SaaS: Still another abbreviation for Software? Not exactly.
// January 15th, 2008 // Emerging Tech
SaaS is more than just an acronym. It’s a new way of thinking.
Software as a Service. SaaS. What exactly is it? And why are companies starting to pay so much attention to it? We’ve heard about the predictions of SaaS being a US$ 10+ billion market by 2009. But we’ve all heard such predictions before. If you’ve just become comfortable with the concept of “Web 2.0”, you’re probably wondering what SaaS is, why you should care about it, and what its implications might be. It turns out that SaaS has the potential to significantly alter the landscape of the software industry—but we’ll get to that later. First, let’s figure out what SaaS is all about.
Software as a Service, today.
Sometimes it helps to start with a definition. Wikipedia’s is as good as any:
“Software as a service (SaaS) is a software application delivery model where a software vendor develops a web-native software application and hosts and operates (either independently or through a third-party) the application for use by its customers over the Internet. Customers pay not for owning the software itself but for using it. They use it through an API accessible over the Web and often written using Web Services or REST. The term SaaS has become the industry preferred term, generally replacing the earlier terms Application Service Provider (ASP), On-Demand and “Utility computing”.
Which is a long way of saying that SaaS represents a shift away from the traditional software model of packaged software distributed with some kind of media such as DVD or CD, that is sold on a per unit basis (whether by seat or by box), to a new model in which software is sold as continuous service distributed through an online mechanism (either via a Web interface or as online downloads). Taking a cue from the Wikipedia entry’s note on Utility Computing, albeit with a different bent: think of SaaS as the difference between buying gas at the gas station, or paying your electrical utility bill: you pay for the energy consumption either way, but one is a continuous stream to your home, the other is by the gallon (or liter) for your car.
“…think of SaaS as the difference between buying gas at the gas station, or paying your electrical utility bill: you pay for the energy consumption either way, but one is a continuous stream to your home, the other is by the gallon (or liter) for your car.”
You may have noticed that the definition of SaaS specified two components: the first is the way the consumer acquires the software, the second is how the consumer uses the software. This distinction has caused some confusion. The two concepts are related, but may seem to be separate issues at first glance. So, let’s clarify the two components by first looking at each separately, then explore how they relate to each other.
Acquiring SaaS applications
SaaS at first was typically described by its nature as a digital distribution mechanism for software. Rather than talking about how a SaaS application is used, this concept simply differentiates SaaS from traditional software in terms of how the software is distributed. Traditional software is typically considered “packaged” software. In other words, the software is distributed on some physical media. SaaS eliminates the physical aspect of distribution and offers software as online digital downloads.
Using SaaS applications
However, people soon realized that SaaS really was much more: the central concept is that SaaS applications actually run as online applications, essentially making the software available anywhere at any time. This is typically achieved by creating Web front-ends for applications, thus allowing anyone with a browser to access the SaaS application. But traditional software (software that you install on your computer) can also fit within this model — with one twist: the software must be available for download online, which means that theoretically you can use the software from any machine, as long as the software supports the operating system on the machine you’re using. There is a hybrid model in which a “thin client” is downloaded to your machine, which then leverages data that lives on a server via a Web service or via REST. OK, perhaps we’re getting too into the details: suffice it to say that without a network connection, you can’t use a true SaaS application.
“I typically describe SaaS as the ‘networkization of software’.”
How acquiring and consuming SaaS applications relate to each other
In truth, one begets the other: online distribution naturally leads to online consumption of data, and the converse is also true: consumption leads to online distribution of data or application components. Both rely on network connectivity — whether to acquire the software, or to actually use it. The bottom line: I typically describe SaaS as the “networkization of software”. Yes. You’re just witnessed a Spencism: networkization isn’t a word you’ll find in the Oxford English Dictionary. But then again, how many emerging technology terms are?
Why you should care
So, why is everyone suddenly talking about SaaS? Well, take a moment to consider the implications:
For the software companies and consumers there are huge benefits to the SaaS model:
1. Reduced costs. Consider the amount of money companies will save by not having to distribute physical copies of their software. No more printing costs. No more box costs. No more printing of manual costs. In fact, for the supply chain aficionados in the crowd: no more inventory holding costs. Bottom line: huge savings for companies, and in today’s hyper-competitive market, that will eventually translate into lower prices for you and me as consumers.
“…huge savings for companies, and in today’s hyper-competitive market, that will eventually translate into lower prices for you and me as consumers.”
2. Opportunities through incremental components. In the previous article in this series (PLS. INSERT CORRECT URL IN THIS LINK) regarding the impact of the gaming world on the software industry, we talked about something called “micropayments”. Basically, it was the idea of small add-ons that gamers can purchase for a very low amount (typically under US$1). Think about the same happening in your favorite application. For instance, think about a light-weight word processor that allows you to add only those features you really want at an incremental cost. The benefit to software companies: recurring revenue streams in the form of monthly subscriptions for those add-ons. The benefit for the consumer: the end of bloated, incomprehensibly complex, software that does way more than we would ever need (or want).
“…the end of bloated, incomprehensibly complex, software that does way more than we would ever need (or want).”
3. Instant market research. Since SaaS naturally lends itself to componentization of software, companies will be able to see virtually instantly, which components are successful (based on the number of people “purchasing” those components) and which are not. In fact, they can go one step further: companies can see how “sticky” the components are by monitoring subscriptions. For example, should a component sell wildly at first, but then not get re-subscriptions in the second month, this might indicate either a quality control issue, a missed opportunity (the market is thinking your component does one thing when it actually does something different), or changing market dynamics. The benefit for the consumer: companies can react much more quickly to market demands—meaning quicker bug fixes, reduced time-to-market for new software features and functionality, and a wider variety of options. In effect, SaaS will force software companies to be more responsive to you and me.
