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  1. 1. Comeback Kid SaaS Climbs off the Canvas
  2. 2. Comeback Kid The Re-Rise of the ASP as SaaS
  3. 3. Comeback Kid SaaS Climbs off the Canvas Merrill R. (Rick) Chapman Editor of Softletter
  4. 4. Quick Definition <ul><li>Software as a Service is… </li></ul><ul><li>A hosted application </li></ul><ul><li>You rent it </li></ul><ul><li>Method of delivery not important </li></ul><ul><ul><li>Web interface </li></ul></ul><ul><ul><li>Terminal services </li></ul></ul><ul><li>If they buy and install, not SaaS </li></ul><ul><li>Subscription pricing is not SaaS </li></ul>
  5. 5. The Meltdown <ul><li>From the late 1990s to 2001 </li></ul><ul><ul><li>More than 500 companies… </li></ul></ul><ul><ul><li>Received more than $10 billion in VC… </li></ul></ul><ul><ul><li>And… </li></ul></ul><ul><ul><li>Made nothing </li></ul></ul>
  6. 6. The Meltdown (cont)
  7. 7. Why? <ul><li>The applications sucked </li></ul><ul><li>Multiple warmed over “office suites” </li></ul><ul><li>Foolish predictions of the end of the desktop </li></ul><ul><li>Failure to account for “the piracy” discount </li></ul><ul><li>Infrastructure unable to support grand dreams </li></ul>
  8. 8. There Were Successes <ul><li> ASP poster child </li></ul><ul><li>HR </li></ul><ul><li>Project Management </li></ul><ul><li>E-commerce </li></ul><ul><li>CRM/SFA </li></ul><ul><li>Anything NOT mission or data critical </li></ul>
  9. 9. What About Today <ul><li>No longer “ASPs” </li></ul><ul><li>Software as a Service </li></ul><ul><ul><li>SaaS </li></ul></ul><ul><li>SaaS Market Growing </li></ul><ul><li>But still not that big </li></ul><ul><ul><li>Gartner thought $7.4B in 2004 </li></ul></ul><ul><ul><li>Ovum thought $132B! </li></ul></ul>
  10. 10. SaaS vs. Desktop/Client Server (in billions)
  11. 11. But Thing Will Improve <ul><li>Probably 10% to 15% next year </li></ul><ul><li>Things should get even livelier… </li></ul><ul><li>Maybe 30% to 40% growth over the next several years </li></ul><ul><li>Much of the growth will be cannibalization of existing application bases </li></ul><ul><li>Much in new verticals </li></ul>
  12. 12. Why are Things Improving? <ul><li>Hardware infrastructure improving </li></ul><ul><ul><li>60% of Americans have high-speed access </li></ul></ul><ul><ul><li>99% of businesses </li></ul></ul><ul><ul><li>Better interfaces </li></ul></ul><ul><ul><ul><li>AJAX, DHTML, etc. </li></ul></ul></ul>
  13. 13. Why are Things Improving? <ul><li>Software infrastructure is appearing </li></ul><ul><ul><li>SOA </li></ul></ul><ul><ul><li>Google </li></ul></ul><ul><ul><li>Amazon </li></ul></ul><ul><ul><li>Yahoo </li></ul></ul><ul><li>Several idiots have allowed their data to be compromised </li></ul><ul><li>Data-protection standards are in development </li></ul>
  14. 14. Companies are Looking at New Vertical Markets <ul><li>Distance Learning </li></ul><ul><ul><li>E-learning </li></ul></ul><ul><li>Shop Connect </li></ul><ul><ul><li>Marketing for auto repair shops </li></ul></ul><ul><li>Mark Monitor </li></ul><ul><ul><li>Real-time domain monitoring </li></ul></ul><ul><li>LiveCapital </li></ul><ul><ul><li>Online credit scoring </li></ul></ul><ul><li>And the list goes on </li></ul>
  15. 15. And the Smart Companies are Avoiding Horizontals <ul><li>Avoid “office” wars </li></ul><ul><li>Stay away from entrenched application markets dominated by Microsoft, Adobe, Oracle, etc </li></ul><ul><li>There is an ongoing struggle between “fat” vs. “thin” computing and you will be squeezed no matter where you stand </li></ul>
  16. 16. And the Smart Companies are Avoiding Horizontals (cont) <ul><li>Commodity products are not candidates for SaaS because they do not offer otherwise unaffordable technology to customers </li></ul><ul><li>A SMB can buy Salesforce; it’s hard for them to by Siebel </li></ul>
  17. 17. SMBs are the Sweet Spot <ul><li>SMBs are where the action is: </li></ul><ul><ul><li>Firms from $1M to $50M are where most SMBS are making sales </li></ul></ul><ul><ul><ul><li>Source: Softletter </li></ul></ul></ul><ul><li>Vertical markets are also a good place to be; targets can be defined </li></ul><ul><ul><li>There are 70K auto service shops in the US; avg. yearly revenue $250K </li></ul></ul><ul><ul><li>Focus on the M in “SMB” </li></ul></ul>
  18. 18. SMBs are the Sweet Spot <ul><li>When pricing is transaction- or bandwidth-base, the larger the company the more attractive “own” looks </li></ul><ul><li>Smaller companies have CFOs who decide on capital cost (own) vs. current expenses (rent) </li></ul>
  19. 19. The Economics are Very Attractive <ul><li>Rapid growth is possible </li></ul><ul><ul><li> opened its doors in 1999; by 2003 had reached revenues of $66M </li></ul></ul><ul><ul><li>SaaS model tends to under-report revenue due to multi-year service deals </li></ul></ul><ul><ul><li>Deferred revenue not reported on current books </li></ul></ul>
