No, Commoditization Of Software By SaaS Doesn't Lead to Death By Communism

In the light of a recent announcement, I was discussing with a developer about SaaS. His main argument against the SaaS era was that the low margins will lead to the death of software industry. Our conversation was more political but I will try to focus on the techbiz side of it than the political side.

First, the open source and, now, the SaaS are the two game changing moments in the software history. These two developments leveled the playing field in the industry and changed the landscape from a position where only enterprises could take advantage of the benefits of IT to a situation where even a mom and pop business can tap into IT the way fortune 500 companies do. In short, Open Source and SaaS has commoditized software for the masses. Now, we are hearing noises from people in the traditional software industry, and also from people who make their living writing about them, that the margins in the SaaS are very low and it will kill the software industry itself. I am not someone who was trained to think in a certain way by the business schools. In my world view, commoditization of software is a natural evolution with the advances in technology behind the infrastructure. These criticisms are expected when the ground shifts from below, giving rise to a totally new landscape resulting in few players losing out big and many having difficulty even comprehending the seismic shift.

To begin with, the bloated software prices in the traditional world was not a natural outcome of the market reality. Partly, it was an artificial fattening by some of the players who managed to get monopoly like hold on the market. Even with the PC revolution, computers were expensive for the big chunk of population in the world. Internet was at its infancy and the infrastructure in many parts of the world were abysmal. This lead to an environment where certain players could control the market by leveraging their existing marketshare or by being at the right place at the right time. These interests made sure that software was expensive and exclusive.

In their quest to move from 90% marketshare to 93% marketshare, these big players lost focus and forgot the meaning for the term “innovation”. Whenever innovation halts and marketplace becomes stale, even the conservative users (those who are not keen to try a new app every day) get itchy and want change. We were at a similar situation when internet came along in full speed and computing power went into the pant pockets of users in every single continent. This opened up a new way to deliver software at a much cheaper price. The infrastructure costs nosedived and by leveraging internet, the middle men could be cut out from marketing to retailing. This offered a tremendous opportunity to new players who had nothing to lose and everything to gain. Plus, these new players were not used to having bloated margins of the traditional world. This, eventually, lead to the proliferation of SaaS applications which were delivered direct to the customers from the vendors’ infrastructure at a much lower cost.

The margins in the SaaS era may not be as bloated the traditional world but the market is much larger than the previous era. It is open not only to small and medium businesses in the western world but also to such players from every part of the world. When you have such a huge untapped marketplace, you can still make money and live a capitalistic lifestyle even with slim margins.

Here is a piece of my mind to people who use fear tactics to stop progress. SaaS is not communism in new clothes, the other one being Open Source. Open Source and, now, SaaS are natural evolution in the marketplace when there is a healthy competition on a level playing field. From last I heard, it is capitalism.

SaaS

• is a delivery mechanism and we can build competitive business models on top of it
• has leveled the playing field where even startups can compete on par with monster sized monopoly players
• is leading the way in innovation in the marketplace
• offers tremendous cost advantages to consumers and businesses so that they can save a buck of two (profit, anyone?)

For me, these are the hallmarks of a capitalistic society which plays by the rules. Trying to use fear tactics to keep customers on leash will not work for a long time. This is an era of change and the IT landscape is definitely going to change for the better. Smart people jump in when they see a successful trend and others lose out.