What Do You Care What Other People Think?

Scoble Interview: Enterprise Mash-ups

I got the chance to sit down with Robert Scoble for 20 minutes last Friday.  The thing that has puzzled me recently is whether mash-ups are for real, or just another Web 2.0 buzzword.

So I asked Robert: "Are mash-ups going to make a real difference outside of the digerati - do you think they'll make it into the enterprise?"

His take was: what's to prevent mash-ups from being the main way that departmental apps are built in most enterprises 3-4 years from now?

We've seen composite applications pitched for years, with some very cool companies like Digital Harbor building development environments for constructing them, but in a way mash-ups are an even simpler way to build a composite application - pull together a set of ICCs (still looking for the definitive term for this, as are others, it seems - see Harry Pierson's discussion).

So what would an enterprise mash-up server look like?  How would it have to be packaged in order to be adopted by departmental users?  Would it be hosted like the other new technologies that are breaking into departmental use (salesforce.com, MarketTools, ExactTarget, etc.) or would it need to be a local server?

One of the other issues Robert raised was that of attention, and its necessary evolution to make the computing experience more useful.  Currently, attention is captured and processed only on the server, which makes for some thorny issues about trust (who am I trusting with my attention data? and why?).  To deal with these issues it seems to me that there will need to be a client-side standard for attention, implemented by browsers for inter-ICC communication, as opposed to relying on the server to have good behavior.

Then, in a twist of synchronicity, I got to talk with a very early-stage company building a mash-up server that can run on the client or the server.  It's in stealth so I can't disclose much more yet... but I am becoming convinced that this programming model could be just the thing to build SaaS composites on.

[Updated to add reference to Harry Pierson's entry.]

Contrary Evidence at the SLC

At last week's IDC Software Leadership Council, opinions on Open Source were not the only surprise.  The IT Execs from 4 companies (Manufacturing, Healthcare, Heavy Equipment, and Financial Services) were generally against subscription models for software.  As the conversation progressed, two key statements came out:

1. The CIOs did not want to go with subscriptions because if their business grew beyond expectations, they didn't want to pay the software provider more ("Why should we share the upside"?)
2. The CIOs did want providers to reduce pricing if their business failed to grow to expectations

I think this was a case of two things - first, the natural expression of greed (wanting vendors to share the downside but not the upside) - but more importantly, a need for the industry to provide clearer guidance on standard pricing models.  There was a clear conflation between value-based pricing and usage-based pricing in the mind of the customers.  Additionally, they were concerned that in the long run it would be cheaper to go with perpetual licenses and pay maintenance, dealing with amortization internally, rather than pay a subscription cost which would never go down.

So where do we go from here to advance the understanding of the SaaS industry's offer to CIOs of mainstream companies?  Are the doubters right, and will SaaS fail to penetrate large enterprises because of these issues?

Disruptive Innovation and Darwin

I have great respect for Clayton Christensen, who has done serious work putting real meaning into the term "disruptive innovation".  He's quoted in the latest Newsweek article on Skype, saying:

Still, the novel pay schemes "are hugely interesting," says Harvard Business School professor Clayton Christensen, who cites both Kazaa and Skype as great examples of the "disruptive innovations" he studies. "It's almost never the technology itself that paralyzes the incumbent—it's that the incumbent has a system for making money that's irrelevant to the new guys."

The combination of companies growing up after the bubble burst, dealing with recession and market pressure by using free software and then reducing customers' cost to use through "rightsized" pricing (moving amortization costs of hardware and software from the customer to the vendor, and reducing overall management costs through centralization) has produced some very fit organisms - not unlike biological organisms that have deveoped in impoverished environments, they may be tougher than the incumbents of enterprise software.

Axel Shultze of BlueRoads has said that no one originally set out to get to the current state of SaaS - it was a series of changes to fit the customer environment that led the industry here.  It will be very interesting to see where the intersection of pay-as-you go and ad-funded software business models leads us next.  I think Darwin would be having fun right now watching this industry evolve in real time.

