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.
Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at email@example.com
Niall Halpenny says
I liked your BLOG. While I do believe in the promise of Cloud/Saas in terms on bringing greater efficiencies, I don’t see it as being all things to all people from day one.
Therefore I’d be interested in your view any detailed market segment analysis you’ve come across which indicates exactly how big the realistic target market for these technologies will be in the next 3-5 years.
As you’ve pointed out, there are real issues such as the underlying quality of the connection and availability, etc. which are real obstacles to many potenital cusotmer adopting these new models.
Phil Morettini of PJM Consulting says
I don’t know of any market analysis, but I haven’t been looking. I’m certain that there are projections out there on a trend this important. But I would caution against you using such studies as a basis to making a business decision–these types of projections have a habit of being notoriously and dramatically wrong–usually on the upside. The best advice I can give you is to analyze your market and user, and meet their needs. But if you are contemplating a new product, there is also nothing wrong with coding your product in such a way that it can be delivered EITHER via the cloud as a service, or behind a customer’s firewall as a traditionally licensed product. This gives you flexibility to serve users of different psychographic profiles, and effectively hedges your bet.
Thanks for your Post. I have also lived the proprietary to Unix period 20 years ago and well, the mainframe guys still make good money 🙂
A quick question for you. Rather than whemn, where do you think IaaS and SaaS will take off fist?
Have you made any analysis on the segments that will first get value out of these models?
Thanks for your insights
Phil Morettini of PJM Consulting says
The segment taking off first in SaaS is unambiguous–it’s CRM. And that is primarily Salesforce.com.
I don’t necessarily think it’s because of the segment itself, but the execution of Salesforce. They are now upping the ante and trying to become a Cloud Computing platform, rather than just a CRM application. Using their technology to enable others to create SaaS apps that can be integrated, etc. The thing to do is to analyze the segment you are interested in directly: How important is the data portion? Will people be uncomfortable that this data isn’t behind their own firewall, from a security standpoint? How big of a problem will Internet latency (or completely down Internet connection) be? How complex is the app to deploy each time within the end-user’s firewall? And so on. This will give you your answer on an segment’s near term SaaS potential -Phil
Thanks Phil, good tips.
Mark McClure says
This quote from your article speaks volumes to me:
“Allows an end run around overwhelmed IT departments (like PC networking did)”
The ‘battle’ between embedded IT orgs and what the business thinks is available out there ‘in the cloud’ to reduce costs (and shrink IT to some core specialists and governance types) is gathering momentum… but I imagine that concerns around risk and compliance are heavy anchors which may slow down, or even stall, adoption by many large corporations for a while.
Eddie Soong says
Thanks for your view Phil.
Things go in and out of style, like fashion. While fashion get its cue from consumer fancies, technological trend is driven by needs, and the technological advancement available to support that trend. By the same token, this advancement was responsible for the changes in the way we work, live, and affects many aspects of our lives, e.g. the invention of smart phone. We all know what Internet has done. Mobile computing is happening. Their impact is not over but constantly involving. The user community has grown into main street. The only way to serve this huge and growing user base is utility computing, currently identified with Cloud-based and SaaS solutions.
The problem however is that some companies would emphasize SaaS and Cloud when describing their products for the sake of getting on the band wagon. You can quite easily identify them when their description of SaaS and Cloud just don’t make sense.
The points I’m trying to make are:
– the feeling of deja vu is because solutions are constantly morphing to meet the needs and changing market demand in the best possible way given the current state of innovation
– old technology, like mainframe, client/server, etc… will still be around, albeit in niche areas, until such time when a better solution becomes available supported by the latest innovation.
Mike Harris says
Great post. I laughed when I saw ‘ASP’ and remember a prominent San Diego startup that spun off of Titan years ago. It blew through a ton of money and eventually went by the wayside.
Of course that was then and this is now. As you mentioned, when a company’s data resides outside the firewall huge security issues ensue. I believe this was the key reason the earlier ASP models failed. I don’t see that this has been satisfactorily resolved yet.
