Over the holidays I read Nicholas Carr's new book, The Big Switch, which explores how "information utilities" (including SaaS) are fundamentally changing the economics of computing, and also Empires of Light, which traces the clash between Edison's direct-current electricity platform and the (eventually winning) alternating-current platform promoted by Westinghouse and Tesla.
Reading them with SaaS in mind, several important concepts emerged:
The power of standardization: Early AC generators ran at different frequencies and voltages; the first large-scale AC generator at Niagara Falls ran at 25 hertz and 2200 volts (before step-down). Customers' motors and lights had to be designed and built specifically to match the power plant, resulting in extra engineering costs per customer and also additional operational efforts (maintaining and upgrading each disparate system).
The parallel in the IT world is that there are many competing computing platforms (hardware, operating systems, databases, programming languages, etc.), which increases the engineering and operational efforts of corporate IT shops who must run software across multiple platforms. So IT shops have tried to simplify and standardize by requiring all software to run on a single platform, but this simply pushed the complexity and overhead onto the software providers, who have to port their software to multiple platforms, multiplying their testing and support efforts. This causes a huge amount of wasted effort for each software provider.
The IT standardizations that benefit customers are common data formats (HTML and XML for applications) and data transmission protocols (TCP/IP), not platform mandates. With SaaS, the SaaS provider can select the best platform to deliver their software service, and the customer incurs no additional complexity or maintenance overhead, eliminating wasted effort for everyone.
Standardization eliminates wasted effort
The power of efficient remote transmission: Edison's DC system could only service customers within a mile of the power plant, across thick and expensive copper wires, whereas AC could easily be ramped to high voltages and efficiently transmitted across many miles, allowing a single station to serve many more customers. This had two effects: fixed costs and capital were apportioned across many more customers who were served, and per-watt costs were much lower with fewer larger and more efficient power plants, compared to a power plant every few square miles.
Similarly, multi-tenant SaaS enables a single software infrastructure to support many customers, rather than a separate infrastructure per customer.
Remote transmission enables economies of scale
The value of scalability engineering: Tesla invented many electricity-related devices, the most important probably the AC induction motor, and received many patents. However, he didn't actually deliver his inventions to end customers because he didn't engineer the entire end-to-end solution, as Edison and Westinghouse did. Over time, even though he was recognized as clearly the most innovative scientist involved in electricity, he couldn't attract capital to his ventures because he didn't deliver working product or revenues.
The real impact of electricity was delivered by Edison (whose company was merged to become General Electric), by Westinghouse, and by other engineering-focused firms. Over the course of several decades their firms designed and built ever-larger and more efficient generators, electric motors and light bulbs - forever changing manufacturing and the way people lived after sundown.
In a similar way, on-premise software providers deliver just the software functionality - the software is built, demo'd to prospects, and burned onto a CD. SaaS starts with this requirement, and adds on the ongoing engineering effort to operate and scale the software, the platform and the computing infrastructure. This is one of the key reasons that most on-premise software providers cannot successfully transition to SaaS - they simply don't have the many additional needed skillsets.
As Joel on Software says, "the market pays for solutions to gnarly problems." Joel uses this to justify why he offers his software on-premise, where the gnarly problem is figuring out how to install and support his software across a myriad of customer computing platforms. But unfortunately solving this problem ends up being low-value to customers; customers only pay for high-value gnarly problems, and fewer and fewer want to create their own custom-built high-cost infrastructure to run software that's just like everyone else's.
Joel goes on to say that good design is a gnarly problem in software, which it is. But once that's tackled, the new gnarly problem - and the one that actually delivers the value to customers and users - becomes how to quickly and efficiently serve ever-increasing numbers of users around the world with geometrically-growing amounts of data, continuously and without hiccups. That's a real feat of engineering, scaling up software many orders of magnitude over time, and it provides ever-increasing economies of scale to SaaS providers and their customers.
Scaling SaaS operations is the core of ongoing software value delivery
Of course, there are many differences between delivering electricity and delivering information technology, one of which Nick Carr points out - electricity customer must plug in a device at the end-point for electricity to be useful, but software can be hosted centrally and not require any specific end-point device (i.e., consumed with only a browser and screen). The other big difference is IT's need for server-to-server information communications, which takes a lot more coordination than aligning the 60-cycle phases of electricity.
Nevertheless, over time, SaaS will prove to be one of the "information utilities" that Nick Carr describes, simply because it delivers far higher value to customers at a fraction of the cost of on-premise software.