I read an interesting article this morning in The Atlantic – It Has Come to Subscription Tacos. Even Taco Bell is a tech company now. They announced the “Taco Lover’s Pass,” which lets you get exactly one taco every single day for 30 days with a subscription that costs $5 to $10, depending on the store. It got me thinking. Has Anything-as-a-Service.(XaaS) finally, gone too far? Has it jumped the shark as Fonzy did in Happy Days? XaaS is clearly a trend that is here to stay. Product managers should be careful, however, of jumping on the bandwagon in an attempt to gain some marketing or valuation lift for their products.
The Backstory
In 2007 I helped Internet Commerce Corporation acquire Easylink. The combined company was christened EasyLink Services Corporation and I joined as the EVP of product management. The company had two major product lines: an Electronic Data Interchange (EDI) Value Added Network and a fax outsourcing business. The company was in essence a SaaS company. The challenge was that both EDI and Fax were legacy technologies. EDI was first launched during the Berlin Airlift in 1948. EDI reached ‘late majority status in the early 1980s. Fax was even older. The first fax was sent in 1860. The samurai in Japan were not abolished until 1868. That means there was a five-year period when a samurai could have sent Lincoln a fax warning him about his assassination in 1865. The online fax market will be over $1 billion this year – 161 years after the first fax.
A challenge was faced was that Wall Street thought we were a legacy technology company and valued us accordingly. In a vain attempt tp boost our image and valuation I rebranded our online fax business “On Demand Messaging” In our 2008 10-K On Demand Messaging Segment “included all fax, e-mail, document capture and management (“DCM”) and workflow services.” Just as many companies are attempting to rebrand themselves ‘As A Service’, we tried the same thing in 2007. While we met all of the characteristics of a modern SaaS company (Service delivered over the Internet, no on-premise software, subscription billing, etc.) the market didn’t give us any bump for our creativity.
Anything As A Service’ in 2021
Many people believe that Salesforce.com first popularized the term Software as a Service (SaaS) in 2000. A number of academic researchers published a paper at the 2015 IEEE 8th International Conference on Cloud Computing that traced the concept back to the mid-1980s. Today there are over 80 categories of XaaS. Here is a list that Wikipedia offers:
Tacos as a Service have not made the list yet.
Fundamental Differences of XaaS
My early career focused on IBM mainframe applications – the IBM 3084 was my friend. I’ve lived through the minicomputer, PC, client/server, and now the cloud era. I cut my teeth selling and supporting licensed software apps, now known as on-remise software. I moved into the SaaS world post-2000. There are many differences between my distant past and today’s XaaS.
XaaS Runs in Someone Else’s Data Center
The biggest difference for XaaS is that the application runs in someone else’s data center. Companies used to spend millions of dollars to build, equip, and operate their own data centers. Special accommodations had to be made. Redundant power and telecommunication services were required. Special fire protection systems (Halon), flood protection, even tornado-proofing were required.
In 2021 there are hundreds of cloud providers like Amazon, Google, IBM, and Oracle. You can spin up powerful Linux servers completely outfitted with database management systems, storage systems, teleprocessing monitors, systems management tools, and guaranteed uptime with a few mouse clicks. Check out Amazon’s Pricing Calculator or Google’s Cloud Platform Calculator to see what it would cost to replace your current infrastructure.
Subscription Pricing
The second biggest difference is the shift to subscription pricing. Pre-SaaS customers purchased software licenses. They paid a one-time fee for a perpetual license or a term fee for the right to use a piece of software for a specific period of time. Customers also had to pay an annual fee for software maintenance, upgrades, and support.
In the XaaS world, customers purchase a subscription to use a piece of software on a monthly or annual basis. Subscription prices are often based on the number of modules purchased, the number of users, and sometimes on the number of transactions. Discounts are often offered for annual or multi-year prepays. Salesforce.com is the master of pricing by module and users.
Prices for monthly subscriptions are dramatically lower than perpetual software licenses. Instead of one up-front lump sum payment, customers ‘pay-as-they-go’. From a vendor perspective revenue is recognized on a monthly basis instead of all at once. Check out Product Managers Should Understand SaaS Revenue Basics to learn how the shift to subscription revenues impacts today’s XaaS firms.
Disaster Recovery is Someone Else’s Problem
Pre-XaaS customers were responsible for their own software disaster recovery and business continuity. Often they had to establish a backup data center in case their primary data center failed. This resulted in duplicate hardware and software investments.
In the XaaS world, the provider is responsible for disaster recovery. A SOC 2 (Statement of Capabilities) certification is a mandatory requirement for SaaS providers. SOC 2 is an auditing procedure that ensures your service providers securely manage your data to protect the interests of your organization and the privacy of its clients.
Disasters happen in the SaaS world. Even the mighty Google has reported 148 outages across 45 key services in the past year. BigQuery, a key service for both Google internal apps and customer apps, reported nine outages that totaled over 240 hours of downtime. That is only 97.2% availability. Recently Kayseya, a managed services provider to thousands of customers was hacked. The hack allowed the ransomware to be spread amongst thousands of customers. In 2004 I was the SVP of Client Services for a B2B Integration SaaS firm. We operated a value added network that allowed companies to exchange Electronic Data Interchange (EDI)transactions. EDI is one of those legacy technologies that underpin the majority of the economy’s manufacturing, financial services, and insurance industries. We had a two-day network outage that shut down several Japanese auto manufacturing plants that relied on just-in-time deliveries pf parts and supplies. It was a difficult time that cost my employer a lot of SLA penalties and reputational harm.
XaaS Simplifies Software Providers R&D and Customer Support
XaaS ultimately makes life easier for software vendors. In the pre-SaaS days, a software vendor often had to develop different versions of their software to run on various combinations of hardware, operating systems, databases, and TP monitors. The software vendor would have to have versions of each type of hardware, O/S, and DBMS. One company We supported over 20 different environments – IBM mainframes, HP Unix servers, Sun Unix servers, Tandem Servers, zOS, Tandem Non-Stop, Linux (5 variants), Windows, Macs, IBM DB/2, IBM IMS, Oracle DBMS, Sybase DBMS, and SQL Server. Our software had to be adapted to each configuration. We supported the current release of infrastructure software and the two prior releases. Bug fixing across all of the permutations was a nightmare.
In the XaaS world, the vendor controls the hardware and software configurations. While the need to offer multitenant solutions introduces some complexity, the benefits of not having to support dozens of hardware and software versions far outweigh those costs.
So Why Are So Many Companies Jumping on the XaaS Bandwagon?
Valuation. Simply put, XaaS or SaaS companies are worth dramatically more than traditional, legacy, on-premise software companies. Companies are jumping on the XaaS bandwagon to get a lift on their valuation, just like I tried to do when I re-labeled online fax as On Demand Messaging.
Here is a sample of on-premise software enterprise value valuations:
Here is a sample of the top 25 public SaaS companies:
The difference is clear.
Summary
Has Anything-as-a-Service (XaaS). finally, gone too far? XaaS is clearly a trend that is here to stay. Many companies are jumping on the XaaS bandwagon in an attempt to boost their valuation. Product managers should be careful, however, of jumping on the bandwagon in an attempt to gain some marketing or valuation lift for their products.
Also published on Medium.