Pay-As-You-Go Web Services

 
 
By Lawrence Walsh  |  Posted 2008-02-14
 
 
 

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.

The next phase in the Web services evolution, though, is migrating from the heavy subscription-based services to the pay-as-you-go model. As Dancizger says, there is a growing demand for accountability within the enterprise, and that often means justifying how much is being spent where. Switching to on-demand pricing, he says, will give enterprises a better sense of what they’re true application and infrastructure utilization rates are, where they need more and less resources, and more accurate budgeting. “This trend is forcing the service departments within the organization and service providers to put the processes in place to align services with the business,” he says.

It’s a wonderful vision that could save enterprises millions of dollars potentially, but not one that anyone is racing to implement. Digital Fuel, like similar applications, are more reporting tools that provide deeper and broader utilization intelligence under a single pane of glass. While it’s possible to use Digital Fuel to measure customer utilization and charge by the sip rather than drinking from a firehouse, James Jimenez says the market just isn’t there yet.

“It depends a lot on the maturity of the customer. The customer may have a built in mechanism to allocate IT cost and may not be mature and doesn’t integrate with anything external,” says Jimenez, director of business intelligence at Siemens IT Solutions and Services.

Siemens uses Digital Fuel internally and externally for service-level agreement compliance reporting. Jimenez says the tool works very well for measuring multiple, complex metrics that provide the service provider and its customers with the intelligence they need to make strategic IT decisions. Transitioning to a pay-as-you-go model, he says, is the next step.

“We haven’t deployed it in that matter, but it’s certainly been discussed,” he says.

Micropayments and pay-as-you-go service pricing has the potential to save enterprises money, but they too could be opponents to changing the pricing structure. The current subscription-based, tiered pricing gives enterprises consistent pricing by which to budget and allocate funding, says Burton Group analyst Craig Roth.

“Every company has a budget planning season, and you go through and budget what you expect is a fix service cost,” he says. “It helps them by knowing they have an exact figure to work with.”

And don’t expect the Web services companies to willingly start offering variable pricing. The value of offering Web-based services is the sale of regular, fixed subscriptions that create a recurring and predictable revenue stream. Roth said Wall Street will hammer any public company that can’t accurately forecast its revenues, as happened with Google last week when its quarterly performance fell below expectations.

Numerous technology, business thinking and market obstacles stand in the way of a broad-based pay-as-you-go service models taking hold, but Dancziger believes the day will come when businesses will force IT and service providers to adopt a more flexible approach to pricing services based purely on real-time utilization.

“The businesses units are already coming to IT and saying that if they don’t put in place processes and products that are aligned to the business, they’ll go to someone more willing to align to the business and they’ll win the business,” says Dancziger.