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We'll get straight
to the megatrend idea below. First, however, we wanted to post a response
to the potential impact Oprah Winfrey's exit from network TV may
or may not have. Let's just say the hype happened before any of the actual
numbers were considered. Our blog entry 'Oprah
Winfrey's Fiscal Impact (or not) on Discovery, Television in General'
puts it all into perspective from an investor's point of view.
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Megatrend:
The Numbers Behind the SaaS Opportunity |
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Everyone
wants to latch onto investments that reap the reward of so-called megatrends,
like the dot-com rally of the late 90's, or the clean-energy craze we've
seen for the better part of this decade. The challenge is finding one that
actually pays off - most of the fads deemed to be megatrends end up fizzling
shortly after they start. That's why we rarely talk about them.
Ironically,
it was the recession (and necessity) that brought one megatrend to the
forefront, and it's an economic recovery that's likely to cement the industry
into place.
It matters to
us for one simple reason.... some of these companies with the potential
to grow are publicly-traded companies. We think some, though
not all, of these stocks could serve up significant long-term gains.
Even though
many of them are probably using it, most investors aren't likely to know
the acronym 'SaaS' stands for 'Software as a Service'. For that matter,
they may not know that software-as-a-service refers to productivity tools
that work like installed software, but are actually web-based, and are
accessed through a web browser.
 Still
not clear? Google Documents is an outstanding example of software being
offered as a service. Rather than Microsoft Office, WordPerfect, or Lotus,
users can be just as productive using the document creator and spreadsheet
utilities offered - for free - by Google. Best of all, it's all
online.... no software is needed other than a web browser, all of which
are free and pre-installed on a computer anyway.
So, what's
the fiscal opportunity if Google gives it away for free? Google's goal
isn't revenue, but rather user collection. And, Google Documents is a tiny
(and somewhat unimpressive) sample of SaaS options that are available
now. The better and more useful online applications are sold on a subscription
basis. It's a powerful opportunity in that such services are ultimately
easier to deploy, don't require update downloading, and are cheaper than
CD-based software in the long run.
The concept
is part of a revolution you probably have heard of - cloud computing,
which is a term that's gotten a little more traction than 'SaaS' has.
Either way,
that's the idea. The question is, what's the opportunity?
The year 2009
won't go down as a banner year for most industries. Some did better than
2008, since the recent recovery has been a bigger boost that last year's
late implosion was a a drag. Other companies fared a little better last
year, and have yet to shrug off problems that didn't start until early
2009. Overall though, revenue and earnings were weaker in 2009 than
2008.
 Care
to guess one of the key exceptions to that norm? Cloud computing is
expected to end the year as a $7.5 billion industry, up 18% from last
year's $6.8 billion (versus about $4.3 billion in 2007). That's
impressive, but a footnote makes it even more so.
SaaS offers
are generally sold on a per-user subscription basis, paid for by
companies to keep their employees as productive as possible. Unemployment,
though was getting worse near the end of last year, didn't hit peak levels
-
and stay there - until earlier in 2009. Had millions of employees
not
lost their jobs (and countless SaaS subscriptions cancelled), one has
to wonder how much stronger 2009's cloud computing revenues could have
been. Be that as it may, an 18% increase of anything this year is
compelling.
The picture
gets even rosier looking ahead; by 2014, annual cloud computing revenues
are expected to total $14 billion.
While no forecasts
beyond that exist, the message is still clear.... if growth can be achieved
in 2009, then the 2014 forecast is plausible as well.
The cloud computing
primer you just reviewed was intended to convince you of the opportunity.
It was not, however, designed to suggest any and all SaaS operations
would bear fruit.
As with most
megatrends, dreams of dollars draw out more suppliers than actual demand
justifies. It just so happens that in the case of SaaS, the glut of suppliers
can be pin-pointed to the specific purposes of the software itself. Here's
a quick look at those groupings, with a handful of key points.
-
 Content,
Communications, Collaboration (CCC): Contrary to popular belief, customer
relationship management is not the biggest SaaS market. It's content and
communications services, worth $2.5 billion in 2009.
-
Customer Relationship
Management (CRM): With $2.3 billion worth of business for 2009, customer
management software is a major opportunity. The problem is (though it's
not a problem for their investors), the niche is pretty much wrapped up
by Salesforce.com (CRM). Rightnow (RNOW) has a piece of the pie as well.
Either way, it's a tough nut to crack.
-
Enterprise Resource
Planning (ERP): It's worth $1.2 billion per year, but what is it?
Think
of it as management and integration of a company's computers, files, and
functions. Even then, it's a little fuzzy. IT Security would also fall
in this category, as would some HR and accounting SaaS platforms.
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Supply Chain
Management (SCM): It's worth only $826 million in 2009, but it's growing
fast.
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Office Suites:
It's only a $68 million dollar annual business right now in SaaS form,
possibly because Google offers a version for free, and there are still
plenty of copies of Microsoft Office out there in circulation. However,
even Microsoft is aware enough to begin working on an online version of
an office suite. NetSuite (N) is a player in the arena, though its focus
is more on accounting and e-commerce.
A few other groupings
weren't significant or defined enough to even mention. There was one category,
however, that deserves a special mention even though it's not a stand-alone
category ... human resources and compensation management. This group
was folded into the other categories. Yet, some of these are among the
most viable and attractive investments within the world of cloud computing.
Taleo (TLEO) and SuccessFactors (SFSF) are a couple of examples.
As was said
earlier, cloud computing and SaaS is overpopulated with too many suppliers,
yet remains mostly undiscovered (or underestimated) by investors. While
the supply will be thinned out in time, make no mistake... each groups'
leaders are facing a tremendous growth opportunity.
For now, we
are bullish on the industry for the next three to five years, and will
be monitoring it from this point forward as one of only a handful of megatrends
we've ever mentioned. As information is published - and as leading stocks
emerge - look for updates.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
