From Products to Services: The Software Industry in the Internet Era

Abstract

This article reviews the changes to the established software industry caused by the rise of the Internet. Before the advent of the commercial Internet (in 1994, say), the industry consisted of three distinct sectors: vendors of mass-market software products for PCs; vendors of enterprise software products for business administration and corporate computing infrastructure; and computer services firms that performed business process outsourcing and systems integration. The three types of business evolved distinct corporate cultures and business practices that discouraged migration between sectors. Technology also kept the three sectors apart: computer-service firms invested in extensive private networks creating a barrier to entry for other firms, while enterprise and mass-market software vendors made products for distinct computing environments - powerful centralized mainframes versus low-powered PCs.

The arrival of the Internet connected all the parts of the computing environment that had previously been separate, and dramatically reduced the entry costs of establishing a network presence. In the complex restructuring of the industry that ensued, the most conspicuous change was what we have termed a "forward integration" between the sectors: mass-market vendors forward integrated into enterprise software; and both mass-market and enterprise software vendors forward integrated into computer services. We also consider the impact on the industry of open-source software firms that give their code away but make money from services.

Keywords: Internet, software industry

JEL Classification: L86