Lawson to ZDNet: Elephant? I Don't See an Elephant in this Room!

Last month I wrote a column for BusinessWeek about the hidden-- and substantial-- marketing costs of software as a service and it created a bit of a stir. The theme of the piece was that the Internet had killed what was once the greatest tech business model: shipping a CD of software that was too brutal to rip out and charging millions for upgrades not to mention ongoing maintenance fees. The business model that built Microsoft and Oracle and SAP, and the business model that injected profitability and growth into maturing hardware names like Hewlett-Packard and EMC.

Of course, the SaaS model-- while bad for investors and would-be tycoons eying all of Larry's yachts-- is great for customers and for those entrepreneurs who were nimble enough to "get it" ten-plus years ago. As much as I firmly as I believe the myth of the magic SaaS business model needs to be busted, I never once disputed that SaaS wasn't the future of software. Think of it like the record industry: Is an Internet world better for label tycoons? No. But it's better for customers and, well, it's a reality.

Recently, we've seen a few signs of old software grappling with this reality. One is trying to figure it out. Another is just pretending the big, loud, SaaS elephant trumpeting in its ear isn't in the room.

The first one I refer to is SAP--  a company a lot of the SaaS pure-plays love to pick on. Of course they do: SAP is the largest application vendor in the world and most SaaS companies are applications companies. SAP didn't make it easier on itself when it pooh-poohed SaaS for years. And by all accounts, it's struggling to modernize its business with its new Business ByDesign line of SaaS products. SAP finally owned up to this on Monday, backing off its goals to create a $1 billion SaaS business by 2010.

That's not necessarily SAP's fault-- very few tech companies (any?) are able to dominate one platform, and then change course and dominate a new one when the industry shifts. But it's also the particular challenge of the SaaS model, that I wrote about in my column. So is it any wonder that the second company in the press lately is dealing the problem by burying its head in the sand?

Harry Debes of Lawson told ZDNet that the SaaS model will be dead in two years. Oh, and with it all that cloud computing nonsense. You know: The foundation of Salesforce's and Netsuite's businesses-- not to mention the one Web giants like Amazon.com and Google are increasingly betting on. The very technology-- and movement-- that even the mighty Microsoft had to pay lip-service to.

Debes' argument is that he's seen this movie before.

From the article:

"This "on demand", SaaS phenomenon is something I've lived through three times in my career now. The first time, it was called "service bureaus". The second time, it was "application service providers", and now it's called SaaS.

But it's pretty much the same thing. And my prediction is that it'll go the same way as the other two have gone--nowhere. SaaS is not God's gift to the software industry or customer community. The hype is based on one company in the software industry having modest success. Salesforce.com just has average to below-average profitability."

No arguments on the challenge of building a profitable SaaS business from me, clearly. But don't say you've seen this movie before, Debes. You haven't. The Web wasn't what it was then. It wasn't as cheap, reliable, robust or as ubiquitous. There wasn't the same cultural change to "trust" online applications-- nor the desire for that kind of flexibility and the customer demand for software that is easy to use. Lastly, there wasn't a fundamental generational difference. People coming into the workforce live their lives online. My guess is Debes does not. In case you think I'm being hard on the old guy (haha) this bon mot: (ZDNet's question in bold)

"Won't people avoid the mistakes of "previous" SaaS incarnations, as you mentioned?
People are stupid. History has shown it repeats itself, and people make the same mistakes."

My advice to Debes: I wouldn't be throwing out accusations of stupidity. One further comment:

"[Oracle's CEO] Larry Ellison has the same perspective as I do. He accidentally funded the CRM product and Netsuite. He didn't really mean to. They've had small successes, but overall, they've been spectacularly unsuccessful."

That's not exactly true. First off, Salesforce has five times your market cap, Debes. If it's "spectacularly unsuccessful" what are you? Second, Ellison has said that Oracle has only now turned a profit in On Demand and that's why it hasn't bet the business on the strategy. But his funding of Salesforce and Netsuite was hardly "an accident"-- particularly Netsuite. Even a billionaire doesn't "accidentally" invest $150 million in a company. He saw the future before anyone. And clearly, saw it was different this time. Nice try though, Debes.

Now, Lawson is a company in that no-man's land of enterprise software that rarely gets investor attention or press. Its stock is down precipitously this year. I'm betting this is somewhere between a gambit for attention for press wanting a juicy story or investors wanting a contrarian play. (Judging by Yahoo Finance, neither really happened. But hey, my small blog did!) After all: If SAP and Oracle struggle with SaaS, there's little confidence a smaller vendor could take it on.

