SAP has changed its tune. The German software house, the leading maker of enterprise applications, has long looked down its nose at the idea of supplying software as a service over the Internet, arguing that companies will continue to buy complex programs and install them on their own machines in their own data centers. In February 2006, when SAP introduced a decidedly underwhelming on-demand version of its CRM application, it seemed less an endorsement of the SaaS concept than a dismissal of it. Commenting on the SaaS model, one SAP executive told Business Week, “Most customers are hitting a wall in terms of flexibility and the ability to integrate with other programs.” Last April, in a CNET interview in which he was asked about the challenge posed to SAP by SaaS suppliers like Salesforce.com, SAP CEO Henning Kagermann stressed his view that SaaS had limited applicability and value:

We have not changed our strategy … You can do this on-demand for certain areas and certain functions, but not for everything. Everybody starts with salesforce automation because it makes sense since it’s not very structured. It’s simple and more office-like. But the more you come from this type [of system] to the core of CRM [customer relationship management], the more difficult it will become to do it on-demand. People don’t want to share the data with others … I have spoken to many clients and they want to own [the software]. They are happy with this model.

What a difference a year makes. Last week, at the big Cebit trade show in Hanover, Kagermann heaped praise on the software-as-a-service model and introduced the company’s forthcoming suite of SaaS apps – codenamed A1S – as SAP’s future engine of growth. Kagermann calls the subscription-based suite, which spans not only CRM but also supply chain management (SCM) and SAP’s bread-and-butter enterprise resource planning (ERP), “game-changing.” It represents “a completely new model for us,” he said at Cebit. According to an InfoWorld report, he praised the SaaS suite as a much simpler and more business-friendly alternative to traditional installed systems:

“Once businesses have used the application, they’ll get the hang of it pretty quickly.” Kagermann expects even some senior managers of companies, who typically don’t spend much time with software issues, to show an interest and master many functions on their own. Traditionally, the software industry has developed applications and businesses have had to adapt their processes, according to Kagermann. “Now with A1S, users define their software requirements,” he said. [In addition to mid-sized and smaller companies,] Kagermann expects subsidiaries of large enterprises to be interested in the product.

Most remarkable were the comments Kagermann made about the SaaS suite in a Financial Times interview published on Friday:

Mr. Kagermann said investors were nervous as the new product was coupled with a new business model. While big groups buy SAP’s software for their offices, small companies will rent A1S and use it online. Installing databases meant the subscription model had big start-up costs. “People know this is the better model. But the upfront cost means few dare to introduce it,” he said. “You only start printing money later.”

Although Kagermann appears to have been referring to mid-sized and smaller companies, the fact that he would call SaaS “the better model” – both for customers and for his own company’s future profitability – represents a striking change of heart and of strategy. As Salesforce has demonstrated, the SaaS model, after proving its value in the mid-market, naturally moves up-market to ever larger companies – in classic disruptive-technology fashion. If SaaS is “the better model” for mid-sized companies today, how long will it take before it becomes the better model for big companies as well? Kagermann’s conversion, spurred no doubt by his firm’s recent earnings shortfalls, seems like a milestone on the road to the transformation of business software. The game, indeed, has changed.

UPDATE: Vinnie Mirchandani smells a rat.

Google has begun to nibble at the business market, introducing its $50-per-employee-per-month package of personal productivity applications, Google Apps, and buying up some little companies like JotSpot, a purveyor of corporate wikis. Now the time has come for the fast-growing company to take a bigger bite out of the enterprise pie. And the best way to do that would be to buy Intuit. I would argue, in fact, that there’s no company that provides a better immediate fit with Google than does the maker of QuickBooks, Quicken, and TurboTax.

Google’s strategy in the enterprise market is the same strategy pursued by most software-as-a-service companies: start by serving small and medium-sized companies, then work your way up into larger corporations. The core software program used by smaller companies is the bookkeeping and accounting application. Intuit’s QuickBooks holds the dominant position in this market and, as Larry Dignan notes today, Intuit has quietly been moving up into the middle market with its more powerful version of QuickBooks, QuickBooks Enterprise, which provides basic enterprise-resource-planning (ERP) functionality. As Dignan writes:

[QuickBooks executive Gary] Wiessinger says Intuit’s plan is to stay focused on mid-market companies looking for simplicity. The division started in 2001 following numerous customer surveys. What Intuit discovered was that more mid-market companies were maxing out QuickBooks as their firms grew. “From those surveys, we realized we had to put a focus on (QuickBooks Enterprise) so we launched enterprise solutions,” says Wiessinger. “Our original goal was to keep them in QuickBooks family. Now we’re focused on meeting needs of more complex companies by offering greater scale and power.”

