Was 2011 the year of ‘peak software’?

Two recent headlines have columnist Denis Pombriant pondering the future of licensed software and the future of interactions both person-to-person and business-to-business.

As I write this in the waning weeks of 2011, the headlines tell a story about what 2012 could look like. Two stories in particular relate to the front-office and customer-facing industry that we know and love -- Oracle significantly missed its earnings target this quarter, and video chat is becoming pervasive.

While Oracle made a small amount of money in the last calendar quarter of 2011, it was far less than analysts’ projections and it calls into question the future viability of the licensed software business model. Oracle has announced its cloud technology, but it is still a company focused on selling software licenses

The Oracle miss is, to me, interesting because I believe it signals not a single quarter result, but the beginning of the end of the licensed software paradigm, which I am calling “peak software.”

Of course, we’re not returning to some prehistoric era before the tech revolution, but the software industry that grew out of those times may have reached its high watermark. The reasons are simple and have been around for more than 10 years. The cost of licensing, running and maintaining software is becoming insupportable. The licensed software industry won’t go away over night but it has reached its zenith. From now on I think we will see a progressive acceleration of cloud computing uptake even in places that frowned on exposing data to the big, bad Internet.

The Oracle miss has everything to do with the sluggish economy and -- believe it or not -- energy prices. As energy prices climb, they have the perverse effect of cooling the economy. A cooler economy drives down demand for everything, and software, especially enterprise software, is one of the things that companies can elect to do without in a downturn. But the longer a downturn persists, the more a company might look around for alternatives to high-cost-of-ownership enterprise software. 

Cloud computing offers that alternative, and while companies like Oracle begin to struggle, companies like Salesforce.com continue to execute well, adding products and people at a breathtaking pace. Salesforce, NetSuite, and many smaller and innovative companies like Marketo, Cloud9, Jobscience, Get Satisfaction, Zuora and thousands more are all riding high in an era that needs software but not high software prices.

What’s happening? Two things that you’ll hear about from me in the next year -- substitution and resilience. Buyers are substituting inexpensive cloud software for expensive on-premises software, and that is a trend you will see accelerate. This substitution takes cost out of business and makes each business more resilient to the vicissitudes of the post-meltdown world.

Substitution and resilience come together in an emerging technology -- video chat -- delivered across the Internet through VoIP protocols that make chatting virtually free. A recent New York Times story discussed how video chat is becoming a part of personal lifestyles, but much the same can be said for leading corporate users as well. The substitution-resilience nexus happens when people and companies use video chat as a stand-in for travel, but it also extends or improves on building closer relationships.

Video chat is where social media was about five years ago. People have begun using it but need more technology, such as microphones and cameras, to fully implement it. But like social media, they are using video chat to extend relationships to areas that had no support before. Social media made it possible to expand your circle of friends to include looser relationships with people on the margin of your time horizon. There’s only so much time for anything in your life, relationships included, which had the effect of limiting your circle of friends. Social medial made the circle much bigger.

In a similar way, video chat is helping to maintain closer ties with people who are on your geographical margin. Out of sight, out of mind, you know. Both technologies started at the grass-roots level, but it quickly became clear that the kind of loose-tight relationships they enable fit perfectly into business where a full-blown “relationship” is rarely expected but a certain base level of engagement is needed. Video chat is changing the idea of the base level.

All of this is important in a world of pricey energy. Video chat and other forms of projecting presence are critical substitutes for travel to engage customers, and they offer richer experiences than a simple phone call. Using such substitutes contributes to a company’s resilience in the face of higher costs driven by energy.

Taken together, it is no surprise that Oracle missed its numbers. Its traditional enterprise software brethren have not exactly been hitting the ball out of the park either. A better question than why did Oracle miss might be, How did it stay so high for so long? 

Customers are voting to substitute higher-cost solutions for lower-cost ones, and in the process they are inventing whole new business processes that leverage the technologies. All this signals the market peak for licensed software. 

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