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

Archive for October 30th, 2007

How Many Tenants For a Multitenant SaaS Architecture?

Posted by Bob Warfield on October 30, 2007

We’ve talked about the cost advantages multitenancy can bring, up to 16:1 compared to a single tenant per instance.  But how many tenants do we have to put into an instance to get those kinds of savings?  In other words, what metrics should we shoot for?

Once again, we can turn to statements made around to get an idea.  For example, Michael Dell says that Salesforce was running 40 Dell PowerEdge servers at one point in time.  If we go back into Salesforce EDGAR filings, we can see that they had 6,700 customers (tenants) and 134,000 seats when running on the 40 Dell servers.

With a little math, we conclude that if we view the 40 servers as one instance, Salesforce was able to stack in 168 tenants per server, and 3,350 seats per server.  I’ve queried my contacts at various other SaaS companies and learned that this is pretty high in their estimation.  Admittedly, the CRM application is not very taxing on machine resources relative to a lot of other applications.  It’s basically fill in a form and keep track of the data with a little reporting.  Transaction rates are governed by the rate at which sales cycles change and are added, which is pretty slow among Enterprise transaction rates.  Based on that, let’s view Salesforce as the practical zenith.

It does seem like we can draw some conclusions pretty quickly.  Most virtualization strategies are not going to let you run 168 instances on a single server.  Figures I’ve head are in single digits.  If nothing else, virtualization means you don’t modify your software.  Virtualization is therefore good at sharing variable costs, those costs your software is designed to vary anyway, but not so good at sharing fixed costs. 

One of the SaaS vendors that uses virtualization mentioned a good example of this fixed versus variable cost issue.  He mentioned that adding a domain to an app server has a fixed minimum cost to them of 1GB of RAM.  His reaction to the SFDC figure was to say that running 170 zones (what he calls their virtual partitions) was a non-starter because it would mean the server needed 170 GB of RAM.  A true multitenant architecture could share the app server resource requirements across many tenants.

Note that this fellow I talked to wasn’t sweating it very much.  His business calls for fewer larger SaaS tenants than Salesforce.  Their average is in the hundreds of seats per tenant, not 20 or so like Salesforce, so they naturally have many fewer tenants.  All of this has to factor into your decision making when considering multitenancy versus virtualization for SaaS.

A last consideration is that even loyal multitenancy fans still keep multiple instances, each of them multitenant.  There are a variety of reasons to do this that boil down to operational convenience.  If nothing else, it’s easier to build and provision an instance and then migrate customers to it when doing upgrades.  Opinions vary on how many servers go into an instance, but vendors I talked to are thinking along the lines of 50 to 100 at the high end.

Utility computing infrastructure with painless scale up/scale down would have a bearing on this.  I’ll be writing more about that over time.

Posted in platforms, saas | 2 Comments »

The Value of SaaS vs Maintenance Recurring Revenue

Posted by Bob Warfield on October 30, 2007

Oracle’s bid for BEA valued the company at 7.5x maintenance revenue.  According to Credit Suisse, past Oracle acquisitions have all fallen into the 7x to 8x range.  BEA asked for 9x. 

This made me wonder about the value of SaaS recurring revenue.  After all, if the Oracle’s of the world are primarily after nice, safe recurring revenue streams, maintenance is one thing, but it’s computed as a fraction of the license price, usually in the 15-20% range.  Why not look at companies that get 100% recurring revenue for their software?

Here is a quick look at those figures for some publicly traded SaaS companies:

SaaS Valuation

The average is 9, which is pretty close to the 7x-8x Oracle wants to pay for recurring maintenance revenues.  A small premium for growth might make sense for these younger SaaS companies.

It’s always interesting when two relatively unrelated things, in this case a multiple on maintenance revenue and a multiple on SaaS revenue, match up so well.  That’s usually telling us we’re on the right track.

Posted in business, saas, strategy | 2 Comments »

How Will This Web 2.0 Bubble Burst?

Posted by Bob Warfield on October 30, 2007

The cries that the present Web 2.0 world is a bubble about to burst are becoming increasingly strident.  Emotions are starting to run away, and sometimes it gets a little ugly with the name calling.  We are at that classic point where bubble cryers abound and those who believe there is no bubble are becoming increasingly aggressive in their attempts to disagree.  Doesn’t it feel just like it did the last time?  What’s left to do to wrap up this bubble and move on?

Bubbles don’t go away until everyone is in.  It’s never quite everyone, but it’s so many that there’s nobody left to keep the momentum of joining going.  When everyone is on the train, the next step is for something to falter.  Something pretty big.  In the last bubble, I remember IPO’s going off like clockwork, and then suddenly, at the peak of bubble mania, WebVan’s IPO faltered seriously.  People who got pre-IPO shares lost money.  I’m sure there were more incidents like this going on, but that’s the one I knew about.

