I’m Not Paranoid, But...

I suppose I can’t blame Amazon.com for incessantly recommending that I buy

a CD by an obscure Malian singer named Rokia Traore. Given my purchases of other

Malian CDs on the Web site, the suggestion is actually spot-on. Or it would be,

had I not bought it somewhere else already. But Amazon’s automated

recommendation program doesn’t know that. Amazon–and every other site I

visit or buy from–knows only a sliver of my preferences and buying behavior.

Frankly, that’s the way I’ve wanted it. Sick of spam, I now employ six

e-mail accounts regularly–reserving one for work, a second for friends,

another for trusted businesses, yet another for merchants I’m not sure about,

and so on. Worried about high-profile privacy breaches online, I even lie about

personal details, such as my name or birth date, when I register at many Web

sites. The result: Online, I’m a regular cyber-Sybil, creating a different

identity for every site I visit. And I’m not alone. At least 24% of people lie

about personal details online, according to a survey done last year by the Pew

Internet & American Life Project.

Multiple personalities may not be a disorder online, but they’re sure

counter productive. For online buyers, maintaining all these identities is

simply a hassle. I can barely remember my home phone number, let alone dozens of

user names and passwords. And therein lies the problem for e-merchants: I forgo

shopping at many sites because it’s not worth creating yet another persona and

keeping track of the details once I do.

So far, the potential solutions to this conundrum are pretty thin. Several

companies, from startups such as Privada giant Microsoft, offer programs that

run on personal computers or through Web sites and allow people to control which

information they release to sites. But they haven’t caught on because they’re

cumbersome to use. Others, such as Anonymizer.com and Zero-Knowledge Systems,

keep our identities secret by masking identifying information stored on PCs. But

they prevent any possibility of a fruitful relationship with online sites.

The best solution: Online businesses should let us control our own data–and

give us something in return if they want any of it. Online privacy is a huge

concern not because people are paranoid. Mostly, they have a justifiable fear

that they don’t know how information about them will be used. Once we have

control, we’ll be much more willing to share more of our purchase history and

preferences with sites we trust if we can get better deals, personalized

services, or help in finding products we want. Indeed, the Pew survey found that

54% of Americans gave up personal information to sites to get content they

wanted, and 10% more say they would.

Understandably, sites don’t want to cede control of customer data that they

think gives them an advantage. But most of them ultimately would gain much more

than they would lose. Accurate consumer information can be a gold mine for

targeting products to people ready to buy. And the more consumers have a stake

in keeping that data accurate, the more they’ll patronize sites that give them

something for it: Think frequent-flier programs.

I hope online companies get wise pretty soon. Schizophrenia may be a

necessary condition for online sanity right now. But those voices in my head

tell me there’s a better way.

By Robert D Hof

in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

Looming battle

Those who like software dished up this way aren’t going on faith alone. One

company, VeriSign, shows that offering up software as a service can work

profitably. VeriSign, which sells encryption services for e-commerce sites and

corporate communications, posted $474.8 million in revenues last year, up 460%

from a year earlier. Pro forma net income hit $45.5 million. VeriSign is a

winner because it spotted a technology needed by every company doing business on

the Net, then beat others to the punch by offering it as a service.

That sets the stage for a bruising battle this year. With piddling revenue

streams to be had in the short run, the early ASPs will fight desperately to get

the formula right while next-generation companies pile into the market. And the

old behemoths? Don’t count them out. They, too, want a piece of the action.

"The software business is going to change fundamentally in the next three

to five years," predicts Oracle chief executive Lawrence Ellison.

"Oracle is going to be ahead of that charge."

Some of the pioneers now seem to be on the right track. USi has rounded up

170 customers, and its revenues grew 208% last year, to $109.5 million. Analysts

project revenues this year around $165 million, with the break-even point coming

in the third or fourth quarter. The best news is that USi has finished building

three huge data centers for running the software, which analysts say totaled

more than $300 million. Another leader, Corio, reported revenues of $43.6

million last year, up 650%. Analysts project $75 million in revenues this year

and profits early next year. Both companies are now asking customers to pay part

of the cost of software licenses up front. They have skirted problems

encountered by some of the ASPs that failed, such as Pandesic, which tried to

make money off of fees based on its customers’ e-commerce sales.

No matter how well they tune their engines, though, the first generation ASPs

will have a tough time outperforming the newer entrants. The newbies establish

one super-reliable Web site that all their customers hook into–plugging their

information into simple templates. They don’t have to buy a new set of server

computers for each individual customer, as the pioneers do. If the Young Turks

get it right, the economies of scale could produce gross profit margins topping

90%–dramatically better than the 70% average among traditional software makers

and the 15% to 20% margins that early ASPs have achieved, say analysts. Boasts

Marc Benioff, chairman of sales-force-automation ASP salesforce.com: "We

are going to kill traditional software.’’

Don’t think that big software companies will oblige Benioff. Microsoft, for

instance, is betting its future on an online-service strategy. In addition to

allowing ASPs to rent out such desktop applications as Word, Microsoft is

building a technology foundation upon which other companies can build their

services.

With a market as embryonic as this one, it’s too early to call winners. The

Microsoft of the ASP world might not even be alive yet. But, already, some of

the contestants are promising. Analysts especially like VeriSign’s prospects,

since it has a proven track record and a dominant 75% share of the market for

Internet encryption.

While the notion of software as a service could turn the traditional

packaged-software world upside down, the approach has deep roots in computing.

For decades, companies such as IBM have run other people’s software from their

data centers for a monthly fee. When the Internet came along, Web-hosting

companies managed sites for tens of thousands of companies. USi’s innovation

was to offer the full array of corporate applications–from accounting to

materials planning–as services delivered via the Web. IDC dubbed this an

application service provider.

