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Fri, Jul 18, 2008 20:33 EDT

BusinessWeek: SaaS and Open Source are Good for Customers ... Unfortunately

Topic: Partner/Vendor Management

Blog: The Open Source

Current Rating: 5 Comments: 2

There's an (unintentionally) funny article in BusinessWeek online today, bewailing the tough business circumstances that SaaS (and open source) face. From the opening paragraph:

"The Internet revolutionized the distribution of software—perhaps a bit too much. The Web brought a new, cheaper method for getting software into the hands of users, but in doing so may have killed one of the best models in Silicon Valley history."

The piece goes on to say that OnDemand companies have problems because their margins are lower and they have to work so hard to get customers.

The author, Sarah Lacy, recounts the story of one CEO, frazzled by so much travel, who is frustrated by how long it takes to grow the business. One analyst says:

"The challenge is you have to spend 50% to 100% plus of revenue in sales and marketing cost," he says. "You need this [limitless] amount of cash to forever feed the growth machine."

Lacy states:

"On-demand software has turned out to be a brutal slog. Software sold "as a service" over the Web doesn't sell itself, even when it's cheaper and actually works."

She also takes a glancing blow at open source:

"Software companies in the open-source space are feeling some of the same Web-induced pressures."

Summed up, her point is that software companies *loved* the old perpetual license business offering, because they got all their money up front, could charge separate yearly maintenance fees, and got an extra-special present in the form of an upgrade fee every few years as well. By contrast, when software is sold as a service, software revenues get spread across a longer time period, and maintenance and upgrades are bundled into the ongoing subscription fee. And this isn't nearly as fun for software companies.

I hear this kind of thing all the time from vendors. Somehow the shift away from lucrative up-front license fees is ... well, unfair. "We don't make as much. It's harder to get rich" goes the mantra of frustrated vendors. Left unrepresented in this bewailing about the injustices of the software business are customers. You know, the people who buy and (putatively) benefit from using the software.

The reality of this new world is vastly different than Lacy paints:

  1. SaaS isn't necessarily any less expensive than packaged software. I looked at Salesforce pricing a couple of years ago, and it ran $900/year per user, or $2700 per user over three years. This is pretty comparable to packaged enterprise software. So the argument that somehow SaaS has financially ruined the software business reflects ignorance ofactual pricing in the marketplace.
  2. One thing that *is* different is the pattern of cash flows. Packaged software attains a significant portion of its lifetime revenue cash flows at time of sale, so there is cash to feed an extensive marketing and saleseffort (Lacy refers to this as the days when "swaggering, elephant hunter-style salesmen would drive up in their gleaming BMWs to close massive orders in the waning days of the quarter"). SaaS receives its revenues much more evenly over the course of the contract, so there is less money received quickly to fund those elephant hunters. In this respect, SaaS resembles a subscription business rather than a product business.
  3. The reason why it's harder to
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    Average (1 vote)
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Sat, Jul 19, 2008 1:03 EDT
Anonymous user
Posted by: Suvendu Sahoo
Rating:

Here are some of the questions SaaS provider should answer in the context of their future viability :

1. Are the SaaS providers targeting the right market or they focusing the same market as the traditional software companies ?
2. Is the value proposition based only on the monetary cost of ownership ?
3. How does SaaS meet the challenges when hosted application requires complex integration with existing legacy and other 3rd party applications ?
4. Do they meet the requirements of compliance and regulatory requirement ?
5. How portable the SaaS application -if the customer wants to move from one service provider to another ?
6. How flexible and agile the SaaS provider is to meet the dynamic business needs of the customer?

Only those SaaS ventures, which meet these customer requirements will be able to sustain itself as future alternative.

 
Mon, Jul 21, 2008 12:33 EDT
Posted by: apereymer
Rating:

Thank you much for this informative article.

The software business has changed and will continue to change rapidly over the next few years. As you mention, the software vendors were/are relying on the initial licensing fee, maintenance fee and upgrade fee. This is the software model. I think this will continue to change with SaaS. Especially, since SaaS demands less hardware requirements versus the traditional desktop software applications. Even if one would argue that SaaS licensing fees are close to the traditional software licensing fees, still the fees for SaaS would be much less due to the minimal hardware requirements. In addition, how many times does the enterprise purchase software apps, put them on the shelves and not use them. Or even how many times does the enterprise only use a small portion of features in the software app. Yet, the enterprise user pays for the entire software bundle (even for features he/she is not using). That is why I think SaaS will continue to outgrow traditional software packages.

Arsen Pereymer
Chief Technology Officer
eCompetitors, Inc.
http://www.ecompetitors.com

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