In 1999, the idea of renting software over the Internet was dismissed by many in techdom as little more than a marketing ploy cooked up by Salesforce.com Chief Executive Marc Benioff. At the time, the outspoken exec was operating in the shadow of software giants Oracle and Microsoft and fighting to get his nascent company some attention.

After all, Benioff was already famous — or infamous, depending on who you spoke to — for attention-grabbing stunts like hiring out-of-work actors to picket sales meetings at Siebel Systems, which was the biggest supplier of customer relationship management software.

Benioff may have the last laugh. Oracle acquired a distressed Siebel last year, and now all the software giants are grappling with how to come up with a software strategy similar to the one championed by Salesforce (CRM).

SIMPLICITY. Why all the fuss? Renting software over the Web, a concept known in the computer industry as on-demand software or software-as-a-service, solves a lot of big problems companies have had with business software.

For starters, the applications are hosted and maintained by the software vendor — not an internal IT staff — and then delivered over the Web like a service. The software is less expensive and easier to get up and running.

What’s more, customers typically buy a monthly subscription rather than pay a huge up-front license fee that can easily run into millions of dollars for big corporations and require board approval. Even better: If the software isn’t to customers’ liking, they just stop paying.

In the old world, software was expensive and took years to install. The chances of just ripping it out were about as likely as Windows going open-source.

This year, on-demand software vendors are expected to rake in just under $2 billion, up from $1.5 billion last year, according to AMR Research. That’s still less than 10% of the overall software market, but it’s growing more than 20% a year, compared with single-digit growth in traditional software. And though there’s widespread disagreement on how pervasive this change will be, on-demand is a powerful enough trend that the incumbents have been scrambling to come up with a strategy.

CHASING THE BANDWAGON. Consider the fate of Siebel, one of the rockets of the dot.com era. The company got squeezed by SAP (SAP) selling large all-in-one suites on the high end and BY Salesforce on the low end. After years of pooh-poohing Salesforce’s software as insufficiently feature-rich, Siebel finally launched an on-demand strategy in 2003. But by then it was too little, too late.

The software Establishment doesn’t want to be "Siebeled." Right now, the bulk of on-demand software is still in the customer relationship management realm, but should it spread, Oracle (ORCL), SAP, and Microsoft (MSFT) say they will be ready.

The biggest — and most recent — strategy shift came from SAP. It’s the No. 1 seller of software applications that run everything from a company’s back-office accounting to its sales teams. Earlier this year, SAP made a big about-face when it announced its on-demand strategy, which for now is limited to CRM (see BW Online, 2/02/06, "SAP Gets On-Demand Religion").

Microsoft also endorsed on-demand last November at an event many likened to the moment when the company jumped into the browser wars. According an internal memo obtained by BusinessWeek, the company acknowledged that it is once again late to a market but is trying to move quickly to catch rivals (see BW Online, 3/10/06, "Memo Outlines Microsoft’s Plans").

And when Oracle shelled out $5.8 billion for Siebel, Chief Executive Larry Ellison made it clear that one of the crown jewels that wouldn’t be squandered was Siebel’s fledgling CRM On-Demand software, which competes against Salesforce.

THREE-WAY RACE. Public posturing aside, is any of the Big Three software vendors reengineering its business around on-demand software? Oracle has been in it the longest and may be most committed. But some purists quibble with Oracle’s definition of on-demand: It is the the company’s usual software with its maintenance outsourced, not a new, lightweight application written from the ground up to take advantage of the Web.

Still, Oracle has been giving companies the option since 1999, and hundreds of thousands of people access Oracle applications that way today. To up the ante, the company recently invested in a state-of-the-art data center in Texas and has more than 600 engineers working just on software-as-a-service R&D.

Juergen Rottler, executive vice-president for Oracle’s on-demand business, says he expects that some 50% of its customer base will get at applications this way going forward. "Increasingly, customers aren’t interested in running the software themselves," Rottler says.

Here’s the rub: Oracle is in the middle of integrating a tangled mess of acquisitions. Even the company isn’t sure of the fate of CRM On-Demand. Benioff takes the silence as proof things aren’t going so well.

"Oracle has killed Siebel," quips Benioff. "The Siebel buildings are empty. There is no one home anymore. All of the top executives are gone."

DIFFERENT APPROACHES. Say what you will, Ellison clearly gets the picture when it comes to changing the software business model. He was an early investor in both Salesforce and NetSuite, an up-and-coming on-demand company that’s likely to go public this year with a valuation as high as $1 billion.

And despite the fierce rivalry, Ellison still owns a sizable but undisclosed chunk of Salesforce — although he has said he’d be happy to see that stake shrink to zero when Oracle steals its business. He also owns more than half of NetSuite, whose applications include just about everything needed to run a business, from CRM to order management.

As recently as a year ago, SAP executives downplayed the extent of customer desire to outsource the management of their software. And largely, the company is sticking to that view.

But SAP execs say customers are clamoring for a quicker, easier way to get up and running on applications, so the company launched an on-demand version of its CRM product earlier this year. Still, SAP is hardly transforming its business or trying to go toe-to-toe with other on-demand providers such as Salesforce.

Instead, SAP pushes the notion that its on-demand products offer an on-ramp to its more sophisticated and expensive traditional applications. "We believe on-demand provides a great start, but over time companies want to differentiate themselves and how they deal with customers," says Peter Graf, executive vice-president for SAP.

STUMBLING BLOCKS. Of the Big Three, Microsoft has the most to gain — or lose — if it stumbles. The bulk of Microsoft’s business customers are small to midsize companies. And since it’s those businesses that are clamoring most for cheap, easy-to-install, and easy-to-use software products, upstarts like NetSuite and Salesforce — which cater to those customers — are a particular threat.

Microsoft is working on Windows and Office Live, online counterparts to Microsoft applications that reside on PCs. It’s also trying to push hosted versions of its current software.

The challenge is that it has traditionally sold software through resellers and has to get them on board before it can make a big push to customers. Microsoft has to convince resellers that it’s worthwhile financially, since they would no longer get a big up-front license payment and would have to do the hosting themselves. Microsoft says it won’t host its on-demand software.

That could be a potential roadblock for customers. The fact that Microsoft is pushing the host function onto partners would give AMR research analyst Rob Bois pause, were he a customer, because it means there’s less control when it comes to two big concerns companies have about on-demand: up time and security.

"They lose some control there," he says. "What they should do is operate CRM like MSN, where Microsoft has the data center and they lease that out to partners. But they are still a year away from having the architecture to really do that."

UNCERTAIN FUTURE. Microsoft, Oracle, and SAP each have natural advantages and disadvantages when it comes to on-demand suites. But in the view of analysts and customers, one thing matters most: commitment. Unlike earlier software revolutions that were sparked by snazzy new technology, this one isn’t centered on the next big thing. If anything, the features and technology are stripped down.

On-demand software is about both business model and culture. It’s changing how software is sold and produced. Here again Oracle may have an edge: The company is already shifting away from dependence on big up-front license payments to steady annuity-like revenues from long-time customers.

That goes hand in hand with why many customers love on-demand. But nothing is a cakewalk in software: SAP is the market leader in applications and isn’t ruling out a broader commitment to on-demand in the future. Meanwhile, Microsoft has much more experience selling cheaper, digestible chunks of software, and its revenues aren’t heavily tied to up-front license payments.

Whether any of these companies can match the pure plays on ease of use is another question. Until one of the three do, pesky competitors like Salesforce, RightNow, and NetSuite will only make bigger inroads.

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