Kitepipe has over 30 years of experience in IT technology and services. In the Beginning was the Internet, and the Internet brought information from Everywhere to the browser on the desktop of Everybody. And Microsoft won the browser war, which helped to standardize the browser platform, and make it possible for applications, not just information, to run in the Internet Browser. And the Browser was good.
Then there was ASP – Application Service Providers. These were the original vendors of “Web Based Applications”, which were pioneered by software vendors who were the first to have this insight: If the users could access the application through a web browser, the back end of the application could be anywhere, and not necessarily on the customer site.
Many early ASP vendors took their Box-on-site systems, put a Browser interface on them, and hosted them for their customers. In many cases, the licensing business model was the same.
Then there was SAAS – Software as a Service. SAAS differed from ASP in two primary ways: One technical and one business/sales.
On the Technical side, SAAS applications are characterized by “multi-tenantcy” – that is, a single logical data structure that contains multiple companies’ data. In Salesforce for instance, your Support case record might be physically adjacent to the Support Case record of a company across the country. And you don’t care, because the application presents the data to you as if you were the only user in the data base.
Multi-tenancy mainly benefits the Vendor, as costs are reduced, and release cycles speed up, which results in faster growth in application functionality and configurability. But when these improvements in cost structure and application capability are passed on to the customer, what results is better value for the customer. And great value for the customer is one of the hallmarks of the Cloud.
The other, and arguably more important innovation in SAAS is a business or sales innovation – the selling of software as a service. The traditional software sales model is a licensing model which is front-loaded with large licensing fees from the customer day one, and a residual “maintenance charge” covering upgrades and support.
This up-front fee has the effect of moving the risk to the Customer, who must buy before he knows the customization and implementation is successful, or how much it will cost.
The SAAS innovation was to license the application on an ongoing service basis, per year, per user, with no big up-front licensing fees. This had three powerful effects on the mechanics of marketing and selling software:
More affordable – the application was cheaper, with no large financial commitment up front;
Reduced risk – because the big up-front commitment was eliminated, the risk for customers in investing in a new application was reduced;
More entry points – because cost and risk was reduced, no longer was software application purchase a Central IT decision. The manager in the White Plains office could and did decide to spend $500/month for ten seats and see how it went. So the software vendor had more entry points into the organization, and could use lower cost inside sales models to sell the product.
This was Marc Benioff’s insight when he started Salesforce, that this new business model would confer significant benefits both to the vendor and the customer. I don’t know if he foresaw that his new model would overturn the $200B application software sector, but so it has.
In many ways, the characteristics of the leading Cloud Vendors like Salesforce were established in the SAAS era, six or seven years ago. So what fundamental shifts created the current Cloud era?
I think that there are three distinguishing characteristics of the Cloud era, and I’ll detail them in the next post.
