The ‘Cloud’ Effect

While Oracle Corp. put out a very upbeat forecast this week, analysts covering software companies are concerned about the threat that smaller companies, that deliver software as a web based service, pose to software giants like Oracle and SAP.

Colloquially known as SaaS (Software as a Service), SaaS companies deliver business functions to customers over the internet. SaaS is a subscription based model where the customer pays a set monthly charge for using the services from the SaaS vendor. This helps the customer avoid paying expensive licensing fees to the software vendor for installing the software on-site.

SaaS has been around for many years but wasmore popular with small and mid-size companies who could not afford the costs associated with on-site installation. With more competition, economic downturn and shrinking IT budgets, this trend has been shifting lately with an increasing number of larger companies adopting this model. For example, Salesforce, a pioneer in SaaS space, recently reported that it has won over some major Oracle customers. Analysts believe that this trend threatens software vendors’ ability to renew database and App maintenance agreements over time.

Cash rich compamies such as Oracle and SAP are fighting back by buying SaaS rivals. Oracle recently signed deals to acquire RightNow, which offers CRM software. SAP has bought SuccessFactors, which offers HR applications.

What are the choices for the traditional software companies?

Creatively destroy their business and go after growth opportunities or Just age out and fade in the background?