A back-to-the-future strategy for software as a service

Selling off-the-shelf -- way off-the-shelf -- offerings at retail stores

One of the potentially hottest items in the software aisle of U.S. electronics retailers this Christmas season is, if you ask Santa's load-bearing reindeer, just an empty box.

.Mac (pronounced 'dot-Mac'), an online service from Apple Inc., has been the second most-popular Mac offering at retail so far this year, according to The NPD Group Inc.

For $99, buyers get one year's access to Web-based storage, e-mail and address book syncing between their iMacs and iPhones, among other features.

Still, customers may be taken a bit aback when they open up the .Mac box and discover "there's nothing in there other than a license key," said Chris Swenson, an analyst at the Port Washington, N.Y.-based NPD Group.

The conventional wisdom is that software as a service (SaaS) is finishing what piracy, open-source and the Web started: killing the packaged software market.

Computer retailers long ago bought into this premise. Go to any Best Buy Co. or Circuit City Stores Inc. store and observe the scant aisle space for software compared with PCs or hardware peripherals.

But in fact, the packaged software market is still growing. According to NPD Group, U.S. retail sales of packaged software so far this year (including those by online retailers) are up 10%.

Tallies have been lifted by new versions of old favorites: Adobe Systems Inc.'s CS3 design suite, Microsoft Corp.'s Windows Vista and, in particular, Microsoft Office 2007. Office 2007 alone has captured one out of six U.S. dollars spent at retail on software so far this year, Swenson said.

But other categories remain healthy. Sales of security software at retail are up 17% so far this year, said Swenson. Other burgeoning categories include tax preparation software such as Intuit Inc.'s TurboTax or H&R Block Inc.'s TaxCut, and personal finance or small-business accounting software.

So why go retro?

Apart from CompUSA Inc., which declared bankruptcy on Friday, retail remains a viable channel for software. But SaaS? When you're in the middle of a revolution, why go the retro route?

"I think it makes complete sense," wrote Ismael Ghalimi, a French software entrepreneur in Silicon Valley who maintains the Office 2.0 Database, a comprehensive list of online office software, in an e-mail. "People need reminders and convenient ways to buy stuff. It's also much better to have a box if you want to gift it to someone."

But isn't SaaS growing fast enough through online word of mouth alone? Take Google Docs, the search company's online office software, whose usage grew sevenfold in one year to 1.6 million users in November, according to Web market research firm Compete Inc.

"I expect this trend to continue," blogged Compete analyst Becky Bitzenhofer in a Dec. 6 post. "Google doesn't have to do much, as Docs and Spreadsheets are viral by nature and should continue to spread."

But contrast that with a recent survey of 586 U.S. PC users conducted by the NPD's Swenson. He found a whopping 73% of respondents had never even heard of Google Docs. Another 21% had heard of but never tried online office software. While 6% had tried the free services, only 2.3% used them regularly. And only 0.5% used them as a replacement for a desktop suite such as Microsoft Office, which Microsoft claims has more than 500 million users worldwide.

"If Google sticks with marketing online only, it could be years before they move the needle," said Swenson. He argued that Google and other Web 2.0 vendors are focusing purely on winning approval from the TechCrunch crowd, when in fact getting onto a store shelf would reach a bigger mainstream audience.

"Lots of consumers still go to store shelves to evaluate products," he said.

Apple, apple, apple, orange

But wouldn't a boxed-up subscription for Salesforce.com Inc. look, well, weird sitting on the shelf next to the Grand Theft Auto III or NBA 2k6? In other words, aren't many SaaS applications simply too business-oriented or cutting-edge for retail?

Not necessarily. Before its financial troubles came to a head, CompUSA last summer began selling a hosted CRM service from NetSuite Inc., a Salesforce.com rival, in its stores.

But the big three office supply chains (Staples Inc., Office Depot Inc. and OfficeMax Inc.) all cater to small to midsize businesses, a potentially ripe market whether in the Silicon Valley or middle America.

At the OfficeMax in Kirkland, Wash., entering shoppers are immediately confronted by a display of Intuit software, including boxed one-year subscriptions to its QuickBooks Payroll Service.

OfficeMax also sells three-year subscriptions to the LoJack for Laptops service for $99, as well as Family Tree Maker, the $89.99 genealogy software whose main feature is a six-month subscription to the online database at Ancestry.com.

Paying for free stuff

Another seeming obstacle is how to repackage a SaaS application that is currently offered for free online, supported through Web advertising.

One way is to create a premium version that can be installed on a PC -- for the times when a user is on an airplane or otherwise not connected to the Internet -- that also connects to extra online services.

That's what ThinkFree Corp. is doing. Besides an installable version of its online office software, which retails for $49.95, ThinkFree plans to bundle a limited free subscription to an upcoming online service similar to .Mac in boxes of ThinkFree Desktop.

"Selling software that runs offline makes a lot more sense to hardware companies or big-box retailers in that there is actually something there to sell -- real software that resides on a disk and gives a real value to customers," said Jonathan Crow, ThinkFree's director of marketing.

By contrast, rival vendor AdventNet Inc. is going the .Mac route. By mid-2008, it plans to release a boxed one-year subscription to a premium version of its Zoho online office software that will cost $40 to $50 at retail, said Raju Vegesna, Zoho's chief evangelist.

"It will be an empty box," he said.

Still, AdventNet has developed an offline version of its office suite, using the Google Gears programming framework. Such frameworks, such as the upcoming Adobe Integrated Runtime (AIR) and old-school examples of Sun Microsystems Inc.'s Java or Microsoft's .Net, make the task of recreating a desktop version of a Web application much easier.

As for the reliance on Web advertising, some experts such as Axel Schultze, chair of the Software and Information Industry Association's channel committee, argue that is more of a reflection of the myopia of SaaS vendors today (download PDF).

"People will soon realize that Web advertising is not a sustainable business model," he said.

The old guard suits up

Some vendors that have traditionally relied on retail for packaged software are using it for SaaS, too.

Microsoft is selling its Windows Live OneCare security service at retail. Purchasers download the product using the license key in the box, a spokesman said.

But what if your SaaS application is small and unknown? Can it realistically get on the shelf of a Best Buy? No problem, says Swenson, pointing out the many boxes of antivirus and utility software from no-name makers on retailers' shelves.

Of course, no other SaaS application is in the same position as .Mac, which gets pushed by employees at more than 200 Apple Stores worldwide whenever customers come in for service or the latest Mac OS X upgrade, Swenson said.

But don't underestimate the weapons that SaaS can bring to the fight for premium shelf space against desktop applications.

"Let's assume a subscription costs $40 a month. Let the retailer sell a box with a first month's subscription for $35," Schultze said. "That lets the buyer save a little money. Meanwhile, give the retailer a split of the ongoing subscription fees."

Generating monthly revenue for a product that no longer takes up any floor space is extremely attractive to retailers, Schultze said. Antivirus vendors, which jumped early onto the subscription bandwagon, are close to reaching such an arrangement with some retailers, he said.

Going with a partner can help. To handle distribution of its desktop product, ThinkFree uses Avanquest Software Inc., which has a long history of taking relatively esoteric shareware products, and now SaaS software, to retail.

With no end to packaged software in sight, SaaS vendors would do well to adapt rather than wait.

"In the digital world we live in, it makes no sense at all," Ghalimi said, "but humans ain't fully digital yet."

Copyright © 2007 IDG Communications, Inc.

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