Friday, July 18, 2008

SaaS economics

While researching the offerings of rPath, I came across Billy Marshall's blog . Among many of the tidbits of insight, two jumped out of me.

Complex server applications have typically so many configuration hooks that application deployment is not easily automated. This implies that bringing up and shutting down applications is not the same as what we are used to on the desktop. Applications become tightly coupled to physical host configuration, internal IT processes, and the prowess of the admin. Billy blames this on OSFAGPOS, or On Size Fits All General Purpose Operating Systems. OSFAGPOS is deployed in unison with the physical host because the OS integrates drivers that enable access to the physical hosts's hardware resources. A RAID or network stack can be configured to improve performance for specific application attributes, and it is this separation of roles that creates the root of all evil. rPath's vision is JeOS (read "juice"), or Just Enough OS that packs all the meta data needed for the release engineering process to do the configuration automatically. This would make application startup fast, cheap, and reliable.

Here is an economic reason why new SaaS providers will siphon off a portion of the software universe. A typical ISV spends between 25 and 40% of its engineering and customer support expense on peripheral functionality such as installers, cross-platform portability, and system configuration. Since a SaaS provider solves these issues through a different business model it frees up a significant portion of the development budget to work on core application features.

In my mind, the cross platform aspect is not as clear cut as Billy makes it appear. Whereas for an ISV the economic lock-in limits the TAM for its application, for an SaaS provider it can cut both ways. If the SaaS provider caters to customer for which high availability is important selecting gear from IBM or Sun might create a competitive advantage AND credibility. But if the SaaS provider caters to customers for which cost is most important, selecting gear from Microsoft/Intel/AMD might be the better choice. The hardware platforms have different cost structures and if a SaaS provider wants to straddle both customer groups they still need some form of cross-platform portability.

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