Amazon’s Cloud Economics Are Now Disrupting The SaaS Disruptors

Remember when software-as-a-service (SaaS) companies like NetSuite were the hip challengers to the legacy world of on-premise software and big upfront license fees? When Salesforce CEO Marc Benioff could pummel his stodgy competition with “No Software” ad campaigns?

See also: Cloud Acronyms Unwound: How To Tell SaaS, IaaS And PaaS Apart

Old-school enterprise software companies continue to be disrupted by SaaS vendors like Workday that host enterprise applications in the cloud instead of corporate data centers. But these days the SaaS disruptors are finding themselves at risk as they cling to increasingly outmoded pricing models.

Their biggest threat? The cloud.

The Cloud Threatens Legacy Tech Vendors … New And Old

It has been apparent for some time that we’re in the midst of a massive industry shift to the cloud. Legacy technology vendors have repeatedly missed earnings over the past few years as they’ve struggled to adapt. Earlier this year, Cowen & Co. financial analyst Peter Goldmacher declared:

[W]e are in a major technology transition as IT buyers are increasingly turning to newer apps and data management technologies that offer more robust and flexible functionality at dramatically lower prices.

No one has ridden this shift to better effect than Salesforce, which has seen its stock rocket to a $30 billion valuation over the past 10 years. And yet, as Gartner analyst Robert Desisto argues, SaaS companies like Salesforce are deeply threatened by the very thing that once set them apart from legacy technology vendors: The cloud.

As Desisto suggests, the cloud is more than merely a more agile way to deploy applications and other infrastructure. That’s Cloud 1.0. The real promise of the cloud, as Amazon keeps teaching us, is to make both how we deploy and pay for enterprise IT a flexible service.

SaaS Vendors Begin To Look Like Dinosaurs

While SaaS vendors might think they’re home and dry on this count, as well, given subscription pricing plans, they’re not. The cloud was supposed to turn computing into a service, but for many, if not most, SaaS vendors, this promise is only half fulfilled, as Desisto points out:

[T]he vast majority of vendors who offer SaaS in the enterprise market do so with a fixed term subscription basis. This means there is no ability for a SaaS customer to pay for what they use, something we commonly see with infrastructure as a service or in many lower end consumer or SOHO applications.

Why would SaaS providers go halfway on the cloud? Well, it turns out that the money in old-school accounting is simply too rich to pass up:

[Pay-for-use] was supposed to be one of the foundational tenants of SaaS but has rarely been offered because SaaS vendors want large contract lock in. SaaS vendors were also supposed to be agnostic to the end of quarter or end of year deals. Clearly, in my experience of reviewing 100s of contracts a year, SaaS vendor salespeople behave just like their on premise ancestors. The bottom line is SaaS vendors will resist to the move to “pay as you go” because it will have a very big impact on their business model predictability.

In other words, cloud economics threaten SaaS vendors just as much as they threatened on-premise technology vendors: both are addicted to fixed-term license fees.

Amazon: Disrupting Even The Cool Kids

None of which would be a problem if Amazon would keep its service-oriented pricing to itself. But it hasn’t. Instead, Amazon has made pay-for-use pricing a new industry norm. This challenges not only old-school tech vendors but also new-school SaaS vendors.

Pesky Amazon!

Of course, we won’t see SaaS vendors dying off overnight, just as we haven’t seen IT vendors who service the data center implode overnight. It will take time, in part because SaaS continues to offer significant benefits to enterprises looking to escape calcified procurement bureaucracy.

But over time we should expect to see Amazon’s “pay-per-use” model to become the new normal for enterprise computing, rendering an entire generation of SaaS providers “legacy”…just as they once did to their on-premise peers.

Lead image via Flickr user shvmoz, CC 2.0