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Martin LaMonica

Staff Writer, CNET

IBM is in discussions with its partners to create a prepackaged set of hosted applications, a move that could ultimately create an online analog to traditional packaged applications and spur market adoption of software services.

Though still under development, the project is meant to simplify the process of procuring a full suite of hosted business applications–and boost IBM’s billion-dollar hosting business, people familiar with the plan told CNET

The initiative, called by one member the “IBM Software as a Service Partner Council,” could be announced as early as next month at IBM’s PartnerWorld conference in Las Vegas. An IBM representative declined to comment Thursday.

The creation of an IBM-hosted application bundle is one of several initiatives at Big Blue to promote the notion of software as a service, or having applications delivered over the Internet. This model for buying software “on demand” is taking hold after years of missteps and failures, which were due to both technical challenges and faulty business models.

IBM on Tuesday acquired Corio, an application service provider serving medium-size businesses. IBM also has programs to encourage independent software vendors, or ISVs, to convert their applications to run effectively over the Internet.

Analysts said IBM’s growing interest in hosted services reflects a belief among software companies that spending on hosted applications offers brighter growth prospects than traditional software sales.

“It’s where some of the hottest growth in the market is right now,” said Tom Kucharvy, president and chief research officer at Summit Strategies. “It’s going to be many years before we reach a crossover point, but the growth rates are much higher for software services.”

Indeed, the potential for boosting the number of its application hosting customers, particularly to midsize companies, drove IBM to buy Corio. Until now, IBM’s application outsourcing business has been primarily focused on larger customers, which favor customized development and installation, while Corio has software to run a simplified application installation to a large audience, said analysts.

“The hosted market will grow at over 20 percent annually–that’s four times as fast as unhosted software,” said Jim Corgel, general manager of IBM’s e-business hosting services, when discussing the company’s rationale for buying Corio.

According to researcher IDC, hosted software will grow at an annual rate of 26 percent for the next few years, from $2.1 billion in 2002 to $8.1 billion in 2007. Meanwhile, the software market is seeing only single-digit growth rates, with most of the spending concentrated in a few areas, such as infrastructure, security and management.

Getting apps online
In 2005, IBM will be accelerating its efforts, in the form of technical and sales resources, to promote software as a service with application partners, Buell Duncan, the company’s general manager of developer and independent software vendor relations, said in December. As part of its broader plan to recruit ISV partners, IBM is seeking out companies that build their applications on Big Blue’s software and hardware infrastructure and that have their hosted services run from IBM data centers.

The packaged online-application plan calls for a number of providers, including online financial application provider Intacct, customer management software maker Siebel Systems, and online expense management service company Concur, to certify that their respective offerings work well together without custom coding.

“The objective is to preconfigure a suite of horizontal and vertical on-demand building blocks and make it easier for customers to take advantage of the on-demand model,” said Robert Jurkowski, CEO of hosted business application provider Intacct. Customers will gain streamlined purchasing and unified support through the arrangement, he said.

Tackling the issue of integration between different hosted services would help address a long-standing hurdle to adoption of software services, an idea touted since the advent of the Web but only now commonplace. That maturity–and growing competition from hosted online outfits–is prompting more ISVs to rework their applications to work over the Internet.

Siebel, for example, initially dismissed the idea but then partnered with IBM to create Siebel CRM OnDemand, where the applications run in IBM’s data centers. Meanwhile, upstart competitor, which went public last year, now has 12,000 customers.

Oracle, too, has boosted its investment in software as a service. The sector still represents only a small portion of Oracle’s overall revenue, but it’s important to the company’s long-term plans to derive more revenue from subscriptionlike fees, such as maintenance and services, rather than from license sales.

“Oracle is doing it because they see the growth rate in enterprise applications slowing,” said Kucharvy. Software services “is a means of shifting their revenue model from upfront licenses to ongoing annuity sales.”

Why now?
The on-demand purchasing model has long offered several advantages to customers, particularly smaller organizations, said analysts.

Rather than purchase a license and spend months installing software, a hosted offering lets people get started immediately with applications delivered via a Web browser. The purchasing model is different as well, with customers paying a monthly fee for a specified number of users. This is particularly attractive to smaller companies wary of large up-front costs, said analysts.

But several technology changes have made the business more commercially viable since an initial wave of so-called application service providers launched in the mid-1990s. Many ASPs went out of business or, like Corio, were unprofitable.

So-called virtualization software lets a data center operator partition off dedicated portions of a single large server to separate customers. Also, software companies are increasingly building their applications in a more modular form around standardized protocols, such as Web services, which greatly simplifies the task of moving data between different applications.

The services themselves are getting more mature as well, with better management tools and even the option to have applications run in-house while being remotely managed by a third-party service provider.

A preconfigured combination of different applications, as envisioned by IBM and some of its partners, will help drive the market for hosted applications from one-off purchases for an individual department to broader usage, said analysts.

“It’s becoming less and less one-item shopping,” said Counse Broders, an analyst at Current Analysis. “Providers are combining elements into a broader solution.”