SmoothSpan Blog

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

Archive for February 26th, 2008

SaaS Creates New Markets in Plain Sight

Posted by Bob Warfield on February 26, 2008

David Feinleib at Mohr Davidow Ventures likes SaaS.  He eloquently lists some great reasons:

– Recurring Revenue Model:  As a Sales VP I once knew said, “Why do we have to start all over again every quarter?”  SaaS, term licenses, subscriptions, and a very few other models help fix that problem. 

– Low cost of sales:  I’ve actually done the numbers on this one and can tell you without a doubt that SaaS provably costs less to sell.  The hubub about SaaS profitability is because these companies do backload their revenue and frontload expenses, and also because most are throttling for maximum growth not maximum profitability.

– Ease of Delivery:  Reducing friction in the transactions your business depends on is always a good idea.  So far, SaaS is the lowest friction model yet seen and in some cases results in true click-to-buy self service.

– Stickiness:  This is not a special advantage of SaaS, but rather of Enterprise Software in general.  Once up and running, vendors have to do something really bad to get kicked out.  Customers face the daunting task of moving data from one mission critical system to another one, fighting through any incompatibilities and outages that may bring.  One could argue the ease of adopting SaaS may even make it the least sticky variant of Enteprise Software, but it’s still pretty darned sticky.

– Measurable growth:  I personally think this is a restatement of the Recurring Revenue Model.  Everything new, less churn which should be small, falls into the gift that keeps on giving category.

Feinleib misses out on another huge advantage of SaaS though:  it creates new markets in plain sight. 

What I mean by that is SaaS is such a corrosively disruptive business model that the incumbents generally can’t adopt it when an upstart comes along.  For all intents and purposes a SaaS and Perpetual License Vendor may as well be in completely different markets.  The Perpetual License company has to slit their own wrists to win by accepting monthly revenue instead of the big license payoff that is all recognized the month the software is sold.  It’s all but impossible for these companies to do it it.  The short term pain in order to achieve long term success is simply too great.

There’s a lot more on this point in my interview with Concur’s Steve Singh, but having decent barriers to entry, especially from big established companies, is hugely important for startups. 

Posted in saas | 5 Comments »

What’s Next on Sun’s Open Source Shopping List?

Posted by Bob Warfield on February 26, 2008

MySQL is done, and Sun is now cranking up their machine to take it to the next level.  As Jonathan Schwartz says in his blog:

The overall message is simple: we’re bringing our largest customers the innovation and performance the world’s most important on-line companies are already experiencing – giving them the option of putting MySQL into global, mission critical deployment.

 More strategically, Schwartz puts it that, “Companies that freelydistribute their products, rather than limit access via pricing or proprietary licensing, are simply prioritizing adoption over immediate revenue.”  Translation: Sun wants massive adoption.  That’s a good thing, really.  They’ve been suffering from massive de-adoption in the wake of the last Internet Bubble and this time around want to make sure they have a firmer grip on their markets.  Open Source seems an excellent way to accomplish that, and is a bold new strategy to go forward with.  In particular, if it can help drive hardware sales, Sun can well afford to give it away.  Jonathan sees this clearly and said as much:

…although a small (but growing) percentage of their downloads convert to purchase orders, 100% of those downloads require a hardware purchase – for many, a server and storage device (for just as many, a laptop). We’d like to believe we can earn some of that business with solutions optimized for MySQL – even if the end customer isn’t (yet) paying for software.

There’s even a nice competitive backhand dig at Oracle and Microsoft (who are lately doing well at DB2’s expense in the database market):

Finally, remember that database licenses often make up a considerable part of any company’s budget – to the extent we can introduce new options for those customers (even via the appearance of a well designed coffee mug on the procurement agent’s desk), we can free up budgets for new investments. Which drives more customers to seek out Sun – vendors that save money with better performance are well liked.

Nice!  I predicted this sort of tit for tat with Oracle would be going on, and it’s only going to get stronger.  Oracle doesn’t partner well, and generally Larry’s minions perceive the world as Alexander the Great’s generals must have seen it in Ancient Times.

With the MySQL transaction done, Sun has also made it clear that intends to continue pounding the Open Source beat looking for more good acquisitions.  Larry Dignan points out Schwartz’s remarks on the conference call:

“Open source is really in the DNA of Sun,” said Schwartz on a conference call to trumpet MySQL as a transforming acquisition. Schwartz also added that Sun was “looking forward to more tuck in acquisitions on the open source front.”

So what makes sense for Sun to go after next?  More systems software and tools?  RedHat with JBoss?  The latter would be a definite dig at Oracle in the wake of their BEA acquisition.  And why not?  They could do a lot worse than to add a big Linux and J2EE app server business to their portfolio.  Per my SaaS market segmentation study, I would look for Sun to hang out in the lower levels of my stack.  It’s probably early to buy a language, but PHP and Ruby are out there and would also make interesting plays.

Posted in strategy | 2 Comments »