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Will cloud computing reduce software prices?
By Michael Pietroforte | 8 Comments | Permalink | Trackback | Previous | NextThere is an interesting article about on-demand computing at BusinessWeek. Most texts you read about this topic these days claim that cloud computing is a serious threat for traditional software vendors, because the software-as-service (SaaS) model does not allow the same high profit margins as licensed software does. The BusinessWeek article is a bit more balanced. I do not think that the profits of traditional software vendors will change just because of the Internet. For customers, this means that software will not get cheaper.
I think that one has to distinguish two different questions here. One is whether cloud computing or on-demand computing will replace traditional computing, and the other is whether software companies will earn less in the future.
The rise of on-demand computing has been predicted for many years. BusinessWeek makes clear that these things will not change as quickly as many believe. However, let us assume for a moment that someday all our apps will run somewhere in the big Internet cloud. Would this really be a problem for traditional software vendors?
Many say, yes. Usually they compare it to related business like the content industry. For example, the big music labels and many news publishers make less money because of the Internet. People no longer buy CDs because they can download music for free. Publishing houses earn less on the Web because they cannot ask the same prices from advertisers as for ads in print magazines. It is a matter of fact that many newspapers will disappear within the next few years.
Will traditional software vendors share the same fate? I would say, no. I believe that this situation is very different. The problem for the music industry is that it turned out that DRM did not work because it is too easy to crack. Once there is a cracked version of a music title on the net, it is very difficult to sell the DRM version. However, “DRM” works well for software vendors. Most commercial software products will not run without a license key, and installing cracked software is too dangerous because it might contain malware. In addition, if apps only run in the cloud, then software vendors do not face this threat at all.
The problems that news publishers face are different, though. The reason that their online magazines are not as profitable as their printed editions is because there is more competition on the web. There is a myriad of blogs and web sites that compete with traditional publishers. Moreover, there are the Googles and Yahoos demanding their share of the advertising market. More competition means lower prices. The question now is whether the Internet will also increase competition in the software market. I seriously doubt that it will. Yes, Google also offers office software and there are other SaaS providers that compete with traditional software vendors. However, the difference in the publishing sector is that there are now countless tiny websites that compete with the big publishers. This is possible because Google’s Adsense and similar programs spoil ad prices.
However, small software vendors cannot really compete with the big software vendors. The price of a piece of software depends only on its capabilities, and will not drop significantly just because there are many other vendors offering similar software with fewer features. Microsoft Office did not become cheaper just because Open Office was available for free. There is no fundamental difference to Google Apps here. It does not matter whether I download a free application or if I use a web browser to access a free piece of software in the cloud. If Open Office were as good MS Office, Microsoft would not be able to sell one license. The problem for Google and others is that it is not easy to offer applications with the same capabilities as a complex software suite like MS Office. In order to do so, a company needs a lot of highly paid programmers.
However, as I outlined above, it is not necessary to have highly paid bloggers to destroy the business of big publishers. The fact that software runs in the cloud does not change anything. Even if there were an online version of MS Office, Microsoft could still charge the same price as long as there was no competitor offering an office suite with the same capabilities for a lower price. Maybe Google Apps will be a serious competitor one day, but this will not happen quickly. Even then, the prices would not drop significantly. There have always been alternatives to MS Office. The fact that there are also online alternatives now makes no difference. Rest assured that Google would not charge less than Microsoft if they had a comparable office suite.
Thus, I am quite convinced that we will not pay less for software next year or even in five years. If your CEO tells you that she no longer wants to pay for software licenses because she read about the cloud where everything is so cheap, just uninstall her Excel for a week or so and everything will be back to normal.
By Dan D. Gutierrez
CEO of HostedDatabase.com
We launched the web’s first web-hosted database service, eCriteria.net, in 1999 so we’ve been in the SaaS (used to be called ASP) arena longer than most. It is that perspective that enables me to say that on-demand software solutions will not replace on-premise software, but it will definitely provide a viable option for certain classes of applications. In our case, we move the database to the cloud, and for our target class of customers, small businesses, our service did mean lower cost of software because they didn’t have to “buy” any database software or hire a programmer to write server-side code.
One of our customers has been with us for 7 years now. He’s paid us a total of around $3,500 during that time. If he had gone the on-premise route, we estimate his investment would have been more like $10,000.
The other facet of the cloud computing thing is that I’m sure there are admins like me: Those who do not trust cloud and web anything.
I run my backups local, I store my data local, what makes Microsoft or google think I would leave my apps at their whim?