What Dignan doesn’t mention is that Intuit also happens to be a major, if largely unacknowledged, player in the software-as-a-service business. It offers a SaaS version of QuickBooks called QuickBooks Online Edition which has more than 85,000 subscribers (growing at a 50% annual clip), making it one of the most popular Web-based business apps. QuickBooks Online is a fairly rudimentary accounting program, though it has become steadily more sophisticated over the years with the addition of various features such as payroll management. Right now, it would be an ideal complement to Google Apps. Roll an accounting/payroll service into Google Apps, and you have a suite that literally covers all the software required by a whole lot of small businesses. And you have a strong base for moving up into the mid-market.

Intuit also, of course, has Quicken, the leading personal finance program, which is another natural for moving onto the Web. And it has the leading tax preparation program, TurboTax, which has already moved to the software-as-a-service model with the popular TurboTax Online. Weave this stuff together with Google Finance, run it on Google’s infrastructure, and you’ve got the makings of the dominant personal finance service.

If Google were to buy Intuit, it would also fulfill another of its core goals: annoying the hell out of Microsoft. You’ll remember that, back in 1995, Microsoft tried to acquire Intuit, only to be thwarted by the Justice Department’s antitrust regulators. (That marked the real beginning of Microsoft’s legal woes.) Even though, in the long run, Google could end up an even bigger monopoly than Microsoft, I don’t think it would run into antitrust problems if it tried to buy Intuit today. (If it waits, though, all bets are off.)

Bottom line: By acquiring Intuit, Google leaps to the forefront of the small-business software market and establishes a foundation for moving up-market with its software-as-a-service business suite, while at the same time gaining a big share of the personal finance sector just as it’s beginning a shift to the SaaS model. The acquisition is certainly do-able. Google’s current market cap is about $137 billion. Intuit, a nicely profitable company, has a market cap of just under $10 billion, with a little over $1 billion of cash on hand. And just a few months ago, Google and Intuit announced a major strategic alliance, so the lines of communication are certainly open. What’s not to like?

UPDATE: In the comments, Isaac Garcia notes that Intuit also has QuickBase, another popular software-as-a-service application for small businesses and corporate teams (which even includes a CRM module). Does anyone know how many companies currently use QuickBase?

There’s an amusing story in tomorrow’s Times about the free shuttle service Google runs to cart its pampered employees to and from work every day. The scale and sophistication of the operation are impressive:

The company now ferries about 1,200 employees to and from Google daily — nearly one-fourth of its local work force — aboard 32 shuttle buses equipped with comfortable leather seats and wireless Internet access. Bicycles are allowed on exterior racks, and dogs on forward seats, or on their owners’ laps if the buses run full …

The shuttles, which carry up to 37 passengers each and display no sign suggesting they carry Googlers, have become a fixture of local freeways. They run 132 trips every day to some 40 pickup and drop-off locations in more than a dozen cities, crisscrossing six counties in the San Francisco Bay Area and logging some 4,400 miles …

At Google headquarters, a small team of transportation specialists monitors regional traffic patterns, maps out the residences of new hires and plots new routes — sometimes as many as 10 in a three-month period — to keep up with ever surging demand.

I’m guessing that at Google the buses run on time.

Alas, the rides themselves seem pretty dull. On one recent afternoon shuttle, reports the Times, “except for a couple snuggled together, no one sat on adjacent seats. Many took out iPods or laptops and worked, surfed the Web or watched videos.” You’d think they’d at least be able to get a decent Yahtzee game going.

Artificial intelligence guru Danny Hillis has launched an early version of the first major Web 3.0 application. It’s called Freebase, and its grandiose epistemological mission is right up there with those of Google and Wikipedia.”We’re trying,” Hillis tells John Markoff of the New York Times, “to create the world’s database, with all of the world’s information.” Alpha user Tim O’Reilly says that Freebase “appears to be a bastard child of wikipedia and the Open Directory Project” but that it’s really “like a system for building the synapses for the global brain.”

The product of Hillis’s latest company, Metaweb Technologies, Freebase is a user-generated brain. Like Wikipedia, it allows people to freely add information to it, in the form of text or images or, one assumes, anything else that can be rendered digitally. But it also allows users to add “metadata” about the information – tags that describe what a word or picture is and how it relates to other information. Freebase, says O’Reilly, “turns its users loose on not just adding more data items but making connections between them by filling out meta tags that categorize or otherwise connect the data items, using a typology that can be extended by users, wiki-style.”

