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SaaS Moves From Niche To Disruptive Technology: Analysts

Several industry watchers are expecting software-as-a-service to make huge gains, but first vendors need to figure out new revenue and sales models, among other things.

Laurie Sullivan

June 16, 2006

3 Min Read

Software-as-a-service applications from Google, Yahoo, and Salesforce.com are driving change in architecture, appearance and business model of enterprise applications, turning the sector from a niche into a multi-billion dollar market. But the business model isn't without its challenges.

Calling the trend a "disruptive phenomenon," Merrill Lynch & Co. analyst Kash Rangan said in a report released Friday that upstarts, such as Salesforce.com, WebEx, RightNow, Taleo, Blackboard and NetSuite, will benefit most, compared with traditional software players Microsoft, SAP and Oracle attempting to move into the space.

Part of the disruption will come from the method in which traditional software companies recognize revenue from SaaS sales, according to AMR Research Inc. senior vice president Jim Shepherd. "If SAP sells a system today for $1 million, they recognize the million dollars on the day they sell it and it goes into the revenue for that quarter," he said. "If they were to sell that same system as a software as a service, they may get $20,000 per month for the next 10 years."

The same dollar amount is spent on applications, but logged in accounting books differently under the SaaS business model. Assuming there's a strong demand for these services, it could have a negative short-term impact on license revenue at traditional software vendors, Shepherd said.

That's part of the reason Microsoft, Oracle and SAP didn't rush into offering these services offerings, which companies like Intuit Inc. have been offering for years.

For years, Intuit has delivered TurboTax and QuickBooks through multi-tenant SaaS applications, where multiple companies or consumers run the application on the same code base.

Intuit QuickBase General Manager Janna Eggers said it's easy for companies to get started in the space, but difficult to deliver the service. "Look at Salesforce.com, for example, the challenges they had earlier this year to keep their site up and running," she said. "Getting a full service SaaS platform up and running quickly is difficult and it's going to take major players, rather than startups, to deliver them long term."

One way of looking at SaaS, also referred to as OnDemand, is by seeing it as a distribution model in which Web applications are hosted by the vendor or service provider, such as Intuit's TurboTax or QuickBooks. Recent examples of SaaS applications offered by Google include Google Spreadsheet and Writely, because they are Internet-based rather than desktop-bound applications. Salesforce.com offers customer relationship management (CRM) applications through the SaaS model.

Both Eggers and Rangan agree the model is transitioning from a niche to multibillion dollar market, but the Merrill Lynch analyst believes traditional software companies adding SaaS will find it more difficult to make the move.

By simplifying the software stack and integration requirements, companies offering SaaS services can address market requirements better. But industry veteran Eggers questions whether Microsoft can change fast enough to keep companies, such as Saleforce.com, at bay.

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