  20. 20. The Economics are Very Attractive (cont) <ul><li>Most SaaS firms are collecting revenue in advance or in conjunction with the delivery of services </li></ul><ul><li>This is contrary to conventional wisdom </li></ul><ul><li>Subscription-based companies often wait months to see invoices fulfilled </li></ul>
  21. 21. The Economics are Very Attractive (cont) <ul><li>Predictable growth </li></ul><ul><ul><li>Less “blank slate” projections </li></ul></ul><ul><li>Development costs are significantly lower </li></ul><ul><ul><li>SaaS range between 7% to 12% </li></ul></ul><ul><ul><li>Enterprise software between 20% to 22% </li></ul></ul><ul><ul><li>Source: Softletter </li></ul></ul>
  22. 22. And There are Some other Nice Benefits <ul><li>Freedom from license compliance issues </li></ul><ul><ul><li>Purchases </li></ul></ul><ul><ul><li>Receipts </li></ul></ul><ul><ul><li>Certificates </li></ul></ul><ul><li>Best-business practices compliance </li></ul><ul><ul><li>Sarbanes-Oxley, section 404 </li></ul></ul>
  23. 23. SaaS as a Platform <ul><li>SaaS companies are increasingly opening up their products to vertical markets, i.e. Distance Learning </li></ul><ul><li>An alternative to DVD/CD-based content programs </li></ul><ul><li>The company has a developing OEM market </li></ul><ul><ul><li>Application for the retail car market </li></ul></ul>
  24. 24. Some Reality Checks <ul><li>Sales and marketing costs are no lower than those faced by traditional software companies </li></ul><ul><ul><li>20% to 24% privately-held firms </li></ul></ul><ul><ul><li>40% + for public companies (with the exception of Microsoft) </li></ul></ul><ul><li>SaaS 45%+ sales and marketing costs (source: Softletter) </li></ul>
  25. 25. Some Reality Checks (cont) <ul><li>Traditional licensing empowers vendor lock-in </li></ul><ul><ul><li>They pay a big amount of money up front (eventually) </li></ul></ul><ul><ul><li>They pay even if the product has a few “issues” </li></ul></ul><ul><li>SaaS removes much of this leverage </li></ul><ul><ul><li>Switching is still painful, but they can fund it out of that big lump of dollars they didn’t give you upfront </li></ul></ul>
  26. 26. More Reality Checks <ul><li>As mentioned, cannibalization is inevitable for companies selling licenses </li></ul><ul><li>Your SaaS product will appeal to SMBs/verticals in its first iteration </li></ul><ul><li>A focused subset of features </li></ul><ul><li>A steady bulking up of the product </li></ul><ul><li>Parity achieved in about two to three release cycles </li></ul>
  27. 27. Pricing Issues <ul><li>For SaaS, it’s a volume game </li></ul><ul><ul><li>New customer costs are very low: </li></ul></ul><ul><ul><ul><li>$.10 to $.50, on average (Source: Softletter) </li></ul></ul></ul><ul><li>Pricing models are becoming increasingly granular </li></ul><ul><ul><li>Heavy volume users of your product are your least profitable customer </li></ul></ul>
  28. 28. Pricing Issues (cont) <ul><li>Most pricing models have three to five tiers </li></ul><ul><li>You WILL be tied to a license model if you have an installed base </li></ul><ul><li>You can also charge for: </li></ul><ul><ul><li>Bandwidth </li></ul></ul><ul><ul><li>Storage </li></ul></ul><ul><li>But customer acquisition needs will squelch many of these attempts </li></ul>
  29. 29. Service Issues <ul><li>An era of “white glove” customer service is coming </li></ul><ul><li>Companies we have interviewed estimate that customer service is going to become a significant cost center: 15% to 20% </li></ul><ul><li>The SaaS model requires you to be nice to people; no one is the phone company (yet) </li></ul>
  30. 30. SLA Issues <ul><li>In a sense, the issue of SLAs is almost not relevant to the SaaS market </li></ul><ul><li>Yes, there will be SLAs </li></ul><ul><li>But… </li></ul><ul><li>If your product doesn’t do what it says, there’s nowhere to hide </li></ul>
  31. 31. Salesforce Management <ul><li>A tremendous change in mindset </li></ul><ul><li>The traditional $50K, 5%, $1M a year paradigm does not fit well with the SaaS model </li></ul><ul><li>Significant SaaS sales require cultivation over time </li></ul>
  32. 32. Salesforce Management (cont) <ul><li>Significantly higher commissions upfront </li></ul><ul><ul><li>As high as 40% </li></ul></ul><ul><li>Then a steady ramp down as the account grows </li></ul><ul><ul><li>Decrement in stages to between 5% to 10% </li></ul></ul>
  33. 33. Salesforce Management (cont) <ul><li>The trick is to balance the need to develop new account vs. the necessity of nurturing existing business </li></ul><ul><li>Attempts to cut off the account from the salesforce have not been very successful; relationships and professionalism are lost </li></ul>
  34. 34. Comeback Kid The Re-Rise of the ASP as SaaS