How long will it take for the majority to make the shift, and where will new services come from?

Chou: Technology shifts occur all the time now, and I see no reason for them to stop. Hardware gets cheaper, networks get faster and software gets more creative all the time. New businesses services will come from at least four sources: First, there will be some traditional software companies that will take the bold step of converting their entire business to Internet models. Be a student of Concur [a provider of on-demand employee spend management services] if you want to understand how that might happen.

Second, you will see traditional software companies offer some of their software using more hybrid Web-based approaches. Companies like Blackbaud already deliver their traditional products this way, and Callidus Software is advancing to become an on-demand business. In a short period of time, both companies have seen a tremendous movement to these models.

The third source of new services will come from the consumer Internet. Amazon’s S3 [Simple Storage Service] and EC2 [Elastic Compute Cloud] are providing infrastructure cloud computing; Apple’s iPhone platform, Facebook’s F8 [developer conference] and Connect could all become the source of many new business applications. Finally, there will be new companies based totally on search instead of SQL, such as Openwater Networks and other companies, like StrikeIron, that will deliver data as a service. And these are just scratching the surface.

Nevertheless, there are tradeoffs that enterprises have to make when moving to the new models. They may have to forgo much of the customization that they’re used to in order to get simpler, cheaper, more reliable applications. Service-level agreements and contract specifications may take on new importance, or they may become less necessary: It all depends on the application and the business requirements.

How is the nature of vendor/buyer relations fundamentally changing?

Chou: It’s a cliché to say that the Internet changes everything, but it has. Once upon a time, enterprise software vendors sold only $1 million products, and the only channel to buyers was a human being armed with a few reports. Today, two things are different: Products are significantly lower in price—so we can’t afford to have the human being in the loop—and the Internet provides a low-cost, diverse channel for information that can be used to educate anyone. Reference calls [on a product or service] have been replaced with hundreds of online forums that let you understand a diverse set of experiences with a product.

Find the people in your company who are the early adopters, engage them in a community to find out what’s working—and what’s not. Encourage them to network with others at different companies to learn more. We’re moving from being “sold to” to a select-and-purchase model. No one was sold a plasma TV last Christmas; consumers got educated, then selected and purchased the product. There’s no reason this won’t be the case with business.

What does the future hold for the current leaders in the server and software businesses?

Chou: Large software and hardware businesses have been consolidating around the service of existing hardware and software—whether that’s Oracle and its consolidation of the support revenue streams of Peoplesoft, Siebel and BEA, or HP with the recent acquisition of EDS. Lou Gerstner long ago successfully put IBM on this path.

The challenge all these players face is three-fold. First, internally they will be challenged to reduce service delivery costs. As most of them are in countries with low labor rates—unless there are a lot of college-educated pygmies hiding in Antarctica—the labor arbitrage game is over.

The second challenge is how to reduce the cost of service for the CIO. With no standardization to speak of, every computer, application and network looks different, which means there can be no specialization. Ultimately, this sets a floor on costs for both the buyer and the seller.

Third, as we have seen in each successive change in technology from mainframe to client/server to the Internet, new unknown players emerge to disrupt the scene. When Google presented its vision, how many investors in Silicon Valley said, “Who needs another search engine?”

The one thing we can be certain about is this: The next Google is out there.