Business Web 2.0: The Rise of Software as a Service Gavin Christensen Tyler Baldwin Niraj Zaveri Kapil Chaudhary Is Software Dead?  Marc Benioff Overview      Evolution of SaaS Traditional software vs. SaaS Market Trends Hypotheses Next Steps Evolution of SaaS MIT & IBM develop timesharing on Mainframe computers 1950 1960 Mini computer enables more users to have computing resources Source: William Blair Analyst Report, 9/27/04 Ethernet connects PCs together 1970 1980 1990 The web enables hosted applications (e.g., ASPs) 2000 Client-server computing becomes the predominant model for software applications 2006 SaaS is the Future of Software  “[SaaS] affects everybody who uses software, it's a dramatic sea change." states Gates when describing the new approach in how the company develops and releases software via its live software effort  The enterprise is up for grabs again  Web 2.0 technologies enable  Web platforms will enable applications that address the long tail SaaS Key Characteristics    Network-based access to, and management of, commercially available (e.g., not custom) software Activities that are managed from central locations rather than at each customer's site, enabling customers to access applications remotely via the Web Application delivery that typically is closer to a one-to-many model (single instance, multi-tenant architecture) than to a one-to-one model, including architecture, pricing, partnering, and management characteristics Need fatpipe + Ajax-type applications Value Proposition Key Benefits     Less pain – primary pain with traditional software are cost, time, risk e.g. 28% of CRM implementations failed to go live (AMR Research) Management economies – manages and security updates, provisioning, license optimization, scalability Lower up-front costs – typically enterprises face 10X license cost for full implementation, initial burden is typically much less witih SaaS Remote access made simpler especially with Ajax Is Software Dead? SaaS Model Traditional Software Model • Can choose best of breed • Potential influence on future functionality with vendor • Remote access facilitated • Speed potentially limited by bandwidth, shared server setup • Potential to customize to exact specifications • Unlikely future influence on vendor • Remote access potentially difficult Implementation Speed • Fast due to low customization, low integration, and potential for gradual rollout • Still need to adjust business processes • Slow due to customization, integration and drain on Internal IT resources and/or consultants Integration with Legacy Systems • Limited integration available • Integration can be facilitated by XML or other web capabilities • More thorough integration and customization can slow future maintenance and upgrades • Reliance on vendor • Assess data center security, systems and operations • Content / data control an issue • Vendors must provide security or else out of business • For smaller companies, vendor security could be better • In-house control of security • Control of content and data • Must provide own security • Increased availability of internal IT resources • Revenue center • Training • Cost center • Need to ensure alignment of technology with business processes, staffing, etc. • Subscription, commission, advertising, or a hybrid • Typically variable model, with small setup fee and monthly payments • Upgrades typically included • Can change or cancel contract if solution doesn’t work • Easier to budget • Low implementation costs • Hardware scalability • Large upfront capital investment with subsequent purchases of updated versions • Opportunity for long-run economies of scale • High implementation costs, often including consultants • High, maintenance and overhead costs with internal IT staff • High switching costs • Harder to budget Functionality Security and Reliability Organizational Impact Total Cost of Ownership Source: “On Demand: The Tectonic Shift in Computing.” Maynard, J., et al. CSFB. January 2006. Market Potential $14.0 $12.4 $12.0 $10.8 Worldwide $10.0 $9.0 $8.0 $6.9 $6.0 $4.9 $3.3 $4.0 $2.1 $2.0 $0.0 2004 Source: William Blair Analyst Report, 9/27/04 2005 2006 2007 2008 2009 2010 34% CAGR Key Players Software Giants The Web Giants The New Kids on the Block The Outsiders Hypothesis 1: Platforms will enable the long tail   Will a dominate platform emerge? Very high stakes game which we believe that all the major players will seek to play The following are early movers in the competition for the creating an ecosystem for Saas or “On-Demand applications” Partners ISVs & Customers CRM HR Ecosystems ADP Hypothesis 1 Long-Tail Example: Symbiot  Symbiot     What they do: Consolidating sales, supply chain management, and best practices for independent commercial Pest Control, Landscaping and SnowRemoval industry 900 partners avg. revenue $5 MM Business issue – need specialized financial and business, revenue management process applications focused on “Green Industry” Solution: Built platform for HR, labor management, finance, accounts receivable etc on top of Appexchange Symbiot Partners CRM HR ISV Symbiot Hypothesis 2: Rapid movement towards On-Demand model  SaaS vendors growing at the expense of traditional software vendors    Oracle, SAP, Microsoft all launching on-demand product     Traditional software still captures 90% of revenue but  Growth slowed in 2005 to 4.9% (double digits in the 90’s)  IDC predicts SaaS will grow 48% from 2005 to $4.9B in 2006 Greatest in-road in CRM market: On-demand rose from 5 to 9% Companies say these are their fastest growing offerings Oracle has over 600 engineers working to better deliver this offering Siebel’s failure to adopt: Revenue ($1B-$487M), Stock ($100-$8) Challenges large, traditional players face:   Operational and Cultural Financial: Accounting practices to accommodate differing revenue streams and expectations of analyst community Hypothesis 3: SaaS only at the tip of the iceberg   2004 – Initial Buzz 2005 – Initial implementation 2006 – Reaching mainstream Hottest IT category in VC     Emergence of New Top Players:   Rocketed by 20% to $1.1B (VentureOne) First-time investments soared to 52% to $273M Overall software down 10% Salesforce.com, NetSuite, RightNow, SugarCRM Next Wave starting:  Zimbra, Vettro, Jamcracker, Rearden Commerce, Five9, DreamFactory Next Steps  Test hypotheses    Case Studies     Salesforce.com, Google  Platform VCs  consumer & enterprise investment opportunities in SaaS Dreamfactory  tools for On-demand Thinkfree  On demand office tools Zimbra  On-demand enterprise email Explore impacts/correlation with BPO