SaaS Revenue Growth Set to Leapfrog Packaged Software by 2014

By Doug Allen

The SaaS market is poised to jump from $13.1 billion in global revenue last year to $40.5 billion by 2014, a compound annual growth rate of 25.3 percent, according to a report by IDC. What does that mean? Diminishing returns for the old software sales model, shipped by CD, which IDC expects to drop to 15 percent of net-new software sales by 2012; that means 85 percent of these offerings will be cloud-based, while more established ISVs will move to SaaS delivery by 2014. At that point, SaaS will represent more than one-third of total new business software purchases, at 34 percent, and cloud-based software delivery will make up about 14.5 percent of global software revenue across all primary markets.

The SaaS model has become mainstream, and is quickly coming to dominate the planning from R&D, to sales quotas, to partnering, channels and distribution of all software and services vendors, said Robert Mahowald, vice president, SaaS and Cloud Services research at IDC. Enterprise IT plans are rapidly shifting to accommodate the growing choices for sourcing most or all IT software functions, from business applications to software development and testing, to service and desktop management, as SaaS services become available from established vendors and new models for accessing functionality in the cloud creates lower-cost options and more tailored models for consuming IT services.

The rise in SaaS will also lead the software industry to adopt more subscription-based models, causing a permanent disconnect in the way companies license their software. With the decline of traditional, packaged software and perpetual license revenue, there may be little choice; this shift will cause worldwide license revenue to drop by almost $7 billion this year. In addition, the SaaS market will expand to other cloud-based domains, such as infrastructure and application development and deployment (PaaS). By 2014, applications will drive over half of total market revenue, as international user adoption picks up.

The numbers may be different, but market consultancy Gartner certainly validated this trend from the end-user side in a recent report, forecasting global SaaS revenues for the enterprise market to surpass $8.5 billion this year. Thats up 14.1 percent from last years $7.5 billion. SaaS adoption has been so fast that it has driven growth to varying degrees across much of the enterprise software markets, leading to an increase in total SaaS revenues from just over 10 percent of these combined markets last year, to more than 16 percent by 2014.

Gartner estimates the cloud accounts for 75 percent of todays SaaS delivery revenue; as business models mature, the total for the broader SaaS market could surpass 90 percent by 2014. Its been a while coming, Sharon Mertz, research director at Gartner says; SaaS really only began to take off about five years ago, but today, many businesses have begun to resolve key concerns about hosted services, particularly security, response time, and service availability.

According to the Gartner report, even though SaaS overall is doing quite well, deployment levels vary widely between the broader enterprise application markets and specific market segments, depending on buyer demand and applicability of a particular app. Some sectors are booming, such as the project and portfolio management SaaS market, and customer relationship management SaaS, which pulled in almost 24 percent of the total revenue for that market last year; that number is expected to creep up to 26 percent this year. Similarly, Web conferencing SaaS accounted for roughly 82 percent of the market in 2009. By comparison, enterprise content management SaaS brought in a miserly 4 percent for the same period.