Quocirca's Straight Talking: Hosted software - it's back

The rebirth of software-as-a-service is challenging the traditional relationship between IT platform vendors and the software companies that develop for them. Quocirca's Bob Tarzey looks at what's on the horizon in this arena - and how big boys IBM and Microsoft are dealing with the changes.

Businesses do not buy IT platforms for their own sake; these platforms exist to run the applications that help drive the business. No one is going to go through the process of contacting Intel and AMD to see which has the whizziest chip; HP, IBM and Dell to see who is selling the shiniest box; Microsoft, Red Hat and Novell to find the cheapest operating system; BEA, IBM and JBoss to find the most function-rich application server - and then wonder what they are going to use their newly assembled application platform for.

This would be akin to purchasing a motor vehicle by selecting a chassis, without knowing if eventually you wanted a family car, a stretch limo or an ice-cream van. Well, almost.

Most application vendors do select the platforms they will support but require their customers to buy that platform for themselves. Whereas motor vehicles are purchased ready to drive out of the showroom, to get a business application up and running usually requires dealing with a number of suppliers. There are exceptions for some commodity applications such as email and other collaboration software, where some hardware vendors sell their servers ready to go with products such as Microsoft's Small Business Server pre-installed.

Once a business has invested in an application and the platform it runs on, this will influence the future selection of applications because the business will tend to seek new applications that run on the same platform or, at least, can be easily integrated with it.

Some big vendors of business applications such as SAP, PeopleSoft and Siebel sell their products on multiple software platforms, so the purchaser has some decisions to make. Others like Sage and FrontRange stick mainly to one software environment - Microsoft. Most of these vendors are selling generic applications of some sort but companies really start to differentiate their use of IT when they select the specialist applications that drive their particular business.

These specialist applications are supplied by a host of independent software vendors (ISVs). The decisions the managers of these ISVs make vis-à-vis the platform vendors they will work with are a major influence on the sales of the hardware and software of those vendors.

It is not surprising, then, that winning the hearts and minds of ISVs is a major battleground for the platform vendors. It would be better, you might think, for the businesses that buy those applications that this battle is fought elsewhere. But the process that platform vendors go through to court ISVs and the commitment ISVs make to their chosen platform vendor is more important to the purchaser of an applications than you might think. This is true at the technical, contractual and financial level.

Technically, it is important that the ISV has good support from the platform vendor. This may mean them selecting one platform and sticking with it. Committed ISVs can get access to some useful resources. IBM has long had innovation centres to help ISVs build their applications for the IBM platform and over the last 18 month has built a strong vertical industry focus in to its ISV program. Microsoft has recently opened a new development centre in Denmark where ISVs can test their products on future versions of their platform like the much-vaunted Longhorn.

Most platform vendors offer special incentives to smaller ISVs to give them a leg up; hardware at special discounts, for example, or free development software. But for more advanced support they will charge, and only an established and fairly successful ISV can expect to get direct access to support centres and the like.

Some platform vendors also help to remove a bit of the risk for businesses who want to work with smaller ISVs by helping with financing. For example, IBM works closely with venture capital companies to secure funding for promising ISVs and Intel has its own venture capital programme to nurture ISVs who develop for their chip set.

The most important thing the platform vendor wants in return is platform sales, which will mean targets being imposed on the ISV. These relationships become symbiotic; the ISV lives off of the platform and the platform vendors rely on the loyalty of their ISVs.

But there is a fly in the ointment for the platform vendors. A new breed of ISV has emerged from the ashes of the dot-com bust delivering business applications hosted in off-site data centres. They have learnt from failed predecessors and are making better use of resources and applying realistic business models and charging mechanisms. If their early success continues and established ISVs copy them - as many are starting to do - the whole dynamic of platform selection will change.

Currently some larger ISVs offer their product on multiple platforms and the platform vendors can win market share off of each other by better supporting them. Those ISVs who support just one platform may be persuaded to switch or introduce a second. But ISVs who use the hosted model will select a single platform and host all their customers on that and are unlikely to change in the short term.

IBM has recognised this and is taking seriously predictions that revenue for hosted applications could exceed that for on-site licensed applications as soon as 2007. To this end IBM has started to host some its own ISVs' applications and is selling these services via its Global Services division.

Hosted applications are more of a headache for Microsoft. Its platform is most popular with small and medium-sized businesses (SMBs) and ISVs supporting the SMB market have followed. But with hosted solutions, many small businesses can be supported on a single server and the platform sale becomes an enterprise one.

The number of ISVs who sell their applications as a hosted solution is growing. One of the most well known is salesforce.com. Their customers don't care what the delivery platform is as long as the application works. After all they don't have to support it. salesforce.com supports all its customers, large or small, on tens of servers in their data centre and, as it happens, they are all servers from Sun, running Linux.

Today most applications are still managed in-house under licence and it is a key part of the purchasing process to understand an ISVs' long-term vision and financial and technical support. Knowing how ISVs work with their chosen platform vendors is a key part of this. However, if those ISVs going down the hosted route have their way, platform vendors will have to rethink the way they work with these companies altogether.