Editorial: Software as a Service (SaaS) and the Telecoms
Dr. Matthew Lucas
12/01/2006
Driving revenue from new services is at the top of every operator’s business plan. For the most part, entertainment services (IPTV, ringtones, user-generated content, etc.) is leading telecom’s “next-gen” product strategy. But there is another business line on the horizon with possibilities: software as a service (SaaS). This article looks at the SaaS market, and how telcos might get a piece of the action.
First off, what is SaaS? In short, it’s a radical shift in how software is architected, delivered and purchased.
Today, software is generally delivered under an unlimited “right to use” license that allows the licensee to install the software on a particular computer (or “customer premises equipment,” in telecom vernacular), and to use the software package in perpetuity.
For example, consider Microsoft’s Office products. Here you pay an up-front fee of several hundred dollars (plus tax) for the right to install the software on a single machine, and use the software as much as you want, for as long as you want.
For the most part, there is nothing wrong with this business model—but it isn’t perfect. Specifically, it is not appealing to those who want to use the software only once, or for a short duration or sporadically. Plus, the software license generally doesn’t address upgrades, nor related services such as installation, support, configuration, maintenance and all the rest. Lastly, whereas the product model is wonderful in that the developer gets all of its money up front, it is also its own enemy, in that it generates no ongoing revenue opportunities or a direct customer relationship that can be leveraged to upsell and the like.
SaaS, on the other hand, is a hosted software delivery model. Typically the software is hosted at a data center and is accessed using the Internet or a private IP network. As a hosted solution, it has obvious benefits in terms of reduced infrastructure requirements and administration overhead. Also, the approach generally mitigates problematic IT issues such as scale, performance, uptime, disaster recovery and maintenance.
The second key difference is that under the SaaS model, the end user doesn’t license the software. Instead, SaaS shifts from the one-time, up-front payment model (a product model) to a monthly or usage-sensitive, or “service,” model that typically includes support, configuration, hosting and maintenance.
Considering software as more of a service than a packaged product is a radical change for the software industry. But SaaS is gaining huge support for the software giants (such as Microsoft) who want to offer more granular pricing and support options for both their consumer and enterprise products offerings. It is also very appealing to niche application developers, many of whom are adopting SOA to offer their application through a web-based interface, and it is attractive to “on demand” application vendors who offer outsourced IT solutions (for example, Salesforce.com and custom applications) to the SMB market and home office community.
So why should telcoms care about SaaS? There are a lot of reasons; here are my top 10.
1) Market Potential
SaaS has enormous market potential. An IDC study predicts the SaaS market will reach $8 billion by next year. OK, this is peanuts compared to telecom’s $1 trillion in revenue. But IDC further predicts that by 2010 more than 70 percent of worldwide software licensing could evolve to a subscription service model.
Only time will tell if these numbers hold. But today there is no question that Internet-based application services and software are leading the way in terms of innovation, valuation and new purchases. For example, Salesforce.com has more than 500,000 users, SAP has released its own hosted CRM solution, Google hosts more than 85 applications, and software giant Microsoft has a range of announcements covering Office, Xbox and more.
2) Network Assets
By definition, the SaaS business model requires network connectivity. Since the application and data are hosted, the SaaS model cannot succeed without a network. So telcos have a strategic asset that is a fundamental enabler of the SaaS architecture.
The question is, what type of network support will the software need? If it is just best-effort, standard Internet connectivity, then net neutrality may keep the broadband operators out of the picture—as is the situation today with Google, Yahoo!, iTunes and others.
On the other hand, many of the SMB and “professional-consumer” products contemplated won’t be accessed via a web browser but a client application requiring performance-based, reliable, low-latency, high-bandwidth communications with the data center. This is not best-effort service, but rather QoS-based, premium transport. In this case, the telco free ride is over.
3) Service Assurance
SaaS benefits from enhanced telecom services such as security, service assurance, QoS transport and more. One of the main reasons for the failure of ASPs—an outsourced software business model similar to the SaaS model—was that network performance was unpredictable and service quality was low. Also, data security was (and still is) the No. 1 concern for most enterprises. Telcos can help mitigate these risks for SaaS providers.
4) Billing Expertise
SaaS providers will need billing and OSS systems. As mentioned already, the SaaS business model assumes recurring, service-based revenue. But don’t expect one-size-fits-all packaging. Software today is priced on a granular basis—number of seats, transaction volume, number of accounts, resource consumption, features used.
Telcos have this expertise. They know how to bill for a broad range of services, business models and credit models. They know how to manage complex account structures. They know how to process large volumes of usage data, and perform complex settlements (such as interconnect and revenue sharing). They know how to deal with rapid service creation, provision complex product bundles and manage enterprise sales processes. And they have powerful rating and online charging systems that can support any pricing strategy and perform real-time authorization.
SaaS providers are going to have to deal with these issues. They are tough issues to solve, and get right—as telcos still struggle in this regard. But telecom billing systems and know-how is a strategic asset that SaaS vendors might do well to consider leveraging.
