SaaS companies are due for disruption by next generation of vendors. SaaS vendors who built their infrastructure with VMs will become new legacy.
The reason Cloud ( IAAS ) took off is because it attacked the most vulnerable areas of infrastructure vendors. Infrastructure vendor’s business model relied on ELAs, reserved capacity and margins. Infrastructure vendors loved the predictability of traditional ways of selling. Their pricing models encouraged customers to buy more of their product whether they needed them or not. The software business was a business that put company profits ahead of customer needs.
The predictability of ELAs and multi year commitments became an unbreakable addiction. They ridiculed Cloud as a developers toy. They refuted customer patterns as illogical. Unfortunately for these vendors, a very disciplined vendor ( Amazon ) decided to address this problem. As early as 2010, the writing was on the wall. It was game over.
Fast forward to 2017. Many have gotten out of the Cloud business. Many have become divisions of larger companies. Some are living on the crumbs of PE firms.
While this was happening, SaaS vendors were building highly profitable businesses. They werecopying what Salesforce was doing in building a successful SaaS business. SaaS vendors perfected the art of scaling up infrastructure to meet customer growth. Some built their own data centers, others used public cloud. Lets call the first ones as v1.0 SaaS and second ones who use a public cloud as v1.5 SaaS.
Whether you are a v1.0 SaaS or v1.5 SaaS, there is one thing common to all. They all depend on VM based compute. The smarter ones amonth them started using containers and container orchestration to squeeze more juice out of their VMs. Lets call them v2.0 SaaS.
The business models of all these SaaS vendors are similar. It can be argued that v2.0 SaaS vendors are more efficient than v1.5 SaaS vendors. Similarly, v1.5 SaaS vendors are more efficient than v1.0 SaaS vendors. This efficiency allows them to redirect more investment to non infrastructure elements.
However, all of these SaaS vendors do VM based compute, which has several problems:
- utilization inefficiencies — you keep the VM up whether its 40% utilized or 80% utilized
- prediction inefficiencies — you have to predict how much capacity you need and allocate it ahead of time
- commitment inefficiencies — you have to commit to the VM even during periods of low usage. You have to pre-pay for reserved instances.
All these SaaS vendors prefer that customers commit for at least 30 days. Monthly fees per user ( or a different unit) is a very popular pricing model. They even have magic formulas to calculate. The whole business model is built around thinking from 2005.
Now for the plot twist: SaaS vendors are the new legacy. A new generation of vendors will make current SaaS vendors lose. The new vendor’s will attack current SaaS vendors on where it hurts most. The pricing model, the efficiencies and the business model.
How will the new upstarts do it? They will abandon VM based model. They will go 100% server less. They will offer true usage based pricing. They will appeal to customers that want to use without monthly commitments. They will charge lot less than current SaaS vendors. They will scale much faster and effectively. They will not have weekly maintenance windows. They will not own data centers. They will pay less to cloud providers than legacy SaaS vendors. The new upstarts will not fight the Cloud wars. They will use the best service from any cloud provider. They may run on AWS Lambda will leveraging Google ML.
Legacy SaaS vendors will double down trying to squeeze more out of their containers. They will offer more incentives to customers to sign multi year contracts. In essence, they will copy the playbook of legacy infrastructure vendors. They will lose, and will lose big.
This is my prediction: If you are a tech vendor and you do not have an active project working on serverless, your clock is ticking and there will be a special place reserved for you in the tech graveyard.