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 awaits them right ahead.
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.