Billable hours, not billable bits

Where’s the money in the software business? Increasingly, it’s in the consulting or maintenance contracts or in software rental – anything but in the software itself.

Consulting around enterprise software isn’t new. One of the tenants of the open-source software movement is that software itself should be free – and that customers should pay for support. If you don’t need help with the software, great. If you do need help, well, you can sign up for service contracts, buy a maintenance agreement or engage someone to help you on an hourly basis.

That’s obviously the case with the Big Software Companies, as well. When IBM purchased Lotus Development Corp. in 1995, Big Blue knew that the Notes’ software licenses were only part of the prize. The bigger benefit was that Notes customers would need lots of handholding from IBM Global Services. And indeed, Notes has been a cash cow for IBM ever since.

Where IBM has Global Services, Hewlett-Packard has EDS. HP has expanded its services business tremendously since that purchase a year ago – the point where yesterday, HP decided to abandon the EDS brand. Now, customers will work with HP Enterprise Services.

Dell, too, is getting into the services game in a big way, with its announced acquisition of Perot Systems. In Dell’s case, though, the big payoff would be in increasing its enterprise hardware sales; Dell is not a big fish in the bits business.

Of course, betting your business on selling billable hours instead of billable bits doesn’t always pay off. Sun Microsystems moved aggressively into open source software, giving away nearly all of its crown jewels in the hope that customers would sign up for service contracts. Sun also spent US$1 billion buying MySQL in early 2008, betting big that it could make lots of money on services by giving away even more software. That didn’t work out, and of course, Sun is now in the process of being acquired by Oracle.

As companies like Microsoft look to move big-profit software businesses like Office to the Cloud, renting software by the hour seems to be the next model. Is the era of selling a software license dead? What do you think?