I was thinking of cooking up a post on platforms in the cloud when Abhijit Dubey, Junaid Mohiuddin and Aadarsh Baijal at McKinsey & Company (and several pundits by now) beat me to it.
The report outlines this new market for SaaS platforms that provide some combination of:
1. Traditional software stack components (e.g. OS, app server, DB)
2. Unique SaaS components (e.g. billing, SaaS dev tools, )
3. Hardware as a service (pay by the drink CPU/storage usage)
The report goes on to categorize different PaaS plays into categories based on what cocktail of components they offer today (e.g. Amazon’s EC3 is just hardware whereas Force.com is a full dev environment and runtime).
Good. Fine. Agree.
Then the report goes onto describe how lucrative the market for PaaS will be based on the notion that lots of SaaS ISV’s are getting started and much of their revenue will get paid back to the PaaS vendor for providing the infrastructure, with 30% of the PaaS value then getting passed onto the underlying database vendors and the like.
Strongly disagree. More on this later.
The paper goes onto make a few more predictions, namely:
1. The data center/rack space vendors will coexist with the Amazon EC3 types for a while as they serve somewhat different needs.
2. On premise development platforms (e.g. J2EE, .Net, etc) and on demand development platforms will start competing immediately.
3. Application focused PaaS offerings will fragment into several purpose built sub-markets (e.g. for UI intensive apps vs. transaction intensive apps)
I think the team does an excellent job cataloging and categorizing the various PaaS plays in the market but mis-reads the market and competitive trends that will drive the evolution of these businesses.
In enterprise software, the real platform money is in the enterprise in-house developer, not the ISV.
In fact for most enterprise software vendors, the ISV is a break even venture at best. This is for several reasons:
1. ISV’s are cheapskates. Most of them are losing money or breaking even themselves and so they cannot afford to pay much.
2. ISV’s are technically savvy and so they are very savvy platform shoppers.
3. ISV’s are fickle. They are afraid of holdup costs and so they want to play on multiple platforms at the same time.
4. ISV’s go out of business often.
Basically champagne tastes on a beer budget. The main reason why platform vendors cater to these developers is they create ubiquity for the platform which encourages the enterprise vendors to pay the serious money for the platform. The checks that Citibank’s CIO writes to IBM Websphere dwarf what any ISV will write.
So focusing on who will win the ISVs is (nearly) a moot point. A PaaS company whose business model is built around monetizing ISV customers will most likely change their business model or go broke.
PaaS offerings of all types and flavors will compete with traditional on-premise development environments and runtimes for the hearts and minds of the enterprise developer. If you look at Force.com and Coghead for example both focus their marketing squarely at this audience.
It is very early days, but I think development and application oriented PaaS offerings will face an uphill battle to win the hearts and minds of the internal IT developers currently using WebSphere, .Net or LAMP. The simple reason being customers who buy SaaS are usually choosing to outsource some IT project they find to be distracting or problematic while choosing to develop in house is in many ways a choice to embrace a project that they believe is important or solvable.
This all sounds like I’m a PaaS pessimist when I am not entirely. More to come in my next post…