Cloud computing and the related SaaS, PaaS and IaaS have entered the mainstream of the software business. In my consulting practice I am very involved in software startup activity, and most new software companies that I see today is being built on cloud-based business model. The cloud is all the rage–so much so that it appears that any self-respecting software entrepreneur would be embarrassed to start a company using a traditional software licensing model. Even if an entrepreneur was so inclined, good luck finding a VC who would even consider funding such a company. In many respects the trend toward cloud-based computing has been accelerated by VC funding trends–which has be influenced largely by the higher (excessive?) valuations being given to cloud-based companies in both the M&A and public markets.
Now of course there are exceptions to this institutional funding trend–but not all that many, at least in the category of institutionally funded companies. And it’s all well and good–there are definitely many good reasons for this m0ve toward cloud computing. But most high technology trends are often a bit over-hyped and tend to get ahead of themselves. In addition, this particular story seems ever so familiar to a tech veteran that’s been around for a few of these cycles.
The first bit of history this reminds me of is the old terminal/mainframe model from the early years of computing. There were some real advantages to this model, but also some big disadvantages as well–which opened the door for the golden age of PCs and networking.
The second era that the current SaaS wave reminds me of is “Web 1.0”, when Web-based hosted software (then called ASP rather than the modern SaaS terminology), was first going to take over the world. The current trend seems so very similar because it was around the Web 1.0 years of the late 90s/early 2000 when the traditional software license business model was first proclaimed dead. At that time nearly every new business plan was based upon an ASP model.
Of course the technology around hosted models is much more mature and advanced now. So some of this fast-moving Cloud Computing or SaaS technology is new–but at least ideologically it could be viewed as recycled from past trends. Let’s look at the Pros and Cons of this computing model:
- Enables “Utility-Style” computing – a variable expense instead of capital investment
- Allows an end run around overwhelmed IT departments (like PC networking did)
- “On-demand”–use only what you need, when you need it–as long as your connection is up
- More efficient use of compute resources by time-slicing large farms of cost-efficient computing resources
- Web-based allows anywhere, anytime availability
- Off-site storage of data assists disaster recovery preparedness
- Still immature and inherently larger target with respect to security
- till more difficult integration with other applications although improving
- Internet latency
- Internet reliability
- Data resides outside the company firewall
- Costs over time aren’t necessarily lower for customers
- Often Lower margins for software vendors–aren’t always accounted for in current pricing
Where does it all end up?
The trend toward computing in the cloud is now well entrenched and will continue, but there will be some stumbles and pullbacks along the way. Cloud Computing and SaaS has some inherent strengths–but also some under-publicized weaknesses. Because of market momentum, many software vendors and customers are overlooking the weaknesses at this time, as is typical of any new new trend in technology. Traditional licensed software hosted by the user still has its strengths and a definite place in the market. Like many mature technologies and business models, the death of traditional software licensing has been greatly exaggerated. As time goes on I believe decisions on whether to computer within the firewall or in the cloud will once again be made on the individual merits, costs and user needs for a particular application within a particular company. And eventually something will come along to supplant the move toward Cloud-based computing as the latest trend. What will it be? Maybe something like a new and improved form of grid computing–which has had it’s own past false starts in the market? How does the cloud computing trend play out — and what do you see coming next? Post your own thoughts in a comment below.