Selling software on the Web
MOST software arrives in a huge box on a set of disks or a CD-Rom. It is usually expensive, bulky and heavily advertised and the user pays for all that packaging and marketing.
But thanks to the Internet, this could be about to change. The Net threatens to transform the way software is distributed and priced, its size and the market's winners and losers.
Distributing software over the Net to be downloaded by a computer from a Web site has great advantages for start up software companies. It lowers the entry barrier, making worldwide distribution cheap and easy and eliminating the need to compete for retail shelf space against giants such as Microsoft.
It also means products can go from completion to distribution far more quickly. Getting software onto compact discs, boxed up with a manual and delivered to stores, takes at least several months. Loading software onto a Web site for downloading can take minutes and costs almost nothing.
This means small, nimble companies can be very quick in getting their product to market. "The new business model is one to five guys writing an applet [mini application] for the Net in a garage," says Michael Avis, Sun Microsystem's product marketing manager in Britain.
But distribution is not the only area of change. A lot of software is available free over the Internet, partly because secure payment methods aren't widely - used and partly because giving it away is one way of competing against established software producers such as Microsoft. This approach is helping to depress prices and is also used as a way of building market share - then charging.
"Prices of software have come down in the last few years and will continue to fall," says Steve Roberts, Intel Europe's Internet marketing manager. "Small companies can be very aggressive on price and the availability of free software has a knock on effect. Some companies offer a free trial online, then - if you pay - give you a code to unlock the full version.
Others are building up huge numbers of customers for free user software, then make their money selling compatible software for server computers on the Net. A classic example now is the Web browser company Netscape, which makes most of its money from server software, while users often get its Navigator browser for free.
Similarly, Web users can download without charge Real Audio software, which lets them listen to music via the Net. The company then charges companies which want to distribute the "Internet radio" programmes using compatible software on their servers.
One possible development - "pay-as-you-go" software - could hit some companies profits. Larry Ellison, chairman and chief executive of Oracle, thinks users will log on to the Net to use applets only occasionally. These could be components of the large software suites (such as Microsoft Office) that people use on their desktop computers today. For example, they could download ready made graphics to illustrate a report.
But Microsoft's Bill Gates isn't convinced: "Once bandwidth goes up, we could distribute the content of a CD-Rom electronically, but we are not going to say go here for the grammar checker; go there for the spell checker.
Software delivery over the Net is only viable if applications are fairly small, otherwise it takes hours. "The Net model of software makes suites of office software like Microsoft Office or Lotus's SmartSuite seem monolithic," says Avis. Software companies writing big applications may have to rethink the way they do things.
The Net is also helping to establish new de facto standards other than Windows, such as Sun's Java language for writing applets (which can run on a variety of systems).
"There are lots of opportunities for developing new Internet software - in the areas of electronic mail, groupware, multimedia, video compression, security etc," says John Moroney, senior consultant at researchers Ovum. In particular, small applications take less time to develop, lowering the start-up cost for new entrants.
Yet obstacles still have to be overcome before the new business model takes hold. Secure payment over the Net needs to be widespread; users need faster, cheaper ways of downloading software; and security needs to improve so that users do not risk downloading viruses with their software. Most of these problems are likely to be addressed over the next few years, with greater telecommunications capacity taking the most time.
Companies which will benefit from the new business model include Sun, Netscape and many newcomers. "It is impossible to say which companies will win from the Net," says James Eibisch of researchers Input. "Many of them will be new names. Who had heard of Netscape a few years ago?"
As development and distribution costs fall, European software companies could also challenge America's dominance in the industry.
Those most at risk will include those dependent on sales of proprietary operating systems and related products, and on feature rich desktop software. Under pay-as-you-go, overhyped features won't generate much profit.
"Microsoft is not going to be able to hang on to its market share over the next five years," predicts Eibisch.
Avis says Microsoft's 90 per cent share of the operating systems market could fall to 70 per cent. But Gates's company is adapting to the new business model faster than many other established software companies, with free Internet browsers and paid-for software on the server.
"The Internet is already having a big impact," says Roberts. "Distribution via the Net has a great appeal for small companies, because they get to keep more of the profits."
As Avis says: "The Internet changes the rules of the software market completely.
. A survey by California-based market research firm Zona Research showed last week that Microsoft had more than tripled its share of the Web browser market, from eight to 28 per cent. Netscape's share fell to 70 per cent from 83 per cent since August according to the survey, which asked 211 businesses to name their primary browser for the Internet. California-based Netscape's shares tumbled on Wednesday, despite making an $8.8-million profit in its final quarter of 1996 - up from $500,000 a year earlier. Microsoft's Internet Explorer is free, while the latest version of Navigator costs about $50. Both can be downloaded via the Web.