When it gets resolved, however, we’ll see Web 3.0 take off like the proverbial rocket. (My definition of Web 3.0 is the addition of artificial intelligence to the cloud so that when I text my friend asking if he’s aware of a good tire store I may receive the latest tire sales and promos in the area where I live. Of course the permission issue is equally important as the security issue.)
Mike, interesting ideas about adding AI to the cloud. I haven’t seen anyone talking about that to date.
Jim, thanks for the excellent comments–but don’t call me “Mike”…..
Jim Quanci says
Great piece Mike! Love most of it!
But at risk of nit picking…
I think two of the Con’s are not really con’s (and some of the other responders have mentioned con’s that really aren’t).
“more difficult integration with other applications although improving” is definitely not a con of cloud best apps. Most of these cloud based apps are based on broad and mostly simple industry standards/technologies – http, REST, OAuth and so on – that make integration between apps very very easy compared to the old client/client-server days. Talk to someone that has been integratings apps with old client-server SAP and then ask them about the newish SAP NetWeaver Gateway web services interface. Integrating apps with salesforce.com or NetSuite’s cloud based systems is across the board easy. Almost everything that is using the Cloud makes integration between apps easier (and frankly more robust because its based on standard technologies and not all too frequent old style hacks).
“Data resides outside the company firewall” I assume is doubts about security. Again all the main stream Cloud technologies have better security then almost any private behind the firewall system in several ways. The biggest security whole is people that are already behind the firewall who give outside access by accident or on purpose. The latest “two step” security processes used by a growing number of Cloud based services (and almost all on-line banking) is much much better then current behind the firewall processes. Never mind the IaaS providers like Amazon and Microsoft have much better physical security (try getting into one of their data centers) and network security (try hacking their pipes) then dare I say “anyone”. The only way for your data to be safer then with these folks is by not being connected to the Internet at all.
Its funny seeing the early B2B adopters of the Cloud are the IT folks. The IT folks know how vulnerable their old systems are and how hard it is to keep their users educated on “safe practices” and stay ahead of the hackers . They were also the quickest to recognize the power and simplicity of the new Cloud based architectures that makes it much easier for them to develop and deliver tailored apps on almost any device anywhere at any time (something that was expensive and slow to implement with the old client server based solutions). As you pointed out salesforce.com is the poster child (started in the “old” ASP days) – as is NetSuite – both being embraced by IT organizations around the world.
And its not just VCs who just want to invest in Cloud based technologies/solutions. Take a look at the company I work at, Autodesk, and where we have been making acquisitions the last few years… the Cloud acquisition out number the desktop technology acquisition 10 to 1.
Mark van Wolferen says
Took me 4 years to find your post, my apologies. Good post and commmetns. I share your view that traditional licensed software hosted by the user will co-exist next to cloud and Saas solutions. It would be good to even split out the pro’s and cons between Cloud and Saas as there is a lot of software in the market place that is traditionally licensed but does make use a cloud infrastructure (in house or hosted).
The major element I’m missing in the overview is a human aspect. I’ve met frustrated CIO’s who are fed up with the lack of control and insight they have over their infrastructure. Saas and external clouds depend on external entities to deliver what has been promised and, especially as a small/medium enterprise it is hard to get your (future) requirements met. Lacking the ability to get one of their employees to take up full responsible and provide him/her with the appropriate tools/responsibilities to fix issues quickly is a human element that frustrates. For critical systems and system that support physical production in-house solutions (maybe with rented hardware) are chosen.
Finally, within my speciality; software licensing, traditionally licensed software running on a cloud infrastructure can become very expensive due to unfavorable license counting of large, clustered, virtualized environments. Especially with some enterprise software solutions. This drives some companies to a ‘avoid’ cloud strategy for some software publishers purely due to commercial reasons.
Mark, thanks for your excellent additions to the discusion.