SaaS is the "S" in SPLA

I've found that relatively few people know about the Service Provider License Agreement, which was built for hosters and companies which need monthly, usage-based licensing.  From the program description:

The Services Provider Licensing Program enables services providers to license Microsoft® products on a monthly basis. The program is designed to emulate how service providers do business - providing services on a monthly fee to their end-customers. A sample list of products available to service providers in this program is provided below.

So it's a pay-per-use model that works in arrears - hosters provide a report of the license units used that month and pay after they're done.  SPLA incorporates Software Assurance so there is only one license and one price to pay for usage.  There is a version specifically for ISVs which you should look at if you're currently a SaaS ISV using the Microsoft perpetual license model.

Two good examples of why this is useful:

1. Cashflow management: under the perpetual license you would need to buy the software up front and amortize the cost over a multi-year period.  SaaS is a cashflow-focused business model with little room for capital expenditures that need to be rationalized later (as seen by the standard practice of leasing hardware rather than buying)
2. Seasonal volumes: if usage goes up one month, and down the next, there's no need to buy additional perpetual licenses, guess what the necessary capacity will be, and suffer for guessing too high (if you're in Operations at a SaaS company, you know how challenging this can be - as they say, "it's hard enough to predict the past, let alone the future").  Instead, SPLA users report & pay month to month, so payments go down when usage goes down.

The team that came up with SPLA, led by Pascal Martin, has partnered with Rackspace and other hosters so that SaaS ISVs can transfer their existing operations to an MSP.  They are working hard on the next version of the ISV-focused hosting solution - more news on this in the near future.

A Billion Emails via SaaS on .NET

I've had the chance to some time with ExactTarget in the last week.  They're a SaaS email marketing company based on .NET with a very slick AJAX interface.  Since they're an email-centric company, they use Outlook as their design center - task pane selection and folder trees on the left, interaction page on the right, etc.  This parallels feedback I've heard from customers about email interfaces in the recent past.

The impressive statistic I got from our conversation was that they will send a BILLION emails this quarter - perhaps it's my ignorance of the email marketing space but I thought that was impressive.

While talking with their CTO and VP of Engineering, I learned a few things. 

First, they're doing all of this on end-to-end .NET (Windows Server, SQL Server, etc.) and have achieved massive scale.  Second, they're based on AJAX.NET, an elegant Open Source AJAX framework for ASP.NET (for example, to make a method asynchronous on the client, you just add an attribute: [AjaxMethod]).  Furthermore, they've hand-built a number of generally useful client-side features using AJAX - a WYSIWYG editor like Writely, and due to their server-side architecture, they've been able to integrate useful data cleansing tools via SOAP interfaces.  With the number of comments I get about REST >> SOAP these days, I had to ask about their use of SOAP.  They said they got it for free by using ASP.NET (.asmx pages), and that the automatic harnessing of SOAP rather than raw XML was useful.

The new stuff they're coming out with - and which they demoed at Salesforce's conference recently - is significant - partly because of their use of AJAX for some sophisticated drag & drop workflow features, and partly because of the breadth of scope they can handle with their workflow engine.  I can't give it all away here, but be sure to check them out when they launch the new stuff in December.

The ExactTarget team was happy overall with our technology, but were not happy with our licensing.  Running on Windows and SQL Server perpetual licenses, they are charged in a way that's out of sync with their business, and while standard "failover" servers are not charged for by Microsoft, "unutilized production" servers are.  Fortunately, we do have a better offering for them - I believe that the Service Provider License Agreement (SPLA) will be the solution to most of their issues.

If you're a SaaS ISV and you're using Windows, you should almost certainly be using the SPLA instead of perpetual licenses - it's pay-per-use and is a much closer fit to the SaaS operations & cashflow model.

People as a Service?!?

