M&A in a SaaS world

People often casually talk about mergers and acquisitions in the SaaS space. Some say this space is "ripe" for M&A. There is already enough statistical evidence that M&A has more chances of failure than success. SaaS company acquirers should take this data point even more seriously.

There may be several reasons to acquire a company in the SaaS space e.g. to buy your way into a market, buy innovation through acquisitions etc. But the most critical part is the post-acquisition integration. Since SaaS is still an evolving space there are no clear SaaS platform leaders. In fact there are hardly any SaaS platforms in the market.

Without a standardization or maturity in the SaaS platform market, every SaaS vendor has a purpose built platform for their product. This applies to any company out there including Salesforce.com, SuccessFactors, NetSuite, Concur etc. Imagine integrating the platforms of these companies if they were to merge. It is a non-trivial problem and should be a huge consideration for the acquirer for one simple reason - margins.

The margins for a SaaS company is very heavily dependent on how scalable their SaaS platform is. By scalability I don't mean only technical scalability. It is also the cost of scaling. If the cost of scaling is high then the business is not scalable. I can easily imagine a cost-of-scaling metric that will eventually be used to value a SaaS business just as customer acquistion cost and customer churn numbers are key metrics used to measure a business like Netflix.

Integration becomes a challenge with highly custom platforms and without integration the benefits of economies of scale become a dream. I don't think there is a realization of this fact in the industry. So I think major M&A activity in the SaaS space is nowhere near. And the ones that do get acquired by bigger players like PayCycle by Intuit, will forever remain independent operations without ever achieving the benefits of economies of scale.

Future of cloud computing and SaaS

Cloud computing is the next BIG thing with all the major platform players aggressively going for the land grab. Each player has a different approach and are trying to provide their offering at different levels - from raw computing and storage to application fabrics and SaaS platforms. Amazon, Google, Microsoft, Salesforce.com, IBM are some key players betting big on this trend.

There is a lot of confusion and debate about which platform will prevail and what is the best approach on cloud computing. My take is that it is going to follow the path that the internet economy has taken. Broadly 3 layers are likely to emerge. These layers of clouds with current day analogies are mentioned below:

• Infrastructure clouds - Provide raw infrastructure. Current day Amazon EC2 similar to an older day Savvis. There could be any number of providers in this category primarily differentiating on cost.

• Development framework clouds - Provides application development framework. Current day Microsoft Azure similar to an older day Windows + .Net combination. Infrastructure cloud will be included and could be outsourced to a strategic partner. There will be a less than 5 cloud providers this category with limited portability amongst each other.

• Application clouds - Provides higher level abstraction to build applications. Current day Salesforce.com similar to an older day SAP. There could be any number of providers here. But the likely scenario would be a 2 tier system where large application companies like SAP and Oracle have their own cloud and other smaller application vendors sharing clouds or are part of other eco-systems. The platform with a better eco-system will emerge as an eventual leader - similar to Google in search-ads and eBay in auctions. The ability to reach a wide number of target users or customers will eventually be the key driver for application cloud adoption rather than ability to build applications. The ability to build applications will eventually be similar on most major platforms.

Another trend likely to emerge is the creation of special purpose clouds. This would be similar to special purpose social networking sites or radio channels. There will be aspects around data security, workflow, availability, SLAs and eco-system that will be better suited for market segments like legal, government, finance, insurance etc. These will be built as value-added-clouds using the infratructure and application clouds.

Microsoft PDC 2008

I attended Microsoft PDC 2008. It was my first time at this event. I must say that I was impressed as seeing Microsoft's focus on the right things. Below is a highlight of areas I found interesting.

Azure Service Platform
Yes, Microsoft is late to arrive to the cloud computing race. Amazon has shown world the way to monetize the cloud computing paradigm. But I think Microsoft is thinking right and doing right in this space. Cloud Computing is not a choice for Microsoft. It is a natural progression in the evolution to a distributed computing model. It has realized that conquering this new frontier is critical for its existence. I believe Microsoft is going to make it easy to extend every aspect of software development, deployment and service to cloud computing and become one of the top 3 players in this space.

Windows 7
With a focus on Performance and usability, I think Microsoft is finally thinking right. I have long believed that the PC has changed from being a computing device to a consumer electronic device. Apple has demonstrated this through the way it makes it easy to do the most common things easily on its Mac units. I believe Microsoft is going to make the PC a consumer device with its Windows 7 OS. One example is the demo of the ease of home networking shown at the PDC 2008

Silverlight
Microsoft boasted about Silverlight 2.0 and said it has 25% penetration of all internet connected PCs. That is pretty impressive and demonstrates the distribution channel that Microsoft has through its dominance in the PC market. I think Silverlight is an important technology in Microsoft's overall cloud computing strategy. Good to see that Microsoft is aggressively working on adoption, developer productivity and creative tools around Silverlight

Surface
Amazing new technology. I had seen it on TV when it was launched. I was more impressed when I played the scavanger hunt game on 5 sets of surface computers located at 5 different locations at the event. It demonstrated the capability of camera based vision system, multi-touch, intelligence and ruggedness very well

Role of Technology in Media Censorship

Have you ever seen the ads running during prime time? Watching a game or a G rated movie with your kid requires a constant run for the remote to block inappropriate ads. It is the same while watching a funny video on YouTube with unexpected and undesired content flashing all around you. Today you can block access based on channels or specific time slots but that approach is too coarse grained. We need to look at censorship differently.

