Three mega traps for Google Apps
At first glance, the news that Google is about to introduce subscription charges for Google Apps for Your Domain seems like a tremendous endorsement for the way established SaaS vendors already do business. Presumably Google has heard back from its business customers that they aren't interested in ad-funded applications and prefer the security of a fee-based contractual arrangement — something I personally have always argued in favor of. So it looks as though GAYD is going to adopt exactly the same model as Salesforce.com, WebEx, NetSuite and all the other leading on-demand SaaS vendors.
But after the initial celebrations, there ought also to be a fair bit of trepidationThe end result would wreck confidence and profitability among the SaaS establishment about the substantial risks introduced by Google's endorsement. Here is a high-profile entrant to the market that is known for its high-handedness. If Google mishandles its debut it could do immense damage to the SaaS sector — and not care. The risks set three mega traps for Google, its customers and competitors alike:
1. Google Apps become non-strategic. Now that Google has discovered that businesses want to pay for their applications instead of having them funded by advertising, is it going to stay interested in offering business applications? Google's business revolves around contextual advertising, which generates 99% of its revenues, and most of Google's expansion plans are to do with expanding into other forms of contexual advertising, including location-based. Would Google have got into applications so aggressively if it hadn't believed those applications provided another context for advertising? I don't think Google has any enthusiasm for subscription revenue model and if that's what Google Apps for Your Domain is going to have to adopt then Google is likely to rein back its investment in the project, with potentially calamitous consequences (see traps 2 and 3).
2. Google Apps sets unsustainable pricing. Most new entrants to the on-demand market begin by setting their pricing too low and end up having to ramp it up as they quantify the costs of infrastructure investment, product development and account management. This tendency is amplified in Google's case by its deep pockets, mass market ambitions and residual yearning for an ad-funded model. It will set loss-leader pricing in anticipation of scaling rapidly to big economies of scale. Then it will lose interest (see #1 above) just as take-up begins to tail off. The doomsday scenario is that Google undermines every committed vendor in the sector by undercutting their prices, then withdraws or sunsets its offering when no one else has the strength left to take up the slack.
3. Google Apps falls over. I'm sure that Google believes that its infrastructure is world class and that everyone appreciates its remarkable uptime performance. Yet there's a huge difference in expectation between ad-funded search and subscription-funded business applications. I'm not sure that Google really understands what a difference that makes — in common with most Internet giants. Amazon doesn't. Microsoft doesn't even take its business customers seriously. Yahoo can't even automate basic customer requirements. So when (not if) Google Apps falls over, I'm sure we can rely on Google to turn it into a complete PR disaster. The worst of it is, this incident could be the trigger that makes Google finally lose interest in selling applications to business, and the end result of its apparent endorsement of the on-demand subscription model would be a train-wreck of customer confidence and vendor profitability that could set back the entire sector for months or even years.