SaaS is disrupting how we live our lives and how we do our businesses. It deeply penetrates our lives, quickly becoming one of our biggest necessities. The global market for SaaS software is $33.4 billion in 2015, and is projected to double by 2019, to $67.2 billion.
Horizontal SaaS, similar to horizontal integration, refers to SaaS companies aiming to reach as many customers as possible in their areas of expertise (mostly focusing on providing one or two types of services such as analytics, sales, and distributions.) Horizontal SaaS addresses broad business functions, the three currently with the largest market sizes are customer relationship management (CRM), Business Intelligence & Analytics, and Sales performance management, etc. Famous horizontal SaaS companies include Salesforce, Zenefits, Workday, and Slack, etc.
Vertical SaaS, similar to vertical integration, refers to SaaS companies aiming to provide comprehensive services to cover a particular market or a specific group of customers. Most focus on providing integrated solutions to solve industry-specific problems. Vertical SaaS penetrates industries such as healthcare, energy/utilities, real estate/construction, legal, and fintech, etc.
1. Hybrid cloud adoption rate will continue to soar, and more enterprises experience private cloud
2. Cloud integration will be seen as a top strategy to remove entry barriers in non-IT industries
3. Cloud based spending will represent more than half of global IT spending, but private data centers will still exist
4. Cloud computing companies will compete more narrowly in niche services than more broadly defined markets. Differentiation is key
5. “Conservative” industries will adopt cloud
6. Public cloud will become safer, and eventually the end state for most cloud adoption
Threat of New Entrants: MODERATE - HIGH
Different type of cloud service model has different levels of entry barrier.
For Infrastructure-as-a-Service, entry barriers are high due to the high fixed costs of developing and maintaining the infrastructures. Also, the type of services IaaS provide are more difficult to differentiate than those of PaaS and SaaS, which can tailor more towards certain industries or certain functions. There are fewer players in the field, and successful startups tend to be acquired by industry leaders to eliminate competition. As of June 2017, Amazon Web Services and Microsoft are the two top leaders that dominate all levels, Google, Oracle, IBM, and Alibaba Cloud trailing.
Similar to IaaS, entry barriers of Platform-as-a-Service are also high. Although most PaaS do not need to develop or manage its own infrastructures, they need to build the code or meta-data supported platforms for software application developers to utilize. The high development and maintenance costs and the relatively limited service types made PaaS field also dominated by major players, many of which coincide with IaaS dominant players.
For Software-as-a-Service, the entry barriers are very low. There are many new entrants every day, in every industry, and targeting serving nearly every possible function. The low expense and expertise requirement of developing software continuously reduce the barriers of entry. Yet, since SaaS has already reached the plateau of productivity, only startups with top technology, best market integration, and consistent revenue streams will continue to survive the battle. The majority of other startups either fails or gets acquired by other bigger players.
The overall cloud computing landscape is characterized by high competition, decreasing profitability and prices, high customer churn rate, frequent technology upgrades, and decreased creativity for a unique business.
Bargaining Power of Suppliers: LOW - MODERATE
IaaS and PaaS : LOW - MODERATE
Only a few years ago, bargaining power of suppliers could be from moderate to high, but not anymore today. With frequent mergers and acquisitions activities, major players become bigger than ever, with their services covering all aspects a customer can possibly ask for. Before, suppliers might have the bargaining power as they can still threaten to leave one cloud company, but now all suppliers lure to do business with AWS, Microsoft and Google.
SaaS : LOW
Bargaining power of suppliers to SaaS companies is limited. The IaaS and PaaS industries offer almost interchangeable services and charge for similarly low prices. SaaS companies have a variety of suppliers they can choose from. The more developed IaaS and PaaS industries are, the more limited the bargaining power of suppliers will be.
Bargaining Power of Customers: MODERATE - HIGH
IaaS and PaaS : MODERATE - HIGH
For IaaS and PaaS companies, although the threat of new entry is somewhat low, they are still in an extremely competitive market. Competing on fees and features, companies could easily lose new customers by not being on the top of the game.
Notice, I said ‘NEW’ customers, because once a customer is on board with one cloud provider (IaaS or PaaS), it is more difficult for it to get “off board.” IDG Enterprise had its surprising discovery in its 2014 Cloud Survey, that when asked if switching cloud providers is less difficult than switching on-premise provider, 29% of IT leaders said negative compared to 22% of non-IT leaders. Moreover, more than 40% of the non-IT leaders simply did not know. Most cloud providers have different network bandwidth provided to their virtual machines. Switching network bandwidth can have a direct impact on the software’s performance, and the re-integration process is expensive and tedious (just considering the amount of data a customer needs to move from one provider to the other). Therefore, for existing customers, bargaining power of suppliers is still quite high.
