The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Pranav Kiran

TORONTO, Oct 1 (Reuters Breakingviews) - The adage is that software ate the world. Artificial intelligence is proving a difficult morsel. Upstarts like ChatGPT developer OpenAI offer valuable tools that charge based on usage, challenging the flat subscription models undergirding, say, $231 billion Salesforce CRM.N. The trick is figuring out whether these older companies’ reams of data can train new AI services. Just as private equity once took a wave of software companies private and gave them a cloud makeover, buyout barons will again play a role.

While asking a digital oracle to build custom software remains far-fetched, the old business model faces new trials. Sebastian Siemiatkowski, boss of $15 billion Klarna KLAR.N, boasts that his company has stopped using Salesforce entirely. Larger Fortune 500 clients might be too conservative to make a similar leap, but they too have ditched outdated technology in the past.

Products like Salesforce are valuable largely because of the sales, productivity and operational data customers store on them. Unique information is AI’s lifeblood: though if a model is fed high-quality inputs, the hope is that it can become a crucial companion.

Early efforts have stumbled. Fewer than 5% of Salesforce’s over-150,000 clients pay for its Agentforce product, which automates customer service queries. The company has switched its $2-per-conversation pricing to only charge for specific actions Agentforce performs.

Such pessimism is showing up in valuations. For companies in the Software Equity Group's SaaS Index, the median enterprise value as a multiple of expected revenue for the next twelve months is the lowest in over three years. This is despite trailing-twelve-month growth sequentially ticking higher in the second quarter for the first time in three years.

Still, the sector’s previous technological pivot from selling packaged software to offering cloud-based services offers a more hopeful template. Developer Autodesk's ADSK.O annual revenue growth averaged just 2.7% in the three financial years before it moved to cloud-based subscriptions in 2016. Top-line expansion subsequently accelerated to nearly 15% between then and its year ended in January, sending the stock up sevenfold.

Buyout barons can speed things up. When Thoma Bravo carved out cybersecurity platform Dynatrace from Compuware in 2014, the unit's entire $400 million in revenue came from traditional software licenses and maintenance contracts. By the time the buyout shop took the company public in 2019, over 80% of its $430 million of sales came from subscriptions.

As with Autodesk, some software groups have transformed their prospects in the public markets. Shares of helpdesk software provider ServiceNow NOW.N have more than doubled since ChatGPT’s launch. In 2023, the company launched a chatbot product that makes it easier to summarize and get responses to IT queries. If clients move up to ServiceNow's AI-infused higher subscription tier, it could drive up to an extra $2.5 billion in revenue, TD Cowen analysts reckon. Traditional software might yet take a few nibbles from the machine learning boom.

(Editing by Jonathan Guilford; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on KIRAN/pranavkiran.t@thomsonreuters.com))