TWIS#22- This Week in SaaS – Morgan Stanley State of the Internet Coverage

TWIS #22 -- This Week in SaaS

In this week’s TWIS:

• Major Morgan Stanley “State of the internet” report analysed- how will it effect SaaS? Where is the market going? Great Deck and Video coverage.
• Great new stats from Genentech about how mobile has increased their adoption and use of SaaS
• Big Freemium news this week- Ning withdraws free version and cuts 40% staff- does freemium really work? ReadWriteWeb, 37Signals and Lincon Murphy comment.
• Really nice thoughts by Giff Constable on funding vs effectiveness on the back of Ning / Twitter.
• And in other news- Oracle’s latest SaaS acquisition, Chirp Stat’s and the tech sector is hotting up.

I’m speaking tomorrow at the Cloud Circle in London on the ROI of SaaS and Cloud- deck + post to follow shortly (my head is full of SaaS ROI at the moment…) and next week I’ll be at InfoSec Europe talking to people about the state of SaaS and Cloud security. Any thoughts on what you’d like me to ask? Your comments via email or twitter please!

TWIS #22

Some of you might have been thinking I’ve been going on and on about mobile the past few weeks- what’s it got to do with SaaS???

Well, sometimes I’m not all that cognisant of where things are taking me- I guess that’s one of the pitfalls of writing a weekly blog post on the state of the industry, but this week things really crystallised for me with the latest Morgan Stanley “State  of the internet” research being released.

I realised that we’re active participants of the next shift of computing- from desktop internet to mobile internet.

Cloud (and therefore SaaS) is a key enabling technology as part of this shift.

The really interesting trend is that the mobile web is predicted to be bigger than the desktop web in the next five years:

Now research is just research, and it does matter where it comes from. GigaOm thinks it’s a pretty good source of insight:

Mary Meeker of Morgan Stanley isn’t just any Internet analyst. She was covering the sector when the brokerage firm was the lead underwriter for Netscape Communications’ initial public offering in 1995, was dubbed the “Queen of the Net” by Barron’s magazine in 1998 and was covering the space in 2004, when Morgan Stanley helped launch the Google IPO. Now a managing director at Morgan Stanley and head of the global technology research team

They went on:

The Morgan Stanley analyst says that the world is currently in the midst of the fifth major technology cycle of the past half a century. The previous four were the mainframe era of the 1950s and 60s, the mini-computer era of the 1970s and the desktop Internet era of the 80s. The current cycle is the era of the mobile Internet, she says — predicting that within the next five years “more users will connect to the Internet over mobile devices than desktop PCs.”

And what’s even more interesting is mobile’s trajectory:

Interesting also how they see Japan as a lead in this- a new market to watch for TWIS? The effect on the carriers? GigaOm again:

But that mobile boom will take its toll on carriers, Meeker says, because mobile Internet use is all about data. The average cell-phone usage pattern is 70 percent voice, while the average iPhone is 45 percent voice. At NTT DoCoMo, data usage accounts for 90 percent of network traffic. The analyst says her team expects mobile data traffic to increase by almost 4,000 percent by 2014, for a cumulative annual growth rate of more than 100 percent. Such numbers will likely strike fear into the hearts of carriers, but joy into the hearts of equipment suppliers and mobile service companies.

Shall we keep tracking the carriers in TWIS and how they effect SaaS and Cloud? I think so.

What are the characteristics of the new paradigm according to MS?

Reduce Usage Friction Via Better Processing Power + Improved User Interface + Smaller Form Factor + Lower Prices + Expanded Services = 10x More Devices

Sounds familiar to previous shifts doesn’t it? But regardless- I think SaaS and Cloud can only benefit from the mobile trend, since mobile depends on SaaS and Cloud services for much of it’s functionality. The entire deck is worth checking out as well as the video:

I love hunting out stats for TWIS readers and in preparation for the Cloud Circle event tomorrow (where I’m speaking on Cloud ROI), I came across this slide from Todd Pierce’s deck, the CIO at Genentech:

Normally we’re stuck at comparing mobile usage of facebook to web (60% mobile apparently), rather than usage of an app with real substance like the Genentech one, which is for their Pharmaceuticals business. The key takeaway- put the app where the user wants it most and the business is going to drive results (average double the number of calls in this instance).

SaaS / Cloud + Mobile = Real business results

Anyway- enough of Mobile for this week!

