SaaS Emerges as Long-Term Rival to Packaged Software

The software-as-a-service model is appearing as a growing competitor to packaged software. But the likes of Microsoft, Oracle and SAP stand in the way of SaaS becoming a dominant software-distribution model.

LOS ANGELES—Selling software as a service rather than as packaged goods is catching on around the world. But leading advocates of the practice say it will probably be close to 10 years before this sales model approaches even 50 percent of total software sales.

This was the prediction of software industry executives who participated in a forum titled "Enabling the SaaS Revolution" at the Software & Information Industry Associations 2005 Enterprise Software Summit here.

Software companies such Inc., RightNow Technologies Inc. and Jamcracker Inc. have gained attention because their customers access and use their software products over the Internet rather than installing it on servers, desktops and laptops back at their home offices.

With so many of its members getting involved in this software sales model, SIIA devoted a significant portion its enterprise software forum discussing its implications for the industrys future.

The key reason why SaaS (software as a service) wont become the predominant sales model is because the "big three" software producers—Microsoft Corp., Oracle Corp. and SAP AG—still sell virtually all of their software as licensed software packages designed to be deployed on customers computers, said Treb Ryan, CEO of OpSource Inc., a provider of online SaaS support services based in Santa Clara, Calif.

Sales volume of SaaS products cant catch up with licensed, on-premise software until the biggest software companies adopt the model, Ryan said. But it is inevitable that they will offer at least some of their products on a SaaS basis because the economic model will prove so compelling that customers will demand it, he said.

/zimages/6/28571.gifClick here to read more about CRM (customer relationship management) as a leading example of software as a service.

The key advantage of SaaS is that the customer doesnt have to provide the in-house support infrastructure to deploy new applications or add additional users as the organization grows.

OpSource is so confident of the future of SaaS that it has based its entire business model on providing system support services to companies that are delivering new products on the SaaS model.

Todd Johnson, president of Jamcracker Inc. of Santa Clara, Calif., another company that provides online support services for software service providers, concurred with Ryans view, but was more explicit. The SaaS model will have won on the day that Microsoft starts delivering a significant portion of its products as a service, he said.

Jamcracker also points to estimates that as much as 90 percent of the new software companies being funded by venture capitalists are SaaS startups. Furthermore International Data Corp. (IDC) estimates that SaaS sales will grow by at least 26 percent annually from $2.1 billion in 2002 to $8.1 billion in 2008.

But Greg Gianforte, CEO of RightNow Technologies Inc., which provides CRM application services, is a dissenter from the view that it will take five to 10 years to catch up with package software sales. He contends that his companys sales of online CRM services are steadily catching up with Siebel System Inc.s sales of package CRM software.

Siebel reported $75 million in new license sales in its latest quarterly results, Gianforte said. RightNow reported $25 million in new sales and said that if the trend continues, it wont take long for his company to catch up with this particular packaged software competitor.

But Gianforte noted that his company also will sell licensed versions of its CRM products for customers that want the option of installing the software on their sites. Some larger enterprises prefer to install the software so they can have greater control over data access and security, he said.

/zimages/6/28571.gifTo read about Siebel Systems efforts to enhance its on-demand CRM service, click here.

The term "software as a service" has recently evolved as a better way to describe companies that presented themselves as ASPs, Ryan said. But the ASP term was confusing because it involved companies that were really application aggregators who provided online versions of formerly licensed and packaged software, Ryan said.

The ASP term also got wrapped up with the concept of on-demand computing as it was promoted by IBM and Computer Associates International Inc., which sell large-scale IT management products and services, Ryan said.

But the SaaS concept is an idea that has strong potential "and not just for the short term but for the long term" because it promises to provides large-scale efficiencies to customers, said Gregory Gronowski, vice president of sales and software commerce at Aladdin Knowledge Systems Ltd.

Aladdin, based in Arlington Heights, Ill., markets products for DRM (digital rights management), user authentication and data security. Aladdin doesnt currently offer its products on a SaaS model. But Gronowski said he could see the potential of SaaS in the digital rights management and software security fields.

There are concerns about ensuring the integrity of customer data at SaaS sites, but Aladdin sees this as a significant opportunity for its products in this market, Gronowski said.

"Were very positive in terms of the long-term prospects of software as a service," he said.

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John Pallatto

John Pallatto

John Pallatto has been editor in chief of QuinStreet Inc.'s since October 2012. He has more than 40 years of experience as a professional journalist working at a daily newspaper and...