Why wouldn't they bitch it?

For all those skeptics of Cloud computing economics, Nick Carr has a tell all with a NYT illustration. It’s a long post. I am pint sizing it here.

“The history of computing has been a history of falling prices (and consequently expanding uses). But the arrival of cloud computing - which transforms computer processing, data storage, and software applications into utilities served up by central plants - marks a fundamental change in the economics of computing…

In late 2007, the New York Times faced a challenge. It wanted to make available over the web its entire archive of articles, 11 million in all, dating back to 1851….That's not a particularly complicated computing chore, but it's a large computing chore, requiring a whole lot of computer processing time….Fortunately, a software programmer at the Times, Derek Gottfrid, had been playing around with Amazon Web Services for a number of months, and he realized that Amazon's new computing utility, Elastic Compute Cloud (EC2), might offer a solution. Working alone, he uploaded the four terabytes of TIFF data into Amazon's Simple Storage Service (S3) utility, and he hacked together some code for EC2 that would, as he later described in a blog post, "pull all the parts that make up an article out of S3, generate a PDF from them and store the PDF back in S3." He then rented 100 virtual computers through EC2 and ran the data through them. In less than 24 hours, he had his 11 million PDFs, all stored neatly in S3 and ready to be served up to visitors to
the Times site.

The total cost for the computing job? …Gottfrid told me that the entire EC2 bill came to $240. (That's 10 cents per computer-hour times 100 computers times 24 hours; there were no bandwidth charges since all the data transfers took place within Amazon's system - from S3 to EC2 and back.)”

Amazing economics. Now why wouldn’t they (high cost, license based, on-premise enterprise s/w makers) bitch it?

.

"Let the economics deliver"

By now your grandma will know that the one big cost component in setting up data center is power. Not for computing, for cooling the whirring machines. To get around this, companies have begun setting them up as far as Siberia, so that they can cool server farms by simply throwing open a few windows.

Now Google dips into its vast patent filings and executes a wonder – a floating data center. Yes, a data center that is powered by waves, cooled by water and no property tax to pay because there is no property. It uses a technology called Pelamis wave energy converter that generates electricity into a grid from offshore wave energy. The search giant filed for a patent in February that was approved Aug. 28. The patent outlines a concept that would not only be savvy engineering, but deliver great returns. Rich Miller at Data Center Knowledge calls Google’s patent a “startling new take on data center engineering.” Larry Dignan says “I’d call it brilliant engineering, but the financial engineering could be even more impressive.”

Being a SaaS lover and a cheapskate, I would just wait for the economics to deliver ;)
.

Have it in the cloud, will burst !

When we rely so much on the internet for our daily dose of email and other web applications, we are exposing ourselves to its fallibilities also. For the web-obsessed amongst us relying way too much on email, blogs and wikis through the day, a couple hours of outage is indeed our idea of hell. Now imagine enterprises that expose themselves to the vagaries of cloud-based computing services? That clearly means loss of business. Apple's MobileMe service was down for a few hours yesterday, and access continues to be sketchy for some, representing the most unfortunate kind of consistency over the past month.

Google found itself apologizing for its Gmail outage yesterday: "Many of you had trouble accessing Gmail for a couple of hours this afternoon, and we're really sorry. The issue was caused by a temporary outage in our contacts system that was preventing Gmail from loading properly. Everything should be back to normal by the time you read this." And an online storage service called The Linkup (formerly MediaMax has closed up shop after losing an unspecified amount of customers' data.

That triggered another round of commentary from the blogosphere about how dicey a proposition it is to trust your data and services to the cloud, especially your business critical applications. But while trouble in the cloud carries the added annoyance of feeling powerless while someone else works on a fix, these outages are just a vaporous extension of what we know to expect with more tangible, earthbound systems, indeed with every device, appliance and service we use. Why don’t we just say, stuff breaks? Systems are going to go down, it’s a fact of life. What’s important is to be prepared when those systems go down which is a major reason that some kind of offline access should be built into systems like email. In theory we’ll reach a time when the cloud really is always on, but we’re not close and it may never happen Maybe it breaks less if you pay enough money, but it breaks. With that as a given, especially so with complex or newer technologies, any plans to use the cloud also require plans to do without it if need be. The advice from the Department of Redundancy still holds: back up. Because the alternative is on-premise enterprise software with its huge license fee, maintenance and hardware costs, frequent upgrades, revisions, consultants and system integrator fee besides long process breaks entailed by complex installation protocol.

Don’t you know there is a liquidity crisis crippling global business sentiment? Economics will win hands down anyday. Never mind the outage…

.

Not so promising Cloud?

Courtesy of Nick Carr, I read Sarah Lacy’s take on why SaaS will drag.

Lacy says

“….On-demand software has turned out to be a brutal slog. Software sold "as a service" over the Web doesn't sell itself, even when it's cheaper and actually works. Each sale closed by these new Web-based software companies has a much smaller price tag. And vendors are continually tweaking their software, fixing bugs, and pushing out incremental improvements. Great news for the user, but the software makers miss out on the once-lucrative massive upgrade every few years and seemingly endless maintenance fees for supporting old versions of the software.”

