SaaS


A poll from SMB marketplace Accredited Supplier suggests that Microsoft risks losing Microsoft Office share amongst UK small businesses.

Accredited Supplier conducted a survey of 1400 existing Microsoft customers and found that nearly 15% of respondents were ready to switch to Google Apps.  That clearly is the risk:

Respondents considering switching to Google Apps (from Microsoft Office):
13% Switching
29% Not aware of Google Apps
22% Undecided
36% Not switching
Source: Accredited Supplier, 2009

Now for the opportunity, which is unlikely to be news to Microsoft:

Preference for accessing business applications through a browser:
34% Prefer browser
28% Strongly prefer browser
12% No preference
8% Unsure
18% PC software
Source: Accredited Supplier, 2009

The reason that customers are considering the move to Google Apps appears to be linked to how the applications are accessed and interacted with.  The published survey results do not point to dissatisfaction with Microsoft office or cost concerns, although these may be contributing factors.  The data does show that respondents want a SaaS access mechanism to their business applications, office productive suites included.

Microsoft has been working on this problem for some time, and the existing Office Life Small Business offering is a step in the right direction.  The missing piece with Office Live Small Business is the hosted office productivity applications.  That missing piece is crucial, and Microsoft needs to fill it soon. Today, Office Live Small Business lets users share documents, but the actual editing of documents requires a desktop install of Microsoft Office.  Microsoft knows this needs to change, least it cede its small business share to Google and others.

Follow me on twitter at: SavioRodrigues

PS: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.”

Really, I’m not obsessed with cloud computing! I’ll try to write about something else next.  However, I wanted to reply to a post from Chris Keene, titled: “Larry Whistles Past the (Cloud) Graveyard”.  Chris writes:

“Larry’s rant is an extraordinary example of whistling past the graveyard. Oracle’s huge transformation over the last 10 years has been from an infrastructure company (databases & middleware) to an applications company (ERP, CRM, SFA ect). Now, just as this transformation is completed, along comes an infrastructure that will obsolete all the applications Oracle just got done rolling up.”

I agree that Larry’s rants sometimes distract from the real discussion.  However, I don’t agree that SaaS/Cloud is a magic bullet, let alone the only answer for customers.

A point that Chris doesn’t make explicitly, but I’m sure he has considered is what it would take for Oracle to become a SaaS/Cloud player.  It would be extremely expensive for a vendor like Oracle to build new SaaS-based apps alongside their current apps.  But Oracle has an ace up its sleeve, namely, the average customer’s willingness to migrate core business applications.  Hint: willingness is very low, considering how painful migrations are.

Over the next decade Oracle will have to balance spending R&D dollars on their current applications (i.e. non SaaS-based) and on new applications designed from the ground for a Cloud/SaaS environment.  What portion of their R&D will Oracle invest in the latter?  Play a game with me.  Imagine Larry et al. trying to explain missing quarterly targets because “we are investing in the right products for 5 yrs from now, that won’t drive substantial revenue anytime soon”.  What would happen to their stock?  A more realistic option is for Oracle to follow a BAU approach with their R&D and products. Then, as SaaS/Cloud really begins to negatively impact revenue, Oracle will acquire SaaS/Cloud vendors.

When this occurs, Oracle will offer significant customer choice.  If a customer isn’t happy with traditional Oracle Apps, and wants to migrate to a SaaS platform, Oracle will have an answer.  The “Customer Choice” card is not a new strategy, I’ve written about it in the past.  It works.  Customers are a lot more nuanced than the black and white, for-vs-against SaaS, open source, maple syrup etc., figures we like to paint.

If you take this thesis to be true, then vendors that win, will have to offer both choices to customers.  Sorry to say, but in these types of games, the incumbent tends to win.  On the other hand, incumbents tend to win via acquisition. Incumbetnts acquire startup competitors that took the different approach to serving the customer.  To me, this seems like a win-win game.

What do you think?

“How could all these smart people have let this happen?” seems to be the question on everyone’s mind lately.  Obviously, I’m talking about the disaster created by mortgage backed securities linked to subprime loans.

The layman’s answer is that the smart people should have known better.  But they let greed and peer pressure (i.e. “everyone is doing it, don’t question, just come along”) get in the way.

I won’t touch the topic of greed‘, since my MBA colleague Vincent Wong keeps telling me it’s good.  I will however discuss peer pressure as it relates to the software market.

Two years ago I was taken aback by the intellectual peer pressure against questioning if open source software was truly the end game for the software market.  Thankfully, many of the myths associated with open source software have be revealed.  As a result, the open source software movement is stronger, because proponents now use logic-based arguments.

Via Shaun’s blog…we’re seeing the peer pressure led cycle repeat in the SaaS market.  I’m very impressed with Harry Debes, Lawson Software CEO who is quoted:

“as we did the maths, we realised we could get killed. It was going to take us 7 to 10 years before we made any money. That’s nonsense. So we reversed our plans…because all your costs are up front and your revenue is over a five-year period, the more you sell, the more you lose. You don’t break even till the four-and-a-half-year mark, but here’s a bigger problem: there’s no guarantee that that customer is still going to be yours in four years’ time.”

