Software-as-a-Service isn’t just a huge convenience for users; the model also has a fundamental impact on software vendor business. This is the picture drawn by consulting firm PricewaterhouseCoopers (PwC) in their study “PwC Global 100 Software Leaders“. In the study, the authors describe nothing less than a fundamental transformation that the software industry will be facing worldwide in the coming years.
The findings are based primarily on a compilation of business figures from a total of 294 software vendors: the top 100 worldwide along with the respective top 100 for North America, the EMEA region, and developing markets – including China, India, and Brazil. Interviews with 28 experts from the software industry were also incorporated, including one with Jonathan Becher, Chief Marketing Officer at SAP.
The low share of SaaS revenue is misleading
It is clear that SaaS is on the verge of becoming a fundamental component of the software market. At first glance, the transition to using software from the cloud is taking place in baby steps: the share of SaaS revenues to total software revenues by the PwC Global 100 Software Leaders is a mere 4.9 percent to date. Yet this low number is deceptive, as the study’s authors derived from their interviews with industry representatives. The number of customer meetings involving cloud models is much higher among many vendors.
Next page: SaaS: 24 percent of software sales by 2016
PwC stresses that a further, significant shift to SaaS is imminent, based on figures from analysts at IDC. They have tracked a drop in license revenues compared to total software revenues since 2004. From 2012 to 2016, they predict growth of four percent annually. In contrast, subscription models such as SaaS are slated for a 17.5 percent rise. As a result, SaaS will account for 24 percent of software sales as early as 2016, according to IDC.
The PwC analysis sees further developments in combination with the availability of SaaS that the authors feel will place the software vendors’ established business model in doubt: mobile devices are achieving ever-deeper penetration, along with broadband connections. In combination with the often-mentioned consumerization, i.e. the increasing focus of IT on non-expert users, the result is that individual users are gaining more power over vendors.
Software vendors must address users, not just the CIO
In the interim, smartphones, tablets, and programs originally conceived for private users – such as Dropbox – are spreading rapidly at companies. Software vendors are facing several foregone conclusions, as the PwC report illustrates: tailoring a product merely to satisfy the CIO is no longer enough. They have to focus on the actual users. After all, cloud models, and specifically SaaS, make it easier for customers to switch vendors.
The more the consumer moves into focus, the more important marketing becomes. SAP CMO Jonathan Becher is quoted as saying that the Walldorf company has nearly tripled its expenditure for new technologies, for example, to mine knowledge from big data analytics and gain insights into the customer experience, over the past two years.
A further consequence: more than just a few vendors are pursuing direct interaction with end users via social media, where they are also encountering changing habits. Spoiled by cloud consumer tools, many consumers have become used to software that costs nothing. Vendors are being partially accommodating: they offer free apps, for example, to give users an idea of the functions provided by an application – but the customer still has to pay for the software to gain the full functional scope.
New competition through local online-only services
One difficulty for the vendors: as PricewaterhouseCoopers describes it, they have to adapt to the new conditions quickly – but at the same time they still earn the vast majority of their money the old way, through conventional license sales. It is only a matter of time before new competition looms. Established vendors are being confronted with a new type of competitor: small, locally active producers who launched their offerings as online services from the start.
Next page: Education specialist tops SaaS revenues
The figures compiled by PwC show that software vendors have wildly different positioning in the context of the impending transformation. The company with the highest proportion of SaaS revenues to total software sales is Blackboard, an education specialist. With software sales of $411 million, the U.S. company scores 80th place in the global industry top 100. 96.2 percent of this sum, or $396 million, comes from SaaS business. This puts them in ninth place in the ranking of vendors by SaaS revenues.
SAP, in contrast, the world’s fourth-largest software vendor, earned $220 million in the SaaS segment. This is a mere 1.4 percent of the company’s total software revenues of more than $15 billion. Nor are such single-digit figures the exception among listed companies – the picture among vendors such as Microsoft and IBM is similar.
Strategy: acquire small SaaS companies
The study does not propose a single, definitive answer as to how established software vendors can accelerate the transition toward cloud models. One feasible method, of course, is to acquire smaller SaaS providers. But that alone isn’t enough. Should the SaaS division continue to operate separately after the acquisition? Should it be integrated, or even swallow the larger buyer’s business in the long term? None of these three paths provide a blanket guarantee of success.