How ISVs Can Survive the Switch to Web Services

In the mid-1980s, leading computer manufacturers made a fundamental miscalculation. Today's leading software makers are making exactly the same mistake.

Twenty years ago, computer manufacturers kept all their systems design, manufacturing and customer management in-house. They built their own disk drives, memory chips and processors, they wrote their own systems software, and they maintained their own sales, installation and maintenance teams.

The ISVs They Are a-Changin'

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Today, only Sun survives with that vertically integrated model. The rest — including once-proud giants such as Burroughs, DEC, Data General and NCR — crumbled in the face of stronger competition from the horizontally layered PC industry. Here, each separate component of the system is contributed by specialists who compete to dominate their own individual layer of a shared architecture — Intel at the processor layer, Microsoft with its operating system software, and assorted vendors of hard disks, memory chips, graphics subsystems and so on.

The computer manufacturers' miscalculation was to remain firm in their belief that a system assembled out of an assortment of components from multiple suppliers would always be inferior to one that was designed and managed from beginning to end by a single team. At first, the frequent incompatibility and unreliability problems of early PCs appeared to prove them right. But as the 1980s came to a close, the balance of evidence suddenly flipped. Proprietary integration became a handicap as the greater flexibility and economy of the horizontally layered PC model came to the fore.

Back to the Future
The advent of software-as-a-service and the evolution of Web services have brought the software industry to a similar turning point. For years, independent software vendors (ISVs) have designed, built and delivered applications in a vertically integrated, proprietary model. They see no reason to change their ways as they transform their products into online services.

Initially — as with computer manufacturers in the 80s — that point of view will seem to be correct. There are many compatibility and performance challenges to be overcome before the Web services architecture becomes as slick and robust as the PC architecture. For the first few years, building composite applications out of an assortment of loosely coupled Web services will not rival the capabilities of vertically integrated application stacks. But then the balance will flip. A mature Web services architecture will allow the flexibility and competitiveness of the model to flourish, accelerated by the ease of real-time collaboration in the online environment.

The likely result will be a fragmentation of the ISV industry into three distinct horizontal layers of activity. Today's vertically integrated, multi-purpose ISVs will face a difficult choice if they are to survive. They will have to choose between one of several roles that most have previously fulfilled as a single business.

• Service Integrator — The natural inclination for most ISVs is to preserve their direct customer relationship. But to do so in the Web services environment is to assume the role of service integrator, obliged to focus on a narrow industry or regional market, and denied access to the customers of third-party integrators. This is a viable model for a small, specialist ISV, but it's not a high-growth strategy.
• Software Developer — Companies that own successful software technologies or command strong development skills will find themselves drawn into the infrastructure segment. They will sell to service providers, who will use their platform products and component services as a foundation for creating their own applications. Companies in this segment will range from small, specialist development shops to large platform vendors and infrastructure service providers.
• Application Publisher — Vendors and providers that wish to leverage strong brand visibility or market penetration will continue to use their skills to create and promote integrated application offerings. These application publishers will increasingly rely on third parties to provide the raw software and other infrastructure components that they package up for onward provision to customer-facing service providers and integrators. This will be a high-volume, commodity business and it is the segment where today's leading application vendors must aim to make their mark if they are to survive the transition to the Web services era.

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