January 20, 1997
Tossing the boxes
But keeping the contents; that's what firms are doing via electronic software distribution over the Internet--where the publishers zap program bits to the end user
By Jeff Moad

When DuPont buys electricity from its local utility, it doesn't come packaged in a box. DuPont doesn't have to keep track of which employees are licensed to plug in, nor does it have to worry about whether all of its business units are running the latest voltage release. The utility takes care of delivering the product and measuring usage. DuPont simply cuts a check.

Lately, DuPont IS manager Barney Kantar has been wondering why buying software isn't as straightforward. After all, with the Internet providing a common link between software publishers and corporate users, and software products transforming into applets, why shouldn't publishers just electronically zap application bits to users on an as-needed basis?

"We feel electronic distribution of software is eminently feasible and something that would help us reduce costs," says Kantar, software purchasing manager at the chemical and petroleum products manufacturer in Wilmington, Del.

Lots of corporate IT users and major software publishers also are resurrecting their interest in the idea of ESD (electronic software distribution). In today's era of universal Internet connectivity and pay-as-you-go content, they're beginning to ask, why should commercial software continue to be bought and sold like bathroom tissue or potato chips--a physical product in a box? "Software is really just bits and intellectual property, and it makes infinite wisdom to distribute it that way," says Gene Phifer, senior IT manager at Texas Instruments Inc., a chip maker in Plano, Texas, that has begun pushing its software suppliers and resellers to distribute software electronically. "There's no reason we shouldn't be able to buy software over the Internet in 1997."

In fact, Soft*Letter, an industry newsletter based in Watertown, Mass., reports that most publishers believe 33 percent of their revenues will come from ESD business by 1998. Currently, only about 1 percent to 2 percent of total industry sales happen electronically, states Soft*Letter.

Given the rosy prospects, the software industry is beginning to build a blueprint for ESD. With an eye to cutting their own distribution costs, leading desktop software publishers, including Microsoft Corp. and Lotus Development Corp., have in the past few months begun hammering out what they say should be standard ESD policies and practices across the software industry. And a small cadre of electronic commerce vendors have begun pilot projects that, by the end of this year, could result in widespread electronic distribution of commercial software to both retail and corporate customers.

The ESD plans of Microsoft and ISV supporters hinge in part on the introduction of a new entity in the software distribution supply chain--a so-called software clearinghouse. The idea has already run into problems from traditional software distributors. But, if Microsoft and its partners can sell the idea to channel players, the result could be lower software distribution costs for IS.

No more mess

For companies such as DuPont, ESD isn't just about doing away with the hassles of dealing with software packaging and documentation. In fact, most large corporations already get their desktop software from publishers and retailers on CD-ROMs containing master copies of applications. They typically sign long-term volume purchasing deals that afford discounts based on the number of licenses they actually use. Then they copy off the programs they want and distribute them to users. The problem is that it's typically up to IS to keep track of licenses, distribute applications and upgrades to end users, and make sure users have the correct software version.

"All of that adds to our costs," says DuPont's Kantar. "Every time we have to touch the software or get involved in distributing it, we pay." Managing the process of manual software distribution costs corporations $150 per workstation per year in technical support bills, according to Gartner Group Inc., in Stamford, Conn. Rolling out ESD could allow companies to cut costs by 55 percent, Gartner estimates.

That's music to the ears of companies such as DuPont and TI, which have been working at cutting software asset management costs. In DuPont's case, it's outsourced a lot of the work to resellers who've taken on distribution and license administration for a fee. Others such as TI are attempting to use software distribution tools to automate much of the process.

For one thing, say IS managers, buying software over the Net and having it distributed electronically would allow near instant delivery of upgrades and new products directly to end users.

Some medium-size companies already are beginning to get software quicker by buying it online. Several electronic commerce sites have sprung up, offering a wide range of off-the-shelf products, some as mainstream as Lotus Notes, others too obscure or niche-oriented to gain shelf space in the traditional distribution channel. One organization with 550 PC desktops, Chemical Abstracts Service, in Columbus, Ohio, has been buying PC software through CyberSource Corp.'s World Wide Web site (www.software.net) for more than a year. Although bandwidth limitations make it impractical to buy large programs such as Window 95 over the Web, says System Services analyst Kathy Perry, "we can get other packages quickly. We have a standing purchase order, and we just tell them what we need. Once it's downloaded, we send a confirmation back." Other online software sources include Internet Shopping Network (www.internet.net) and AtOnce Software (www.atoncesoftware.com) .

The paper trail

Larger companies are more interested in the potential of ESD to shift much of the software asset administration burden to software publishers and their channel partners. The idea is that, since software publishers and resellers would be taking orders, shipping software and recording transactions all on the Web, they could easily create Web-based systems to track and report asset management for corporate customers.