Amazon’s S3 service just went down recently, what happens when there is a service outage for an application as simple as Excel or Word; or there’s a problem with my ISP or router and the net is down for 3 hours?
I just don’t trust anything. I don’t trust any provider to be up 100% of the time, I don’t trust a local server to be up 100% of the time either… But on a local server, I have control and a fairly firm ETA on a fix.
BTW: How many servers with decent hardware and decent maintenance/replacemnet schedule go down just “like that”?
I am skeptical about cloud computing over two issues: First, reliability/accessibility, as mentioned above; and second, security – if my apps are run over the web with sensitive data, is there adequate security protecting it?
I think the average home consumer would also be a bit suspicious of who might gain access to their data, and if both their ISP and the cloud software company could maintain a reliable and sufficiently fast enough service.
Call me paranoid, but I’d rather keep my software and files in-house.
Cloud computing being the trend of the day it would not be suprising if everyone start using these webservices and stop using the offline applications, well the software prices will tend to drop as the demand for them will decrease as more and more people start using these cloud computing sites like eDeskOnline, Thinkfree.
Dan, you are right, there have been already quite a few terms for “SaaS”. Before “ASP” it was just called outsourcing. The question is if anything fundamental changed within the last 10 years in this area. I’d say, no. The fact that we can now run super simple word processing programs in a web browser is not enough to convince me. As to your customer, what if they just installed MySQL on a Linux PC for $500. Wouldn’t that be even cheaper?
Leonardo, MDillenbeck these are exactly the same considerations when it comes to outsourcing. Will my service provider really be reliable enough? Will they be as flexible as our own IT? Will we really save money this way? Many companies had to answer these questions with “no” after they tried it. This led to the end of the outsourcing hype. I think it will be the same with the cloud hype. There will be more on-demand computing in the future. There is no doubt about that. However, this doesn’t mean that we will spend less for software or need fewer IT pros. The contrary is true.
kalivd, what about some arguments that support your view?
Well, first of all i would like to thank you on having taken interest. I myself have been a avid office suite user for more than a year now, It lets me COLLABORATE seamlessly and effortlessly on several docs. It s bye bye to the friggin NIGHTMARE of mail attachments and endless versioning chaos and disorder. And it really is a pleasure to collaborate in real-time on the same doc with these office suites not only me but all my colleagues and friends use the same while we are working on some project. With this gaining popularity one must not be surprised enough to see “Cloud Computing” as the next thing in IT.
The other aspect of cost savings is the cost savings in the personnel required to manage these cloud infrastructures. If you deploy your app to a cloud, you may need less people to manage hardware, network, failover, high availability, etc. You can get all of the architectural qualities and not have to maintain the staff to manage that infrastructure. Granted this won’t happen tomorrow, but it makes sense to me. If this doesn’t save money, it will open up smaller companies to infrastructures that have a quality of service that only larger companies can afford.
As for security & trust, responding to some of the comments. There are some big companies using SalesForce for CRM… there’s some sensitive information in there. That doesn’t mean that security is not a concern, but it does imply that problem has been solved to the satisfaction of some big companies at least in one cloud.
Kalivd, thanks for mentioning this argument. It is probably the one you hear most often when it comes to web-based office apps. I have two objections: First, why shouldn’t it be possible to integrate simultaneous editing in what you call offline apps? Why should the offline app Firefox be more suitable for this feature than the offline app Word? The other question is if this is really a useful feature, which brings me to my second objection. I do not think that this has something to do with collaboration. Collaboration doesn’t mean that people do the same thing at the same time. Imagine two football players carrying the ball simultaneously. I doubt that this is a good strategy. It makes more sense if one runs ahead to catch the ball when his teammate is ready to toss it. I think many people using this simultaneous editing feature are just fascinated by the technology behind it. When I work with others on a document, I want to get informed whenever they changed something and want to know what they have changed. They should be able add comments and I want to be able to choose what changes I keep and what not. These are essential features of a text processing program when it comes to collaboration. Thus, in my opinion Google docs doesn’t really support collaboration. If you want real collaboration you better get MS Office with Sharepoint or Office Live.
Kris, agreed. Hardware management costs are an issue here. I do think that one can reduce costs with cloud computing in some environments. But in most cases it will reduce flexibility too. If you have your own IT under control, you simply have more options. This is the main reason why many companies gave up outsourcing. However, I think that renting complete servers in the cloud has its charm. I compared prices recently. An ordinary server with 16GB RAM costs about €300 per month. I think I can get this is a little cheaper if buy a server and put it in our own server room (management costs included). But prices might go down in the future. So this could become an interesting option.