Pay-As-You-Go Web Services
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Microsoft’s now-stalled,
but massive first-attempt bid for Yahoo is, on the surface, about search and
online advertising, a game dominated by Google. While this appears primarily a
play for a consumer-oriented business, the online marketing services offered by
these companies is nothing more than Web services in another form. Most
brilliantly is that these services follow a pay-as-you-go model, in which the
buyer only pays for the amount of services used and the amount paid is usually
measured in pennies not dollars. And those pennies are adding up, with online
advertising spending expected to top $80 billion annually by 2010.
Perhaps this
micropayment model is also the future of Web services or software as a service
(Saas). Soon, companies like Salesforce.com and Qualys could be offering their
on-demand services with the same pay-as-you-go pricing as Google charges for
sponsored links.
“IT is
shifting the majority of the organization to manage services as a business. You
cannot just treat this as a set cost and flat fee. There’s a growing demand of
the businesses and enterprise to be treated as a customer,” says Yisrael
Dancziger,
CEO and president of Digital
Fuel, a company that makes software specifically for measuring SaaS
utilization.
The pay-as-you-go
model for Web services is like cell phone service without a contract: you pay
for only the minutes used. Google keyword marketing campaigns only charge
pennies for each time a Web surfer clicks on a sponsored link. Facebook, the
rapidly growing social network site, is offering advertising services where you
can buy ad distribution across its network for pennies with predefined limits on
the maximum amount charged.
Enterprise-class
Web services, however, follow a more traditional model, subscription based.
CRM
and financial analytics SaaS vendors such as Saleforce.com and NetSuite sign
corporate customers up for subscription-based services that are more similar to
cell phone pricing plans: for a set monthly charge, you’re given access to a
certain level and amount of service.
Subscription services are often charged in
the same terms as traditional software licensing—per user or seat—with no
regard to the customer’s actual utilization. If you pay for 100 seats per month
and only assign 50 seats, you receive no discount for those unutilized
accounts.
The change
isn’t as radical as it may appear. In his new book, “The Big Switch,” author Nicholas
Carr compares the build out of IT services to the maturation of the electrical
grid at the turn of the 19th century. Prior to the acceptance of alternating
current and the construction of the distributed electrical grid, individual
companies and municipalities built their own local-area power plants to support
factories, public infrastructure and residential homes.
Edison may have perfected electrical generation, but he made his money on the
manufacturing of equipment and his business model was based on supplying the
plethora of small generating plants. The model was expensive to maintain and
had limited scalability. That changed when pioneers broke with Thomas Edison’s
conventional views and started building centralized power generation plants and
a distribution network. The result was lower costs and a greater adoption of
electrical services.
The model
doesn’t sound too dissimilar to the client-server architecture we have today.
Enterprises spend billions of dollars annually building and operating their own
information power plants. Not only must they buy the equipment and software,
but also maintain the expertise to run these complex infrastructures. Companies
like Microsoft, Cisco Systems and Oracle make fortunes on the renewal of
software licenses and equipment upgrades. And enterprises are forced to live
under their vendors release cycles for upgrades and feature set improvements.
In the Web
services world, enterprises can subscribe for access to an application that
converts raw data into actionable intelligence. No confusing and complex
licensing to follow. No waiting for new releases and coping with difficult
migrations. And no need for expert staff. It all sounds pretty reasonable, and
the advent of reliable, persistent broadband connections makes Web services
more feasible than ever.