Some vendors recently took a first stab at figuring out how that might work. The Software Publishers Association in October released a proposed standard set of policies and procedures that they say publishers, distributors and resellers should implement in moving to ESD. A key but controversial element of the SPA model is the "software clearinghouse," which would act as a trusted intermediary between publishers and other players in the new electronic channel. Its role would be to record and report ESD transactions and maintain what the SPA calls an end-user license agreement database of information on product licensing terms and what customers have bought which products. Already, some clearinghouse companies have sprung up with plans to use that information as a foundation for providing turnkey, Web-based asset management services to IS as well as ESD transactions.

One such company is BITSource Inc., which is currently pilot testing an ESD clearinghouse system called SmartShelf. The offering consists of a dedicated server that stores encrypted master copies of commercial programs and distributes them on CD-ROM in digital wrappers. Users license the packages by executing Web transactions with a selected reseller and obtaining keys that unlock the wrapper. Software publishers download new releases or other code over 56K-bps intranet links to the server, which can be located at the corporate user site.

BITSource, of Mountain View, Calif., plans to provide tools to let corporate software purchasing managers do "what if" analysis of purchases before making the electronic transactions. SmartShelf is slated to roll out commercially in the second quarter.

Another new clearinghouse is Seattle-based Commerce Direct International. Unlike BITSource, CDI runs its service on centralized NT servers on its own sites and works directly with software publishers rather than resellers. Already Corel Corp. and McAfee Associates Inc. are using CDI's encryption, wrapper and transport technology to sell their security and photo library products through Web sites.

BITSource, CDI and other software clearinghouses, including CyberSource, of San Jose, Calif.; LitleNet LLC, of Lowell, Mass.; and Release Software Inc., of Menlo Park, Calif; are all currently scrambling to line up partnerships with software publishers and resellers. If they do, analysts say, clearinghouse-based asset management offerings could change the way IS manages commercial software. "At first it's only going to complement what companies are doing on intranets to distribute and manage software," says Christopher Germann, research director for IT asset management at Gartner. "Over time, however, there's no doubt that ESD could bring about an upheaval in the way commercial software is distributed and managed."

Too many layers

Not everyone is quite as enthusiastic about ESD or the clearinghouse concept, however. To many traditional software distributors and resellers, software clearinghouses represent new competition. "We feel clearinghouses introduce another layer into the channel, and we question the need for another layer," says Fadi Chehade, vice president for customer information at Ingram Micro Inc., a distributor in Santa Ana, Calif.

Last week, Microsoft and other backers of the SPA ESD clearinghouse proposal met with a reseller and distributor trade group, the Computer Technology Industry Association, in an attempt to gain support for the plan. Even if they can make software clearinghouses palatable to resellers, there are still plenty of hurdles before ESD makes sense for corporate customers. For one thing, different ESD clearinghouses will have to find a way to share customer and transaction information. Clearinghouse companies are trying to agree on common EDI-like data definitions that would make that possible.

Perhaps more challenging, IS managers say, is that software publishers will have to find a new way of pricing their products in an ESD world. "They'll have to come up with new volume licensing deals that recognize the fact that, once they're distributing software electronically, publishers incur almost no incremental cost for producing extra copies," says DuPont's Kantar. "Licensing deals don't recognize that today."

If software publishers and their partners can overcome those challenges, ESD could change the way corporations buy and manage desktop software assets. Some day, instead of unwrapping thousands of shrink-wrapped boxes, installing software may be as easy as flipping a switch.

The Rise and Fall of the ELSI Project

Led by Microsoft Corp., the Software Publishers Association-backed electronic software distribution initiative might have the clout to establish industrywide policies and procedures that can eventually pay off for IS managers. But it won't be easy.

Other groups have tried the same thing and failed. Most recently, a consortium of software distributors, Internet service providers and consultants led by Stream International, of Westwood, Mass., designed a model ESD software clearinghouse, but their effort crumbled when broad industry support failed to emerge.

The failed project, dubbed ELSI (Electronic Licensing and Security Initiative), announced last May, was in some ways more ambitious than the current SPA effort. ELSI was to have established standard ESD policies and procedures and also to have built and operated a standard clearinghouse for the industry. Initial backers included BBN, the Strategic Services Consulting unit of KPMG Peat Marwick LLP and electronic commerce provider LitleNet LLC. IBM also became an ELSI backer after the consortium decided to use IBM's E-commerce server products to implement the clearinghouse. The ELSI group was to have started pilot testing the clearinghouse by the end of 1996.

In the end, however, the ELSI project failed to attract support from major software publishers such as Microsoft Corp., and late last year, BBN and LitleNet pulled out. LitleNet threw its support behind the SPA effort. IBM's representative to ELSI, Paraik Sweeney, says the group has discontinued efforts to set industry ESD policy and procedure standards.

The group is still discussing whether to build a clearinghouse, Sweeney says.

Observers blamed ELSI's problems on concerns that it was too proprietary. "A lot of companies were in an uproar over ELSI because they thought Stream was controlling it and would control the ELSI clearinghouse," says David Collings, an ESD consultant in Redmond, Wash. "That's why ELSI essentially bit the dust."

His best shot: DuPont's Barney Kantar is trying to reduce costs with electronic software distribution.

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