“In effect, SaaS will force software companies to be more responsive to you and me.”
4. Expediency and ease. From a software company’s perspective, SaaS offers significant advantages in terms of scheduling (software upgrades and updates in response to market demand, not based on some arbitrary annual schedule), development effort (reduced risk due to instant market feedback, lower initial costs due to reduced development efforts for components, software better aligned to market demand, again, based on immediate market feedback), and from a financial standpoint (since there is no production lag between the completion of software and its release to the market, sales to revenue conversion times reduce essentially to approaching zero). From a consumer standpoint, it’s a matter of convenience: software is available when we need it, where we need it. Software that doesn’t meet our needs can simply be abandoned after one month at an incremental cost (which, by the way, also lowers barriers to entry and barriers to adoption for companies). In addition, SaaS represents a simple mechanism by which consumers can be assured that they’re using the most current version of the application available, ideally without having to constantly patch/upgrade their applications.
“…software is available when we need it, where we need it.”
Alright. Sold. SaaS has benefits. But what’s next?
Now that you know something about SaaS, and why it’s so valuable today, what might be the logical step in SaaS application evolution?
Collaborative Development: Not just for programmers any more
When considering where SaaS might be headed, the future of Collaborative Development looks particularly bright. You can find out more about Collaborative Development at alphaWorks. The idea is that, by embracing a network-centric model, SaaS also naturally lends itself to connecting not just machines, but people. In this view, Collaborative Development isn’t just about programmers working together, it’s about people working together. It blurs the line between users and developers as the user community participates in the development cycle directly. The ability of SaaS to offer instant market feedback is a first step in pulling users into the development cycle. Web 2.0, in many ways represents another step. “Collective intelligence”, after all, is basically the distribution of work across a community, and leveraging that work and insights for the benefit of a particular application or company and eventually their users as well. Sometimes I jokingly refer to this as “Communal Computing”, but in essence, that does capture the underlying concept.
“…Collaborative Development isn’t just about programmers working together, it’s about people working together.”
The Lego effect: Building from common elements
Another result of SaaS may be a kind of “Lego Effect”. Basically, as market and financial pressures force companies to componentize their applications, these applications which will be easier to assemble, since smart companies will create common components and reuse them in multiple applications. In fact, this will naturally occur as the market will demand cross-connectivity of their applications due to the network-centric nature of SaaS. We see this now in the formation of Web services and REST applications, and can expect it to only gain momentum. Witness the pressures on companies to abandon proprietary DRM, standardization of music and video formats, etc. Another early indicator for trend is the rise of composite applications and mashups: both concepts revolve around the idea of reusable widgets and data. If you take this concept one step further and apply it beyond software, it becomes a case of what’s old is new again: imagine applying this concept to communities and ideation, for example. In fact, it’s something human beings naturally do, so we’ll see it replicated in our online environments as well.
“…as market and financial pressures force companies to componentize their applications, these applications which will be easier to assemble, since smart companies will create common components and reuse them in multiple applications… imagine applying this concept to communities and ideation…”
Massive, dynamic, marketplaces: The alternative economy is here.
When you think about it, one of the most striking (and logical) possibilities for the future of SaaS is the concept of massive dynamic marketplaces. Again, there’s a clue to the future in the gaming world: we’ve seen the rise of wholly digital, fully functioning economies in the virtual world. In fact, in some cases, those digital economies are connecting to our real life (RL) economies. SaaS naturally creates marketplace environments: micropayments require venues through which to sell the components which in turn requires economic systems to support them, which requires economic infrastructures to regulate.
In effect, SaaS can lead to a true digitalization of the economic world (if it’s not halfway there already), in which goods and services are virtual, not physical by creating natural marketplaces (and eventual economies) which support these virtual goods and services. And this transition can only accelerate as the value of the virtual (information, basically) becomes paramount. We already see this in our traditional economies: software spending is estimated to be US$243B in 2007 and have a projected year-to-year growth rate of around eight percent annually. Virtual economies are growing at phenomenal rates, wjth some projections of 10 to 15 percent per month. While they are currently almost insignificant compared with the traditional economic markets, the impact of virtual economies will continue to grow, the line between the virtual and “real” economies will blur, until a total and complete integration of the two economies occurs.
SaaS offers companies an ancillary benefit: while initially SaaS may consolidate power in central hubs likely dominated by large industry players, eventually (as witnessed with software componentization) the standardization of protocols (remember, this is a network-centric model) will enable players to jump from ecosystem to ecosystem, further accelerating the already hyper-competitive nature of IT. Those companies who deploy appropriate systems, will reap massive opportunities, ranging from optimization and streamlining of efficiency to partnerships which previously were either not apparent, or difficult/impossible to create due to physical or technical barriers.
“…SaaS can lead to a true digitalization of the economic world (if it’s not halfway there already), in which goods and services are virtual, not physical by creating natural marketplaces (and eventual economies) which support these virtual goods and services.”
Summing SaaS up
We literally stand at the cusp of a new era in computing. While SaaS isn’t the only catalyst that will spark this new era, it is a key component. So, when you’re sitting down and either preparing to write that next line of code, planning your marketing strategy for the next quarter, or figuring out how to invest your company’s resources to position yourselves well for the future, keep an eye on SaaS: it’s not just an acronym, it may very well be a disruptive technology with significant business impact.