The New Conventional Wisdom

All the hoopla over Larry Ellison’s race with Bill Gates for “world’s richest man” obscured an important point: Conventional wisdom regarding how computing works has changed.

The old world of buying hardware and software has been overthrown. Formerly you bought both and the money was in the chips. Here, in the 21st century, the power’s in the software you rent.

They laughed when Ellison (and others) first talked about this, but all that 1996 analysis missed the point. It was never about replacing a $500 copy of Microsoft Office with a server version. It was about enabling a business model for really expensive software.

This idea hits your business when you look at tools like campaign management. It turns out to be outrageously complicated. You may have to link client data, cookies, and an advertising database in real time to hit your target.

Companies that sell such products (such as Xchange Applications in Boston) found themselves pushing software costing $250,000-$500,000 (installed) to companies that couldn’t afford it.

The solution was to make it a feature in an even larger e-customer relationship management (eCRM) offering, delivered through a new type of company called an application service provider (ASP). This made high-end software affordable to a larger slice of the market.

This week I’m in Orlando, where the ASP industry is celebrating its own trade show, ASPCon. Many ASPs evolved from the world of Internet service providers (ISPs). Others came from the software area.

Still, others like Avenue A in Seattle, which serves interactive advertising shops (maybe yours), comes from the application side.

Avenue A started as an agency, built a tool to serve its ads, then began serving ads for others in order to improve the tool. It now finds itself renting software.

Once this kind of software is in place, Galgan told B2B Magazine last month, it “completely transforms what an ad agency looks like.”

The business does not go inside the machine, even if the creative heart of the agency must follow the technology head. “You can have the best software in the world, and it’s no good without a great pilot,” Galgan said.

This kind of thing is happening everywhere. When software becomes big enough and essential enough, it’s affordable only when sold as a service.

In the ASP space, the Internet is merely an enabling technology. Databases are another enabling technology. Economics favor this model in the long run, because professionals must manage mission critical applications, and sharing the cost through renting makes a lot more sense than buying.

Oracle wasn’t the only outfit to spot this trend. Microsoft spotted it too. So did hundreds of other firms.

But Oracle committed to it early (before it had a name), then executed its strategy well. Meanwhile, Microsoft was trying to be all things to all people, pursuing a “unified operating system theory” that spanned everything from palmtops to mainframes.

So while it’s interesting that Larry’s on top, it’s more important to know that a new world has been created. It’s the direction that you take, not the one he takes, that counts.

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