Well, I have some questions to Lacy. Isn’t that gouging by licensed software vendors (charging fresh-off-the-oven rates even after years of amortization of developmental expenses) in the name of maintenance and support and upgrades and consultancy the reason why SaaS came into prominence? Now won’t the users that are victimized give a longer rope for SaaS vendors to perfect their art? SFDC did succeed after all, didn’t it, albeit in its own niche?

Lacy then asks “Why isn't Oracle a bigger player in on-demand software?” She seems to have some answers as well. But I would rather say - “Ellison just didn’t get it”! On-demand model has to be designed from scratch by some brain that has not been corrupted by the luxuries offered by the licensed software model. Ellison knew he won’t be able to figure it out ever. That’s why he smartly backed Marc Benioff of SFDC who had no such prejudices.

On the same lines, I also differ with Nick Carr as he says -

“The unsentimental Ellison will wait until the profits from traditional software begin to decay, and then will buy his way into the software-as-a-service business, cherry-picking attractive suppliers”.

Given the way software business and user patterns evolve, both licensed model and on-demand model will have to co-exist for a long time until other issues around connectivity, hosted service quality, data storage and security, WiMax spectrum availability are resolved globally. If profits from traditional software begin to decay, chances are that it will be replaced by a more economical enterprise application and not necessarily by a SaaS app. Transition of all things on-premise to everything on-demand may not happen at all. But the economics will tempt a lot of rethink and it is that scenario which might drive some sense into enterprise vendors to stop gouging customers and get real.

So don’t hurry to bitch SaaS. For every believer in enterprise hegemony, there could be ten others that swear by SaaS economics.

.

Can't beat'em? Join'em...

If this happens, the enterprise IT universe is sure to be disrupted. Very violently perhaps. Will Oracle bite it?

.

If it doesn't, SAP / Microsoft / HP will be more than happy to - even if it takes cannibalizing their own in-house initiatives to turn on-demand from on-premise models.

.

BBD or not; Larry Ellison is in no hurry

Larry Ellison never shoots from the hip. He is quite level headed and makes sure that he’s never caught with his pants down. I am referring to his casual dismissal of SAP’s SaaS offering – Business By Design (BBD) – by saying that it’s not going to make a lot of money.

But the fact is that he owns NetSuite, a SaaS ERP provider that is prepping an IPO. If Ellison really thought there would be no money in SaaS ERP he wouldn’t own NetSuite. But Ellison’s comments, which were delivered (transcript) after the company’s solid earnings report, do reveal Oracle’s strategy. Oracle isn’t going to try and replicate what SAP has done. Here’s Ellison’s strategy: Let SAP figure SaaS out and crow if the rival fails. If SAP is successful–it probably will be over time–Ellison buys NetSuite from himself.

Here you got what Ellison had to say about the growth strategies of Oracle and SAP and the SaaS market.

Simply put, Oracle will just buy NetSuite when the time is right. Sure, there are corporate governance hackles to be raised since Ellison is basically buying his own venture, but that’ll be worked out with some independent committee and a healthy premium. So when folks figure out this SaaS thing, Ellison will answer with another acquisition.

If BBD fails, he can start a grapevine and say Henning Kagermann, CEO of SAP was a daffy professor who bullshitted his way into a project that never made any sense in the first place, and predictably failed. But I have this question for you Mr.Ellison - costing a tenth of your economics, why would you think BBD will fail...? Wouldn't you agree it'll make up in volumes what it loses in the width of its margins...?

.

Thank you, Mr.Kagermann

So, SAP has unveiled its Business By Design (BBD) program – the latest on-demand offering from its stable aimed at small businesses, that runs on SAP's own servers and be accessible over the Internet for as little as $54 a month.

Now it remains to be seen how soon or long does it take for CEO Henning Kagermann and his team to leverage BBD for his $13 billion company's efforts to expand its customer base from the current 42,000 to 100,000 by 2010, in particular customers with 100 to 500 employees.

They say it carries a new risk. I am not sure how much of a risk it is even if partners, VARs, SIs, and others get less enthusiastic, since end users can download and install BBD by themselves. But then, that’s also the idea – to eliminate middlemen and cut some costs in the process. In the final tally, it isn’t how MANY partners someone has, but how good they are at supporting their customer’s goals that count. I’m a lot more impressed with vendors who have a few hundred of the right partners than with the “army of ants” strategies, where the number of partners is very high, but it turns out there are thousands included in the count with minimal skills and very thin relationships to their partner.

Customer first, any day. Thank you Mr.Kagermann... hope BBD leads to customer delight !

.

"Make the high mountain bow its head; make the river yield its way."

If entries of LCCs like Southwest Airlines in the US and Air Deccan in India drove airfares down to the floor and shook up the smug industry majors from their cocky slumber, it was the entry of SaaS operators like Salesforce and Netsuite that did enterprise vendors like SAP, Oracle, Microsoft, IBM and HP in. As bloggers showered huge praises on SaaS vendors’ pricing model and beat up that adopted by enterprise gorillas post after post, they knew their bluff had been called. Good friend and fellow blogger Vinnie Mirchandani draws a parallel to EDLP model of Wal-Mart in that superb post.

