The days of selling shrink-wrapped software without also selling services are over, said speakers at a Silicon Valley event Monday.
"The industry is at a crossroads," said Ray Lane, a managing partner in Kleiner Perkins Caufield & Byers, the Silicon Valley venture capital firm.
He spoke at a daylong event called "The New Software Industry" that was held at the Microsoft Corp. campus in Mountain View, California, and cosponsored by Carnegie Mellon University's West Coast campus and the Haas School of Business at the University of California at Berkeley.
Software is facing the same fate as the hardware industry, Lane said, in which profit margins shrank from 70 percent at its peak to about 20 percent today as hardware became a commodity. The software licensing model is being undercut by open source software and the lowered barrier to entry for new firms selling software as a service, where software isn't licensed to a customer but available for a monthly subscription, complete with maintenance, support and upgrades included.
Although venture capital firms are investing billions of dollars in software companies each year, according to recent industry figures, most of it is funding startups serving the consumer markets, Lane said.
"If you come in and say you're developing enterprise software that's going to be sold to an enterprise, the VCs are likely to close the door on you and won't even listen to the pitch," he said.
Gradually, most software companies will hit "a criss-cross point" where more of their revenue comes from selling services than from selling products, said Michael Cusumano, a professor at the MIT Sloan School of Management.
It remains to be seen whether this transition to a services model is temporary or permanent, Cusumano said. New software innovations could mean more revenue for a company from licensing a particular hot new product, but he thinks it's more likely to be a permanent change.
"Software will follow just like hardware and prices will eventually fall to zero. The open source software movement has already started that commoditization," he said.
Microsoft has been the most successful at selling using the license model, but it is also transitioning to offering services, said Craig Mundie, chief research and strategy officer for the company. However it still generates most of its revenue from products.
He claims little effect on Microsoft of the open source movement where software code is shared freely with developers around the world.
"The open source movement hasn't been a first order contributor to shifting the relative monetization for Microsoft," Mundie said. "If somebody offers a free version of what's considered an equivalent product [to a Microsoft product] then it would tend to drive your price to zero. But I think people don't see equivalency in the open source alternatives."
But while still relying on its proprietary licensed software model, Microsoft made an overture last year to the open-source community by partnering with open source software company Novell Inc. to promote Novell and improve the interoperability of Novell software with Microsoft's.