Software can be free if you don’t mind the adverts . . .

Spiceworks offers IT Helpdesk and other IT network support software for small and medium size businesses (SMBs). There are many vendors offering similar IT management software that all look incredibly similar from a customer point of view. Co-founder of Spiceworks, Jay Hallberg, describes Spiceworks’ IT Management software as “a good product suite, which happens to be free”. His proposition is that “everything in IT service management has been done”.

Spiceworks believes that in a mature software market, product innovation is irrelevant. New product features are quickly and easily copied by competitors, and do not provide a sustainable business edge. Spiceworks focuses on staying close to user needs to provide the functionality they require today. The company avoids the common software vendor practice of developing elaborate product roadmaps and fancy engineering to deliver 100s of new features (just look at Microsoft Office… ) that most users can neither figure out nor find. Product simplicity allied to a new and different commercial business model is Spiceworks’ value proposition.

An IBM survey of 750 CEOs worldwide found that business model innovation is a better source of differentiation and enjoys a higher margin return than the traditional innovation categories of “product / market / service” and “operational” innovation. The IT industry has always been transfixed with the first of these—product innovation. In addition, operational innovation (such as introducing CRM and better software support tools) for front line staff have also been important. On the flip side, market segmentation and customer service have rarely been truly innovative nor differentiated, and for most software vendors the licence fee commercial business model is the same as when the market started out in the 1960s.

So what is different about Spiceworks’ business model? 1. It is free (but not Open Source) and 2. the business is funded by web-based advertising revenues. The cost to users is not financial, but rather in having to put up with rotating non-intrusive banner adverts on the right hand side of each screen. Often these adverts point to educational white papers. The adverts are not animated and are designed to serve an educational purpose, rather than be “in your face”.

So why should advertisers like HP, RackSpace and Dell be so interested in advertising with Spiceworks? The answer is that Spiceworks provides access to the desktop of a difficult market to reach—the small and medium size enterprise (SME) IT staff.

Spiceworks encourages continuous feedback from its user community, hence users ‘rate this advert’. In one case the user community thought an advert was somewhat distasteful and it was pulled, as Spiceworks retains the power of veto over vendor advertising copy.

Spiceworks now claims to have over 100,000 users and manages 4.3m devices world-wide. CEO Scott Abel says “we have demonstrated that the ad-supported model can not only work but succeed beyond the expectations of the marketplace”. Heady stuff.

Other software vendors are trialling a similar approach. For example, Practice Fusion Inc offers a free insurance claims processing service to doctors—provided doctors are prepared to see healthcare adverts alongside. The big beasts of the jungle, Google and Microsoft are also giving ad-supported software a go. A free ad-supported version of Google Apps was launched in February 2007. If you don’t want adverts you pay $50 per annum. The same for the free Microsoft’s Office Live—they charge $20 a month if you don’t want adverts. Between them, Google and Microsoft reportedly have 500,000 organisations using free ad-supported services.

Many software vendors find it difficult to tear themselves away from the traditional licencing model. As commercial innovation kicks in hard they will increasingly find it difficult to compete. Customers want not only choice of products and services, but also payment terms. Dinosaur software vendors who fail to offer customers commercial convenience and choice will gradually have their addressable market eaten away by more innovative risk-taking vendors. The lesson of Salesforce.com’s success in the CRM market using a new innovative business model (SaaS) should not go unheeded.