A couple of weeks ago, the ‘net was abuzz with Larry Ellison’s remarks about SaaS (News - Alert): “it’s hard to point to any Software-as-a-Service provider that’s doing a good job of improving its profitability.”

 

Cheap shot. When you are growing as fast as our field of companies, you choose to invest every penny in growth. 

 

The movement is way bigger than just delivering software over the Internet. It is classic Clay Christiansen “disruptive innovation” and Ellison, once the innovator, now has the dilemma that his entire business model needs to change in a bunch of ways over the next 10 years.

 

Software used to be static. A stand-alone, non-networked model can no longer cut it for businesses. Things move too fast. The era has ended where businesses can possess individual silos of data; now everything is plugged in and networked. Companies in the SaaS industry have realized the financial savings of no longer needing to ship out software (yes, again in static); they also cross their fingers that people won’t illegally distribute software. And the networked “Flat” world forces us into more ethical models (see The World is Flat) — customers don’t want break-fix at all, they want providers that you pay every month, when their service works, every month. In contrast, businesses have to focus on their core and get everything else, as a service – to compete. Oracle’s inability to capitalize on this trend by no means spells failure for the SaaS industry's profits.

 

Consultants in the software industry have a tendency to dislike SaaS. Consultants don't appreciate easy solutions for solving a problem because it eliminates the opportunity to charge for customizations and upgrades. I don't know of one person (or company) who ever used Oracle 100% out of the box. Ellison has an ecosystem to protect, not just one (static-like) package. The complexity gets you hooked in and somehow conceptually this becomes SaaS too, but at a larger cost.

 

The comment Ellison made in the recent Information Age article also reflects negativity towards other emerging on-demand industries showing promise. SaaS and hybrid SaaS trends have spawned Communications as a Service, Voice as a Service and Verizon's (News - Alert) newly coined Computing as a Service. Profit for SaaS comes from all directions and industries. The predictability of SaaS success is stable as other related technology that also requires telecommunication and network capabilities. One of the most profitable in SaaS is the gaming industry this site reports U.S. Total Game Software Sales for 1995 were at about $3.2 billion and in 11 years grew to $7.4 billion. According to Wikipedia, a profit means to "make progress." Profitability in Ellison's view is based on predictability, would 11 years of straight growth not be enough? Does this upward trend of revenue look like progress?

 

PR has also become on-demand. Vocus is a great example. According to Phil Wainewright's article, Vocus's SEC (News - Alert) filings report annual revenues of around $50 million and year-on-year growth has just notched above 50%, having been steadily on the rise for the past year. According to IDC (News - Alert), SaaS is expected to grow by more than 30 percent a year and reach $21B in 2011. Why the movement towards this hosted or on-demand model? Well, SaaS allows for little IT implementation and maintenance requirements -- and little disruption in a business is always crucial. Vocus, a leading provider of on-demand software for public relations management, is one company that is seeing the success of this model. The company just announced financial data for its second quarter ending June 30, 2008 and it achieved record revenue and profit. CMO Bill Wagner attributes this to that fact that the SaaS model gives his customer more real-time upgrades and functionality than traditional license and install software.

 

“As an early pioneer of the SaaS model, Vocus saw the value of the on-demand model for both customers and investors,” says Wagner. “With 36 consecutive quarters of revenue growth and a rapidly growing customer base, Vocus is an example of a company using the on-demand model to introduce meaningful innovations to customers and transform an industry.”

 

In my patch, voice is no different. Voice as a Service is an emerging phone company model. How would someone get their phone line for a new office or their new home shrink-wrapped and out of the box? There's no way for phone service to be connected/functional/useful without some help and guidance (a.k.a. network connectivity) from another company. Measuring things tends to help them improve. Using Voice over IP also has the potential to provide businesses with a slew of On-Demand services. A boss can measure call quality by logging into their CRM (SaaS/On-demand/no shrink-wrap whatsoever). A manager can use a CRM attached to their phone system to indicate who is performing on the team and who is not by looking at call quantity, duration, close ratio; every bit of information is neatly packaged together and sent (on-demand) daily or weekly emails displaying a pretty user interface.

 

SaaSy as this trend has seemed to become, SaaS has paid its dues by completely reshaping the software industry. Software wanted and needed to be reshaped. Companies (including Oracle) will have to redesign their solutions, restructure their businesses and retrain their people to care more about the service part of the equation rather than just the product-centric past.