The Elusive Software Pull-Through?

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Jul 1, 2009

It started when I saw the open-source model gain momentum in the content management space a la Alfresco, Drupal, Joomla, Nuxeo, and several others. The no-license model clearly had potential, especially given the associated services and support revenue streams we were seeing. In fact, my own (commercial) ECM market numbers indicated that license revenues were typically less than 1/3 of large deals anyway. Fast-forward.

Early this month, on an earnings call with HP, our hosts implicated that they’re playing in a “free license” market. Their competition was giving away software, they claimed, to capture coveted services and support revenue streams across a contract. Once again, I was intrigued but not altogether shocked — this was, after all, a buyer’s economy for technology solutions, and shrinking license margins were no surprise. Fast-forward once again.

EMC recently announced that they were giving away developer’s editions of Documentum. Although it will likely improve their overall revenue ‘ecosystem,’ it’s certainly a new move for a platform that otherwise costs developers plenty to work with in the past. Just another drop in the bucket, though.

Enter FatWire and their PR a few week ago– FATWIRE LAUNCHES RESCUE PROGRAM FOR VIGNETTE AND INTERWOVEN WEB CONTENT MANAGEMENT CUSTOMERS. Specifically, “The program enables customers of these recently acquired companies to upgrade to FatWire’s industry-leading solutions at no license cost, when they employ FatWire’s proven migration tools and services that reduce the risk and increase the speed of migration.” Of course, customers will want to quantify the cost of “employing… [these] tools and services” when examining their project budgets. In light of my recent experiences, though, the bigger picture made me shudder as I read the words — no. license. cost.

There’s always been an interesting dynamic between hardware, software, and services market components. In the office equipment market, we talk about [software] solutions driving hardware revenue. In the mobile market, we talk about apps driving iPhone revenue. For most of us, these “pull-throughs” help us understand how our traditional (often, lower-margin) market is being influenced by value-added services and/or software.

In the mobile market, apps growth required stronger smartphones. In the office market, network document solutions led to increasingly sophisticated (and larger) MFP and copier display panels. In the information market, explosive growth has led to a surge in storage technologies that offer  features such as de-duplication (see: NetApp’s and EMC’s battle to acquire Data Domain). Already, we see that the iPhone App Store has necessitated the creation of faster and more capable hardware in the form of the iPhone 3G S[peed].

Well, this all seems consistent if you’re the hardware or services vendor, but what if you’re the software guy? Do open-source and falling license margins signal the end of “selling software”? A prime consideration is that unlike hardware and services, software is easily replicated and transported (i.e. there are virtually zero unsunk production costs). Is there no software pull-through to be realized?

I would argue that like hardware pull-through, software pull-through requires a fundamental shift in application requirements to reach a tipping point. More importantly, these requirements must create room for architectural differentiators in the product itself. For high-volume processes, this was an architecture optimized for processing speed (e.g. mainframes). For unstructured documents, this was a platform optimized for binary objects rather than data tables (e.g. document management). For other processes, the ability to integrate data sources in applications may be critical (e.g. mash-ups and SOA). And there remain several unexplored optimizations.

As a wise EMC blogger noted, “when IT vendor strategy guys get together, they talk about emerging stacks, control points, where you want to be open and where you don’t, where you monetize and where you commoditize.” At least in my opinion, there seem to be adequate emerging stacks on the horizon that even the current mass commoditization of licenses will leave room for software pull-through… at least for now.

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