Free software is taking over the market, but at a price . . .
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We have all taken extreme advantage of the plethora of free services, free software, free marketing and free apps. This ‘free’ option has radically altered the economics of the software industry and will have a continuing impact in this generation.
‘Free’ has opened our minds about the definitions of value in the digital age:
The value of audience—visitors and subscribers (opt-ins) and the ability to market to, and mine, consumer information.
The value of the network—B2B or P2P connectivity. Who has a bigger network? Who has a network that looks like my market? Who has the prebuilt standard connections?
The value of platform—interoperability and integration. Is this platform compatible with the rest of my applications?
The value of human interactivity—social and collaborative connections, services, information and community values.
And now we expect all this for free.
Free conference services, free file transfer, free marketing (social networking), free storage and free ERP. These free services enable individual entrepreneurs or young companies to leverage this ‘free’ world to start new enterprises and develop new services, reaching global audiences with skillful use of those large networks. And they offer new opportunities for individual end-users in big companies who are looking for convenience and speed in getting their job done, often by-passing the overworked IT department.
Roots of the Free World
Much of the start of the free moment didn’t originate from the social networks, free apps, and mobile apps of today. Rather, it is a fairly old concept—the need for standards coupled with a ‘democracy’ movement—that brought us LINUX and other tools and standards. Organizations include Free Software Foundation http://www.fsf.org/, Open Source Development Labs,1 and many other developer groups.
Seeking interoperable solutions and apps that could generally be used across platforms, The Open Systems Foundation (now the Open Group)2 sought to advocate for, and collaborate on, the development of UNIX and open standards for software to hardware integration.3
Along came the .com world with all its play money—where the value of the enterprise was measured in subscriber counts. If your web site did not make real money selling stuff, you could always use it as a conduit for marketing. Many web sites gained value just from their audience—visitor counts and their dwell times. And thus the web competition for opt-ins began, providing a wealth of online advertising dollars and consumer data analytics opportunities.
Young people growing up in this world do not expect to pay for tools and access. As access (seats) and tools (functionality) are the very definition of the enterprise application, it’s hard to imagine BIG enterprise software companies giving these away. However, younger people think differently: They don’t think in terms of just one enterprise deal at a time. They think in global terms. “Wouldn’t it be cool to have an app that did….and millions of people used it?” This attitude is behind many of the apps and tech phenomena we take for granted today.
But ultimately, someone has to pay. For example, several years ago the market asked, “How would Facebook monetize their subscriber base?” Someone will pay: the advertisers or the end-users. Ultimately, these issues have to be faced. Youth grows up and eventually the understanding comes that some traditional values4 —and business sense—make sense.
From Free to Fee—Conversion to the Revenue Engine
The genie is out of the bottle and there will be no returning. However, the development of services and technology does cost money—a lot of money—so eventually, freeware developers have to find a way to recoup their investment. Investors seem to love sites such as Facebook, LinkedIn, DropBox, YouSendIt, and Skype. From accounting to project management and collaboration, these applications run the gamut from pragmatic to fantastic (games and entertainment). Ultimately, though, for these enterprises to thrive they need to consider (and they have) what it will take to convert their audience into paying customers.
To enter into the Google Marketplace, the Android Market, or Apple’s App Store for business is to enter a different world beyond the traditional big software world many know. Visualize innovative developers spinning and weaving together apps that leverage free apps into a functional (and free) system. But there is much more. Many of the solutions sold in these online app marketplaces are real contenders for the CIO’s dollars. They are not just for consumers looking for the next cool iPhone utility.
Let’s look at a few examples:
DropBox now counts over 45 million users. Started by two MIT students, it has grown to over 250 employees. It has received over $257M in funding which has been used to transform the company into a formable contender for the hearts and wallets of average business users. Having many users and demands has upped the ante for DropBox to get serious about security.5 Funds are used for development and to make acquisitions, transforming DropBox from a purely ‘blue jeans code factory’ to a market place player.
YouSendIt is in a similar vein. I spoke with Lori Shen and Mihir Nanavati of YouSendIt and became convinced that these enterprises are changing the world. With over $14 million in investments and 210 employees, YouSendIt has become an extremely popular application, providing millions of file transfers a year. It has a growing user base of over twenty three million users. Security and privacy were the big focus here, as the company pursued top certifications in both arenas.
myERP—It was only a matter of time before a free ERP entered the market. As outrageous as it seems, we now have just such a solution. Recently I wrote a report, ERP for the SMB, and after reading it, Jean-Baptiste Su and Francois Nadal contacted me to tell me about their company, myERP. I was mildly shocked at the existence of a free ERP. But they told with me that they also charge for things.
