The SaaS/Cloud Computing Shakedown

I recently came across this Forbes article in the June issue by Sramana Mitra detailing some of the expected M&A activity in the SaaS space, including Citrix Systems, SuccessFactors, and NetSuite as possible targets. With many of these venture-funded businesses seeing their funding drying up, I imagine plenty of these companies will get acquired.

On-premise vendors will look to expand their product portfolio or enter the SaaS market entirely via an acquisition while others, such as the IBMs of the world, will look to enter the application side of the market via a purchase.

But now that the SaaS market has achieved widespread market penetration and the idea of cloud computing has become popularized in the business world, the discussion in 2009 has begun to shift to why organizations should adapt SaaS/cloud computing and how to do so effectively. In other words, cloud computing is going through the same hype cycle – to quote Gartner – that every technology inevitably experiences.

Along the same lines of Martin’s recent comments on SaaS, businesses have discovered there’s a big difference between what vendors guarantee and what the software actually delivers. A year or two ago, the concept of hybrid, on-demand and on-site deployments, along with private clouds, was irrelevant. That’s changed in the past 12 months thanks largely to the kickback from customers, as businesses have discovered that letting your vendor host everything doesn’t provide an answer to anything and everything.

So back to all the M&A, I agree with Mitra when she states that we’ll see a shakedown in the market through this year and into next, the benefits of which will be fruitful, but short-lived as the buzz, definition, and expectations around cloud computing and SaaS also shakedown over the coming year as well.

3 thoughts on “The SaaS/Cloud Computing Shakedown

  1. Great post Colin. I agree.
    I could see Oracle purchasing NetSuite, Ellison already has a majority stake and it would do a nice job of rounding out their on-demand offerings.

    But for other vendors that don’t offer both on-demand and on-premise products, they’re going to be left behind in the long haul. Being able to accomidate a businesses’ different needs are critical these days. I see virtualization and private clouds as being just as important a trend as cloud computing.

    Cloud computing doesn’t equal vendor hosting.

  2. Colin,

    I agree there is a looming shakedown in the SaaS market, but entirely for the reasons you suggest. First, Salesforce, NetSuite and Successfactors are just a few companies that have proven that the SaaS market is very viable – just look at NetSuite’s recent earnings. I also believe that SaaS has fundamentally changed the way companies think about software and has made it much easier for IT to deploy needed solutions faster. This translates into competitive advantage and productivity gains. Anyone who has gone through a traditional enterprise software implementation versus a SaaS implementation will tell you SaaS wins hands down.

    I think the consolidation will happen, just for other reasons. First, the major enterprise players need to have a SaaS story. At this point, its likely easier to acquire this than build it out themselves – though with Sun, Oracle has the infrastructure if they wanted to make this investment. I aslo think we need to consider the venture capital environment, where investors no longer have the staying power they once had and will likely pressure combinations to get scale faster. Also, there are likely some SaaS companies funded in the last 5 years that will combine as a natural course in the lifecycle of any new space.

    But don’t discount the advantages that SaaS has and the value is has delivered. It will not go away.

    Bill

  3. Interesting post Colin.

    Consolidation in the SaaS market was inevitable. I think we’ll continue to see some of the big boys like Oracle, Microsoft, or SAP acquire SaaS/cloud computing companies to accelerate their migration to the hosted services world. Saas and cloud computing have too much momentum not to, and the benefits they provide to smaller, or even bigger businesses can’t be underscored.

    But I do agree with you when you mention the hype surrounding SaaS. On-premise installations have never been easier, and there’s always going to be reasons for adopting that deployment model. The “shakedown” you mention will take place between on-premise and on-demand, with cloud computing providing a happy middle ground where companies can either deploy their solution’s in the vendor’s cloud or their own.

    T.J.

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