Online Software Catches On

Jim Obsitnik was unusually tethered to his home PC. Without it, even
jogging
wasn't quite the same.

On business trips, after a rousing evening run, the 30-year-old software
salesman had no way to log his miles and times on his Excel spreadsheet.

Now, he's up and running. The San Francisco resident recently transferred
his records to his own password-protected runner's log that resides on a
free Web site called Desktop.com. He can post his speed from anywhere using
his laptop. "It's very convenient. If I get to the hotel at 8 p.m. and run,
I don't have to worry about losing a paper log."

The Internet is transforming software from a shrink-wrapped package --
purchased in stores and loaded, sometimes unhaltingly, on PCs -- to a
monthly service, not unlike the phone or cable TV.

Instead of plunking down $30 for a game or $300 for a suite of word
processing, spreadsheet and e-mail software, consumers are starting to
visit
new Web sites that offer such programs for free or monthly fees of $5 to
$15. The software is stored on the site's server and typically runs on a
browser. You don't download it to your PC, so you must have Net access.

In much the same way, small to midsize companies are hiring outside centers
-- called application service providers or ASPs -- to host the personal
software that each employee uses, as well as heavy-duty human resource,
accounting and marketing programs.

Skirted are set-up costs of up to $1 million or more for servers and
software, and the hassle and expense of hiring platoons of technicians.
Start-ups can fire up in weeks, not months. Upgrades, which can be pricey,
are included. Companies just pay monthly to access their records over the
Net or a private network. Savings: up to 40%.

The trend is rocking the $8 billion software industry, threatening titans
like Microsoft, IBM, PeopleSoft and Siebel. The bellwethers are frantically
investing in -- and cutting deals with -- the ASPs so their software can be
leased. PeopleSoft said this week it will become an ASP itself. Microsoft
will join the fray. A benefit: No software on PCs means no piracy.

But the stalwarts may be outmaneuvered by a new breed of nimbler, less
expensive players built for the Web. "They'll lose a lot of market share,"
says Forrester Research's Stacie McCullough.

The migration of software to the Net is intensifying privacy concerns as
many providers become glorified Web sites, culling customer data that might
be used for marketing. Privacy advocates wonder if corporate data is really
secure at a third-party site. "It's sitting there waiting for the
government
or a private litigant to subpoena it," says David Sobel of the Electronic
Privacy Information Center. "It raises questions about the custody or
control of your documents." But ASPs say they're safe as banks.

To be sure, Web-based applications are not brand new. Portals like Yahoo!
have been offering free e-mail, calendars and address books, all aimed at
keeping viewers glued to sites so they can sell more ads. But the Net's
explosion has raised customer awareness and the emergence of high-speed
connections is spawning more robust programs.

Intuit expects 2 million people to file their tax returns this year using
Turbo Tax on the Web, paying an average $20, up from 400,000 last year.
About 4 million buy the software in stores for an average $29.95. "Our
incremental costs (on the Web) are incredibly small since we don't have to
worry about pressing CDs," says Intuit's Raymond Stern.

After generating $100 million in 1998, Web-based software sales --
excluding
service fees -- swelled to $700 million in 1999, or less than 1% of the
U.S.
software market. By 2003, its $5.8 billion in sales will be 22% of the
market, the bulk spent by businesses, Forrester says. The Net also "will be
the prevailing way to distribute applications to the home," says analyst
Clare Gillan of International Data.

Venture capitalists are taking notice, pouring most of their investments
into ASPs rather than old-line software start-ups. "In the future, I don't
think you'll see a pure software company," says Sameer Gandhi of venture
capital firm Sequoia Capital of Menlo Park, Calif. "They'll be hybrids or
ASPs."

Start-ups fuel the trend

Web-based applications were heralded by Oracle CEO Larry Ellison, who
predicted several years ago that PCs were dead and the world would run
applications on "dumb" inexpensive terminals, or network PCs, tied to
servers. But PC prices plunged, boosting computer sales and making his
forecast notoriously premature. Now, several forces are bringing his vision
closer to reality. Besides providing a better delivery network for
programs,
the Internet has spawned thousands of start-ups that must rev up quickly or
get trampled by the next dot-com. The shortage of information technology
workers has increased their anxiety.

