT-services companies on the strength of their financials - period. A few years back he started what has become an extremely popular award for the most "boring" companies in the UK market.

A Holway Boring Award has simply one criterion: uninterrupted earnings-per-share growth for 10 years. While we were chatting at a cocktail party at the conference, I witnessed European IT-services CEOs begging Richard to include Europe in his pool of eligible companies. (Many Europeans still do not consider the UK to be part of Europe.) This behaviour inspired us to speculate on who might be eligible for a Boring Award in the US. After a cursory inventory of the usual suspects, it became very clear that few IT-services companies would make the cut.

Because of Richard's reputation for accuracy, I thought I might share some of his predictions. For the most part, Richard firmly believes that in the battle between software and services, services will prevail.

In fact, he has a standing wager with several UK executives over the future of Microsoft's revenue streams: "Microsoft will derive less than 50 per cent of its revenues from product licences by the year 2002." He made this prediction in 1997.

And he has an even bolder prediction: "If your longer-term business plan does not incorporate earning nothing from product licences in exchange for services revenues, your company will not survive." His views on the hardware market are even more heretical. One of Holway's presentation slides features clip art of an electric guitar with the words: "Money for nothing and PCs for free."

Now, Richard does not wish to be misunderstood. He's not suggesting that software and hardware are irrelevant. "That's ridiculous," he scoffs. He is simply pointing out that the way traditional product companies have charged for their products in the past will transform into some type of a services- related transaction in the future.

I believe he's onto something. Not very long ago I had the opportunity to corner Ted Waite, CEO of computer maker Gateway, with this notion. He bristled at the idea of free PCs but confided, "We'll compete on solutions in the future." (In other words, not on product specs or unit shipments.)I've been blathering for a while now about the unmistakable shift in the balance of market power from technology products to services. GartnerGroup has even been publishing "services is king" for a year or so.

Though investors are currently seduced by the promise of Internet stocks, it might be time to sneak a few "boring" companies into high-tech portfolios.

Whereas most Internet stocks have failed to make a profit (even once), if you had invested in Richard's UK-based Boring Award winners in 1989, you'd have realised a 4700-per cent return on your dreadfully dull investment. Do the Brits know something we don't?

Susan Scrupski is president of IT Services Advisory LLC. E-mail her at Susan@ITSinsider.com


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