Microsoft's software rentals may cut costs

How much will Microsoft's plan to let customers rent Office 2000 cut computing costs? Nobody seems to know.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
4 min read
How much will Microsoft's plan to let customers rent Office 2000 cut computing costs? Nobody seems to know.

The "rent or own" question that is central to many companies arose again today when Microsoft formally announced that application service providers such as Digex and Micron Electronics will be permitted to rent or lease Microsoft's business software to customers.

At present, businesses must pay for a full "application suite" for every computer in their organizations. In the hosted model, corporate applications and data sit on a central server and are accessible by password from any computer.

Renting eases upgrade and installation, reducing the need for support and the software that must companies buy. Competition could also keep software prices down as Sun Microsystems, Corel, and others are releasing server-based productivity suites to compete in the market long dominated by Microsoft.

Sun recently purchased Star Division and plans to release the StarOffice Suite as a server-based suite, though the company said today that its plans for StarOffice's debut will be delayed.

Such competition still may not translate to immediate bottom-line savings for software customers. Microsoft will likely tinker with its fee schedule so that renting will be about the same as buying Office 2000.

Microsoft has not released pricing yet, and at least one of its service partners, Micron, said it cannot evaluate a comparison.

"You're not going to save much on overall software costs," Joshua Greenbaum, an analyst and head of Enterprise Applications Consulting. "The real ROI [return on investment] is in distribution, maintenance, and upgrades."

And even those cost savings, if they materialize, will be tempered by additional security issues and other factors.

"When you introduce a remote 'app' over a network, you introduce a whole new layer of things that can fail," said Winthrop Robinson, director of technical services for W.R. Berkley, an insurance holding company in Greenwich, Connecticut. "Windows is not always a stable environment [right now]. It has to be tough for people to say, 'Well, given that scenario, why would I want to increase the complexity and chances for failure?'"

PC makers could be the losers
If anything, the losers in this scenario could be the PC manufacturers. If server-based applications take off, corporations will no longer need to buy computers with the latest and greatest microprocessors, let alone machines with hard drives.

Corporations, in fact, seem to have become more amenable to less robust "thin clients," stripped-down machines that use server-based applications. In 1998, 368,000 thin clients were shipped in the United States, according to Eileen O'Brien, an analyst at IDC. In the first half of 1999, 305,000 shipped.

Terminal-style computing will become still easier to deploy next year as Microsoft integrates Windows Terminal Server, a crucial software layer that allows Windows-based machines to access Microsoft server applications, into Windows 2000. "This will make it easier to buy," said O'Brien. "They [Microsoft] obviously believe in it."

Office 2000 applications, such as Word and Excel, will be doled out from Terminal Server, Microsoft said today.

Analysts who have used hosted versions of Office say that performance may not be an issue, especially over a typical corporate leased line. "From a usage standpoint it is not the same as having it right on your desktop, but its damn close. In some instances, there is better performance," said Chris Le Tocq, an analyst at Gartner Group.

Advocates and observers believe server-based applications are not only beneficial; they are also inevitable.

Market research company International Data Corporation expects spending on services offered by application service providers, such as Corio, to reach $150.4 million worldwide this year. Service firms argue that mid-sized companies can avoid management headaches and save 70 percent in up-front costs by renting all software applications instead of buying them.

In a recent interview, Mark Jarvis, senior vice president of marketing at Oracle, said the cost to rent is only a third of the amount needed for a company to install and manage Oracle software themselves. Oracle has established its own application service, Oracle Business OnLine.

When you rent, he said, you pare down the need to buy servers, pay administrators, and staff a help desk.

Jarvis estimated that, within several years, about half of Oracle's customers will rent their software, with pricing set at between $300 and $800 a month depending on the type of applications and number of people using them.

Although Microsoft applications are much cheaper than any typical Oracle application implementation, the formula is the same: rent the software and avoid maintenance and upgrade headaches, analysts say. Accountants have also pointed out that software as a service can be deducted as a business expense, rather than as a capital one.

News.com's Mike Ricciuti and Kim Girard contributed to this report.