Clash of Software Business Model Generations

Nicholas Carr has an interesting blogpost on the battle between Microsoft's currently dominating Operating Systems (OS) vs. Google's upcoming Web-based OS. I look at it as the clash between the currently dominating software business model vs. the potential future of software business models (for more info on what a business model is go here). In the former you buy and install a product (i.e. the software) on your computer, whereas in the latter you access a service on the Internet (and the software as such is not visible to the customer anymore).

This is a tremendous transition in terms of business model change. It means the software industry is moving from a product-based value proposition towards a service-based value proposition. And since there is no more software as such there is no more versioning either. The customer won't have to buy software upgrades anymore, bu will benefit from a continuously updated software on the supplier side of which he only sees the service. It also represents a substantial transformation regarding the capabilities and resources a company needs to implement the business model. Carr clearly describes this difference with the Microsoft OS vs. Google Web OS example:

A Web OS is very different from a traditional computer operating system like Windows. The latter is an intellectual construct, a set of instructions written by people. You have to spend a lot on salaries and other labor costs to build a traditional OS, but the capital expenses are negligible. A Web OS, on the other hand, takes physical as well as intellectual form. If you want to control the OS, as Google and Microsoft do, then you not only have to write the instructions but you have to buy, assemble, and maintain all the equipment - processors, storage drives, and so on - that the instructions control. Because a Web OS runs centrally, you have to own the equipment it runs on, rather than offloading that headache onto your customers.

This shows how substantially different the incumbent vs. the insurgent software business model is. The former mainly invests in software development resulting in salary costs, while the latter invests heavily in infrastructure and thus bears high capital spending. Carr outlines this for Google:

Google this year will buy at least $1.5 billion worth of capital equipment, double what it spent last year and about five times what it spent two years ago. In announcing its first quarter financial results a couple of weeks ago, the company said, "We expect that the growth rate in capital expenditures in 2006 will be substantially greater than the revenue growth rate for the year."

Which type of OS will succeed and which software business model will be dominant in the years to come is still uncertain. However, the battle between Microsoft and Google is definetly gives us a hint for where the entire software industry is heading. An indicator that we are moving towards the incumbents model is the fact that Microsoft is also heavily investing in capital spending. Carr writes:

Microsoft, said Ballmer last week, will jack up its capital spending for its web business to $500 million during its next fiscal year, which begins on July 1. That's up from an estimated $300 million this year and just $100 million last year. It will also spend a whopping $1.1 billion on R&D for its web business next year, as it rushes to catch Google.

If I look at my own behavior I can clearly observe that I am using less and less installed software and more and more services available on the web. Some because they are free and some because they are just more convenient and immediately accessible. The value proposition of online services is often more attractive to me...