Ah, But Do They Make Money?
Conversion is the name of the game. Why would a user, who gets all this for free, start paying?
Somewhere in the service is the customer’s value motivator—that lever or conversion point—that motivates the business to pull out the wallet and sign up for monthly or annual service.
Take, for example, storage and back-up. With myERP, a small business with two users can use the ERP for free (for more end-user seats, they charge). But if you want to back-up your data, you pay. We can easily visualize even a small business of one person wanting their billing, accounting, and other data backed up. Today, many small businesses rely on QuickBooks and have paid for this all along. So, the market has demonstrated in the past that customers are not necessarily averse to paying for services and now they have a basis of comparison.
QuickBooks, myERP and the many apps in the Google Marketplace often integrate with other services such as payroll, and 401K/retirement and insurance payments6 completing the fullness of the application and making it sticky. Stickiness is a critical issue, since freeware has the rap of no switching barrier. But in reality, there are many elements besides sunk costs that make applications sticky, such as conveniences, interoperable platforms, integration, established network connections, and communities of interest. Thus the success of the marketplaces mentioned above.
The difference, of course, between freeware and the traditional software model is the willingness for the founders to take the risk—“If I build it, will users really convert?” (No matter how cool the app, this is not guaranteed.)
But according to YouSendit, they are. In the last two years, besides the astronomical adoption rates of their free services, they are having impressive growth of what they call monetizing the user base. They will end the 2011 with about 500,000 paying customers and are experiencing a 60% growth rate!
YouSendIt and DropBox both have threshold conversions: more users, more files, or file retention. For example, you may want to share, but you also may want a record of the entire document you sent as well as retention of those files for a long period of time, so you are willing to pay for it.
And in talking to the people at YouSendIt, we discussed the grass roots phenomenon and how they leverage it. As the corporate population of an enterprise—many individual users—increases, they then can contact the CIO and present the fait accompli.
Larger enterprises also become customers because they cannot control their employees’ initiative in finding and using free apps. And larger corporations naturally are concerned that this is an unauditable environment without a centralized service. Procuring a file-transfer or file-sharing app brings it under the domain of the enterprise so that any transfer of important documents out of the company is auditable.
Taking a more strategic view, YouSendIt has announced their Business Content Collaboration Suite,7 moving beyond basic ad hoc document transfer8 to folders and capabilities like electronic signatures.
Services such as digital signatures on documents and communications clearly are high value and add a depth of security, so YouSendIt can present a strong case to the larger enterprise.
Conclusion—Convergence at Work—A New Era for the Software Market
Several key trends have converged to ensure that the freeware world will continue—and thrive.
We clearly see consumers adopting and expecting free apps. But the business community has other things on its mind.
Cost is one thing. Since 2007, we have tried to get really skinny—both large companies and small—on many expenses, tech included. (Though there is still plenty of money available for big software deals, the budget gets exhausted there.)
Department concerns—individual departments often don’t make the annual IT budget. They do, however, exercise their own independence and use their funds to acquire affordable applications.
End-user savvy—with so much technology at our fingertips, organizations cannot stop the inquisitive and the self-starters from finding utilities to make their jobs easier.
Small business start-ups and SOHOs— we live in a world with thousands of new business start-ups each year, whether independent consultants or makers of the next gadget to change the world. They all have a responsibility to manage and account for their business activities. And free apps are a great way to conserve cash for use elsewhere.
The cloud—Users are beginning to trust the cloud and, in general, trust third parties they only met in the cloud. A real change from the last decade.
It’s a New Generation . . .
During my early days in the big enterprise, we would never have bought software without the company visits, scores of customer reference tours, and thorough background checks. This is a new generation, for whom the online world is a credible representation of physical reality.
They network with strangers online, meet and date, so why wouldn’t they trust a cloud-based third party to move a file or download an app from? The fact is, cloud-based firms have taken security seriously, and so should buyers—and competitors. Attaining and maintaining the highest level of required security makes them all serious players.
And what is most serious for big enterprise software is the world we are entering now. The implications are clear. There is a reason that so many enterprise apps players have free modules or entry points and also have so-called low cost, mid-market or small business solutions. Not only is the SMB market target rich, but more importantly the new generation of buyers is seeking a new way to acquire technology and the traditional players are trying to get in the game.
However, the free option is different and it is not as easy to play the game as it looks. The economics are different and public companies or companies with many software modules for which they usually charge high rates probably won’t be able to get into the game.
As usual, the new will challenge the old. The revolution has begun—socially and technically. The end of this decade will look extremely different than the beginning. We will discuss just how different in this continuing series, Trends 2012, with major trends being revealed in future articles in ChainLink’s the brief.