SaaS : HIGH
I recently saw a really good description about the SaaS market on SaaScribe, and it is true. The SaaS market is one of the paradigm of how to hand over as much as power to the customer as any industry could possibly achieve. First of all, many SaaS products are free of charge to users, or at least have a free trial before deducting money from users’ accounts. The amount of information available to users before payment means that if the product cannot meet the satisfaction of the user, it is unlikely for the company to get any revenue from that user in the future, because switching to an alternative SaaS provider with similar product is so easy. In this situation, product differentiation is the key. Yet, technology does not have patent. Once you had a successful launch of product, there will be 20 identical SaaS products on the market the next day, and with cheaper price! This is all due to the draining power of SaaS suppliers, those IaaS and PaaS companies. With lower cost of software development, new SaaS companies will blossom like flowers in the spring. But how long can each of them last?
Threat of Substitute Products of Services: LOW
The main substitute for IaaS, PaaS, and SaaS is the traditional on-premise IT products. IDC predicts, that by 2018, at least 50% of all global IT Spending will be cloud-based, with 60% of all IT Infrastructure and 60-70% if all software, services, and technology spending on cloud by 2020. Cloud computing is entering into our main life as a necessity to survive the competition or to live an easy life, rather than some new high-end technology that only the tech people can enjoy. In 2017, of the fortune global 50 companies, 48 have publicly announced their cloud adoption plans. Therefore, the external threat of substitute products of services is minimal.
Competitive Rivalry: HIGH
Jason Lemkin, founder of SaaStr, once said, “competition-to-the-almost-death seems the norm in SaaS.” One step behind, the entire enterprise is risking the fail next day. For the overall cloud computing industry, competitive rivalry is extremely high.
Cloud computing industry is not a new one. In fact, it is reaching its saturated stage. New cloud computing startups emerge every day, and fundraising and M&A activity is a commonplace.
According to Gartner, leading IT research and advisory firm, the lifecycle of a technology follows these six development stages: Trigger for a technology, Hype stage, Peak of inflated expectations, Disillusionment stage, Slope of enlightenment, and Plateau of productivity. The overall cloud computing industry has already entered its slope of enlightenment, reaching its plateau of productivity. Yet, various aspects of the cloud computing industry are at different stages depending on its development.
Cloud computing adoption rate has reached a new level on all aspects. In the 2016 RightScale State of the Cloud Survey, 95% of respondents are using cloud products, up from 93% in 2015. Adoption of public cloud products has increased from 88% to 89%, and adoption for private cloud has dramatically increased from 63% to 77%. Hybrid cloud adoption has seen the highest jump, from 58% to 71% in just one year (State of the Cloud Survey focused on the use of IaaS).
According a BDO marketing survey, 74% of tech CFOs chose Cloud computing as having the most measurable impact on their businesses in 2017. It is now generally agreed that in order to maintain leading position in an industry, to break the entry barrier of an industry, to reduce cost and increase operational efficiency, or to expand existing markets, companies need to adopt cloud and constantly integrate its businesses with cloud computing strategies. Cloud computing has never become so essential.
Depending on their deployment model, most cloud computing companies can be categorized as: Public cloud, Private cloud, or Hybrid cloud. Other categories include Community cloud, Distributed cloud, Intercloud, and Multicloud.
Public cloud is the one that most people think of when they talk about the cloud. Public cloud is hosted by a service provider who rents space on the cloud to its many customers, or tenants. Those customers generally only pay for services they actually use. Public cloud let you offload management where you don’t mind giving up some control. That’s why they are a popular choice for hosting everyday apps like email, Customer Relationship Management, HR, and other business support apps.
Private cloud is private because it only has one tenant. The single tenant can get all the goodness of a cloud, and can also control and customize it to fit the needs. And the control is why many companies are migrating their data centers to private clouds to run core business apps that provide unique competitive advantages like research, manufacturing, supply chain management, and more. Yet, private cloud still relies on on-premise IT rather than a third-party cloud provider. Managing a private cloud can be more expensive than owning on-premise infrastructures due to the additional cost of virtualization and cloud management. There are several cloud providers that can deploy private cloud infrastructures and thus lower the cost for enterprises.
Hybrid cloud is a combo of both private and public clouds. Users can create new innovative apps with uncertain demand. Apps the user can deploy on private cloud can burst to the public cloud during demand spikes.
Cloud computing stack is built on the service-oriented architecture, which advocates “everything as a service.” Depending on service models, most of the cloud computing companies generally fall into the three categories: Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-Service (SaaS) based on their intended functions. Although these three categories all aim to provide on-demand access to centralized services over the Internet, their targeted end users are different. The rest of the categories include but not limited to Security-as-a-Service (SECaaS), Mobile “backend”-as-a-Service (MBaaS), and Identity-as-a-Service (IDaaS.)
IaaS is the delivering of cloud computing infrastructures such as servers, storage, network and operating systems as an on-demand service. IaaS targets Application owners, IT Operating Systems, and Middleware and application support. These users typically need to manage and process huge database, and would need to get access to servers, datacenter space and network equipments. Before the invention of IaaS, the conventional way is to run the entire database through on-premises infrastructures, which are costly, inflexible to change of market demands, and cumbersome. With the adoption of IaaS, users no longer need to worry about the development or maintenance of any virtualization, servers, storage and networking equipments; Instead, users can purchase or cancel the service according to their market needs, allowing for dynamic scaling and elasticity.