There are so many ideas, already implemented elsewhere, that can be applied to this problem. Let's take the phone industry. They can measure every phone call down to the second and decide how to bill you based on the package you have bought.

The key to the solution is thinking cohesively about media creation, media distribution and media access. We rate media in a coarse grained way and hence it is impossible to control it at the access point. Imagine the possibility of having a viewer rating preference button on the remote. While watching a sports game with your kid you switch to the G viewership mode. The access point - TV, IPTV on your computer or your mobile wireless device - detects your viewer rating preference and replaces an ad for an R rated movie with an ad for a G rated movie.

The realisation of such a cohesive solution lies in innovation around three areas.

• Media creation: Create content with adaptable delivery e.g. Being able to watch an R rated movie in G mode and being able to make this decision half way through the movie
• Media distribution: Increasingly we are moving towards dynamic content and contextual ads. Take into account the user preference for rating of the content.
• Media access: Enable the user to have the ability to add rating as one of his viewing preferences

As far as technology is concerned, the media industry needs to get out of the singular focus of how to protect & monetize content. Let's get the technology crowd creative and change the way we get entertained.

Keep The Radio Alive

Listening to radio is one of the strongest memory I have while growing up in India. Music, regional programming, news and sports - All India Radio's Vividh Bharthi had a little of everything for everyone - even children's programming. The radio medium was not open to the private sector then but the programming was comprehensive and the quality was rich. The memories like listening to the program dedicated to song requests by people from the armed forces are etched in memory. Many of the family Sundays and late night with friends have the sound of the radio in the background.

Radio as a broadcast medium has declined in popularity since then. Television has dominated the late 20th century. Internet is fast becoming the new kid on the block with the ability to let the audience engage and interact with the content. In fact, Internet is becoming the platform for delivering all media including TV and Radio. The much awaited media convergence is around the corner.

Regardless of the new media that come along, radio has some special qualities that make it my favourite.

• Simplicity & reach: It is really easy to understand the medium and consume it. Radio technology is not threatening to the consumer. Even the technophobes are at ease with it. Listen to radio in a remote village, while travelling in a high speed train, while cruising in your car or relaxing at home.
• Element of surprise: You can never beat the feeling of learning something unexpected while driving to work. Or the feeling of nostalgia that hits you when you hear a song that refreshes a golden memory.
• Quality of programming: Radio has to engage the audience only through their sense of hearing. The bar for quality of content is very high because you can't supplement it with visuals. Quality of programming on NPR and Vividh Bharthi are a testimony to this.
• Voice as the great equalizer: Have you ever felt that you have known a person for a long time without ever meeting the person? Radio can do to you. A specific personal experience was listening to Terry Gross on NPR's Fresh Air. The association caused me to read "All I Did Was Ask" but the voice on radio and the conversations are just so much more memorable. When you are listening to someone, you are focused on the content and not judging them on their race, religion, sex, or looks.
• Listening skills: Radio helps developing listening skills in people. In our education system and in the corporate world listening is a very underrated and underdeveloped skill.

There is a lot I am discovering about radio as a part of social culture in different parts of the world. Listen to an old recording of "The Jack Benny Program" from your local library or the vibrant Radio Mirchi while you are stuck in traffic in Mumbai. Radio is an interesting window into our history and culture.

Two very interesting and relevant innovations on the Internet are Pandora (radio from the Music Genome Project) and Mercora (radio using peer-to-peer technology). I hope such innovations keep the beautiful medium of radio alive and interesting for a long time.

The next big innovation in SaaS

One of the biggest technology innovations in the coming years is going to be how to protect information regardless of where it resides. Software as a Service (SaaS) has come a long way and technology advances have made the complete SaaS eco-system viable. Some key elements that have transformed this space:

• The access points: Multiple access points providing information anytime anywhere.
• The network: The spread of broadband and wireless internet access at affordable prices headed in the favorable direction.
• The backend infrastructure: This is a complex domain and the success depends on building an infrastructure that can scale infinitely. Companies like Amazon, Google, Microsoft and T-systems are on the forefront of the innovation here.

In all of the above, the innovators already know what it will take to serve the next generation and have set things in motion.

Perhaps, the most important innovations in this area have yet to come. Today companies and individuals alike are paranoid about keeping their data in the cloud. Three big factors that will determine success in this area:

• Trust: There are various trust issues related to data storage, processing and access. Providing flexibility and access to information while protecting the information is a non-trivial challenge that needs to be solved. The solution needs to be end-to-end. It is not enough to protect the data stored on the server.
• Education: Today, it is too complex to understand how data gets protected at various levels.
• Simplicity: The key to mass adoption is to make it simple – simple to understand and simple to use.

There is a lot of ground to be covered in this area. If there are innovations in this area that can win trust and are simple to understand and use, we will look back and call them the ones that put SaaS adoption on the fast track.