Software margins choked by the cloud?

With new competition, software industry focusing on customer service over software. It is a highly profitable future, but perhaps not as profitable as it has been.

Microsoft expects to lose margins as "cloud" competitors start to eat away at its core businesses.

Kudos to Microsoft for calling out the obvious. But the software maker still has a lot to learn, if it thinks it can charge more under its own cloud model because "the customer will pay Microsoft a larger fee, since Microsoft also runs and maintains all the hardware," as Nick Carr notes:

Capossela's assumption that Microsoft will be able to charge companies more under the cloud model seems optimistic, given the different economics of providing software as a Web service and the aggressive pricing strategies of cloud pioneers like Google, Zoho, and Amazon.

Put more bluntly, there's not a chance in Hades that Microsoft will be able to charge more for its cloud-based offerings--not when its competitors are using the cloud to pummel its desktop and server-based offerings. This is something that Microsoft (and everyone else) is simply going to have to get used to. The go-go days of outrageous software margins are over. Done.

Open source and the cloud (or software as a service, if you like) are still plenty profitable, but the software model for writing once, then digitally copying and charging everywhere is out the window.

Those who desire outsize margins, as Google still gets, need to learn to charge for something other than the software . Pure software businesses will be less profitable, going forward, because the software industry has matured and will increasingly look like other industries that depend primarily on service.

Is this cause for mourning? Of course not. It's just what has always happened to technology-driven industries. Anyone wanting to see where software is going needs only to study the railroad. Or, in Google's case, the billboards along the side of the road. ;-)

Open-source and cloud-based computing are focusing the software industry on customers and service thereof, not on software. It is a highly profitable future, but perhaps not as profitable as it has been.

That's not a bad thing. It is, in fact, a very good thing for customers, who get more value and pay less for it.

Tech Culture
About the author

    Matt Asay is chief operating officer at Canonical, the company behind the Ubuntu Linux operating system. Prior to Canonical, Matt was general manager of the Americas division and vice president of business development at Alfresco, an open-source applications company. Matt brings a decade of in-the-trenches open-source business and legal experience to The Open Road, with an emphasis on emerging open-source business strategies and opportunities. He is a member of the CNET Blog Network and is not an employee of CNET. You can follow Matt on Twitter @mjasay.


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