Comments

[csjohnstone]

SaaS is really more akin to the network PC. Remember those machines that for $500- $1000 you could do nothing without the Internet to provide you with all of your “stuff.” ASP’s were really remodeled consulting companies, and service bureaus are really just a niche flavor of those.

But, while I disagree with the accuracy of his premise, I do agree with his conclusion. Its like what happened to network PC’s, people are not going to trust all of their data and applications to be in the cloud. Not to say that some things won’t reside there most of the time or even all of the time, but they will not do so without the ability to run and have access to most everything locally as well.

An individual’s Internet connectivity will need to reach the reliability and ubiquity of electricity and water before it will work. So much so that the thought of not having access to it/“your stuff” would be a ridiculous thought. We are a ways from that.

The other thing working against SaaS as a business model is the competition. If I offer music editing services online as a service, then later my competitor offers the same functionality as a purchasable application, then now my business model is basically broken.

The more likely scenario in my mind will be to reverse the model. How about SaaS, Service as a Software. (yeah, you’d have to drop an “a”, but that gets messy and likely infringes on someone’s trademark…) A company like Fry Inc, that was recently acquired by Micros, is a company as such. They have an Open Commerce Platform (OCP) that competes with WebSphere Commerce, ATG Commerce and the others. But, they don’t charge for the software directly. In order to obtain a license for it, you must “engage” them as a service. The software is key to the value proposition, but it is not the revenue generator. Then unlike standard vendor relationships, when you break with them, you still own your license. It flies directly in the face of the Oracle, IBM or ATG licensing models. And, the model is working in many other different levels. Many open source service companies are building rather profitable businesses on service models supporting “free” software.

[sarah lacy]

what a long, thoughtful comment, thanks csjohnstone! i agree with some of the stuff you say and when i say it's "the future" i don't actually mean that every single piece of software goes to the cloud. but in terms of creating new businesses i'm not sure who is funding or starting an on premise software business that takes millions of dollars to install, hardly works, and you can't rip out. one thing debes ignores is the 1-10 rule. that we overestimate what technology can do it one year, underestimate in 10. we see businesses ALL THE TIME that fail that technology makes viable years later. my macro point is that if saas is doomed, it's certainly not just because "we've seen this movie before" and it's not all going away in two years.

[Ryan @ Appirio]

Great post, Sarah-- I tried to do a similar point-by-point debunking of the Lawson interview at http://www.appirio.com/blog/.

And no arguments with either of you that SaaS calls for new business models-- we need as much innovation in the sales, marketing, and delivery of business solutions as we've seen in the underlying technology.

Csjohnstone-- your idea of combining software and services is right on. Personally, I think on-demand platforms will be the game changer here: there is very little technical difference between a "packaged application" and a "custom application development" in this environment. That's the big idea behind what we're trying to do at Appirio... would be interested in your reaction to our thoughts on the opportunity this creates:
http://www.appirio.com/blog/2008/05/now-thats-big-paas-market-ryan-nichols.php

[Dan Druker]

Great post Sarah. I also wrote about this yesterday in my SaaS 2.0 Blog at http://intacct.blogspot.com

There was a related story in the Financial Times this week, along the lines of your Business Week column called The End of the Software Gravy Train: http://www.ft.com/cms/s/0/33c8e4bc-7450-11dd-bc91-0000779fd18c.html?nclick_check=1

It seems to me that we are starting to see repeating themes over and over again in regards to SaaS and the large enterprise software application vendors. A focus on company profits instead of on what is good for customers - and nearly always no discussion of the customer at all. A dependence on buyer lock-in and the resultant nearly 100% profit maintenance and support revenue stream. Serious innovator's dilemma issues, structural challenges and internal conflict.

To me this story is much less about whether the SaaS model will be successful, it's much more about whether any of today's enterprise software giants can figure out how to make the transition.

My prediction is that the difficulty we keep reading about for these firms to do SaaS organically will lead to more and more M&A as SaaS matures - Cisco, Google, IBM, Yahoo!, Dell and Adobe have all made initial steps in this fashion.

[Alex Glassey]

First, this type of arrogance and willful blindness to a massive trend foreshadows significant business problems for Mr. Debes and Lawson. Think DEC (PCs will never replace minicomputers) and all the software companies that missed the DOS to Windows wave for whatever reason.

Re: Mr. Debes remark that "people are stupid"... I couldn't disagree more, especially when it comes to SaaS customers. They know what they want and they're adopting SaaS solutions across the globe and at a rapid pace. Here at projjex.com we receive a constant flow of intelligent feedback and great ideas from our customers. Nice try Harry but belittling your customers isn't going to derail the SaaS locomotive!

Alex Glassey
projjex.com