Amazon.com (AMZN) is well known as one of the top e-commerce sites on the web, but over the last few years it has been adding a new component to its business model. Amazon has become a software as a service (SaaS) provider for enterprise clients through its on-demand cloud computing solution. SaaS is a rapidly growing and developing segment of technology, which follows a very different model than that of traditional perpetual license software sales.
SaaS is still a nebulous and evolving concept, but in its most basic terms, SaaS is an on-demand delivery model that utilizes the internet to provide access to existing applications from anywhere with a web connection. Amazon.com provides its Web Services portal and in particular Amazon Elastic Cloud Computing service (aka Amazon EC2) as a truly on demand, as needed computing power and web infrastructure solution. Of course, most of Amazon’s clientele for Amazon EC2 are businesses that do not want to spend the resources to build out expensive servers until they have the revenue necessary to warrant such actions.
For those unfamiliar with the emerging world of software as a solution, consider the growth of this industry. Online software sales still account for only a paltry $9.5 billion of the overall $284 billion software market, but SaaS sales are growing at a pace of 40% compared to just 3.4% in the industry overall. A report from Gartner Research suggests that the growth in the SaaS industry should continue to be strong, expecting the industry to double to $16 billion in revenue by 2013. To be sure, there are advantages and disadvantages to both models and some software will always be sold in the old fashioned way, but if the actions of some of the biggest firms in the space are any indication then SaaS is here to stay. In addition to Amazon.com, massive software companies have started to test the waters in the SaaS space; including Microsoft (MSFT), Oracle (ORCL), Hewlett Packard (HPQ), IBM (IBM)and Accenture (ACN).
In addition to the large firms, many smaller firms are exploring the business of on-demand software licensing on a monthly, quarterly, or annual basis. Amazon’s EC2 has been described as a “game- changer” for these firms by enabling them to minimize up-front costs. It can be expensive and challenging to set up the necessary technological infrastructure for a service that is accessible and reliable. Amazon spent more than 5 years in development of their EC2, and Amazon is the leader in the space even though there is strong competition from the likes of Google (GOOG) and Microsoft. Amazon and its competitors are tearing down one of the major barriers to entry in the SaaS field.
The question is, does this or will this make money for Amazon? Amazon does not specifically break out its web services revenue, but the “other” sales has seen impressive growth in the last few years prompting CEO Jeff Bezos to say there is a “significant and meaningful opportunity over time for enterprise level customers with our web services business.” Estimates from that same Gartner Research study suggests that by 2012 Amazon’s Web Service revenue be only about $50 million, when compared to the estimated $30 billion in sales from the e-tailer side of the business, it is still pretty small. But like most SaaS products right now, the potential for this sort of on demand services is immense. Not only is Amazon providing a SaaS solution through its cloud, it is helping enable other SaaS providers in the process. If Amazon is the bridge by which some of these burgeoning SaaS companies can get off the ground they can expect revenue to grow as their clients do.