Old Dogs, New Tricks and SaaS

I was struck by a recent article by David Linthicum at Infoworld, which highlights EMC’s abandonment of a key cloud offering due to cannibalization concerns:

The larger issue here is that large enterprise software and hardware companies, like EMC, that move into cloud computing could find themselves cannibalizing their existing market. Thus, they might end up selling cloud services to replace their more lucrative hardware and software solutions or — in the case of EMC — competing with their partners.

This story demonstrates how difficult it will be for large enterprise IT vendors to fully embrace the SaaS opportunity.  Success requires not only a likely rewrite of core application software that was never built with multi-tenancy and cloud delivery in mind, but more importantly a fundamental change in go-to-market model.  Anything less than full commitment (at the cost of cannibalization and other severe short term pain) will end up like EMC’s failed Atmos project. The vendor must be willing to abandon their high price points delivered by a costly sales force (which is often more than half the headcount in the company) in favor of a high volume, lower-priced offering delivered entirely over the web, with a small telesales team that gets involved with only a fraction of the business transactions.  A large business trying to accomplish a strategic change like this is like an 18 wheeler trying to make a hard right turn at 90 miles an hour – without rolling over!

Do not attempt at high speeds!

Let’s say the vendor tries to dip its toe in the water:  segment out the SaaS offering into a different business unit so that in theory, it can coexist – rather than compete – with their high margin offering delivered by the direct sales force.  This might work for a quarter or two, but sooner or later, budget cycles and business realities will force the company to make difficult tradeoffs between the relatively smaller, lower margin business, and the high margin business that is paying the bills and making the numbers. It’s almost impossible for a large, public company to risk their core business in the short term for the hope of better growth years down the road.  Public software companies that miss their earnings by a few pennies per share see billions of dollars market capitalization erase overnight.  And their CEOs often don’t stay around long thereafter.

Let’s look at the competitive landscape for web application performance management.  New Relic charges a maximum of $380 per month to manage an application running on 2 servers with four cores each.  Customers can cancel anytime, and don’t have to deal with the headaches of managing their management software.  Our on-premise competitors often charge over $50,000 up front (plus 20% annual maintenance) to manage a similar environment.  They have spent years building a go-to-market engine and a sales force that demands this kind of price point to be cost-effective.  If an on-premise APM vendor could build a compelling SaaS offering, would they be successful taking it to market?

In the coming years, a new group of leaders will emerge in business software.  These companies will have a 100% commitment to SaaS delivery and frictionless go-to-market model, without being burdened with decades of historical baggage and a fixed-cost structure that is almost impossible to eliminate without irreparably damaging the business.  It’s why SalesForce overwhelmed Oracle/Siebel overnight, and continues to dominate their space.  It is coming to enterprise IT management too.

At the end of the day, the biggest winner in this new landscape is, as it should be, the customer.  In short, it’s about better products, faster time-to-value, and near-zero TCO – at a fraction of the cost of on-premise offerings that were built in the pre-cloud era.

Founder and CEO, New Relic. View posts by .

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