Take LoanCity.com, a Web-based newcomer that helps mortgage brokers choose
a
primary lender. To run human resource, finance and marketing software
in-house, Vice President Jim Dybalski would have had to shell out about $3
million on a data center and software, and hire 20 engineers. Instead, he
pays an ASP called Corio $35,000 a month to pipe a software suite from
PeopleSoft and Siebel over a private network. LoanCity was able to launch
in
six months vs. a year or more under a purchase plan. "I didn't think I had
time to do it any other way," he says. "Tech people are hard to find and
very expensive."

For Preston Bealle, CEO of baby-products retailer Americasbaby.com, leasing
Microsoft e-mail and document-sharing through ASP Mi8 might not be cheaper
than buying. But it offers peace of mind. "You want your technical people
working on your site -- not on e-mail."

ASP customers also have new flexibility to share records with partners.
Alan
David, a Milpitas, Calif., accountant, can peek at the books of clients who
use the accounting software of Intacct, an ASP, by typing in their
passwords
on a Web site. "If somebody's making a big purchase that will trigger tax
consequences, I'd rather know it now than when the client brings it over in
two weeks."

Price, privacy issues

Web-based programs have some drawbacks. Dybalski says he has to cool his
heels when Corio fixes or upgrades software. "You're at the mercy of the
service they provide," he says. And he frets about network links going down
and privacy, though "there are strong guarantees" of confidentiality.
McCullough says ASPs, though less open to hackers, are more vulnerable to
corporate espionage. Says Corio founder Jonathan Lee, "No company can stop
employees completely from criminal activity, but we have many layers of
security."

A more vexing issue is price. Leading software makers have been unwilling
to
alter their hefty up-front license fees for the new subscription model. Top
ASPs like Corio and USinternetworking generally buy software from
manufacturers for several hundred thousand dollars. Then they lease it out
monthly, bundling in hefty finance charges, for $30,000 to $80,000. "It's
what has stalled the market," McCullough says.

By contrast, a group of new-age ASPs are hosting their own software and
tailoring it for rent. Employease offers its human resource software at
$3.50 to $6 per employee per month. NetLedger's accounting software: $4.50
monthly per user.

Employease CEO Phil Fauver says he keeps a lid on overhead by using new
technology that lets many customers share each software copy. PeopleSoft's
Deepak Gupta says he too will adopt that technology, shaving costs. But he
concedes, "It's very difficult to sell Wall Street on recurring revenue."

Even cheaper, or free, Web applications can be found at sites like
advertising-based Desktop.com and myWebOs.com, which provides free word
processing and other productivity software that resembles Microsoft's
dominant Office suite. "You shouldn't have to pay $400 for software that
you
use 10, 20 times a year," says CEO Shervin Pishevar, 25.

Sun Microsystems plans to roll out its free Web-based office suite,
StarPortal, midyear. Internet service providers are expected to bundle
StarPortal free with their monthly service.

The free offerings threaten Office, which Microsoft expects to provide as a
monthly service this year. While large companies are unlikely to switch
from
Office, small businesses and consumers are more fickle, experts say. Giga
Information Group's Rob Enderle predicts Office will lose at least 10% of
its 95% market share by 2003.

He believes Microsoft's Windows operating system, which runs 90% of PCs, is
even more vulnerable. While most packaged software is tailored to Windows,
most Web-based applications can run on any browser. In three years, he
says,
low-cost Web appliances will outsell Windows-based PCs.

Microsoft has cited such forecasts in its antitrust trial. But the
government says the growth of Web applications heightens the need for a
penalty that prevents Microsoft from bundling its now-dominant browser in
Windows. By adding special features to the browser, Microsoft could gain an
unfair leg up, officials argue.

"That's like saying Henry Ford created the standard car engine and no one
can innovate," says Microsoft Vice President Tod Nielsen. He also downplays
the idea that Web appliances will replace Windows-based PCs.

"When I'm on an airplane and don't have direct connection to the Internet,
I
lose the ability to work," he says of Net-based programs.

Few believe software will disappear. Only 2 million homes have broadband
connections. Without them, Web-based programs are frustratingly clunky,
experts say. And most large companies are expected to stick with in-house
software because they already have data centers and prefer customized
programs that ASPs can't provide.

Reported by USA Today, http://www.usatoday.com