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The Saas business model: not busted, but still to be proven

August 30, 2008 12:21am
by Richard Waters

The email has been flowing fast and lurid since I wrote a column earlier this week suggesting that the the software-as-a-service (Saas) business was unlikely ever to be as profitable as traditional software (in fact, one venture capitalist with a lot of experience in the field offered to send me to “reeducation camp.” Can’t wait.)

To recap briefly: I argued that subscription businesses where customers can switch suppliers easily tend to suffer from heavy churn and falling prices. It may be called “software”, but the economics of Saas have nothing to do with the old enterprise software business.

The main argument from readers who have been lighting up my inbox is that I failed to make allowances for all the switching costs companies face when they change Saas suppliers (such as training workers to use a new service,) so there is a degree of customer lock-in. A second argument is that Saas companies can add value to their otherwise commodity-like services by customising them to fit specific industries.

These are fair qualifications, but I don’t think they change the central issue. Maintenance fees are the gravy train of enterprise software: SAP recently said it would raise maintenance fees by nearly 30 per cent between now and 2012. No Saas company is going to be able to do that.

Let’s be clear: I’m not saying the Saas market will collapse in two years (which is what the CEO of Lawson Software told ZDNet Asia.) But I am saying that when Saas becomes a more mature market, the power of customer choice will be a significant factor. Some suppliers will still thrive under these conditions, but they will have lower margins than their predecessors.

August 30, 2008 12:21am in Internet, Software | Comment

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