Now I hear SAP is taking a page out of the playbooks of Salesforce and NetSuite, a company majority-owned by Oracle Chief Executive Larry Ellison that filed in July to go public. The news is that SAP will unveil on Wednesday a line of business management programs to be delivered over the Web. Microsoft and other large software companies are also starting to make a similar shift.

Pricing and delivery innovation combined with power of blogosphere – deadly combo to bring down monsters what years of customer harangue couldn’t…?

.

LucidEra makes business sense

Yesterday, I figured out the venture pitch that had taken Peter Rip’s breath away. It’s LucidEra – a company that offers a web-based service that helps businesses collect and analyze data across their internal software systems to make them more efficient.

First I felt LucidEra is just another company in the somewhat crowded “business intelligence” industry. I grew curious. What was it that was so exceptional about this venture that had made an astute VC like Peter fall head over heels in love and leads a $15m round? All I could see was it was an on-demand SaaS application as opposed to most of its competitors that are on-premise enterprise apps. I just ran the demo and I was convinced. I haven’t verified the cost to consumer yet, which I guess should be disruptively low to absorb market share away from high cost enterprise solutions. I am a stingy guy and IT's the last thing I want you to spend money on.

I have great faith in Peter’s judgment and would gladly recommend it for my clients, here in India. In case you are thinking of buying a high cost business intelligence application, LucidEra looks like a far better and economic alternative. No complex architecture, multiple layers or components and no integration or supports required. Just plug and play. Your bottomline should look a lot better with that savings in IT budget.

.

The changing IT services landscape

I had great fun watching the live telecast of announcement of financial results by Infosys and TCS. Being a shareholder in both these companies and in a few other promising companies in the Indian IT sector that give 25% plus y-o-y, I have little to complain on their efficient use of my capital.

As a long term investor, I am not bothered by cyclical factors like the weakening $$ or interest rate hardening. Anyway these companies have hedged their $$ exposures in the short term and the impact cost on their margins can only be negligible. Well, in case if the trajectory persists, they may have to re-price their offerings and I am not much worried about their loss of competitive edge since still it would leave their clients with significant cost and efficiency arbitrage. Even the competition has large presence in India, hence the problem is not just theirs. Interest rates matter much less since these are mostly zero debt companies with sufficient cash hoard (apparently to finance acquisitions) at least in the short term.

But something else worries me more.

I often get to hear CIOs often mouthing the word ROI than CFOs. They are looking for solutions more than technology (which is the way it should be). They say they simply can’t afford large scale, highly customized and costly IT implementations and services. Enterprise solutions are becoming all the more modular, pre-integrated, pre-tested pre-assembled and validated at the Vendor’s side before implementation. Not much different from custom orders given to a carpenter. Customers engage multiple vendors to bid on smaller projects that can be easily deployed, managed and measured. The IT partners are also expected to provide best practices, 24x7 service and at times even to give a better insight into the customers’ business model itself – not as a consulting assignment, for free. These ancillaries have become the differentiators in the otherwise commoditized IT services market place.

Add to it the long term threat posed by SaaS to the traditional revenue streams of these IT services companies. If clients are no longer rolling out large CRM or ERP applications on-premise and are instead accessing them from a remote center via a web interface, won't that bypass the role of third party systems integration and applications management vendors altogether?

Under SaaS, clients use the internet to access remotely-hosted applications, which are delivered on a one-to-many basis. SaaS specialists such as Salesforce.com, NetSuite, and RightNow, which all develop and host web-based CRM and ERP systems are enjoying strong growth, driven by the continued acceleration in speed of WAN bandwidth, and diminishing user concerns over security and reliability.

SaaS will sound familiar to anyone who lived through the Application Service Provider hype of the late 90s. However, the big difference is that ASPs were basically pushing hosted versions of traditional client-server applications on a one-to-one basis, whereas SaaS applications tend to be multi-tenant, are designed for internet delivery from the outset, and many utilize genuine usage-based pricing models.

Some say that the prospect of bandwidth carriers requiring SAAS companies to pay a premium for faster networks could slow the general adoption of SAAS. This is because it will require SAAS companies to rethink how much they are willing to pay to deliver their services, as well as how much to charge customers. But the flip side is that if someone went to a customer and said ”we're going to reduce your access to applications over the Internet because you're not paying us enough”, they would switch providers so fast it would make their head spin. I find it extremely hard to believe there won't be some [carrier] who says, “I’m the one you don’t have to pay for.”

How the small SaaS providers differ from the big consulting organizations is that they are focused on doing lots of short integration projects, whereas an Infosys or a TCS or Accenture wants to send in a truckload of consultants into its clients for 18 or 24 months at a time. If the employees are not on a project, it inflates their bench strength that hits their bottomlines hard.

.

I don’t want to put out a `sell’, but many soon will if a quick rethinking of IT service delivery models do not emerge out of the woodwork to meet the ever evolving set of challenges.

A comprehensive perspective can be found here and here.

.