Prominent industry observers such as Dion Hinchcliffe, Phil Wainewright, and McKinsey have been busy lately discussing the rapidly evolving “platform as a service” offerings from companies such as salesforce.com, Amazon, and Google. One frequently heard sentiment is that nobody can build a “big” business using someone else’s platform.
We don’t buy this argument. Lots of big businesses have been built using the platform capabilities of others. To extend the standard analogy comparing on-demand technology platforms to the electric grid, lots of great companies have been built without building their own “power plants.” The Oracle database platform provides another set of examples. There’s no reason for this to change. Plenty of great businesses will be built throughout the technology value chain, including platform providers, tools providers, and platform consumers that deliver business value directly to the customer.
This begs the question: How big is the market for solutions based upon on-demand platforms? Is the pie big enough to build great companies on a slice of it?
The SaaS market as it is currently defined is just the starting point. Still composed largely of point solutions for CRM and HR, SaaS represents $5-$12B in spending today, depending on which analyst you believe. It’s just starting to penetrate the full business application market, a $50-100B market that includes ERP solutions. More great businesses will built in the market for SaaS applications, and some of these companies will build their offering using the capabilities of a platform delivered as a service.
Even the $50-100B market for business applications, however, fails to capture the full market for platform as a service. The larger market to be disrupted by platform as a service is the business “solutions” market, composed of the software and services that companies consume to develop customized solutions. This market is 3-4 times larger than the market for business applications — generally estimated by analysts at $200-300B.
In our experience, custom development using a platform as a service offers a higher degree of customizability, at up to an order of magnitude lower cost. The fact is that on-premise platforms are lousy for custom development. Once you’ve developed to a platform, you can’t take advantage of future platform capabilities without expensive customizations and rewrites. This kind of wasted effort has fueled the growth an entire industry.
But platform as a service disrupts not just the $200-300B market for software and services, but also the market for hardware and infrastructure. These markets are seeing a dramatic concentration in their buying base, and some competition or substitution from companies they never would have expected, such as Google using its own hardware spec in its data centers. All told, platform as a service stands has the potential to disrupt $1 trillion of IT spending.
The opportunity is large, and real. But on-demand solutions are enormously disruptive, and we have no expectation that any of these IT markets will stay the same bloated size that they are today. We look forward to seeing the current $300B industry that’s generating a nice living for on-premise product and service vendors, and watching it transform into a $100B on-demand industry that delivers more value for customers. We’re willing to help make that happen (and take some profit from the transformation) while on-premise competitors are economically motivated to resist changes to the status quo. See our postings on how this dynamic affects on-premise software and service providers for more.
Expansion in a New Dimension
While the traditional market for business applications and solutions is shrinking, we anticipate that on-demand platforms will open new areas of growth. The inflexibility of on-premise software has severely limited where it can be applied, as we argued in our recent posting on “business solutions meet business people.” Most workers remain woefully undersupported by IT. Many companies haven’t figured out how to support knowledge workers beyond issuing them a copy of Microsoft Office. McKinsey notes that the IT investment in supporting “tacit interactions” – a form of knowledge work – lag IT investment in supporting transactional and transformation work by $30,000 per employee.
The opportunity to solve this problem is enormous. There are 500 million licensed users of Office and Notes globally. These users are the information workers who are making decisions that require access to enterprise data. The global workforce is composed of about three billion people. Every one of them makes some sort of work decision every day that would benefit from additional information. The true consumerization of IT connects every worker to every relevant piece of information needed to get the job done. Serving the full enterprise workforce using on-premise IT is simply too costly, so as a result, companies have gotten by with poor communication and incomplete information. That equation changes with PaaS. Google provides free communication and information services to millions of consumers. These services are higher quality than most of us use at work. With PaaS, those capabilities can now be used as part of a business solution. The recently announced integration points between salesforce.com and Google Apps are just the starting point– we anticipate entirely new ways to “connect the cloud” by bringing the capabilities of every business solution to every business person.
The opportunity to serve the entire business workforce has arrived — and that’s certainly a big enough opportunity to build a company around.