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For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

Archive for May 27th, 2007

Amazon is the Hardware and OS Vendor of SaaS

Posted by Bob Warfield on May 27, 2007

Continuing the “Total SaaS Enterprise” theme, where every aspect of computing in an enterprise is purchased as SaaS except, perhaps for the laptops and internet connection (but then see!), how do Amazon’s Web Services fit in?

AWS offers several services at this time.  The ones I want to talk about are EC2 (the “Elastic Computer Cloud”), S3 (“Simple Storage Service”), and SQS (“Simple Queue Service”).  Using EC2, one can get control of individual machines roughly equivalent to  a 1.7Ghz x86 processor, 1.75GB of RAM, 160GB of local disk, and 250Mb/s of network bandwidth.  These machines are paid for by the hour at a rate of 10 cents an hour, with additional charges for connectivity outside the Amazon world.  Communications inside, between EC2 machines or S3, are free.  S3 offers the equivalent sort of service for bulk storage, offered at a rate of 15 cents per gigabyte per month, with charges to move data in and out of S3, but, cleverly, it is cheaper to move data in than out.  Lastly SQS, is a messaging system, that charges microcents to send reliable messages between processes that are queued.  For example, it would make an effective way for your EC2 machines to communicate with one another, or perhaps for machines outside the Amazon world to communicate into their EC2 resources.

What a cool concept!  And in fact, despite the fact it is relatively new, it has captured the imagination of many developers out there.  In fact, when I checked this morning, I got more hits on Amazon EC2 than I did Salesforce AppExchange on Google, despite the fact AppExchange has been available for much longer and EC2 is still in early beta test.

I got to thinking about the whole concept, and I like it a lot.  When looking at where to place it in the pantheon of SaaS offerings, it seems to me that what Amazon is offering is the equivalent of what Hardware and OS vendors offer under perpetual license.   The difference is you don’t have to install it, pay for HVAC to cool it, and so on.  The classic advantages of SaaS are available even for raw hardware. 

So my elevator pitch for Amazon is “Amazon Web Services makes it the SaaS of Hardware and OS vendors”.

Posted in amazon, ec2, saas, software development | Leave a Comment »

Finance SaaS With Debt?

Posted by Bob Warfield on May 27, 2007

I recently read this Phil Wainewright post about financing SaaS companies with debt, and the more I think about it and the more folks I talk to about it, the more interesting a story it seems.

It’s become generally accepted that SaaS can be more capital intensive then perpetual models.  This stems from several issues:

–  SaaS requires more software than perpetual–multi-tenancy, IT “glue” code, and a host of other things that the perpetual guys don’t need to worry about.  It’s true there is savings from single platform and everyone on the same release, but those savings come later, while the extra functionality is needed up front.

– Speaking of SaaS advantages coming later–revenue is recognized later, creating a lag in profitability.  This is often made up for by cash up front, but it doesn’t wholly substitute.

– Lastly, SaaS is offering a considerable service component at much lower margins to the software itself.

Given this hunger for capital to grow, it’s always interesting to see where new sources can come from.  Now there’s a firm called SaaS Capital that wants to help out with debt.

Traditionally the capital has been raised through successive equity rounds, at the cost of much dilution for existing shareholders.  SaaS Capital is saying they’ll loan the money for interest.  They’re looking for companies in the $4M to $40M revenue range with a proven track record of renewals from their customers.  In today’s world of low interest rates, that’s an interesting proposition.

What’s even more interesting to consider is the tremendous vote of confidence this implies for the SaaS business model.  Their ability to profit from loans is inherently less than an equity investment.  What that means is they have to reduce the risk they’re taking relative to equity investors, and that implies they think SaaS is much lower risk than other ventures still on the equity model.

Or, as one VC interviewed by Wainewright put it:

“The nice thing about the SaaS business is, if the customers are getting some value out of it, then even if the business [management] messes up, the customers are not going to go away,” he said. “There’s still value in the business and you can take it over and just run it for cash.”

Posted in business, saas, venture | Leave a Comment »

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