It’s estimated that well over two billion people are connected to the Internet today. With the explosion of smartphone technology, it’s not hard to imagine that sometime in the next ten years, that number will hit ten billion. That’s ten billion people who will be accessing the Internet—from anywhere in the world, every minute of every day.
Take the combined power of the Internet and the number of people in the world who have access to these modern systems and applications, and it makes sense that many of the fastest growing companies are software companies. This ever-growing list of companies is changing how we use the Internet. They may not be thought of as "software companies," but that’s essentially what they are.
What kind of company is Netflix? How about Amazon? Consider Skype, or even Spotify and Pandora. Think about Zynga, Google, Groupon, and FourSquare. And then there’s Instagram and Flickr. What about LinkedIn?
The core competency of all of these companies is the delivery of software-based services. But they aren’t like the traditional software companies of the past. The key difference is the revenue source. The software delivered by these companies is free. Their revenue comes from either the services that are delivered via the software or by other means of monetization once the software has attracted a large number of users. Let’s take a closer look:
Google: Google is most people’s search engine of choice. One could argue Google is an advertising company, but we all know that the power of Google is its ability to create software solutions across a broad spectrum. Very little of Google’s revenue comes directly from the use of their software; almost all of Google’s revenue (if not 100%) comes from software-based services like AdWords.
Netflix: Netflix is a software company that has completely changed an industry. By creating a new world of in-home entertainment, traditional cable providers have been forced to reinvent their products and services to compete.
Minecraft: Will there ever be a successful video game that isn’t mainly software? Look at Microsoft’s recent purchase of the Minecraft empire. Even the hard-wired game developers included cloud-based features.
All things photography: Every smartphone has a camera, and the way in which photographs are taken and shared is all software-based. The rapid growth of companies such as Instagram will surely be repeated many times by the explosion of rapid sharing across the globe and between thousands of previously unconnected people.
One could even argue that giant, established companies whose success is driven by logistics are really software companies: UPS, FedEx, and even Walmart.
Software will be the single largest driver of success as we continue to see more Silicon Valley–style startups take on the giant incumbents in industry after industry. Software may not be the source of revenue, but software will be the driver. The traditional software industry will not be spared. Major established software companies such as Oracle, SAP, and BMC Software have been put under significant pressure by SaaS vendors such as Salesforce, Workday, and ServiceNow.
This trend is accelerating, and it’s reaching into all corners of the industry. There’s clear evidence that every "legacy" software vendor is feeling the pressure as evidenced by the number of "hosted" or "single-tenant" SaaS offerings that are being introduced by these vendors in response to the SaaS threat. Go to the website of any on-premises "legacy" vendor and you will find their "hosted" or "SaaS" version. In an effort to keep their on-premises version relevant, many of these vendors have introduced what they’ve termed "hybrid." This "hybrid" concept allows customers to choose and move between an on-premises and hosted version of the software.
In all of these scenarios, the cost of software is going down. In some cases, the software is already free; in the SaaS world, prices are both lower and more predictable than legacy on-premises products—and trending even lower as the newer vendors leverage the substantial cost benefits of multitenancy, where a single instance of the software runs on the provider’s server for all customers to use.
There is another interesting trend on the horizon, and, again, the multitenancy SaaS model is the driver. Think about the amount of valuable information a large CRM provider has in its database: it’s a veritable goldmine of valuable real-time research data and insights into industry trends and efficiency levels across an entire community of customers or across peer groups (of course, keeping privacy requirements in mind).
Real-time access to information can enable organizations to measure and attain continuous improvement. This is a shift to a new world of data-mining. The old-world way of doing this was to get an annual industry report of static data, analyze the data, extract the salient information, and run a benchmark against your own data. Then you would build this into your improvement plans. At best, this could be done on an eighteen-month cycle, which meant you were likely measuring performance against a benchmark that was eighteen to twenty-four months old. This isn’t reasonable. You need instant, ongoing data at your fingertips.
In fact, the value of continuous improvement and its impact on financial performance may change SaaS pricing models. If the value is in the continuous improvement, then why charge for the software? We may begin to see premier pricing packages for real-time benchmarking/continuous improvement at the elite level. Customers will pay a premium for added business value. Who knows? Over time, that same software may even be free!
Just about every new software company is a multitenant SaaS vendor. As these new players challenge the legacy incumbents and as their customer bases grow, we will see more and more opportunities for customers and companies to leverage aggregated data.
The possibilities are truly endless. As software and the companies that provide it continue to evolve, so will the way we live and work with it.
Darroll Buytenhuys is COO of Samanage. He has more than thirty years experience in sales, marketing, and general management in the software industry. Prior to joining Samanage, Darroll was a senior vice president and officer at BMC Software. He joined BMC as a result of the acquisition of New Dimension Software, where he was the president of the North American operation and the company’s global COO.