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software as service

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Software as Service (SAAS)


Software as a service, or 'SaaS', is a software application delivery model by which an enterprise vendor develops a web-based software application, and then hosts and operates that application over the Internet for use by its customers. Customers do not need to buy software licenses or additional infrastructure equipment, and typically only pay monthly fees (also referred to as annuity payments) for using the software. It is important to note that SaaS typically encapsulates enterprise as opposed to consumer-oriented web-hosted software, which is generally known as [web 2.0]. The SaaS market reached $6.3B in 2006; still a small fraction of the over $300B licensed software industry. However, growth in SaaS since 2000 has averaged 26% CAGR, while licensed software growth has remained relatively flat. Demand for SaaS is being driven by real business needs — namely its ability to drive down IT-related costs, decrease deployment times, and foster innovation.


read more:  http://en.wikipedia.org/wiki/Software_as_a_Service



Cost Benefits


SaaS not only alleviates the costs of traditional perpetual licensing fees but also eliminates the need for additional IT infrastructure investments to support new applications. In addition to fewer up-front costs, SaaS is often easier to discontinue or substitute, reducing switching costs. SaaS is a version of business process outsourcing (BPO) since it delivers software functionality without the overhead of operating the application.




SaaS has long been considered a potential security and operational risk because it often requires that proprietary company data be transported outside of the confines of the internal network. However, the recent availability of better remote security technologies and data redundancy tools may prove SaaS to be less risky.


The problem with SaaS business model:  A venture capital perspective:


Getting signed up as a SaaS customer is fast, but getting out is just as fast. Whereas traditional software is like cocaine–you're hooked. It's too difficult and expensive to switch providers once you've invested in one. If it were easier to jump ship, a lot of people would've hit the eject button on SAP a long time ago.


Should providers seek to "lock people in" to their service?  Response:  It isn't about locking people in. People lock themselves in! They see the software, like it, and want it. This is true of all professional software. The cost of moving is too high. As long as it's working, people are happy to stick with one product. 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. SaaS is just a financing option for the customer. For that, we offer a hosting service. If the customer pays [over a period of time] through a financing entity, it's exactly the same [experience] as SaaS.



Major Players in SaaS



RightNow Technologies (RNOW)

Electronic Data Systems (EDS),

Equinix (EQIX),


Akamai Technologies (AKAM)

VeriSign (VRSN)

Google (GOOG)



Potential Losers


Who Stands to Lose?


Microsoft (MSFT) and Oracle (ORCL), traditional ISV giants, as well as Cognos (COGN) and Intuit (INTU), two examples of traditional ISV niche players, have the most to lose as SaaS vendors position themselves to steal market share. Vendors who ignore SaaS could be at a competitive disadvantage long-term if the trend continues, while vendors who adopt SaaS early may be in a stronger competitive position. Larger ISV's adopting SaaS could face challenges because of the changes in network architectures (often but not always using service-oriented architectures or SOA) required to successfully exploit SaaS opportunities. Also, it is important to reiterate the risk of these traditional ISV's cannibalizing existing licensed revenues. Most industry analysts agree that it is unlikely that SaaS will replace traditional software licenses. What is likely, however, is adoption of hybrid models where both traditional software and SaaS delivered software co-exist. It will be interesting to see which companies seamlessly make the transition to having a SaaS option and which do not.


Accenture (ACN) and IBM Global Services, leading software/IT consulting companies, because they provide services to ensure that enterprise software works properly, stand to lose because these services are performed in-house by SaaS companies. With SaaS, clients may no longer need an Accenture (ACN) to show up with a large team of people for months at a time (sometimes years) to integrate, maintain, or customize enterprise software. Dis-intermediation is a risk for these consulting firms. It is important to note that IBM in particular has tried to embrace SaaS, aiming to substantially boost the number of SaaS software providers using IBM technology to host their SaaS offerings.


