Will the App Store for Business Revolutionalize the Enterprise Software Distribution Model


Enterprise software has always been a high gross margin business due to the repeatable nature of software that vendors write once, and sell many times.

But for those of us who are familiar with enterprise software vendors as well as large corporations who buy such software, we are all far too aware of the long and expensive sales cycles for both the supplier (software company) and the buyer (corporations using software).

Typically, most margin erosion for software companies happens in the sales and marketing expense. Yes, engineering is a high cost, but typically gross margins can tend to be between 75% to almost 90% for the good companies once a certain amount of volume and scale is reached. But direct sales especially is a low scale business.

So why do corporations who buy software care? Well, if 30 to 40 cents of a dollar is spent by a software company simply in identifying and marketing to prospects, if the larger companies can make that cost go down via an enterprise app store, the savings could ideally be split between the providers and buyers.

Besides, the rate of innovation would increase because software companies can focus on their core of building and supporting good enterprise class software, and leave the selling and marketing to the larger firms who have the processes well defined andhave brand awareness and reach.

This has several benefits for the customer. For one, a business app store could ensure a level of quality assurance, thereby lowering the risk to purchase tehnology from smaller innovative startups.

Secondly, the startup could just ignore building an enterprise class sales force and outsource the selling via the channel (i.e. the app store).

This would also lower the level of investment substantially before the companies become cash flow positive. So companies wouldn’t need tens of millions in venture money to get to launch a start-up, but could do it for hundreds of thousands, or a few million. This would increase quick failures fast, which is the best thing that can happen for innovation. The faster a company succeeds or fails, the better the innovation engine.

Yes, there is a lot of complexity in enterprise sales which can’t all be marginalized, but software sales is about one of the most unproductive processes, that if concentrated in a few companies, could bring about economies of scale. Not every company figures out how to automate payroll, they outsource it. Sales via channel is a similar argument.

But the best argument is how quickly good ideas can scale with this approach. If the distribution platform exists and the models get perfected, or at least substantially improved, not only savings but a lot of innovation could result in the CIO becoming the primary beneficiary.

So just like we can commoditize infrastructure scaling via cloud computing in theory, over time, so can we software distribution through the major brands of enterprise software. This also creates a more integrated ecosystem.

Lastly, existing contractual terms with these enterprise providers can extend to newer start-ups, where purchasing could also benefit from volume discounts.

It shouldn’t be missed that there would be a lot of disadvantages and hurtles to this model. But I predict that over the next decade, there could be a significant shift to moving software to an app store like distribution model, and not just for consumer or mobile software, but also for enterprise class software.

The question is whether significant is 10% or 50% of software volume. An interesting debate to have.

Thoughts??

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One Comment on “Will the App Store for Business Revolutionalize the Enterprise Software Distribution Model”

  1. mcgratha Says:

    Hi Jeetu,

    Interesting post. I’ve been considering something similar from an ECM perspective and I think that the new CMIS standard will play a major factor in creating ECM App stores as CMIS will make it economical to create apps that can be written once and deployed many times into any CMIS-compliant ECM platform, extending and enhancing the functionality that comes out-of-the-box with the ECM product.

    I’ve written about this topic in my post http://mcgratha.wordpress.com/2010/12/22/the-spawning-of-a-new-construction-boom.

    Regards,

    Adrian


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