Don't bail out autos, invest in cloud!

In the cloud model, the vendor rather than the customer takes on all the upfront cost of building and deploying the computing infrastructure. If SaaS and cloud take off, will the software industry have enough cash to fund that huge revenue gap?
Written by Phil Wainewright, Contributor

Microsoft last month launched US availability of its Online Services (Microsoft-hosted email and collaboration software, available on subscription). I snuck into a blogger roundtable held at the event and felt privileged to witness the spectacle of a team of Microsoftees celebrating the benefits of moving applications to the cloud. Of course they maintained the official mantra that customers have the choice whether to stay on-premise or go to the cloud. But hearing how delighted customers are to bypass the horrors of on-premise implementation and the upfront costs of conventional licensing, I wondered aloud how many are ever likely to choose to go back on-premise once they've experienced a cloud deployment.

Privately I wondered also whether even Microsoft has the cash to fund large numbers of its customers moving to the cloud model — in which the vendor, rather than the customer, takes on all the upfront cost of building and deploying the computing infrastructure. In a keynote at the SIIA OnDemand conference the following day, Omniture's CEO Josh James highlighted the horrendous cash demands that weigh on pay-as-you-go computing providers. It struck me that, if SaaS and cloud really do take off — and many people are saying, supported by anecdotal evidence of rising sales this past month or two, that recession will accelerate rather than delay uptake — then the entire industry could face a cash crisis in a few years' time.

Estimates vary, but the global software industry probably generates annual revenues of about $500 billion. Industry analysts are saying that up to 25% of new software sales will be delivered as SaaS within the next few years. That implies a shortfall of some $100 billion of license revenue that won't be collected upfront any more, along with whatever it takes to buy and set up the infrastructure to operate it — maybe another $100 billion?

These are scary numbers, and others can do a better job than I of validating them, but let's say they're even half accurate. Will the industry have enough nerve collectively to fund that revenue gap, not just for a year, but over a period of several years as the big switch to cloud and SaaS accelerates? Especially if such a huge financial shortfall coincides with the tail end of what is starting to look like it will be a deep, traumatizing recession?

The best route out of that recession, of course, will be to encourage investment in the technologies and industries that will fuel economic recovery. I believe Web-hosted applications and business services will play a huge role in stoking growth and profits as we enter the next upturn. But today, the US federal government is being urged to spend money propping up the past — as governments often do — rather than investing in the future.

Of course there's a social obligation on government to do what it can to avert the economic destruction of entire communities. But real jobs come from forward-looking, innovative industries. Instead of bailing out inefficient (and speculative) auto makers, the US taxpayer might be better served by providing tax breaks to the cloud providers who will have to risk so much capital to fund the coming shift to SaaS and cloud computing.

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