Picture the scene.  Everyone is finally on the train.  All the naysayers who had doubted you could make billions of dollars with sock puppets selling pet food had given up.  They’d seen too many make those billions and decided what was happening was too big to fight, so they joined too.  Then the train derailed.  Look how fast a bubble can come unwound once that happens.  One reason is all those naysayers.  They got on knowing they shouldn’t have, and at the first sign of trouble they were facing naked fear.  They never had the courage of their convictions, only the courage of seeing others succeed, and now they’d seen failure.  Right where they used to predict failure would be.  The latecomers were the pragmatists, not the visionaries.  They are data sifters, not intuitive, and this new data of failure can make them change course on a dime.  Thus begins the rush to the exits.  The true true believers will stay on long after it’s too late.  They were visionaries, not pragmatists, or they wouldn’t have been there in the first place.  They fly on intuition, and while the situation may smell funny, it’s hard to shake a strong intuition.  They don’t operate on hindsight.  They usually don’t spot the trouble coming as easily as they create a new direction.  The threat is that the wide eyed optimism that fueled the bubble in the beginning will be gone and it will take more than vision to keep going.  That’s a rather emotional view of what happens, but it is a natural outcome of a competitive system reaching equilibrium. 

How can we tell what stage we’re in?  Watch the fast followers: they are the canaries in the coal mine.  They’ve eliminated the bad genes that the first movers mistakenly had in their formulas and kept only the good.  We know we’re in the fast follower stage when we read about new companies that are endless combinations of familiar things.  When was the last time you heard of a fundamentally new thing like a Wiki, Blog, or Social Network?  Maybe we count the video stuff like Joost, but it has fast follower Hulu.  The fast followers are the sure sign that the white space green field open running is done, and it’s all about competition.  Huge markets will sustain a certain amount of competition without impacting growth rates, but eventually, fatigue sets in, there is minimal differentiation, and people give up looking at new things and choose the market leader.

The market leaders will survive the bubble.  They will even prosper as markets shed competitors that were a dead weight on their growth.  Market leaders will have reached enough critical mass to weather the bursting and emerge stronger than ever before.  This is one reason why folks like Jack Welch have said the time to invest in growth is during adversity when others are cutting back.  Your growth investment goes so much further if you’re actually in a position to be a market leader.

Given all the angel money and bootstrapping, this is a funny age.  The last bubble saw lots of IPOs and hence tremendous collateral damage was done to non-combatants.  This time we’re seeing mergy frenzy.  It isn’t so much the non-combatants as market leaders from the present (Google) and the past (Microsoft) that are providing the exits.  Hopefully there will be a little less irrational exuberance as these companies use the tool of acquisition to fill out their portfolios and compete with one another.  Perhaps we’ll have a kinder gentler bubble bursting, but the end result will be the same.  Only a few in each category can survive, it may just take a little longer and involve less sound and fury getting there.

What does a complete portfolio look like for an Uber-player like a Google, Microsoft, or even a Yahoo?  My Web 2.0 Personality Map seems like a good map of the territory.  To reach all the personality types, you’d want a presence in every square of the matrix:

Web 2.0 Personalities

The properties are clearly laid out.  Note that there are many more services out there that fit in a given square than I’ve listed.  Some of these are already taken.  Master moves such as Microsoft acquiring Yahoo would fill in many squares with a single stroke. 

But, such a combination raises the issue that properties have to want to get bought at a valuation that is compatible with the purchaser’s pocketbook and notions of propriety.  This is starting to happen when we see deals like Zimbra.  It was a good multiple for the VC’s, but nothing spectacular.  Clearly they were becoming concerned their niche was getting crowded with bigger players and their ability to compete was diminishing.  So it will be as each acquisiton plays out, others in the space become increasingly nervous.  It is a game of musical chairs and there are not enough seats for everyone. 

Remember too that these are largely private companies.  Public companies can be coerced under the duress of fiduciary responsibility to be reasonable.  Oracle has polished this to a fine art, and the backlash for those who resist is painful and ultimately futile.  Just ask Dave Duffield who fought hard to keep Peoplesoft out of Oracle’s clutches.  No, in this case, we’re dealing with founders and investors.  It’s largely a game of fear of failure versus the bird in the hand.  The right chemistry is in place.  People are starting to wonder about the bubble, and there are some WebVan-like events too as we look at events like eBay’s spectacular failure with Skype.  There are subtle clues too.  Why was the story on Microsoft’s initial Facebook investment $500M but the final figure was $250M?

The canaries are beginning to nod off in their cages.  Best not to go too much deeper into the coal mine!

Stay tuned, as I have a post I’m penning on where I think the next big bubble opportunity will be.  It’s a doozy, it’s a logical progression, and it may even be near term enough to keep this market going strong on some slightly different cylinders.

Related Stories

Automattic (WordPress) spurns $200 million acquisition offer

R/W Web asks, “Are we still changing the web?”  When I took the poll, 33% said there’s still plenty of innovation, 28% said it’s slowing, and 22% said there was not enough.  Given that the audience for this is probably a little skewed, I’d say there’s still some sand in the hourglass.  OTOH, the author, Richard McMannus, drags a lot of things into this category that I don’t think belong, such as SaaS, Utility Computing, and the Mobile Web.  They are phenomena in their own right that are on a separate bubble clock and not so far along.  They are driven by forces other than Web 2.0 and can continue on if Web 2.0 falters a bit.  Mobile, I suppose, can prolong the mainstream Web 2.0 by increasing access to it.  But ask yourself, how good a job did Blackberry do reinvigorating email?

Posted in business, strategy, Web 2.0 | 9 Comments »

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