Public cloud vendors like Amazon are booming, but the biggest money is in SaaS.
Public infrastructure as a service (IaaS) companies like Amazon are on a tear. With public cloud VMs growing at a torrid 20x clip, billions of dollars are flowing into the public cloud.
And yet IaaS isn't where the big cloud money is.
No, that distinction goes to software as a service (SaaS), a market that could dwarf the ballooning IaaS (and PaaS) markets. The reason? Though everyone needs infrastructure, far bigger checks will be written by the business as it dumps old-school applications.
Storm clouds are gathering
Most of the cloud attention has lately been focused on Amazon, and for good reason. The company generated $5 billion in cloud revenue, and it keeps getting bigger.
In all the furor over Amazon's success, it's easy to forget that enterprises still buy lots of on-premise software. Most IT purchases still revolve around yesterday's software deployment model.
That's changing, but if we look at where software value still resides, it's clear that legacy vendors dominate, as Redpoint venture capitalist Tomasz Tunguz shows. While SaaS currently delivers roughly $24 billion in annual revenue, traditional vendors sell 10X that ($240 billion).
Wall Street has therefore gifted the traditional vendors 82% of the market valuation for software, as Tunguz illustrates:
Even so, a quick look at the fortunes of Salesforce.com, Workday, and other SaaS companies gives us a glimpse into the future. As Tunguz writes, "While cloud software may not be able to wrest all the revenue from legacy players—there are, after all, some institutions where security remains paramount and cloud solutions just won't fit the bill—SaaS startups have enormous opportunities before them."
This is true of the cloud, generally, but particularly so for SaaS. As PWC writes, "Perpetual license revenue has been shrinking since 2004, while subscription revenue (including SaaS and other subscription models) is forecasted to have a 17.5% growth rate in the 2012-2016 timeframe."
There's money in SaaS
The reason, as Dana Blankenhorn suggests, is that while "PaaS [and IaaS] merely enables, SaaS delivers value."
This echoes a sentiment expressed by then Wall Street analyst Peter Goldmacher (and current Aerospike executive):
"The Biggest category of winners is the big data practitioners. These are the business people that have identified opportunities to use data to create new opportunities or disrupt legacy business models. We think this opportunity is so profound, we believe that the dividing line between winners and losers in the business world over the next decade will hinge on a company's ability to leverage data as an asset."
While Goldmacher is talking about big data, the same principle applies to the cloud. In Goldmacher's characterization, those that provide core infrastructure will make a mint in big data (or cloud), but the biggest winners are those that absorb the complexity of the underlying infrastructure to deliver business value.
This is, of course, what SaaS is all about.
None of this is to downplay the importance of IaaS, a critical, enabling market for the rest of the industry. Nor is it to suggest that traditional vendors are about to hang up bankruptcy signs: most are frantically figuring out ways to weave SaaS into their legacy business models.
But it is to suggest that as much as we rightly celebrate public cloud computing (IaaS), the biggest winner is going to be SaaS and the business users that run it.
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