Whatever you think about SaaS, Debes has thrown down the gauntlet against those who strongly believe that the future of the software market has to be SaaS.  If you’re a vendor with private or public investors you are duty bound to think about a 7-10 yr payback.

Only when logic-based arguments, like the one from Debes, are on the table can the discussion progress.  Is there a way to ramp up the SaaS revenue earlier to offset initial development costs? Absolutely, but that question is irrelevant if you hold onto SaaS myths.

Kudos to Mr. Debes.  Let the (mythless) debate begin.  Hopefully we’ll arrive at a solution to SaaS as a component of the overall software market.

Via Nick Carr’s posting today. The McKinsey survey suggests:

  • The software industry technology innovations of the past 2-3 years are nothing compared to new technologies we’re about to see
  • This innovation is likely driven by SaaS/PaaS and Web Services/SOA with 31% and 25% of respondents selecting them as the most important trend impacting their business. Open source received 8% of the votes from 857 respondents, just above 7% for “Software industry consolidation”
  • Currently 65% of software spending is through traditional license/maintenance models, with 19% coming from subscription/on-demand. These figures are “expected” to shift to 58% & 21% respectively by 2009.
  • The majority of this shift toward subscription-based models is coming from companies with <100 employees.
  • The top three criteria for selecting SaaS vendors are: “deployment speed, ease of Integration”, “vendor track record in SaaS” and “Costs”.
  • Overall, control of software decisions split 83% / 17% between centrally controlled vs. business unit controlled. This split grows as the company size increases. For example, it’s down to 67% / 33% in companies with > 25,000 employees.

Lots of other good info (you can read more here). I wonder that last data point will impact OSS adoption. It’s probably a net positive for applications that business users interact with. Not sure if a business unit decision maker cares as much about middleware decisions though.

This Wired story has some very interesting comments on Amazon’s Web Services (AWS) business. The first point was news to me:

“And the idea that AWS is mostly about wringing extra bucks (especially off-season) out of Amazon’s data centers? “We’ve far exceeded the excess capacity of our internal system,” Amazon’s Jassy says. “That ship sailed 18 months ago.”

….

“I’d be surprised if no one else does this,” Bezos says, pausing for effect. “It’s a really good idea!” And there may be an ace up his sleeve. Any economist will tell you that a commodity business — storing and processing data, for instance — is a mug’s game, with prices that plunge inevitably toward the cost of production (in the case of bits, pretty close to zero). That’s music to Bezos’ ears. “Commodity businesses don’t scare us,” he says. “We’re experts at them. We’ve never had 35 or 40 percent margins like most tech companies.””

Wall Street’s best guesses for AWS’s 2007 revenue don’t even reach $100 million.

I scoured Amazon’s 2007 annual report to see if there was any additional data on the size of the AWS business. No luck. About all I could find is that Amazon’s expenses for “Technology and content”, which is where AWS expenses would be counted, were up to $715M ($818M if you include the cost of stock compensation to employees in the “technology & content” group). If the AWS business has grown beyond using the excess capacity of Amazon’s internal systems, it wouldn’t surprise me if 5-10% of that figure was associated with AWS. And based on the comment from Bezos, I’d probably uplift the expense estimate on AWS by < 25% to represent gross profit. All told, we’d be around [717M x ((5% + 10%)/2) x 125% =] $67M in revenue by my back of the envelope estimate. Not bad for 2007 (if my math is close to reality)…would love to know how big 2008 is considering that all the cool kids are using AWS.

Andy McCue at Silicon.com points to a Gartner report that, in many ways, reiterates what we’ve all been seeing.

“Gartner has identified seven major trends converging to change software delivery models, reduce dependence on the giant application vendors and force prices down.

These include business process outsourcing; software as a service (SaaS); low-cost development environments, such as China and India, combined with modular architectures and service-oriented architectures; the emergence of third-party software maintenance and support; growing interest in open source; the rise of Chinese software companies; and the expansion of the Brazilian, Chinese and Indian markets.”

Regarding OSS:

“Although Gartner says open source won’t topple the likes of IBM and Microsoft the analyst believes it will put pressure on traditional software margin structures, particularly in areas such as servers, operating systems, development tools and database technologies.”

I’ve seen customers using OSS as a negotiation tool to get lower prices on commercial enterprise software. This will surely continue.

Captain Obvious, over and out.

Matt has a great post on the sources of deals & leads for Alfresco, which could be useful to a broader set OSS vendors.

What is surprising, but not unintuitive, is the low percentage of Hosted Trials that turn into deals. Namely, Hosted Trials represent 30% of leads, but about 5% of deals.

The conversion rate between Enterprise Trials leads (15% of all leads) and deals (10% of all deals) is much higher.

If you’ve tried the SugarCRM Hosted Trial “just to see what all the fuss is about”, then this data shouldn’t be a surprise. If I had to download, install and configure SugarCRM just to form a few general opinions on the product, I would have found something else to do with my time. Only (more) serious users would go through the hassle of downloading, installing and configuring the product.

So, don’t use this data to prioritize a Hosted Trial (SaaS) lower on your list of to-dos. Even if you don’t get deals via Hosted Trials, you’ll expose your product to a lot more people (especially of the kind that write checks vs. those that write code) than requiring that they install the product to try it out.

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