How to survive the dark side of Cloud Computing

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The last couple of weeks were rich with meetings and discussions about SOA, RIA and Cloud, in between the Forrester IT Forum in the US and the SOA Forum in Switzerland. What strikes me is the “lemming behavior” of a lot of software vendors who decorate their offering with Cloud and XaaS feathers, oblivious of the revenue precipice that aTransition to a Cloud related revenue modelwaits them right ahead.

I have touched upon this subject in my article on RIA and Cloud Computing Apps, as well as in a blog post last year (The coming out of the hybrid SaaS model). It’s ripe for an update.

What we have seen in the last couple of years is an increasing offer of Infrastructure As A Service (IaaS) providing quite elastic on-demand pricing, and an increasing number of software vendors using such infrastructure to offer Cloud hosted applications. The evolution of IaaS technologies facilitates the deployment of traditional on-premise applications over the Cloud, and tempts their vendors to slap on those “Cloud Feathers”. What seems to be put aside are the business model implications.

What the pure SaaS vendors (such as Salesforce.com) experience is a growing pressure of SaaS users towards more granular pricing – real pay per use and not only flat subscriptions. And sooner or later we will see this becoming more and more available. The consequence is a further reduction of software usage costs for customers, and by implication lower revenue per user for the vendor. Vendors will try to compensate by looking for cost reductions – both in developing and maintaining the software and in deploying it. So how can software vendors make money and increase shareholder value in such conditions? They would have to look for more productive and cost efficient software platforms, and implement new business models that tap into the entire ecosystem for shared revenue. And they should be prepared for a very tough transition, which might become fatal.

I recently came across a comment by a Magic Software shareholder that “the licensing model is difficult to understand and costly compared to other tools many of which do not even have licensing models. (this makes MGIC less attractive to potential new developers)”. What is perceived by the commentator as a limitation is in fact one of the bright spots which gives this company a much better position in the growing Cloud market. Magic software already creates most of its revenue using a shared revenue model – tapping into its ecosystem for shared revenues with its customers and partners. It gives the company a very robust outlook and resilience to the upcoming shift in the software business model.

I’m looking forward for your opinions.

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3 responses to “How to survive the dark side of Cloud Computing

  1. If you measure success on shareholder value, Magic’s share price is the same as it was twenty years ago. The licensing model for the cloud is the same dilemma faced with the shift to the internet from client server. The first go around, protecting licensing fees, achieved zero growth. A different concept perhaps is “eyeballs first”. In Magic’s case, a hybrid of protecting revenue and eyeballs first would be revolutionary. I’m not privy to yearly revenue for developer licenses vs runtime, but I do know what the growth rate is for the current model – zero, maybe 10% in the best of times. The same can be said for maintaining separate pathways for unipaas and iBolt. A hybrid model to get the product in the marketplace sure would be interesting. You’re absolutely correct in your current assessment that others will fail while Magic will continue to survive based upon it’s current model. Everybody in the community should appreciate this fact for both stability and their livelihood. But, why not choose one of the fifty countries you do business, and just go crazy and try an experiment? Who knows, it might even work.

    • avigdorluttinger

      Thanks for commenting, Randy. I agree that Magic faces a difficult dilemma with its licensing model. But the key point I wanted to raise in my post is the much tougher dilemma other middleware vendors are facing concerning a service based business model.
      In the past, I equated Magic’s path to that of Forrest Gump crossing America, first alone and then with an increasing number of followers. That was in the context of the adoption of metadata driven technologies. I believe that we will see a similar phenomenon with licensing. As the granular price for a software service unit continues to drop, revenues shrink. One typical reaction to that is consolidation, in the hope of reduced overheads. Another is more fundamental and transformational – realignment of the revenue distribution in the supply chain.
      For Cloud Native companies such as Saleforce.com this is the baseline, charging “run time” fees for Force.com application deployment and usage. But for traditional development tool vendors it would not be as simple, since they do not have a licensing scheme related to the outcome of a development, and such development can be deployed on other vendor’s platforms.
      That’s where Magic’s business model position, which was a big challenge in an on-premise environment, becomes an asset in a Cloud based context. I do hope that Magic’s management will leverage this into new growth taking advantage of the Cloud boom – I must say the the last 12 months were quite positive in that respect.

  2. the per seat license revenue is declining, but also more users can get easy access. So the SaaS-shift is only a disaster for those vendors that do not think in new roles. Eg. additional mobile user roles, or social roles like SFDC’s chatter subscription, will help to compensate at least a bit the decline of license revenues.
    We are fully area of the price declining in general and have incorporate this for example in our prediction of the PaaS market sizing.

    This will cannibalize some partner of existing middleware platform revenues. But, revenues will not only be shifted into subscriptions, they actually decline. Forrester Clients can download the full market sizing model and adjust parameters due to their own business model here: http://www.forrester.com/rb/Research/platform-as-a-service_market_sizing/q/id/47483/t/2

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