So the other big news this week was the freemium social network Ning cutting 40% of their staff posted ReadWriteWeb:

In an email to staff yesterday, new Ning CEO Jason Rosenthal wrote that “When I became CEO 30 days ago, I told you I would take a hard look at our business. This process has brought real clarity to what’s working, what’s not, and what we need to do now to make Ning a big success.” With that, he announced Ning would be abandoning its longstanding business model and discontinuing non-paying sites on its network. In light of this, is it time to reevaluate and reign in some of the excitement about the freemium model for startups?

Now anybody who reads TWIS regularly will know the problem with the previous paragraph- Freemium is not a business model- it’s a marketing tactic and should not be talked about in any other way. The reason people get into trouble with Freemium is because they confuse it with a business model.

David Heinemeier Hansson from 37Signals had a much more realistic perspective than RWW:

Ning is laying off 40% of its staff and dumping free versions of its service. That’s a shitty day for the people who lost their job and the folks left behind without their coworkers. I went through a few rounds back in the dotcom days and fun it was not.

But I can’t help but be puzzled by the coverage of this. Here’s TechCrunch on the situation:

While the massive layoffs are obviously a big hit to the company, it isn’t all bad news for Ning: the service is still seeing its traffic grow according to comScore. But traffic growth is no longer good enough for the company — it needs to start generating some serious revenue, and advertising clearly isn’t cutting it.Are you kidding me? The company has blown through $120MM of VC funding over six years, built up massive traffic, yet just had to slash and burn, and you’re saying that “traffic growth is no longer good enough”. How the hell was it ever good enough?

Ning’s problem is not a lack of eyeballs but its inability to turn them into cash money to pay the bills. Getting more of something that’s a net-negative is not going to make up for it.

That was always their problem. From day one. Just like it’s any other business’ problem. Acting all shocked and surprised now is just incredibly ignorant of our industry’s very recent past.

This is the same kind of ignorance that goes on to celebrate so-called businesses successes before they posted black numbers on the balance sheet. Until that happens it’s all conjecture and possible maybes.

The just-give-it-away-for-free-and-they-will-come-and-we’ll-be-rich automatron is as broken now as it was in 2001.

He’s not fooled by $120m in VC money… Babbel announced they’ve finally turned a profit after dumping the freemium model.

Lincoln probably had the best perspective of everyone:

There continues to be interest in what companies like Evernote are doing with Freemium and how they are making a lot of money with the majority of their userbase not paying a dime. Lets be very clear here; Evernote has found a strategy that works well for them. One of the keys to the Freemium marketing tactic working for Evernote is that it has a very large potential audience; essentially anyone in the world with any sort of device connected to the Internet is a potential user. That is much different than the new tool you created for the Health Club industry in the United States.

So what does this mean for the “Freemium model?” Like most marketing tactics, some will find success with it and others will fail miserably. If you understand that it is simply a marketing ploy and don’t build your “business” around Freemium, when it doesn’t work, you will be in a better position to recover. If you spend all of your time, money, and resources up front attempting to collect some “critical mass” of users thinking that you’ll convert them later when you “turn on the revenue tap” you might have a big, negative surprise waiting for you.

Something that I presented at the Freemium Summit that seemed to be very popular was what I called my “back of the napkin” formula for figuring out if you have a large enough market for Freemium to work. Essentially it says, are there enough people/companies/potential users of my app for the “numbers game” that is Freemium to work. If not, then Freemium is not for me. You don’t even need a fancy calculator for this one.

The formula is dead simple and until now was buried in the slide deck from the Freemium Summit. Since the brief renewed interest in Freemium this week, and the fact that I’ve seen some people talk about the formula, I thought I would extract it from the deck and talk about it here.

Maybe they’ve had this problem?

Money isn’t a magic wand.  For as much as it frees your business from some debilitating constraints, it can also be extremely dangerous, which I’m sure Ev knows well.  With startups, and frankly anything in life, if you spend money too fast, you usually end up wasting a lot of money and making bad decisions (just look at U.S. spending in its conflicts overseas).

The super smart Giff Constable was talking about Twitter but it’s interesting nonetheless. He goes on:

Once you get passed a certain level, more money cannot significantly speed up the amount of time it takes to find good hires, learn about your market, or develop key strategies.  Nor can you purchase product-market-fit.

Yup. Ning obviously failed to do that. His blog is well worth subscribing to.

And a bit of ERP vendor fun

In other news:

• Oracle buys Heathcare SaaS company Phase Forward for $685m. Nice to see some big SaaS acquisitions.
• API analytics specialists Apigee comes out of beta with their Twitter API analytics app.
• In case you missed the Chirp madness- Twitter is growing very fast!
• Apparently the Tech sector is hotting up again- Tech companies are on a hiring drive and competition for great staff is hotting up according to the WSJ

Have a great week!

Justin

jp@justinpirie.com