Web services driven by slowing vendor growth?

For all the noise surrounding Web services, that fact is that it is simply a new form of outsourcing.

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As it becomes increasingly clear that the big players -- Microsoft, Sun, Hewlett-Packard, Oracle and IBM -- are all losing the exclusive preserves in software sales that owning operating systems had given them, they are now making efforts to defend their IT territories and code bases. That's why the five vendors' respective Web services initiatives -- .Net, Sun One Net, e-speak, Dynamic Services and IBM Application Framework -- although...

still largely visionary, are such big deals to them.

We are approaching the stage where the Web effectively is the new operating system. Software interoperability enables applications to be distributed across a whole mass of competing vendors' servers, and that is making vendors nervous.

How are the big guns supposed to continue selling differentiated software products when they no longer control the operating system on which those applications live?

These vendors can only continue growing at historic rates if they assume some of the IT costs that customers have traditionally borne and deliver software as a service. This is the harsh reality of the new economics.

Where once the return on investment was based on marginal costs at marginal revenue, which defined the optimal price for a product, now marginal costs are zero. There is therefore no restraint on vendor size, apart from regulatory and political constraints -- at least that's the theory being posited by U.S. economist Paul Strassman.

Microsoft's .Net initiative is all about the world's largest software company trying to leverage the economics of zero marginal costs.

IT industry profits totaled $37.3 billion in 1999. Microsoft earned 21% of this profit, as did IBM. Oracle earned 17%, HP got 9% and Sun 3%. Microsoft has had the fastest average revenue growth rate over the last five years -- five times faster than IBM, three times faster than HP and considerably more than Sun and Oracle.

However, the collective thread that unites them is that they all know there's no longer enough money left in corporate coffers to continue growing at historic levels. Any strategy that can regenerate these revenue streams is going to be embraced with open arms.

What, after all, is .Net about? It's the Redmond giant's way of expanding its Office desktop as a front end to a wider range of services -- a universal shopping cart, entertainment portal and e-commerce platform.

It's no different for Oracle. It's Web services strategy is predicated on maintaining a stranglehold on the database market, just as HP and Sun are trying to preserve their dominant positions in servers.

Of course, Web services are in a sense nothing new. Outsourcing has always existed in one form or another, and Web services are just the latest incarnation. Similarly, software has always been available on a rental basis, even before the application service provider model reared its head three years ago.

Services, rental and outsourcing models may well come to the fore in the future, but they are unlikely to predominate. And as the ASP model demonstrates, if they do make it to market, Web services will be slow to catch on.

Aside from the technical hurdles involved in solidifying the software-as-a-service model and bringing it into the mainstream -- security, privacy and the delivery of an infrastructure that provides almost perfect uptime -- there's the simple fact that corporations won't junk their existing IT infrastructures, particularly not in the new conservative spending environment.

So, while vendors will continue to chant the Web services mantra, it is going to take considerable time and effort to persuade the corporate mentality that such a strategy is worthwhile. And, equally importantly, it will take as much time to get the technical infrastructure in place and working before the concept of Web services will be embraced.


the451 (www.the451.com) is an analyst firm that provides timely, detailed and independent analysis of news in technology, communications and media. To evaluate the service click here.

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