How can you make money from SaaS?

One of the things that I became very conscious of from my previous post is that in this instance the research showed a very limited view of the SaaS ecosystem by only analysing the core software elements. In looking into this wider ecosystem and the associated auxiliary services i was struck by the question

 

            “where are the profit pools in SaaS?”

And of course, which part is the most profitable. It’s an interesting exercise.

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The core application space has the potential to be the most profitable when you get scale (see this post by Smoothspan). Up till then it might not be the most optimal part of this ecosystem (13% EBITDA).

Right now, at this stage of the SaaS market maturity, it seems to me that the consulting strategy businesses are doing pretty well out of this. They get to double dip in some ways, helping the ISV with the what and how as well as the end customers. It’s easy to see the appeal and given by the amount of interest and trumpeted thought leadership coming out the big 4 this seems to be a large and growing profit pool. I am going on gut feel but it would say that these guys operate way over 13% EBITDA. I also think that there is a clear divergence going on here. You can see the big 4 doing the same old stuff here. Frameworks, sizing, BPO etc. You can also see specialists like Mural ventures emerging. Guys who actually done (and continue to do) SaaS and are monetising their experiences. (in my opinion one is eminently more valuable)

SI’s are a niche but growing business currently. I think in real terms they are only a small fraction of the SaaS market but will grow enormously. Mainly because businesses will still need technical help to get SaaS in, but will still face the traditional foes of being resource constrained. SaaS SI is in opinion the next evolution of technology implementation services, and when SaaS companies get this they will be dis-incented to make their stuff self provisioned. There's an interesting post here by Dennis Howlett with the stunning take out of:

At Microsoft’s recent Worldwide Partner Conference, Tami Reller, corporate vice president for Microsoft Business Solutions said the predicted 2008 market opportunity for services is $93 billion. Set that against the software and enhancements prediction of $51.7 billion” 

That puts the SI profit pool at nearly 2 times the application space. Wow!

Service industries like research and sales and marketing will make quite a bit out SaaS, at quite good margins i would guess. But in real terms this will be quite small. But if you are into niche, highly profitable markets this is a great play.

Network access. The telco piece of the pie. Unless they morph into being a platform provider like BT, then they run the very real risk of being sidelined to a pipe provider who will operate at ever decreasing margins. Regulation, elimination of value (public networks) and global competition from application companies all contrive to make the future of Telco quite bleak.

Platform providers (interesting debate about what a platform provider is to follow) have a good chance through scale to do very well. It depends on their model, the value they provide and their own success in winning over new ISV’s but platforms could be the big winner. Look at portal wars, Yahoo, MSN and AOL spring to mind. These could define themselves as content platforms of some sort. They got massive scale and have evolved their business models to a point where things are ok profit wise. Just ok because you could argue the value they provide is…limited? But if you look at APEX, Apprenda , Opsource and facebook, they are all seeing the value of platforms. The Platform play done right is one of those rare things as it has value up and downstream. If you get scale this could be the big winner. And as i said above if you get the model right it could be even better. Revenue share or stock in a start up, acquisition like Salesforce.com, clip the ticket on a per transaction, SI and business level consultancy, additional services (we’ll even bill for you). And let’s face it, the success rate of SaaS companies isn’t going to be that great, so the chances of one of them being big enough to move to its own datacentre are remote so you got great lock in. There are also great customer benefits too, someone who knows about up-time and reliability managing the app. It’s a good story.

I think there is also money to be made from widgets, gadgets and supplementary applications. Again its niche, but if you make your little customisation available worldwide using someone else’s platform you could do very very well.

So where does the profit SaaS profit lie? Well if you are thinking scale, then in my opinion it’s in the platforms, core applications and SI business. All of these others get have a degree of focus that means their reach is somewhat more restricted.

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