Wednesday, August 13, 2008

SaaS aggregation and experimentation

In his guest column, How Not to End Up as an Anachronism, Greg Olson, the founder and CTO of Coghead describes the SaaS dynamics and particularly the new SaaS startup-up dynamics. It is a wonderful read, in particular, if you like analogies. Here is a quick excerpt of his column:

"We are now at point where implementors of SaaS capabilities are being disrupted by newer SaaS capabilities. Services that are built largely from other services are a reality, and offer many clear advantages. The types of services that could be used in the creation of new services span the spectrum, from base infrastructure services to complementary high-level application services that can be composed or mashed up. Example services include: compute and storage services; DB and message-based queuing services; identity management services; log analysis and analytic services; monitoring and health management services, payment processing services; e-commerce services like storefronts or catalogs; mapping services; advertisement services; in addition to the more well-known business application services like CRM and accounting.

The move to SaaS applications built on SaaS is a much more profound shift than the move from on-premise applications to SaaS applications. The software industry is beginning to display characteristics that mimic the supply chains and service layering that are commonplace in other industries like transportation, financial services, insurance, food processing, etc. A simple set of categories like applications, middleware and infrastructure no longer represents the reality of software products or vendors. Instead of a small number of very large, vertically integrated vendors, we are seeing an explosion of smaller, more focused software services and vendors. The reasons for this transition are simple: It takes less capital and other resources to create, integrate, assemble and distribute useful software capabilities."

In essence, with BIG companies like IBM, Google, and Amazon committing billions of dollars in infrastructure, SaaS start-ups and their financial backers can experiment very quickly with new business offerings and see what sticks. This is a dream for a venture capitalist: they don't need to be experts in understanding the business, they simply need to apply a portfolio approach to have their basis covered: this is typical MBA fare and thus very easily understood by today's VCs.

The reason these big companies are investing so heavily is because they believe that the future is SaaS and Cloud Computing. When infrastructure investments are taking place by multiple, large and international players, you know that the business dynamics are about to change.

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