Core characteristics of IaaS
--- Resources are distributed as a service ---
--- Allows for dynamic scaling ---
--- Has a variable cost, utility pricing model ---
--- Generally includes multiple users on a single piece of hardware ---
Amazon Web Services (AWS) Elastic Compute Cloud (EC2)
Microsoft Windows Azure Virtual Machine
Google Compute Engine
VMware vCloud Suite
PaaS is a computing platform on which software applications can be developed using on-demand virtual tools and infrastructure services. PaaS targets software application developers, who just want to focus on coding rather than taking care of the underneath supporting software and infrastructures.
PaaS is in many ways similar to IaaS, both providing the base equipment for users to develop applications on. However, PaaS is different from IaaS by the addition of value added services and comes in two distinct flavors:
Core characteristics of PaaS
Amazon Web Services Elastic Beanstalk
Microsoft Windows Azure Cloud Services
IBM Smart Cloud
Red Hat Cloud’s Openshift
VMware’s Cloud Foundry
Google App Engine
SaaS is software that is deployed over the Internet, allowing end users to purchase services on demand. SaaS can be subscription based or at no charge, if there is opportunity to generate revenue from streams other than the user, such as from advertisement or user list sales. SaaS targets software application end users who can just pay for using the service when needed without worrying about developing, maintaining and updating the services.
Compared to IaaS and PaaS, SaaS enjoys the biggest market, because it managed to revolutionize the way people live their lives every day.
Core characteristics of SaaS
--- Web access to commercial software
--- Software is managed from a central location
--- Software delivered in a “one to many” model
--- Users not required to handle software upgrades and patches
--- Application Programming Interfaces (APIs) allow for
integration between different pieces of software
Microsoft Office 365
Amazon Web Services
Adobe Creative Crowd
Not long ago, I was planning a trip to San Francisco to take the bio-metrics test for my U.K. visa application. I had all my materials prepared, and I was ready to hop on the train. But then, I encountered a big problem. According to the rules of the U.S. Citizenship and Immigration Services, I cannot bring my phone with me. Ok but wait, how am I going to navigate the city without Uber? And how am I going to check into my Airbnb with ease? It turned out, I can. I can just run around hoping to spot a taxi, and book a hotel a few weeks in advance like what we did 10 – 20 years ago. However, this is certainly not the way most of us with a smart phone prefer to do nowadays.
In less than 20 years since the turn of the century, the world has witnessed exponential growth in the cloud computing industry, and the dramatic impact it has on how we live our lives and how we run our businesses. Cloud computing is the practice of storing and accessing data and software over the Internet instead of through your computer’s hard drive. In short, cloud is a data center (many server computers) at somewhere else, and you are utilizing it with Internet connection. While most of us assume that the cloud computing industry was born alongside the Generation Z, the earliest cloud concept dates back to the 1960s.
With the development of mainframe computers, companies began to explore different options other than buying and maintaining computers for each employee, and one economical way is through shared access mainframe. At the same time, J.C.R Licklider, the director for the development of ARPANET, and computer scientist John McCarthy both introduced the idea of having computation delivered as a public utility, a vision much similar to the cloud computing we have today.
In 1970s, the concept of virtual machines (VMs) was created. Software like VMware made it possible to run multiple operating systems simultaneously on one physical environment, bringing the shared access mainframe up to a new level.
Later on in early 1990s, telecommunication companies started to provide shared data connections to users through the same physical infrastructure. Yet, software was still packed and sold to customers at a high price, including installation, customization and maintenance charges. Everything changed after 1999, when Salesforce.com launched its first software application service (SaaS) over the Internet. Rather than buying the software as a package, users only need to purchase for the right of using it online.
The 2000s was the decade where cloud computing industry really took off. In 2002, Amazon.com introduced its Amazon Web Services, a series of cloud-based infrastructures (IaaS) that enable storage of data, computation and even human intelligence. In 2006, Amazon Elastic Compute cloud (EC2) came onto the market, allowing companies to rent computers on which to run their own computer applications. Google also launched its Google Docs services, bringing the power of cloud computing and document sharing directly to end users. In 2009, Google launched the first Platform-as-a-Service, Google App Engine, allowing software developers to design apps on the platform without the need to worry system management or platform maintenance.
The decade of 2010 welcomed the blossoming of the entire cloud computing industry. With the entire market size of $67 billion in 2015 and about $82 billion in 2016, cloud computing market is projected to reach $99 billion by 2017 and $162 billion by 2020 with an ACGR of 19%. Compared to a 3% ACGR for IT spending, cloud computing is dubbed as one of the fastest growing IT segments in the next five to ten years.