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SAP, Adobe, Microsoft: three monkeys take on SaaS

The challenge: transition from a business model where you earn revenues by selling perpetual software licenses to one based on monthly subscription payments -- while continuing to report rising revenues and protecting your profitability. Can it be done?

The challenge: transition from a business model where you earn revenues by selling perpetual software licenses to one based on monthly subscription payments. Not only that, but achieve the transition while continuing to report rising revenues and protecting your profitability. Can it be done? Steve Singh, CEO of Concur, has led his company through the transition and is doubtful any public company above $1 billion in annual revenues has a realistic chance of succeeding.

Three of the world's largest software companies — SAP, Adobe and Microsoft — have other ideas. Instead of facing the painful disruption of replacing their existing products with SaaS alternatives, they plan to enter other markets with new SaaS offerings that don't compete with those existing products. Once they've built up a separate revenue stream from subscription services in these new markets, the theory is that they'll then have a cushion to lessen the pain of transitioning their conventionally licensed products to SaaS, should they need to later on.

There are three variations on this 'SaaS containment' strategy. Each has its own merits, but the flaw they all share is a determination to put off the evil moment of facing up to the impact of SaaS on their core business. So I've chosen to name them after the proverbial three wise monkeys who 'See no SaaS', 'Hear no SaaS' and 'Speak no SaaS'.

Adobe: 'See no Saas'. The market leader in publishing, design and web development software has just launched the first of a family of services that will target a product segment Adobe doesn't currently serve. Online word processor Buzzword, whose acquisition was announced this week, will head a portfolio of collaborative editing and publishing services for the office productivity market. It's a bold plan, aimed at a market where Microsoft alone currently earns revenues of some $16 billion a year. As a containment strategy, it has some merit, because most of the functionality of office productivity is distinct from what Adobe's existing products provide. But there's still an overlap, and the more sophisticated the online services become (in order to appeal to an ever-larger proportion of the target market) then the more likely they are to start harming licence sales of the existing products. Eventually, Adobe will find itself conflicted by difficult choices as the functionality of the two product sets begins to converge: should it accelerate development of the online products in the expectation of future revenues or hold them back in order to protect existing licence sales?

SAP: 'Hear no SaaS'. The world's biggest business software vendor has chosen to create a SaaS offering that covers the same spread of functionality as its existing products, but targeted at a sector of the small to midsize business market that it doesn't currently serve. Its plan is to achieve massive success for Business ByDesign within that target market, but with no seepage into its existing customer base in other segments of the market. SAP earns points for effort — Business ByDesign has an impressive all-new services architecture — but the strategy has one simple flaw. If the product's good enough to take its target market by storm, it's going to penetrate other segments too. If it's not good enough to appeal to other segments, it'll flop in its own target market. Either way, if you ask me, SAP can't win.

Microsoft: 'Speak no SaaS'. The world's largest software vendor is pursuing a strategy of launching services that are complementary to its existing licensed products, while refraining from offering services that compete directly against any form of licensed on-premises software. It's betting that most customers will prefer to stick with trusted, established products rather than switching to online alternatives, giving it plenty of time to build up revenues from those complementary services. Choosing not to offer direct on-line competition to its own products may seem like a head-in-the-sand strategy, but you can hardly blame Microsoft for seeking to buy time for its existing business model while it develops a services strategy. The problem is that, in providing online services for customers without putting the core products themselves online, Microsoft risks sending customers elsewhere in search of a more integrated user experience.

Some sources for the wise monkeys maxim cite a fourth member of the team, 'Do no SaaS'. That would be Oracle.


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