By Fran Howarth, Partner
The ways in which software is delivered is changing and these changes benefit everyone as end-users may be productive faster and often more economically than when software is delivered using a traditional licensing model.
New models include offering software as a service (SaaS); a subscription-based model typically hosted either by the software publisher or a third party hosting service. Using SaaS, companies do not have to purchase a software license or put in extra technology infrastructure to run the software. They can often use the software more quickly than if they purchase a package and install it in-house. They will also find it easier to switch providers if either the software or the vendor turns out not to actually meet their needs, minimizing risk. For companies with up to around 500 users, using SaaS instead of an in-house software license can save up to two thirds of the cost, but companies with up to 1,000 end-user seats will also see economic advantages.
For larger companies, the economics of SaaS are less obvious, especially since these companies are often able to command volume discounts and they can amortize the costs over a larger number of users, driving down per-seat costs. For such companies, delivery of software applications via a managed service—either installed on their premises or via a server dedicated to them at a hosting facility—will often be a more economically sound option, especially where they have the infrastructure facilities available already. The economic benefits here are that they can outsource the running and maintenance of the application, freeing up their valuable IT resources for other tasks and reducing overall costs.
Even at the consumer level, business models are changing, driven by new capabilities in electronic distribution models and the ability to provision and enforce licenses electronically. Traditionally, consumers and small businesses buying software via an online store or direct from the publisher would wait until the application was delivered to their premises via a courier service, in the same way as physical goods bought online and distributed through physical channels. Technology vendor Protexis claims to be a pioneer in this area, allowing end-users to download software from online stores directly on payment with a credit card. We’ve seen many consumer-targeted products like antivirus software available this way for more than a year. Buying software this way gives instant access to the software and has that advantage that, should the application be lost or the user wishes to install it on a different piece of hardware, purchase records are automatically tied to activation records. This means that the user can return to the online store and re-download the application—thus ensuring that their rights to use the application that they have purchased are upheld.
Purchasing software as a download doesn’t not have the same cost-savings as SaaS, but is a viable alternative for small companies, or for applications required by a small number of users, and not core to the business. At present, this delivery model is typically available only for single license purchases, but it will not be long before multiple licenses can be procured through one central purchase, at which point they will be able to take advantage of volume discounts.
Most technology vendors are at least evaluating offering these options to their customers and some are even claiming that SaaS sales are driving in-house license sales since new customers get the chance to try before they buy. Salesforce.com, the poster child of the SaaS model, has already proved how successful this model can be—even though the initial start-up costs are relatively high in terms of setting up the infrastructure required. Growth rates for technology vendors offering new distribution methods are high and anecdotal evidence suggests that 90% of software companies currently attracting venture capital funding have offerings based on the SaaS model.
Hurwitz & Associates believes that this evolution is just at the beginning and these distribution models will drive a high percentage of software sales going forward. We expect further change. There’s plenty of room for aggregators to enter the market along the lines of what Salesforce is doing with AppExchange. This could mean that costs for end-users could even drop further as technology vendors do not have to incur the costs of building out their own infrastructure, instead benefiting from the shared services offered by a centralized platform. 2007 will be an interesting year.