Online Software: Not Recession Proof

November 6, 2008  

Among the talking points common among supporters of online software is this chestnut: Online software is recession proof. The claim is absurd on its surface, of course. Now we’re starting to see the evidence.

Money doesn’t grow on trees for online-software companies

The recession-proof notion comes from the fact that online software, which is accessed over the Internet through a Web browser, doesn’t require businesses to make the same upfront investment as traditional software. It doesn’t require a business to invest in its own tech equipment and businesses pay quarterly or annual subscriptions instead of a single upfront payment. (It’s worth noting that some large businesses say that the cost of running software themselves is negligible and that depreciating the upfront payment can negate the difference on the balance sheet.)

This week, two online software companies issued weaker-than-expected guidance. Netsuite, which sells general ledger and other management software online, reported revenue for its third quarter in line with expectations, but issued guidance that was lower than analysts expected. Kenexa, which makes online human-resources software, said that revenue from the subscriptions it sells will be flat or slightly down next quarter. Online software companies tend to collect payments before they can recognize them as revenues, meaning that negative sequential growth can only be achieved if they lose customers.

Salesforce.com, the 400-pound gorilla of online-software companies, wrapped up its quarter last week. CEO Marc Benioff wouldn’t bite when we asked how the economy had affected his company. “These are unusual and difficult times,” he told the Business Technology Blog. But he reiterated that his company was in a position of strength and said that the down economy was an opportunity to increase market share.

-Ben Worthen

Image: Tracy O via Flickr