Nicholas Carr recently published a thought-provoking article that describes how software kills hardware. As much as I agree with Nick’s points, I believe that the virtualization trend he describes goes a step further, and while software replaces hardware, services replace software in the end.

This trend was perfectly explained by Salesforce.com’s CEO Marc Benioff in his recent internal memo published on ZDNet.com by Richard MacManus. What Marc calls the Business Web is essentially a set of services that will provide the tools and infrastructure required for conducting business online. Of course, Office 2.0 is part of this picture, and Marc was kind enough to link to my Office 2.0 setup in his memo. Thank you Marc, much appreciated!

What I find especially interesting in the idea of services replacing software is that you can see this transition at play across the entire IT industry today, not just for Software as a Service providers. For example, Open Source business models developed by companies such as RedHat, JBoss, or Intalio essentially replace software licenses by services, be they for training or support & maintenance.

But make no mistake, a lot of money can be made selling support & maintenance contracts once you tie them to automated software updates. When a RedHat customer buys a maintenance & support contract for RedHat Enterprise Linux, what she really buys is the assurance that the very latest security patches will be part of the next software update. This business is very similar to the insurance business, with one major difference difference: when subscribing to a support & maintenance contract for Open Source software, customers get recognizable value at each software update. Instead, when buying a policy from an insurance broker, customers acknowledge value only when an accident happens. For this reason, the business of selling Open Source software has a lot more potential than the business of selling insurance policies. I like that!

Similarly, when companies buy one of these network appliances for spam filtering or XML acceleration, they neither buy a piece of hardware nor a bunch of software, but rather pay for the convenience of having the right piece of software installed on the right piece of hardware. Essentially, they buy installation and packaging services.

As far as I can tell, most software companies will morph their business into one of the three business models outlined above: Appliances, Open Source, or Software as a Service. The larger traditional software vendors might be able to resist the transition longer than their smaller competitors, but down the road, everybody will have to convert to one of these three models, or to some hybrid models that will have been devised by then.

In this Rock-Paper-Scissors game, service is the winner and the winner takes all.