For a while, the computing world was nuts about ASPs. At the height of the

mania, in the fourth quarter of 1999, venture capitalists pumped $2.5 billion

into these companies. That was half of all the money invested in new software

companies that quarter, according to McKenzie Consulting.

So what went wrong? The biggest obstacle has been inertia. It’s just plain

hard to persuade people to try something new. In interviews with more than 25

corporate customers, BusinessWeek found balky executives. Corporate IT

departments are reluctant to give up control over their computing systems. CEOs

are worried about Net security and fret about handing important business data

over to another company, though those fears have so far proven to be unfounded.

Missing link

For some, the numbers simply don’t add up. The ASPs claim they would have

been cheaper partly because they believe Abraham underestimates the cost of

building and operating fail-safe computing systems like the ones they provide.

When ASPs do manage to land customers, sometimes they fail to deliver the

goods. Even among customers who get satisfactory service, there’s a tendency

to move cautiously. At Hershey, for example, just one tiny portion of the

company, an e-commerce site called Hershey Direct, has gone online with an ASP.

The rest of the company’s computing systems are run through a separate

computing division that sticks to running software the old-fashioned way.

Now ASPs are reconciled to slower growth than they had first expected. That’s

why they’re focusing on profits. ‘’The market is much different than it

was a year ago,’’ says USi CEO Andrew Stern. To cut costs, USi laid off 11%

of its staff in January. Now it’s asking customers to pay at least 20% of the

total cost of a contract up front.

While USi and Corio are struggling to get on a winning track, they’ve got

to be wary of the next generation of ASPs who are coming up from behind. In

little more than a year, salesforce.com has landed 1,700 paying customers and

25,000 companies are participating in free tryouts. NetLedger.com, which

provides small-business accounting services, has 3,000 customers. It’s just a

very different proposition than the one USi and Corio face. Since these newbies

build their technology themselves, they don’t have to pay a software supplier

for programs.

It’s low-risk for customers, too. While second-generation ASPs don’t have

all the bells and whistles of a mature software program from PeopleSoft or SAP,

they make it very easy for customers to sign up and use the services. For

NetLedger’s service, the price is just $9.95 a month to start. A corporate

customer can add more users at any time, and they also can drop them.

Growing payroll

The biggest challenge for the new crop of ASPs will be attracting big

customers. NetLedger doesn’t even try. It’s meant for companies with less

than 100 employees. Salesforce is aiming higher, but so far its largest customer

has just 300 users of the service. Are these upstarts going to snatch away giant

business software projects? Not yet. "Maybe in a few years I would consider

working with them," says Nick Amin, vice-president of information systems

at Cigna in Philadelphia. "They don’t have all the capabilities that I’d

need at this point"–such as sophisticated risk-analysis tools.

That’s already starting to change. The upstarts are quickly adding such

features as sales forecasting. And their deals are getting bigger, too.

Employease, an Atlanta-based human-resources service, has seen its average

customer size increase from 96 employees to 441 employees during 2000. "I’m

supporting 500 people with Employease," says Reed Vickerman, vice-president

of information technology at Copper Mountain Networks in California.

"Adding more would just be a matter of clicking a button."

The software giants can’t turn on a dime like the upstarts, but they’re

quickly becoming forces to reckon with. The furthest along: Intuit, the $1

billion maker of financial and tax software for small businesses and consumers.

Already, Intuit is reaping more than 20% of its revenues from online services.

Every piece of packaged Intuit software, from the QuickBooks accounting program

to TurboTax, has an online counterpart.

While Intuit has the jump on its brethren, other major software makers vow to

excel at delivering their software as services. Software heavyweights such as

SAP, Oracle, and PeopleSoft have a distinct advantage over the first-generation

ASPs when it comes to profit margins. They don’t have to buy somebody else’s

software–they make it themselves. In the past year, Oracle doubled, to 100,

the number of customers using its finance, manufacturing, and customer-service

applications online. With SAP, 16 ASPs are hosting its applications for 150

customers.

Microsoft is going at this market a bit differently. While it offers its

Office desktop applications to customers through a handful of hosting services,

its main goal is to provide a software platform for corporations and ASPs to

build upon–the so-called .Net technology. As part of Microsoft’s $50 million investment in

USi last fall, the upstart agreed to offer customers services based on Microsoft’s

technology. But Microsoft faces stiff competition from Sun Microsystems and

Oracle, which also supply foundation technologies for Net services. Upstarts

such as salesforce.com and NetLedger built their systems on Sun’s heavy-duty

Unix operating system and use Oracle databases. Would they ever retool for

Microsoft? "No way," says NetLedger CEO Evan Goldberg. "We don’t

think Microsoft software is ready for an online service."

Making the transition from the traditional software business to services won’t

be a snap for the established giants. They’ve got to retool their technologies

to run smoothly on the Web. And they’ve got to tinker with their business

models without upsetting quarterly earnings–shifting from their dependency on

huge, up-front license payments to monthly fees.

Rather than mess with what’s working well, some of the established software

companies are opting out of the ASP business–at least, for the time being.

Consider Check Point Software Technologies, which sells firewall software that

protects corporations from intrusions by thieves or hackers. It’s deeply

committed to a network of 1,000 distributors that handled 90% of its $425

million in revenues last year. Offer services directly to customers?

Shwed, however, may be in the minority. Most established companies are

gung-ho for offering software services. "If software companies don’t do

this–maybe not today but somewhere down the line–they are going to

die," says Tim Chou, president of Oracle Business OnLine. That may be too

dire a prediction. However, given the volatility of the software business these

days, it makes sense for them to at least hedge their bets.

Jim Kerstetter with Jay Greene in Seattle–BusinessWeek