Investing in SaaS – Fidelity Investments
Fidelity Investments put out an interesting macro analysis on Software-as-a-Service (SaaS) as an Investment Themes for clients. I reproduced the article here with additional commentary.
- As virtualization and other technology developments break the link between applications and the hardware on which they run, software can be offered as a service rather than a product.
- The shift from servers to services can provide tremendous cost savings in application development and maintenance to a variety of businesses.
- Properly executed… SaaS users will benefit initially from lower start-up costs, and developers of popular applications can generate significant subscriber revenue on an ongoing basis.
- However, figuring out which applications to bring into the cloud and which to retain in the traditional data center can be a daunting task for any IT organization.
Investment Theme – Software as a Service
Accessing software as a service (SaaS) is a direct result of cloud computing.
Under the traditional model, even a small- or medium-sized enterprise (SME) would incur significant start-up costs of software application licensing and installation, as well as ongoing expenses for maintenance, renewals, upgrades, and professional services such as IT consultants. Similarly, consumers had to purchase and support software on their own computers.
With SaaS, the cost of starting and running a business has fallen dramatically. Computing power is now a commodity, delivered like any other utility on a pay-per-use model. The SME can implement new software applications and add capacity incrementally.
The application provider maintains the infrastructure, saving the subscriber the cost of hardware servicing and obsolescence every 3–5 years. The feedback from subscriber usage patterns can allow the software provider to make continuous improvements. Frequent updates can occur automatically in the centralized version available to all subscribers, who no longer need to pay for renewals and upgrades, or to hire expensive consultants for retraining in the new versions.
Businesses can benefit from the ability to access industry-leading customer relationship management (CRM) tools through the cloud. Another organizational need that can be met successfully with a cloud-based model is enterprise resource planning (ERP) for essential corporate functions, including finance and accounting, operations, and human resources.
Similarly, consumers can use cloud networks to access applications and share files for word processing, spreadsheet analysis, and tax preparation, among many others. They can also benefit as newer and cheaper apps can be developed and delivered faster as a service. Providers of consumer-oriented applications can take advantage of having more direct channels to their customers, so that their great ideas and coding ability can be tested online and continuously upgraded as users demand new features.
Once again, there are some tradeoffs associated with SaaS relative to the traditional model. Along with the privacy and security concerns inherent in cloud computing, firms lose the ability to customize applications to their exact needs. However, such customization has often been found to be ineffective and inefficient, since most business needs are similar. Lengthy development projects tend to result in “shelfware” that is too late to market and never implemented.
By eliminating the need to acquire and implement proprietary IT infrastructure, the cloud is reducing the costly barriers to entry faced by start-up businesses, especially the costs to develop and maintain software applications.
When software is obtained on a subscription basis as a service from a third-party provider, and not purchased as a product, companies are no longer responsible for the ongoing expenditures required to manage applications internally. Consumers can also avoid buying expensive software by paying only for what they use. Software developers are able to test, improve, and deliver applications to enterprises and consumers more rapidly and cheaply. Given these benefits, SaaS is estimated to be growing at a 17% annual rate.
Cloud providers have been able to capitalize on the SaaS trend by taking a share of the revenue from applications delivered on their Internet infrastructure. Having the ability to identify the software developers who can find ways to profit directly from their own creativity is likely to be critical to investing in this paradigm.
- Private Cloud vs.Public Cloud Adoption Curves (cloudblueprint.wordpress.com)
- Cloud Management Brokers (cloudblueprint.wordpress.com)