Pay-As-You-Go Web Services

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 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 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.