The addition of rich meta tags in a standardized form is what makes Freebase a next-generation Web application – a manifestation of what Tim Berners-Lee long ago dubbed the Semantic Web and what has recently been rebranded Web 3.0 for popular consumption.

Although the wikipediaesque user-generated quality of Freebase will get much attention, Freebase is really more about the creation of a community of machines than a community of people. The essence of the Semantic Web is the development of a language through which computers can share meaning and hence operate at a higher, more human level of intelligence. The meta tags are crucial to that machine language. Freebase hopes to harness the (free) labor of a big pool of vounteers to add those tags, which is a labor-intensive chore (and a big hurdle on the path to Web 3.0).

Should Freebase pan out – and right now it’s largely a theoretical construct – it would have many practical (and money-making) applications. It would provide the basis for a more natural form of searching, allowing programmers, as Markoff says, “to write programs allowing Internet users to pose queries that might produce a simple, useful answer rather than a long list of documents.” It would also enable various information-processing devices that used to have to be configured manually (by people) to be able to program themselves automatically. A rudimentary example is “the video recorder of the future,” which “might stop blinking and program itself without confounding its owner.”

But Hillis has bigger fish to fry than self-programming gadgets. In the past, he’s expressed a desire to create machines that transcend what he sees as the limitations of human beings. “I guess I’m not overly perturbed by the prospect that there might be something better than us that might replace us,” he once said. “We’ve got a lot of bugs, sorts of bugs left over history back from when we were animals.” Freebase is an attempt at creating an artificial intelligence that can be bootstrapped by the contributions of humans. On one level, it works for us. On a deeper level, we work for it. As Hillis has also said, Web 3.0 is a “spooky thing.”

Of course, relying on a rag-tag band of volunteers, all afflicted with those nasty evolutionary bugs, brings its own problems, particularly in an effort that, unlike Wikipedia, requires a great deal of consistency and precision in terminology. Freebase’s ability to attract and manage a human horde will be critical to its success. Will we be up for the job?

Google’s Matt Cutts gives his company and his CEO hearty pats on the back for working to ensure that customers can gain access to the information they feed into Google’s databases. With Google, he claims, you don’t feel “trapped.” You can always pull your information out of the comapny’s systems and cart if off to another vendor. He lists the various Google applications that let you – if you’re fairly computer-savvy, that is – export your data: Gmail, Search, Docs, Spreadsheet, Calendar, Talk, Reader, Blogger, AdWords, Groups, Analytics.

The back pats are in general well deserved. Google has a strong record of supporting open formats and data portability.

But reading Cutts’s laundry list of applications into which customers funnel ever more of their data should also give us pause. As we consolidate more of our personal data into a single company’s databases – whether it’s Google or another firm – how “easy” is it, really, to withdraw our information? The answer is: It’s not easy at all. In a comment on Cutts’s post, Philipp Lenssen gets at this issue:

I agree that Google is rather open in these regards and allows you to export a lot. One thing to remember though is that as soon as Google products cross-integrate — e.g. a link from Gmail to add an event to Google Calendar — the costs for users of switching away are increased for any single product. As a practical example, let’s say I love Gmail and I hate Google Calendar, so I want to move to competitor Acme Calendar. Great, you guys offer exporting functionality for my events, so I’ll quickly move them from Acme. But you guys don’t allow me to set my preferred Gmail calendar integration software… so now I end up with a somewhat broken Gmail feature. This is not at all alarming on this scale, but it can be a problem for users down the road when Google heavily increases cross-integration (Google Checkout is being pushed in search result today, for example, cross-integrating another two theoretically “loosely coupled” services).

As Lenssen emphasizes in his comment, Google has, as a profit-making company, the right and the incentive to raise its customers’ switching costs. It’s a smart strategy. But it makes the self-satisifed claims of simple data portability sound at least a little disingenuous. Lenssen points out that “in the end, any company won’t ‘trap data’ for the sheer fun of it, but because they want to create a lock-in situation for their users to increase the costs of switching to competing products. So we need to look at the end result of whether or not the costs of switching are really ‘one click.'”

Google said last year that one of its core objectives going forward is “Store 100% of user data.” By 100%, it means 100%. The company wrote:

With infinite storage, we can house all user files, including: emails, web history, pictures, bookmarks, etc and make it accessible from anywhere (any device, any platform, etc) … As we move toward the “Store 100%” reality, the online copy of your data will become your Golden Copy and your local-machine copy serves more like a cache. An important implication … is that storing 100% of a user’s data makes each piece of data more valuable because it can be access[ed] across applications. For example: a user’s Orkut profile has more value when it’s accessible from Gmail (as addressbook), Lighthouse (as access list), etc.

