Recently, Knowledge@Wharton ran a great article on Why Software Business Models of the Future Probably Won’t Come in a Box that made some great points that are definitely worth repeating, despite the fact that the article is focussed primarily on Microsoft and the challenges that lie ahead for the lumbering behemoth.

The article begins by noting that the software business model that has made Microsoft so dominant for the last 20 years may begin to fade in the decade to come as new software business models — from open source to advertising supported software — gain increasing traction. (The article is being kind. I think it’s safe to say that this is not a “may”, but a “will”, and that the only unknowns are how soon?, and by how much?)

“Open-source“, which largely relies on voluntary programmers to build applications that are distributed freely; “enterprise open-source“, where a company builds a basic application and gives it away for free, making money on either services and support or on custom / extended versions; “ad supported” software which is free to consumers if they agree to accept advertisements; and “on-demand” software where

customers rent software applications when they need them and pay only for what they use are all gaining in popularity.

According to Kendall Whitehouse, a senior director of information technology at Wharton, there probably isn’t one model that will win out; instead you will have a blend of business models. Kartik Hosanagar, an operations and information management professor at Wharton, agrees that a hybrid model, consisting of all of the above contenders and some traditional licensing, will likely emerge in the software industry.

The article also points out a major advantage of on-demand and open-source applications: they can evolve more quickly. (For more advantages, see Part I.) Furthermore, in the corporate setting, you don’t really own boxed software as much as you pay for access to it. By the time you factor in the cost of routine updates and maintenance, perpetual licensing costs a lot more than the up-front license fee. That’s probably why companies offering access to on-line subscription services are adding customers at a rapid clip – and why you should be looking primarily at on-demand or enterprise open-source solutions when you select your supply chain applications. It’s the future!