Selling software without services doesn't hold promise

Speakers at a Silicon Valley conference Monday said the software as a service model is becoming the dominant revenue model for software companies

The days of selling shrink-wrapped software without also selling services are over, according to speakers at a Silicon Valley event.

"The industry is at a crossroads," a managing partner in Kleiner Perkins Caufield & Byers, Ray Lane, said.

He spoke at a daylong event called The New Software Industry that was held at the Microsoft campus in Mountain View, California, and co-sponsored by Carnegie Mellon University's West Coast campus and the Haas School of Business at the University of California at Berkeley.

Software is facing the same fate as the hardware industry, Lane said, in which profit margins shrank from 70 per cent at its peak to about 20 per cent today as hardware became a commodity. The software licensing model was being undercut by open source software and the lowered barrier to entry for new firms selling software as a service, where software isn't licensed to a customer but available for a monthly subscription, complete with maintenance, support and upgrades included.

Although venture capital firms are investing billions of dollars in software companies each year, according to recent industry figures, most of it was funding startups serving the consumer markets, Lane said.

"If you come in and say you're developing enterprise software that's going to be sold to an enterprise, the VCs are likely to close the door on you and won't even listen to the pitch," he said.

Gradually, most software companies will hit a criss-cross point where more of their revenue comes from selling services than from selling products, a professor at the MIT Sloan School of Management, Michael Cusumano, said.

It remained to be seen whether this transition to a services model was temporary or permanent, Cusumano said. New software innovations could mean more revenue for a company from licensing a particular hot new product, but he thinks it's more likely to be a permanent change.

"Software will follow just like hardware and prices will eventually fall to zero. The open source software movement has already started that commoditisation," he said.

Microsoft had been the most successful at selling using the license model, but it was also transitioning to offering services, chief research and strategy officer for the company, Craig Mundie, said. However, it still generated most of its revenue from products.