A back-to-the-future strategy for SaaS

One of the potentially hottest items in the software aisle of US electronics retailers this Christmas season is, if you ask Santa's load-bearing reindeer, just an empty box.

.Mac (pronounced 'dot-Mac'), an online service from Apple, has been the second most-popular Mac offering at retail so far this year, according to The NPD Group.

For US$99, buyers get one year's access to Web-based storage, e-mail and address book syncing between their iMacs and iPhones, among other features.

Still, customers may be taken a bit aback when they open up the .Mac box and discover "there's nothing in there other than a license key," said Chris Swenson, an analyst at the NPD Group.

The conventional wisdom is that software as a service (SaaS) is finishing what piracy, open-source and the Web started: killing the packaged software market.

Computer retailers long ago bought into this premise. Go to any Best Buy Co. or Circuit City Stores store and observe the scant aisle space for software compared with PCs or hardware peripherals.

But in fact, the packaged software market is still growing. According to NPD Group, US retail sales of packaged software so far this year (including those by online retailers) are up 10 percent.

Tallies have been lifted by new versions of old favorites: Adobe Systems' CS3 design suite, Microsoft Corp.'s Windows Vista and, in particular, Microsoft Office 2007. Office 2007 alone has captured one out of six US dollars spent at retail on software so far this year, Swenson said.

But other categories remain healthy. Sales of security software at retail are up 17 percent so far this year, said Swenson. Other burgeoning categories include tax preparation software such as Intuit Inc.'s TurboTax or H&R Block's TaxCut, and personal finance or small-business accounting software.

So why go retro?

Apart from CompUSA, which declared bankruptcy on Friday, retail remains a viable channel for software. But SaaS? When you're in the middle of a revolution, why go the retro route?

"I think it makes complete sense," wrote Ismael Ghalimi, a French software entrepreneur in Silicon Valley who maintains the Office 2.0 Database, a comprehensive list of online office software, in an e-mail. "People need reminders and convenient ways to buy stuff. It's also much better to have a box if you want to gift it to someone."

But isn't SaaS growing fast enough through online word of mouth alone? Take Google Docs, the search company's online office software, whose usage grew sevenfold in one year to 1.6 million users in November, according to Web market research firm Compete Inc.

"I expect this trend to continue," blogged Compete analyst Becky Bitzenhofer in a December 6 post. "Google doesn't have to do much, as Docs and Spreadsheets are viral by nature and should continue to spread."

But contrast that with a recent survey of 586 U.S. PC users conducted by the NPD's Swenson. He found a whopping 73 percent of respondents had never even heard of Google Docs. Another 21 percent had heard of but never tried online office software. While 6 percent had tried the free services, only 2.3 percent used them regularly. And only 0.5 percent used them as a replacement for a desktop suite such as Microsoft Office, which Microsoft claims has more than 500 million users worldwide.

"If Google sticks with marketing online only, it could be years before they move the needle," said Swenson. He argued that Google and other Web 2.0 vendors are focusing purely on winning approval from the TechCrunch crowd, when in fact getting onto a store shelf would reach a bigger mainstream audience.

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