If you haven't already heard about Amazon's "Mechanical Turk" you absolutely have to check it out.  When I first encountered BPM companies who used "human-in-the-loop" learning I felt cheated.  Four years later the idea of using distributed humans to solve problems that machines still can't seems awfully clever.

Open Source as the Big Bad Wolf?

Having spent time with inventors, entrepreneurs, and the analysts who love them down here in Silicon Valley, I have come to expect generally positive comments from CIOs about Open Source.  Quite surprisingly, at the IDC Software Leadership Council today, the CIOs on the roundtable were consistently "strongly against using Open Source" software in their organization and "realized that they were placing their companies in jeopardy" with their current lack of governance around OSS adoption.

I was fairly shocked - and no, I'm not spreading FUD nor am I against OSS (as Director of Engineering at Ofoto from 2000-2001, I ran a department that used Linux, Apache, Tomcat, and Jakarta for 100% of development; the only software we paid for was Sybase).  The key issue they all raised was indemnification against IP and Open Source Licensing violations.  Jason Matusow was there and raised the point that the concern is really around commercial vs. non-commercial OSS.  Commercial OSS providers take responsibility for understanding the licenses and resulting restrictions embedded in the software they provide, which appears to effectively deal with the core issues the CIOs were raising.  Despite making these points, the CIOs were not mollified and continued their conservative stance on the topic.

Bob Zurek of IBM was at the meeting as was David Gee of HP - very interesting group of people with whom to discuss SaaS, Open Source, and industry consolidation.  Amy Konary of IDC was insightful as usual on the SaaS topic.  Wonder where the conversations will go from here?

Fortunately, I get to sit down with Palamida later this week and am looking forward to learning more about the expanding business implications of using Open Source.

Dave Winer has the Scoop: Ozzie, Gates, and SaaS

Robert Scoble has posted links to Dave Winer's site, where the Ray Ozzie memo I mentioned earlier has been posted, in full and complete form, along with Bill Gates' "turn the ship" email.  Worth reading.

[Updated: Now I think you can see that this is not just about Web 2.0, it's about Microsoft 4.0 which will be a service-based computing platform for the industry - not just an inward-looking "sell our software differently" approach.]

[Update 2: A well-written article in the WSJ discusses the meaning of all this.]

VCs on SaaS

I've been asked several times recently why I'm focusing so heavily on Software as a Service.  The answer is very simple: the future of the model is inescapable.  I work in the team at Microsoft that is responsible for managing our relationships with Venture Capital firms and helping their startups succeed with us as business partners.  In the last 6 months I have heard in person - whether around a table or attending an event - from partners at Accel, Hummer Winblad, NEA, Norwest Ventures, and many others: "We are only considering software deals that include a strong SaaS component." 

John Hummer actually said it more directly, at the SDForum event on SaaS back in March 2005: "If you are going to pitch me a software deal, it had better be Software as a Service."  Emergence Capital is a $125 million fund established solely to finance SaaS plays.  BAVP made their interest clear way back in 2003.

Add to this the fact that many partners I've spoken with have said that the software side of their portfolios currently include between 1/3 and 1/2 SaaS plays, and the reason to focus on this is obvious: the trend is only accelerating.  IDC forecasts the delivery segment (not "market") to reach $10.7B by 2009. 

It can be argued that this is a new bubble, but unlike Web 2.0 (which sure smells like a bubble right now but perhaps it's an echo boom) it is a software value shift that is fundamental and easy to grasp, whether or not you're a member of the digerati. 

Meet up at the VS/SQL/BT Launch?

I'm going to be at the VS/SQL/BizTalk launch event in San Francisco today at the Moscone center.  If you want to meet up and chat in person about partnering with Microsoft as a startup, getting help with VC, or what we should be doing to enable the SaaS ecosystem, drop me an email.

And thanks to those of you who have shared your ideas on the SaaS Startup Offering via comments and email - I will be replying over the next few days (once the launch event and IDC's Software Leadership Council are over).