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I was browsing Minnov8 one of the many interesting local tech blogs today and came across an linked article predicting the collapse of the SaaS industry. The interviewee in the article was Harry Debes, chief executive of Lawson Software — a local Twin Cities company that “done good”.
I’ve never met Mr. Debes but I have to believe he is a pretty smart fellow with a bio full of laudable deeds. But I believe some of his analysis in this article was off the mark.
First, he compares the SaaS phenomenon to earlier technology efforts:
This on-demand, SaaS phenomenon is something I’ve lived through three times in my career now. The first time, it was called ’service bureaux’. The second time, it was ‘application service providers’, and now it’s called ‘SaaS’. But it’s pretty much the same thing, and my prediction is that it’ll go the same way as the other two have gone: nowhere.
The problem with this comparison is that back in those days a fast Internet connection was 56k and companies like Google and YouTube didn’t exist. Some of the basic concepts supporting SaaS existed ten and twenty years ago. But we didn’t have the technology infrastructure to support it. Now we do.
An industry has to have more than just one poster child to overhaul the system. One day Salesforce.com (CRM) will not deliver its growth projections, and its stock price will tumble in a big hurry. Then, the rest of the [SaaS] industry will collapse.
Five years ago there were a handful of SaaS companies. Today there are well over 1000. You will have a hard time getting funded in the Valley if you are a software company without a SaaS play. You can add one more company to the growing SaaS list — and it’s a biggie — Microsoft. Okay, they call their version “software+service” but let’s call it even.
But, as we did the maths, we realized we could get killed. It was going to take us seven to 10 years before we made any money. That’s nonsense. So we reversed our plans. I’m very glad that happened because now we can sell the software in both models. We wouldn’t have to wait 10 years to make a profit.
Lawson created a product that was designed and marketed for specific types of enterprise environments. You have an internal cost structure you have to maintain in order to support your product and be profitable. No problem. But why did you think that same cost structure would align with the SaaS-world? It’s obvious that smaller, more nimble SaaS companies can establish profitability in less than 10 years. Your challenge is that you need to think “smaller” like your friends at SAP, Salesforce.com, and Microsoft. Your go-to-market strategy needs retinkering.
When the sunk costs have been fully depreciated, customers effectively run the software for free, thereafter. Whereas, if they went to Salesforce.com, it’d cost them a million a year because they’re paying for ongoing licensing and maintenance.
Mr. Debes would have us believe that companies don’t pay for annual software maintenance agreements (usually 15-20%), software updates, custom code development, testing and staging environments, production environments, and IT staff to maintain the application environment. SaaS allows companies to effectively share those costs because the code, infrastructure and people are all provided by the SaaS provider.
I talk to small, medium, and large companies every week that are looking to outsource parts of their infrastructure. I know at least one service provider that manages Lawson deployments for companies in their datacenter. That’s a hop-and-a-skip away from SaaS in my book. I’m not trying to say that SaaS is the answer to all our problems. Larger enterprises, some of whom are probably Lawson customers, will certainly have to tread carefully into SaaS. SaaS definitely has potential and to ignore it is a risky bet.
Amazon’s S3 storage service was down for almost 6 hours this past weekend. Just imagine you were running a SaaS company which used S3 for all its storage. Ouch! On the other hand is this level of uptime any worse than what you would expect from any mid or low-tier storage vendor? You get what you pay for.
During the conference yesterday I asked Phil Soran, CEO of Compellent, if the up-and-coming crop of Internet storage services like Amazon S3 are a competitive threat to his business.
His answer was two parts: 1) Compellent sees storage services like S3 as potential customers, and 2) Compellent focuses mainly on customers that need higher-end storage.
I understand his response but I respectfully disagree with some of his thinking.
First, storage services probably are not going to buy Compellent storage. It’s simply too expensive on a $/GB basis. It scales vertically pretty efficiently (by adding disk shelves) but not horizontally. If I were building a storage service I would look for the cheapest disk I could find. Then I would find a way to make it scale (virtualization, load balancing, mirrored storage, etc).
Second, it’s true that many companies need the storage performance that a company like Compellent can provide. Sadly services like S3 will still eat into Compellent’s growth — and their own story proves it. Compellent’s big product claim is their automated tiered storage. Basically a customer can install fast fiber-channel drives and slower sata drives in the same SAN. The SAN will then migrate less frequently accessed data blocks to the slower drives — keeping the faster drives free to store more high-performance data. It’s a smart concept. The problem is what happens when companies start replacing those sata drives with S3. Or, what if S3 becomes the third, and lowest, tier of storage. People just won’t need to buy as many new drives and shelves.
Sure, but companies will always need faster storage right? Well, not if the SaaS companies have something to say about it. My customers aren’t buying storage for Microsoft Exchange and Sharepoint anymore because I provide it at my datacenter. My customers aren’t going to buy storage for Microsoft CRM. Eventually they will be outsourcing their ERP and business intelligence applications to SaaS providers. And guess what? Some of those young SaaS providers are starting to build their platforms on top of the online storage services.
Phil made a good point that many companies don’t want to store confidential information on “shared” storage services. I agree that this is an impediment to the growth of the Internet storage platforms. But this is definitely starting to change — especially with SMB. The larger companies will follow suit as they outsource more of their applications to SaaS providers.