For example, consider a scenario where a parent wants to buy a computer game. First, most wouldn’t know which title to buy, so the SaaS subscription model fits perfectly. But more important, the parent can set user profiles to control which titles the kid can play (G-rated, teen rated, educational, you name it). Next, the parent can set usage limits to, say, one hour per day, or five hours aggregate per week, or whatever. That way, the service model limits the cost exposure, and budgets the child’s game time. Further, controls can limit when games can be played (for example, allowing play after school, but turning off access come 9 p.m.), and game privileges can be revoked (like an allowance), monitored and even controlled on a per-use basis via an authorization message to the parents phone. Telecom mediation and rating systems can perform this type of service logic.
5) Customer Support
SaaS needs customer care. As in the billing example above, SaaS providers are going to need customer management infrastructure. This isn’t just call centers, but also the breadth of related “customer experience” management software—online customer support, order entry, channel management, usage reporting, trouble management, fault management, dashboards. These are competencies that took telcos decades to get right. OK, there’s definitely room for improvement. Nonetheless, this is an asset that telcos may be able to monetize.
6) Bundling Strategy
SaaS aligns with a carrier’s bundle strategy. Operators want to put as many services on their bill as possible, because bundles have proven to lower churn and drive ARPU via uptake of incremental value-added services and products. SaaS aligns perfectly with this bundling strategy, because software is sticky. Once users are familiar with a software package, have their data loaded and make it part of their routine, they don’t switch. It is simply too painful. Also, software packages are defined by features, performance and other characteristics that can be sold incrementally. Again, this aligns perfectly with an operator’s bundling strategy.
From the SaaS perspective, if software becomes a network-based service, then telcos are a natural channel, because telcos have a billing and care relationship in place; consumers generally trust their telecom providers, and hence have a propensity to buy recurring services from them. On top of that, revenues are purely compounded, since neither group has a competing or cannibalizing revenue stream.
7) Tax Smarts
SaaS will have to address taxes. From a tax perspective, purchasing a software license is a simple matter. SaaS, however is a service with a telecom component. How will SaaS be taxed? It is an information service? It’s not clear. But if SaaS is taxed anything like telecom, it will be a mess.
Telecoms have been dealing with these issues for a long time, and have considerable know-how in this area.
8) On-Demand Services
SaaS is on-demand. It is an “on-demand” world according to IBM’s commercials. Telecom devices—cell phones, set-top boxes, game devices, etc.—are essentially multimedia computers that can support a range of applications. Why shouldn’t they have every conceivable application ever written for that device available, and ready to use on demand? Telcos can make that happen in the wireless and cable space, because for the most part they control what the device can and can’t do. That is the essence of on-demand services, and it is very appealing to consumers.
9) Marketing
SaaS will need marketing channels. Many of the SaaS offerings will target a niche audience—the so-called long tail. The trouble with the long tail is the difficulty in finding and targeting that audience. SaaS providers will need a “try it, buy it and put it in front of the right consumers’ face” marketing mechanism.
The telcos are in the best position to make this happen. Only the telcos have insight into user profiles, preferences, buying patterns, interests and so on. And, as in the previous point, operators often controls the device and the customer relationship, so they have a natural way to promote SaaS offerings—either on a cell phone’s “deck,” the customer bill, at the call center, online or otherwise.
10) The IMS Model
SaaS and IMS perfectly complement each other. Telecom operators, particularly mobile operators, are committed to deploying IMS. As discussed in previous editorials, IMS is about simplifying service creation, monetizing IP assets and consolidating OSS/BSS stacks.
SaaS aligns perfectly with the IMS model. IMS offers real-time charging, real-time authorization, QoS provisioning, standard application APIs, service profiles and more. These are exactly the OSS primitives SaaS will need.
IMS is also about converged access—mobile, broadband, and so on. As such, it is a natural solution for fixed-mobile voice convergence. But it is also a natural solution for SaaS convergence—that is, any software, on any device, at any time. Mobility and home-office are not only a huge driver behind voice communications, but also what you can do with IP devices beyond voice (namely software).
It’s All Up Side
SaaS holds a lot of potential. Ask yourself, why buy a software title outright when you can pay for only what you use? Why buy the latest game, when your kid is only going to use it for a month or until it is replaced with the next version? In fact, why go to the store at all, if you can buy someone a subscription?
If you are a small business, why deal with IT issues associated with production software (reliability, scale, maintenance, upgrades, servers, all of that), if you can cost-effectively outsource?
For operators, there’s almost no risk. Why not make every conceivable software title or game available on a product catalog for purchase? As long as the applications work and don’t drive complaints to the call center, any revenue is simply incremental, high-margin dollars—something the telecoms desperately need.
For developers, it is a new business model that monetizes the long tail and casual use, incorporates modern network technologies and drives recurring revenue. So what’s the downside?
In the end, however, it may boil down to whether IMS can effectively supply the QoS and seamless delivery as promised, and whether an operator’s OSS/BSS infrastructure can manage the details.
If so, then SaaS may be a big win for the software community, the telecoms, consumers and small business.
TeleStrategies is looking to put together a pre-conference workshop on SaaS at the annual TeleStrategies’ Billing and OSS show, April 24–27 in Chicago. If you have interest in presenting or participating, please email mlucas@telestrategies.com.
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