Software as a Service Economics

Scott Bolick, George Gilbert and Rahul Sood of Tech Strategy Partners have assessed the economic model of software as a service (SaaS) in their recent post on Sandhill.com.  It is worth reading.  Their conclusion is the the SaaS model is likely a superior economic model, particularly once scaled.  They estimate that SaaS vendor operating margins will range between 34%-40% in its mature manifestation.  These margins are superior to the traditional model as evidenced by SAP with a 27% operating margin and Oracle at a 34% operating margin.

Comments

[Brad Feld]

Eric - I saw it this morning and was excited. I read it and was very disappointed. While I like the conclusions they came to, they didn't surface their assumptions very effectively and the one's that I could figure out (or infer) didn't feel very robust to me. As a result, I didn't think the conclusions actually had any validity.

[vinnie mirchandani]

As MS is finding out I think SaaS to be robust is going to need heavy capital investments in high-availability grids, security etc. On the other hand it has the promise to laser focus on features users are really using to invest R&D in (since vendor should be able to monitor rather than guess or survey features in use). Also, we could see a move to more of a self serve sales model...but I think still too early to predict economics in the enterprise apps space