There’s the Faustian rub. Keeping all your data in Google’s database will make the sharing of that data among different applications much easier and will allow you to do things you couldn’t do if the data was spread across many companies. At the same time, it raises the cost of extracting any chunk of the data and moving it elsewhere sky high. In a “Store 100%” world, the doors may be unlocked, but you ain’t going nowhere.

What’s the value of a customer who doesn’t pay you anything? If you’re running a hot dog stand, the answer is probably “zero.” But if you’re running a two-sided market – a market, like eBay or Monster.com or AdWords or YouTube or Digg or even Second Life, that needs to attract both buyers and sellers (or content generators and content consumers) – the answer may be “a lot.” EBay, for instance, earns most of its money from its sellers, who pay the company a fee whenever they sell something through the auction site. The buyers don’t have to pay when they make their purchases. But while eBay receives no direct revenue from the buyers, the buyers nevertheless represent a crucial set of customers for the company – without buyers, there’d be no sellers and hence no business.

Clearly, each buyer in such a networked business has value to the company – but how much value, exactly? That’s where things get tricky. Because traditional approaches to determining the economic value of a customer don’t work when the customer isn’t generating any direct revenue, there hasn’t been any good way to estimate customer value in these sorts of two-sided markets. That means companies have to fly blind when determining how much they should be spending on marketing to attract the non-paying customers. And that, in turn, likely means they’re spending either too much or too little.

But a recent paper by three business-school professors – Sunil Gupta, Carl Mela, and Jose Vidal-Sanz – offers a new approach for estimating the value of nonpaying, or, as the professors term them, “free,” customers. The authors created a mathematical model of a hypothetical firm, with a business similar to Monster’s, and used it to calculate how much every new buyer joining the company site is worth and how that value changes over time.

Some of the results are fascinating. The professors found, for instance, that the value of each nonpaying customer (buyer) was actually slightly higher than the value of each paying customer (seller) – even though there were far more buyers than sellers in the company’s marketplace. (To put it another way, the network effect of a buyer on a seller was far stronger than the network effect of a seller on a buyer.) The research also demonstrates that it’s possible to estimate optimal marketing expenditures as a two-sided business grows. While heavy markering spending is required in the early days to attract a critical mass of buyers, the network effect itself becomes a larger attractant than marketing as the business grows, allowing a company to cut back its marketing budget over time. Knowing the optimum spending amount with some precision at different points in time would help businesses maximize their profits. The information would also, the authors argue, allow a company’s founders, managers, and investors to gain a more accurate understanding of the firm’s overall value.

In an interview about the study, Gupta notes that the model applies only to fairly simple two-sided markets. But on the Net today, of course, nonpaying, “free” customers are also critical to other businesses with more complex network structures, from YouTube to MySpace to Skype to an open-source software company like Red Hat or MySQL. If you have a “community,” you likely have “free customers.” Gupta says that he’s currently

working on understanding and modeling complex network structures such as those of MySpace. Here the issue that we are grappling with is the tangible and intangible value of customers. In other words, customers provide tangible value to a firm through direct purchases but they also provide intangible value through network effects or word of mouth. It is quite possible that some customers have low tangible but high intangible value. Traditional models would label such customers as low value and would miss a huge opportunity for a firm.

This promises to be a particularly fruitful, and practical, area of study in the years ahead.

The Government of South Korea, reports the BBC, has launched a project to develop a Robot Ethics Charter “to prevent humans abusing robots, and vice versa.” The Ministry of Commerce, Industry and Energy declared: “The government plans to set ethical guidelines concerning the roles and functions of robots as robots are expected to develop strong intelligence in the near future.” A member of the ministry’s “robot team” gave a sense of the dilemmas that lie in store as robotic beings get smarter and more flexible: “Imagine if some people treat androids as if the machines were their wives.” (Do I have to?) “Others may get addicted to interacting with them just as many internet users get hooked to the cyberworld.”

The European Robotics Research Network is also in the process of developing ethical guidelines for robot use. A draft of the guidelines states, “In the 21st Century humanity will coexist with the first alien intelligence we have ever come into contact with – robots. It will be an event rich in ethical, social and economic problems.” That strikes me as an awfully human-centric view. What we see as problems our robot friends will recognize as opportunities.