Cowen: Debating SaaS slowdown; Google Apps and AMD market share

Cowen & Co. outlined its top 10 potential technology surprises for 2008 and a slowdown in software as a services is front and center on the list. There are also a few wild-cards such as Google Apps adoption and AMD giving up on the market share war.

Cowen ranked its surprises based on events most likely to occur (10) to items unlikely to occur (1). Here's the list and we'll cherry pick items from there:

10 - The Telco Threat to Cable Becomes Glaring 9 - The Growth of On-Demand Software Vendors Hits a Wall 8 - U.S. Legislation Favorable to Alternative Energy Is Passed During Election Year 7 - Google Experiences Meaningful Adoption of Google Apps By Medium & Large Businesses 6 - Qualcomm Abandons Gobi 5 - PlayStation 3 Fails to Achieve Critical Mass, Developers Shift Focus to Wii 4 - AMD Loses its Infatuation with 30%+ Market Share to Focus on a Profitable Niche Strategy 3 - DRAM Market Conditions Turn Favorable by Mid-year 2 - Cisco Lands a Major Wireless Infrastructure Deal with a Tier-1 Service Provider 1 - Hollywood Studios Announce Intention to End Physical DVD Distribution and Embrace Cable VOD and Broadband Downloads

The first item on telcos threatening cable is obvious. Verizon and AT&T are going to be big threats to cable players and plenty of customers--including me--have jumped ship to services such as FiOS.

The second item caught my eye for a few reasons. For starters, Cowen rates it as highly likely that software as a services (SaaS) will hit the demand wall. Given that the industry is still in its infancy Cowen's stance is interesting--after all SaaS vendors are working off of smaller bases. Meanwhile, Dan Farber notes that some people see SaaS as recession proof.

You could argue the point either way. For instance, SaaS vendors could see more business as technology managers refrain from large implementations and the costs that go with them. On the other hand, businesses could just stick with the software they have (the paid for kind) and refrain from any changes--including moves to Saas.

Here's what Cowen said:

Saas vendors are unlikely to post a financial shortfall even in a difficult IT spending environment because the subscription nature of their business models affords a high level of predictability. Even if IT budgets contract, software delivered as a service can be deployed for such a minimal up-front investment that new customer signings and net subscriber additions will continue to grow at a rapid clip. On-demand vendors will continue to gain share vs. legacy providers of on premises software at an inexorable pace in both good and bad environments for corporate IT spending.

But...

None of the above claims has been tested in a slowing economy. Enterprise software company activity levels are always volatile and back-end loaded. This challenge is a constant in the software industry -- and applies as much to on-demand software companies as to traditional on-premises software companies. The exposure of SaaS vendors is heightened by the fact that nearly all are "one product companies" that are fighting the increasing inclination of corporate IT buyers to consolidate spending with a few large vendors like Oracle SaaS vendors all provide applications for which new deployments are likely to be tightly tied to the willingness to fund discretionary new projects (which is more economically sensitive than spending on IT infrastructure). Moreover, new deployments and seat growth for the on-demand vendors is likely to be highly exposed to fluctuations in both HR and marketing budgets - departments that traditionally bear the brunt of corporate belt tightening early in a business downturn.

Overall, Cowen said there's a 30 percent probability that its surprise will play out. My take: I'll never say any business model--including Google's--is recession proof. There is no such thing. However, I will acknowledge that SaaS companies may see a demand slowdown later than others. Cowen hits a few key points. First, SaaS falls into the new project category. It's quite possible that companies will hold off on any software implementation--SaaS, packaged or otherwise. Meanwhile, the fact that SaaS is heavily concentrated in CRM, sales and marketing is a negative.

As with any industry, a downturn will clearly outline the winners and losers. Salesforce.com with its mindshare gains and lineup of large installations could gain share. Other players--including NetSuite--may have a different experience. The NetSuite problems that Dennis Howlett has been highlighting are important. In a downturn, those horror stories will be even more important.

Onto the next item:

Cowen argued there's a 20 percent probability that Google Apps will get meaningful adoption in medium and large businesses in 2008.

We estimate that it is 80% cheaper to run Google Apps Premium than the all-in cost of Microsoft Outlook (license fees, exchange servers, IT labor). If the economy continues to slow, IT solutions that save money and improve productivity are more likely to be considered by management. We have been testing Google Apps Premium and have found that it generally matches the functionality of Outlook's email, calendar, and contacts features. In addition, Google Apps Premium provides 25 GB of storage per user (100 times greater than the 250 MB average for corporate Outlook users), much better search, and much better web access features. In addition, Google Apps Premium provides compliance and security features required by most companies via its acquisition of Postini in September 2007. At present, Google Apps Premium cannot be used offline, which is a major hurdle to corporate acceptance. However, we expect Google to launch offline capability by mid-2008. The free version of Google Apps is already being used by 100,000 small businesses. Increased awareness and a drive to cut costs could accelerate adoption by medium and large businesses. Expected timing of event: Late 2008 with the expected launch of offline functionality for Google Apps Premium in mid-2008 spurring adoption.

My take: Cowen has an interesting argument given its take on SaaS. In other words, SaaS isn't recession proof yet Google Apps could gain from a slowdown. Cowen said that its Google Apps prediction has a 20 percent probability of occurring. I'd put it lower. Even if Google Apps wins over customers like Cowen's team it's unlikely that gun-shy CEOs are going to implement any radical changes. The wild-card: How much do CEOs view Outlook as essential? Is outlook viewed like electricity or the travel budget? If it's the latter Google Apps could get some momentum in a downturn.

And the final item that caught my eye is this gem from Cowen: AMD will give up the market share game.

I've argued that Intel and AMD should form a happy duopoly, but neither will listen to a peon like me. Intel has no reason to listen--it has the most market share and all the benefits that go with it. On the other hand, AMD can't possibly win a market share war so why try? That's why Cowen's argument makes sense to me. Here's the argument:

Under its current cost structure, AMD cannot be profitable without substantial share gains. Yet material market share gains are unlikely because:

(a) AMD's current and projected offerings are too weak to support gains in market share based on superior products

(b) AMD's cost structure cannot support a strategy based on price-driven share gains without producing even greater losses than at present.

As a result, AMD faces a stark choice. The company can choose to continue to post losses until it achieves a superior product offering (well beyond any reasonably forecast-able horizon in our opinion) OR it can significantly reorganize its business. Future capital infusions are likely to be conditioned on such a re-organization. A realignment likely would include a change from its current 30%+ market share objective in the overall MPU market to an objective of achieving high market shares in select processor categories where AMD can offer superior products.

My take: The sooner AMD realigns the better from a business perspective. However, Cowen said that AMD won't go there until it feels "completely cornered." Cowen said there's a 15 percent probability that AMD will drop its market share obsession. That probability is fair. In 2009--after another year of pain--the odds that AMD would make such a move rises.