Dell (DELL) and Sun Microsystems (SUNW), leading examples of Network Infrastructure OEM's, may see reduced demand for their products because network resources are used more efficiently (often reused) in a SaaS driven SOA environment. Imagine a world in which individual companies aren't required to operate their software in house. They may spend less on servers and storage devices, among other equipment. Those equipment manufacturers who effectively develop hardware to support SaaS delivery may be able to mitigate their downside, while others could find themselves struggling to compete and losing market share.




Online tax preparation is an example of one successful SAAS category, Swenson said. Successful SAAS products typically share a common trait: People pay for them.



Dont count out Microsoft Office just yet


n a recent survey, NPD asked nearly 600 PC users: "Have you heard about online, browser-based office productivity applications like Google Docs, Google Spreadsheets, gOffice, etc.?" NPD also asked, "If so, how often do you use them?"


Ninety-four percent of U.S. consumers have never heard of Web-based productivity suite alternatives. A mere 0.5 percent have substituted Web-based productivity suites for desktop software such as Microsoft Office. Chris Swenson, NPD's director of Software Industry Analysis, described the 0.5 percent figure as being a "bit high." Swenson predicted worldwide usage to be even lower than the United States.


The scant adoption makes some sense of Microsoft's Office Live Workspace, which went into broad beta last week. The service clearly is designed to be an adjunct to Office desktop software rather than a Web-based alternative. If NPD's numbers are indicative of real-world usage, Microsoft hasn't much to worry from Google Docs and Spreadsheets or other online alternatives. Maybe too many people make too much about the Web 2.0 threat to Office.


"The survey results show not only that SAAS [Software as a Service] firms have a long way to go to build brand awareness and trust among PC users. but it points to how powerful the Office brand still is, and how difficult it will probably be for most of these firms to dislodge huge swaths of Office users from the grips of Microsoft," Swenson said.


Google Docs and Spreadsheets perhaps is the most visible of the Web-based Office alternatives. But usage is still nascent. "My estimate is 840 million PCs-in-use by the end of 2007—that's about 0.18 percent of PCs," Swenson said.


US Consumer Awareness and Usage of Web-based Productivity Suites<br />

While online Office alternatives may not be the thing, other software-as-a-service categories are doing just fine, thank you. Online tax preparation is an example of one successful SAAS category, Swenson said. Successful SAAS products typically share a common trait: People pay for them. Most online Office alternatives are free, at least for consumers.


Another successful SAAS offering is surprising at first glance. Through the end of September, Apple's .Mac was the second-ranked Mac OS-only software SKU, at U.S. retail, behind Office 2004 Student and Teacher Edition, according to NPD. While .Mac is an online suite of services, Apple sells a license number in a box at retail.


"Because the physical box exists, Apple retail staff can put it on top of the MacBook someone's buying," Swenson said. The service costs $99 a year, but Apple chops $30 off the price when purchased with a new Mac. "The Apple Genius can sell .Mac to someone who's had a hard-drive failure, and, of course, someone could wander in off the street, discover the product and buy it," Swenson added.


If not for the boxed retail SKU, "I think volumes for .Mac would no doubt be a lot lower," Swenson emphasized.


Apple's .Mac success is a reasonable alternative for some SAAS providers to follow, even those offering Web-based productivity suites. NPD's survey shows that typical viral marketing campaigns won't be enough for Web-based productivity upstarts to even modestly displace Office.


"There are still a lot of consumers that discover their software products by browsing store shelves, or getting a recommendation from a store clerk," Swenson said. "Between 10 percent to 30 percent of consumers that buy software discover new software products this way. If you're not going to advertise, it might pay to figure out a way to get your consumer SAAS product into the retail channel."


Swenson said that he couldn't over-emphasize the importance of retail shelf space, even for software services, like tax preparation. If H&R Block and Intuit "didn't have great fat-client software products to sell, I'd recommend that they put their SAAS apps in a box and push them in retail, too," he said. "Maybe this is a strategy for some of the smaller online tax prep companies that are trying to take on Intuit and H&R Block."


As for Web-based alternatives to Office, the channel strategies aren't working. Awareness is poor and very few consumers use the services. Microsoft CEO Steve Ballmer can sleep easy tonight.










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