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Why Consumers Want to Buy Software as a Service (Part I of II)

In the past few weeks I have had a number of conversations with my friends in the venture capital community that have convinced me that consumers really want to purchase software as a service and not a shrink-wrapped CD offering. It turns out that the marketing gurus for ASPs were on to something — they just aimed their sights on the wrong market at that point in time.

What differentiates software as a service from shrink-wrapped software? The real differentiator is not the mode of delivery (download/subscription vs. CD install) but rather the way in which a user is expected to interact with the product. I will call shrink-wrapped software any product where the majority of the installation, maintenance, and configuration is handled by the end user in his/her environment. Service offerings, on the contrary, are characterized by a greater degree of management by a third-party of some sort who makes provisions to guarantee uptime, reliability, ease of use, etc.

What makes me so confident that consumers want to buy (or rather consume) software as a service and not as a shrink-wrapped software product is that consumers are already consuming most of the most popular software applications on the market (with the notable exception of Microsoft Office) as services. Here are a few examples to bolster this point:

  1. TurboTax – You can buy TurboTax as a CD, but most people interact with it as a service — you use it to replace the services once provided by a tax accountant and it does most of the heavy lifting for you.

  2. Norton/Symantec Anti-Virus – This one is really straightforward. You are really paying for Norton/Symantec to keep your computer protected from viruses — very basic outsourcing.

  3. PayPal – PayPal is another good example. As a PayPal user, I am happy that PayPal hides all of the complexity of using their service and presents me with a very simple three-step process for sending or requesting money.

  4. Yahoo – Yahoo! actually provides its users with a lot of managed services, including email, contact management, calendar, file management, photo sharing, and commerce. The value of Yahoo! is in their ability to manage all of that complexity for the user.

  5. Instant Messaging
  6. – Instant messaging is one of the most popular services on the Internet. The major providers have taken on the Herculean task of managing the uptime, reliability, and security associated with running these networks.

What offers even more striking proof is a story that my friend at another venture firm told me about a recent trip to Fry’s. He told me that he saw aisles and aisles of shrink-wrapped software and associated manuals. As a consumer, how do you sort through that mess and identify the one or two pieces of software that truly are useful?

I am fairly convinced that consumers do not want to manage complex applications or worry about the impact that a new application will have on his/her desktop computing environment. In a world where big businesses seem to have had their fill of enterprise software, enterprising entrepreneurs might want to take a hard look at services that customers would be willing to pay money to use.

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