November 1999

Software Sea Change

Why should you buy applications when you can rent them?

By Frederic Paul

I just built a fully functional e-commerce Web site, and I didn't have to acquire a Web development program to do it. In fact, I didn't use any software residing on my computer at all. Instead, I built the whole thing online at SiteMatic.com.

Sure, my new site is simple-it doesn't have the bells and whistles I could have added by hand or with a Web-design program such as Microsoft FrontPage. But it's an interesting example of a trend that promises to change the way people use and think about software. Rather than existing as products, software is becoming a service. Instead of purchasing application programs, people are accessing what they need over the Internet. Renting, not buying.

SiteMatic represents the latest incarnation of the new model-called "hosted applications"-which began with the wildly popular Web-based e-mail services such as HotMail. Today, tens of millions of people use these services, and traditional software companies are leaping onto the hosted-app bandwagon with so-called "application service providers," or ASPs, which charge customers via a service contract, a pay-per- use deal, or not at all, depending on the service.

ASPs are doing a brisk business, and Forrester Research in Cambridge, Mass., predicts the hosted-application market will top $6 billion by 2001. Though the general public knows of online e-mail and calendaring services and the little mortgage calculators, games, widgets and applets they find on the Web, the bulk of today's ASP market is actually in expensive, specialized programs for giant companies. Corporations pay hefty rental fees for these applications because the ASP covers all the hassles-from installation to maintenance and upgrades.

Mainstream office applications have also begun moving to the hosted model. Late this summer Sun Microsystems bought tiny German-based Star Division and announced StarOffice-a free suite of hosted office productivity applications (word processor, spreadsheet, scheduler, database and presentation
programs) compatible with the Microsoft Office file formats. In response, Microsoft announced it was working with partners to host Office 2000 applications online.