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Michael Topolovac, CEO, Arena Solutions

Jeff HawkinsArena Solutions wants to change the way companies use software for product lifecycle management (PLM).

As with Salesforce.com, which is shaking up the traditional software delivery model for customer relationship management (CRM) by delivering its Software as a Service over the Web, Arena has similar ambitions for manufacturers.

Michael Topolovac, CEO of the Menlo Park, Calif.-based maker of product lifecycle management (PLM) software, recently took some questions from internetnews.com about why he feels the time is right for software as a service.

Q: Microsoft recently announced that it would deliver advertising-supported, online versions of its Windows operating system and Office productivity software. What's your take on the announcement?

In our view, it's clearly a validation of where the market's going [with software]. Microsoft realized customers are looking for services they can get across the Internet. I think it's mostly a defensive move against Yahoo and Google.

Q: Software as a Service assumes major broadband ubiquity by end users. But are businesses there yet with connectivity?

What's fascinating about this model is that if you architect it correctly, it does not require ubiquitous broadband. You need Internet access, but with our bandwidth criteria, it works on a 54K dial-up connection very well.

We do all the heavy computational work on the backend. And we've designed the user interface so that pages that are sent between the database and the customer are very light, five to 10 kilobytes, so it doesn't require a big pipe.

And with Ajax , which is a very powerful UI and toolkit that more companies are using, it allows you to only acquire the snippets of data you require from the server in real time.

So it reduces bandwidth needs and gives you a much richer client-like experience. Common Internet access is required but it doesn't have to be broadband for this to be successful.

Q: How has the on-demand/Software as a Service model changed how you build and develop software?

Well, there are two questions here. One is, how does the evolution to an [Software as a Service] business model change the server model at the IT level, as well as the desktops of users.

The impact is massive on both fronts. On the server side, to run an enterprise application, whether its PLM, CRM or ERP , it requires very sophisticated relational databases, very expensive hardware, a lot of redundant systems, and a dedicated IT staff and database administrators to run these systems. They're just extraordinarily complex. And in the client-server world, all that complexity had to be managed by the customer.

So the total cost of ownership was not just the software you bought from the vendor, but all the IT management and hardware you had to buy to make it work. In addition to that, on the users' desktop, there's usually software you had to run and configure, plus you had to manage that.

What on demand does is eliminate all of that because we're built to centralize all the complexity of managing that application at our location.

In addition, because it's now a Web app, the only requirement on the desktop is a Web browser. The IT departments love this because it removes all this cost of complexity, both on the server side and client side.

With that, we get enormous economies of scale. Now, I have one instance of this where I can buy the best routers in the world, the best hard drives in the world, the best servers, the best IT and security experts and have them manage my system. We share that cost across thousands of customers where customers couldn't do that on their own.

Q: How does your pay-as-you-go subscription model support R&D for product innovation? The traditional licensing model helps support R&D.

The short answer is that [the subscription model] actually works better for all parties.

In a traditional software model, what happens is that you pretty much get all the money up front from the customer. That helps fuel R&D. But there are two consequences of that. One is that the vendor and customer are no longer aligned, because the vendor has their money.

That's not exactly what software companies will say, but that's the economics of it. With on demand, Software as a Service, we're only as good as last year's work. So our interests and the customers' interests are aligned. If we don't do what we say we'll do, they fire us and go somewhere else.

The other part of that question is "Well, yeah, but the older licensing model got a lot of money up front [for a five-year software license, for example]. Isn't that that an economic disadvantage for Arena or an on-demand player?"

If you look at players, such as Salesforce.com versus Siebel, or us versus public companies [that provide traditional PLM], we have for the most part reached feature parity with those companies that have been around a lot longer and have spent more money.

They may have spent $200 million, and we may have spent $5 million on the same product, and we're basically in the same league. We're not 40 times smarter, it's just that because we have one code base, we can be more efficient in how we develop the software.

Q: It doesn't concern you that software is going the way of a commodity by becoming a utility-like service?

In the early days of electricity, not every house could get power. There's a similar case with cost and access to [some kinds of] software.

What is happening with Software as a Service is that it's removing all the barriers to the technology so that every company of any size can have access to these toolkits.

What it's not doing is making these all commodities in which they're all the same. Every company has different needs. Some need PLM, or CRM. There are different types of CRM. It's not like suddenly there's one piece of software that's going to work for every business problem.

These very powerful software tools that were only available to big companies are now available to small and mid-sized companies without anywhere near the same costs. So it's really enabling more innovation to reach more people as opposed to commoditizing the marketplace.