Evaluating the Software as a Service Business Model: from Cpu Time-sharing to Online Innovation Sharing

The evolving literature on the new Software as a Service (SaaS) concept gives a coherent picture of the technical arrangements required between the vendor and the customer in order to enable the new online renting of applications. Many of these articles describe the new SaaS model as a new and customer-friendly way of IT outsourcing, where the vendor will own both the software and the IT infrastructure required for the online service, and where both parties will benefit from simple and attractive revenue logic, which is no longer based on the application development investment. What is not clearly observed yet is that the SaaS model will ultimately change the supplier-customer relationship from one-to-one to one-to-many. Therefore, it will also change the customer-vendor relationship to a typical utility based ecommerce relationship. Better understanding of the Software as a Service model will therefore require applying an ecommerce business model. In this paper we will use the value creation model of Amit and Zott (2001) to analyze the value drivers proposed in the research articles and software industry organization reports of the SaaS concept. We will synthesize the benefits and risks of the major stakeholders and discuss the types of value sources covered. We conclude that the promised customer benefits are not easily realized as many of them are at the same time major risks for the provider. Therefore, the SaaS model will require both an effective supplier network and an innovative and fair revenue logic involving lock-in in order to enable a continuous flow of shared software innovations and to succeed in transforming the software product business into service business.