I’ve been meaning to post these notes a couple of weeks ago but extensive travel and due diligence on two companies kept me otherwise occupied. Let’s start with a positive statement: The future for SaaS applications is getting brighter. Discussions I had with the CIOs and business unit executives of the companies I recently visited support that the majority of applications used today by mid- and large-size companies can be delivered via the cloud. They use the following rationale to arrive to this conclusion: Of the applications used in a corporation, 15% are either company-specific, reflecting proprietary business processes, or need to adhere to particular regulatory requirements. As a result, these must be on-premise applications. The remaining 85% of business processes can be automated using off-the-shelf, packaged applications. Of these packaged applications, 80% can be delivered through SaaS, i.e., they are based on single instance multi-tenant architectures, or, at the very least, they can be cloud-based applications delivered over private, public or hybrid clouds. The type of cloud used depends on the customer’s customization and on-boarding requirements. The remaining 20% must be delivered using off-the-shelf on-premise applications. Getting this message across will require IT vendors to continue educating the market and offering their SaaS applications in pieces that are easily “consumable” by corporate users. Issues such as security, and application and data integration, about which I wrote in the past, will still need to be addressed before cloud computing in general and SaaS applications in particular can be broadly adopted.
Let me now switch to last week’s Google announcement on the launch of its Application Marketplace and why I thought it is worth commenting about.
- The launch of the Marketplace demonstrates Google’s continued interest in business applications (the Marketplace launched with applications from the 50 vendors, such as Concur’s and Appirio’s). With the App Marketplace Google has the opportunity to innovate and clearly differentiate itself from Salesforce, whose AppExchange is a Marketplace competitor, if it can incorporate lessons from its Android App Store. For example, Google can provide additional services to the marketplace participants such as billing, analytics and potentially even an alternative business model by trading annual license fees for ads displayed inside the applications. I have been writing about the upward trend in the Customer Acquisition Cost (CAC) of SaaS applications. These marketplaces have the opportunity to become low-friction sales channels and better rein in such costs.
- Participation in the Marketplace will provide an additional forcing function for SaaS application and data integration, since, at the very least, the applications must be integrated with Google Apps.
- Now that Microsoft is becoming serious about cloud computing, I expect that it will start thinking seriously about establishing a similar cloud-based sales channel for its partners. Competition among these marketplaces, including AppExchange, will be good for the dissemination of SaaS applications and in general and will improve the sales economics for such applications.
The final note stemmed from the recent acquisition of 3tera, a company I considered investing over a year ago, by CA for a rumored $100M price (approximately 30x trailing revenues). The acquisition made me think whether Trident should re-consider its position and try to invest in PaaS/IaaS companies. We have stayed away from this part of the cloud computing stack because we believe that
- Private PaaS and IaaS companies are not capital efficient as will require significant investment to remain competitive with large IT vendors introducing cloud-based solutions. For example, it is reported that Amazon has invested hundreds of millions around its EC2 IaaS service so that it can offer processing at a fraction of ¢1 per hour per server).
- Enterprises considering moving any part of their IT infrastructure to the cloud would use a large IT vendor rather than a small private company. Two recent presentations delivered by Microsoft and IBM executives reinforced these thoughts that PaaS and IaaS may difficult areas for venture investments. For example, IBM recently surveyed 1100 of its customers regarding their cloud computing plans. The survey showed that most of these customers still don’t understand where and how to apply cloud computing. Furthermore, 60% of the surveyed companies stated that they will use large IT vendors to move workloads to private clouds but are more hesitant about using public clouds.
- While CA bought 3tera for an eye-popping multiple, I doubt other IT vendors will follow suit and be willing to pay similar multiples for cloud computing companies. CA bought 3tera in order to acquire its technology and, most importantly, in order to access 3tera’s cloud computing expertise. CA needs to catch up quickly in cloud computing. Telcos, particularly European ones, and Indian IT outsourcing companies may also need to acquire cloud computing expertise but these types of companies are not known for being aggressive IT acquirers.