RSSThe economics of SaaS
Zoho CEO Sridhar Vembu posted an entry yesterday entitled "Why we compete with Google," going into some detail on the economics of the business software market in the process. It's worth a look, if only to understand the rationale that is driving this market today, shaping the efforts of both upstart SaaS providers like Zoho and established mass-market vendors like Microsoft.
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.
Scott, you make an excellent point on long term sustainability of revenues. Yet, the evidence is that enterprise software companies (there were lots and lots of them in 1999) have been just as prone to death long term as consumer internet companies. On the converse, Yahoo & eBay have thrived for 12+ years now, even in the face of famously fickle consumers, and even AOL has a play on the internet, in spite of so many missteps.
Hi Sridhar,
There certainly have been many enterprise software companies which have fallen on times just as hard as most consumer internet ventures, of course, but I would submit that most of those never gained a significant foothold in their market in the first place, and those that did took far longer dying than their consumer internet counter-parts. Yahoo and eBay, on the other hand, while they have continued to score well, percentage wise, in the revenue categories you highlighted, have both seen their respective market shares plummet dramatically despite having dominated them relatively recently. AOL, the largest ISP in the world at one time, has only survived thanks to the merger with Time-Warner which diversified its holdings. The consumer internet portion of the business has declined dramatically. In short, I am not sure I would characterize any of your examples as “thriving” despite their attractive profit per employee numbers.
There may be once-dominant enterprise software firms which have fallen as quickly and decisively, but I’m not immediately familiar with them. IBM comes quickly to mind but their decline was less precipitous and was only partly due to market forces (the other part being the courts, which I presume are outside your main argument).
Cheers,
Scott
Kudos to the Cloud Crowd for Re-Inventing the Wheel!
One thing 30 years in the IT industry has taught me is that the more things change, the more they stay the same. Another is that the only memory we seem to access is short-term. Yet another is that techno-marketeers rely on that, so they can put labels like “revolutionary” and “innovative” on platforms, products and services that are mere re-inventions of the wheel … and often poor copies at that.
A good example is all the buzz about “Cloud Computing” in general and “SaaS” (software as a service) in particular:
http://tinyurl.com/6let8x
Both terms are bogus. The only true cloud computing takes place in aircraft. What they’re actually referring to by “the cloud” is a large-scale and often remotely located and managed computing platform. We have had those since the dawn of electronic IT. IBM calls them “mainframes”:
http://tinyurl.com/5kdhcb
The only innovation offered by today’s cloud crowd is actually more of a speculation, i.e. that server farms can deliver the same solid performance as Big Iron. And even that’s not original. Anyone remember Datapoint’s ARCnet, or DEC’s VAXclusters? Whatever happened to those guys, anyway…?
And as for SaaS, selling the sizzle while keeping the steak is a marketing ploy most rightfully accredited to society’s oldest profession. Its first application in IT was (and for many still is) known as the “service bureau”. And I don’t mean the contemporary service bureau (mis)conception labelled “Service 2.0″ by a Wikipedia contributor whose historical perspective is apparently constrained to four years:
http://tinyurl.com/5fpb8e
Instead, I mean the computer service bureau industry that spawned ADAPSO (the Association of Data Processing Service Organizations) in 1960, and whose chronology comprises a notable portion of the IEEE’s “Annals of the History of Computing”:
http://tinyurl.com/5lvjdl
So … for any of you slide rule-toting, pocket-protected keypunch-card cowboys who may be just coming out of a 40-year coma, let me give you a quick IT update:
1. “Mainframe” is now “Cloud” (with concomitant ethereal substance).
2. “Terminal” is now “Web Browser” (with much cooler games, and infinitely more distractions).
3. “Service Bureau” is now “SaaS” (but app upgrades are just as painful, and custom mods equally elusive).
4. Most IT buzzwords boil down to techno-hyped BS (just as they always have).
Bruce Arnold, Web Design Miami Florida
http://www.PervasivePersuasion.com