The economics of SaaS
Filed in archive SaaS by Scott Wilson on August 19, 2008
Using available numbers from a range of competitors in the SaaS/SaaB (Software as a Box... I just made that up)/consumer internet space, Vembu analyzes the revenue and profits per employee to make the case that being in the business software market ain't all that great, even for the big market leaders like Oracle and Microsoft; he makes an interesting case by essentially asserting that it's a crappy market segment compared to consumer internet and hey, wouldn't Google be dumb if they wanted to go after it seriously? This raises the question, of course, as to why Zoho wants to be in that market, either (and you'll notice that Vembu doesn't include Zoho's numbers in his analysis). More interesting, although a topic for another time, is the relatively, almost shockingly, low margins for dedicated SaaS providers versus traditional SaaB providers (a state of affairs which has been hinted at before as one of the key reasons traditional business software providers have been slow to roll out SaaS offerings; yet despite their more profitable existing businesses, clearly there are other factors which are slowly driving them in that direction)... one wonders why anyone would want to be in SaaS at this point, other than to get ahead of the curve.
It's certainly true that Google hasn't put as much effort as they might into the business software segment, and it's equally true that more conventional business software providers have been making strenuous efforts to get into the consumer internet business (think Yahoo/Microsoft). Everything that Vembu is saying is true, as far as it goes. But it misses out on analyzing the downsides to the consumer internet market and so misses the rationales that might drive Google (just as they drive Zoho) into business software.
The essential downside of the consumer internet market is its transiency. Today, Google dominates search, advertising, any number of consumer internet service (but not e-mail... hmmm); tomorrow, we all wake up and type "yahoo.com" in our address bar and Google's business has evaporated. There is no lock-in whatsoever in that segment, and any company, regardless of its profits, has to be concerned about such an ephemeral nature to its core business. It's true that as long as Google maintains a technical edge in its ability to deliver what consumers want, it has little to fear, but as the company well knows, a couple of guys in a garage somewhere can upset that balance of power almost overnight.
Google's other strength, of course, oft-presumed but little mentioned, is simply its massively parallel server farm. But with other companies putting their own massive processing power up for rent, that's a piece of infrastructure that potential competitors need not go to the expense of building themselves now. The only way that Google can gain any security is by leveraging that capacity into some business with a significant degree of lock-in potential. Business software may be the most obvious choice.
I think Vembu is mistaken, or at least being overly simplistic, in assuming that existing revenue ratios are the sole motivators in market strategy. Google has some excellent reasons to get into business software; they may be slow to do so, just as Microsoft has been slow to put together anything resembling a SaaS offering, and for many of the same reasons. But as Microsoft has demonstrated, penetration into the business market can keep you there, and profitable, long after your technological prime has passed. And that rainy day comes for every technology company, sooner or later. Although the SaaS version of business software is not as locked in as SaaB offerings, it certainly has greater lock-in than search, or advertising; Salesforce has competitors, but switching ones operations to them in any significantly sized business is a non-trivial endeavor. You could say the same for Google Apps, or Zoho. B2B is a good market largely for that reason, and regardless of its abilities to negotiate and drive down margins... it may not be huge, but it's steady, and a little steady has to look good if all you have between you and insolvency is an algorithm which may be outdated tomorrow.
Google's other strength, of course, oft-presumed but little mentioned, is simply its massively parallel server farm. But with other companies putting their own massive processing power up for rent, that's a piece of infrastructure that potential competitors need not go to the expense of building themselves now. The only way that Google can gain any security is by leveraging that capacity into some business with a significant degree of lock-in potential. Business software may be the most obvious choice.
I think Vembu is mistaken, or at least being overly simplistic, in assuming that existing revenue ratios are the sole motivators in market strategy. Google has some excellent reasons to get into business software; they may be slow to do so, just as Microsoft has been slow to put together anything resembling a SaaS offering, and for many of the same reasons. But as Microsoft has demonstrated, penetration into the business market can keep you there, and profitable, long after your technological prime has passed. And that rainy day comes for every technology company, sooner or later. Although the SaaS version of business software is not as locked in as SaaB offerings, it certainly has greater lock-in than search, or advertising; Salesforce has competitors, but switching ones operations to them in any significantly sized business is a non-trivial endeavor. You could say the same for Google Apps, or Zoho. B2B is a good market largely for that reason, and regardless of its abilities to negotiate and drive down margins... it may not be huge, but it's steady, and a little steady has to look good if all you have between you and insolvency is an algorithm which may be outdated tomorrow.
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Zoho Google Microsoft saas economics+saas consumer+internet business+software
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