There’s an excellent discussion going on over on the Cloud Computing Google Group about the pace of migration of traditional software to a SaaS model.

Here I recently went into some of the very real reasons why the migration is slower than some would like, but didn’t really talk about the pace of adoption.  There are some numbers that make for some interesting analysis.

According to PwC, in 2009, the top 100 software vendors (traditional non-SaaS) generated 3.7% of their revenues from SaaS in the US; and 1.1% of their revenues from SaaS in Europe.  In the same report, the US has a 44% market share and Europe has 36% market share by revenue (License, Maintenance and Support).

According to Gartner, in 2010, the WW installed enterprise software market grossed about $104 Billion.  So, roughly, we could say that installed software vendors (US & EU only ) brought in nearly $5 Billion in revenues in 2010.  So nearly 5% of revenues since the inception of SaaS (not including ASP)?

While some ISV CEOs may position the cloud as a fad/irrelevant/non-strategic/etc. the smart companies are out there experimenting with technologies, use-models, and business models…..but most importantly, they’re talking to their customers (who will buy) and vendors (who are looking round corners for their customers).  The benefits of the cloud are undeniable, but there are impacts on both customers and vendors that need to be carefully navigated.

Even after a dozen or so years since the launch of Salesforce.com, we’re still in the early adoption phase of this new phase of computing delivery and application consumption.

Will installed software ever go away?  Have you installed an iPhone/iPad/Android app recently?

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Software-as-a-Service (SaaS) has arguably been around since the launch of SalesForce.com in 1999. We could even say that it’s inception pre-dates even this milestone, but under a different name - Application Service Provider (ASP). Remember those?
The revenue growth rate of the SaaS market is a healthy 22%, and has grown to around $12 billion annually. At the same time, installed software is around $150 billion annually and still growing at about 12% per year. Why is that? Why isn’t the traditional software market dying a quick and rapid death?
While commentators say that it’s just traditional ISV’s (Independent Software Vendors) dragging their feet, there’s more to it than that.

Over on Software Advice, I explore both the selling and the buying side of the installed software business to try and understand why the installed software isn’t being replaced by cloud computing, but will continue to find a way to leverage it.

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It was reported today by the BBC, that Google has signed up Spanish Bank BBVA to a corporate-wide deal whereby the bank will transfer to Google all of its software use for internal communication, collaboration, and various organizational applications.

The move to the cloud by a commercial bank is a watershed moment in cloud adoption in terms of security.  But the motivation underlying BBVA’s move is equally important - the move to cloud is a migration to value.

The Cloud is Secure

BBVA made it abundantly clear that they are not moving any client data to the cloud, but limiting the use of the cloud to purely internal purposes.  Across their 110,000 staff in 26 countries, they will be using GMail, Google Docs, Google Calendar, Chat, Video Conferencing, etc.  If we think about this for a second, and consider the approach BBVA would have taken to moving their internal processes to the cloud, there would have been two fundamental conclusions BBVA’s IT team and executive management came to:

1. Security is not an issue.  The Cloud is secure.  We know it, we’ve tested it, and it’s secure.  We should move forward.
2. Our customers don’t understand the cloud and don’t 100% know if it’s secure or not.  We have to draw a line with our client data until that public perception issue is solved….because we’re not going to resolve it.

Cloud for Cultural Change and Value - Not Price

From the beginning, most vendors in the Infrastructure as a Service (IaaS) segment of the cloud stack have been promoting the idea that a move to the cloud is essentially about price - lower IT costs, scale compute on demand, migrate capital expenditure to operational expense, etc.  This has always been a risky strategy in my mind as you play the cloud industry out over the long term.  It’s essentially commoditization from birth.  Companies like IBM and HP coming into the space will hopefully begin to create a value-based tier in the market, but I don’t think we started in the right place.

This is why ABVV’s motivation is so important.  According to Carmen Herranz (Director of Innovation….great title to have within a bank!), the reason they’re making this move is to initiate “a cultural change within the company” to get “the whole company working together”.  Specifically, the goal is to “promote innovation” and “increase productivity” across the entire organization.

The bottom line is not the “bottom line” - it’s the top line.

Class Structure with the Cloud Stack?

Another way to look at this proclamation by a serious enterprise user is to consider that a “class structure” is developing within the cloud stack.  It shouldn’t be a surprise really.  The model is not a new one.  Consider the market capitalization of ARM, developer of the processor IP (essentially software used by chip manufacturers) that goes into all (pretty much) of our smartphones, at $12.11B; Intel, manufacturer of processors that go into the servers that power the cloud, at $135B; Rackspace (although not the #1 player in IaaS, Amazon does not break out AWS numbers from their annual report, and so the market cannot decide the value of that business in isolation) at $5.53B; Apple (we all know who they are), at $390.10B; and Google (ditto) at $201.88B.

It’s a simplistic analysis, but essentially the higher up the stack you go the greater the perception by the market of the delivery of value.

The reason so many of us have been working diligently to bring the cloud to reality is because we have always seen the value of the cloud.  Unfortunately, too many have been selling on price.  Hopefully this equation will start to become more nuanced as we move forward in this exciting space.

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