Successful SaaS requires open source distribution economics…

Sarah Lacy’s article in Business Week is a sobering reminder of the challenges software companies face building on-demand businesses. The point made vividly clear here:

“SAP thought customers would go to a Web site, configure it themselves, and found the first hundred or so implementations required a lot of time and a lot of tremendous costs,” Richardson says. “Small businesses are calling for support, calling SAP because they don’t have IT departments. SAP is spending a lot of resources to configure and troubleshoot the problem.”

Nick Carr chimes in here with the point:

Anyone who thinks the software-as-a-service business is a gold mine is wrong. The economics are fundamentally different from those of the traditional software business – and not in a good way

I spoke yesterday to a SaaS platform provider who’s business is to help ISVs deliver their solutions as a service. They described some of the challenges their customers face being multi-tenancy, scalability, security, APIs, not to mention simply cramming the features into a browser.

I’ve watched other companies launch on-demand offerings with great fan fare only to find later that the offering languished among their traditionally delivered alternative. Then, after facing the brutal reality of the SaaS model purge all references to the SaaS offering (don’t they know there’s a Wayback Machine?).

As Sarah notes, there’ s no putting the genie back in the bottle. So what’s a company to do?

One point that Sara mentions but doesn’t fully explore is the role of open source in SaaS. There are many dimensions to this including how SaaS companies have leveraged open source to more quickly deliver their services, or how some open source companies are trying to reign in the free riders with the AGPL.

However, I believe the real impact of open source on SaaS will be because of it’s distribution model, not its development model. JBOSS’s sales machines is well known among open source businesses. They were tremendously successful monetizing their community which dramatically reduced the costs of sales and marketing. In fact, most professional open source companies benefit more from more efficient distribution than development.

So what’s this mean for SaaS companies? The successful ones are going to not only leverage the development model of open source, but perhaps more importantly, the distribution model as well. There are already examples of this. SugarCRM is perhaps the most prominent open source company that has extended their model to include SaaS. That’s the fastest growing part of their business and already represents about 30% of their total subscribers.

I believe this is an exciting evolution for both SaaS and open source businesses.


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