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Can new services and programs help propel the ''on demand'' software model?
John Edwards, CFO Magazine
April 1, 2006
When SchoolDude.com Inc. needed a new accounting program to replace its existing QuickBooks system, it didn't shop the usual channels. Instead, the Cary, N.C.-based maker of educational software turned to AppExchange, a new service that operates like an online mall, or, more accurately, much like Apple Computer's iTunes store. No shrink-wrapped package arrives; instead, customers browse available software programs on the exchange and then subscribe to those they want, tapping into an application's functionality over the Web.
AppExchange represents the latest effort of software company Salesforce.com Inc. to usher in what it calls "the end of software," a phrase that is admittedly more catchy if less accurate than "the end of traditional software licensing, distribution, and implementation." SchoolDude.com was already a client, having subscribed to Salesforce.com's flagship customer relationship management (CRM) product, so turning to AppExchange for a product licensed and distributed in the same way wasn't as big a conceptual leap for that company as it may have been for others. But Salesforce.com, a relentless proselytizer for the "on demand" or "software as a service" (SaaS) licensing model, is betting that AppExchange will enable it to become the eBay of hosted software.
They may be right, says Sheryl Kingstone, a software-industry analyst with Yankee Group Research Inc., a technology research firm located in Boston. "It's a great way to meet vertical needs in niche markets," she says. "The service allows developers to offer applications without the cost of creating shrink-wrapped CD-ROM products."
Launched in January, AppExchange (www.appexchange.com) "builds upon what we've been doing for the last several years with customization, and allows our customers to develop their own applications," says Lew Tucker, vice president of AppExchange at Salesforce.com. "We recognized there was a broader need to distribute applications." The company claims that in the first week the service was available customers signed on for 1,800 installations, choosing from among 160 different applications. AppExchange also recorded more than 80,000 application "test drives" during its late-2005 test run.
Tucker says the venture will broaden Salesforce.com's scope from its current role as a CRM and sales force-automation software provider into a company that supplies, albeit indirectly, a wide range of business applications. "Our site shares many similarities with a lot of other Web product directories, such as eBay," says Tucker. "We are very much following on the model of the consumer Web." The eBay analogy isn't perfect, however, since AppExchange prices are fixed rather than bid upon.
A number of products, such as a Skype's Voice over Internet Protocol (VoIP) application as well Salesforce.com's own add-in tools, are offered at no cost. Many other applications sell in the $20 to $60 range. The most expensive offering is Pervasive Software Inc.'s SAP Salesforce.com integration tool, which has a base price of $15,000.
AppExchange is both a distribution channel and a platform for developers, who can use a toolkit provided by Salesforce.com to build applications that integrate well with the company's CRM product and then sell them via AppExchange.
As Salesforce.com shifts into its new role as a software middleman, the company will have to hustle to establish itself as a serious software supplier. While it claims to have more than 15,000 registered developers, and says it has received inquiries from some 500 independent software vendors, the service listed only 160 applications at its launch, 62 of which were generated by Salesforce.com itself. Still, Tucker is optimistic that AppExchange's inventory will grow rapidly as the service's profile rises.
To succeed, AppExchange will also be expected to provide reliable 24/7 service, a critical attribute for an Internet-based operation that's hosting applications on servers that may be located up to several thousand miles away from end users. AppExchange's reliability takes on added urgency in the aftermath of a Salesforce.com service meltdown last December that left clients, including many in the retail sector, without access to critical data just a few days before Christmas.
The software-as-a-service concept also got a boost in February from IBM, which announced a number of programs designed to entice software makers to modify their products for SaaS delivery. The company is offering a range of technical hand-holding and marketing incentives in order to boost the number of applications that customers can buy on-demand. Part of IBM's strategy is to make sure its business partners see opportunity rather than threat in the SaaS model. Systems integrators and resellers have made the customizing of software their raison d'être, and it's unclear how the instant usability of Web-based applications will affect them. But IBM clearly sees a big opportunity in providing SaaS infrastructure.
John Edwards is a technology writer based in Gilbert, Arizona.