There once was a time when a piece of software would be loaded from a disk onto your computer. And that was that; the software lived on that computer in perpetuity.
Over the last 25 years, that relationship between software provider and user has evolved drastically, transforming how the entire tech industry operates in the process. The growth of cloud computing and widespread internet connections gave rise to a new model for how businesses and people alike access digital technology: software as a service, or SaaS.
That model boosted a generation of bootstrapping startups that might not otherwise have been able to afford top-shelf enterprise software. Now, a new revolution in giant generative AI models could be poised to further shift tech industry business models.
Back-SaaS: But let’s back up. In September 2003, Adobe, already one of the top software makers in the world for graphic design, bundled its various offerings—Photoshop, Illustrator, InDesign, and others—into a Creative Suite for the first time, setting the stage for the monumental shift to the web-only Creative Cloud nearly a decade later.
Also in 2003, a burgeoning Salesforce held its first Dreamforce conference, when the company’s tagline was “the end of software,” an early encapsulation of the SaaS model. And the same year, Amazon executives huddled for a retreat at Jeff Bezos’s house, where they began to conceive how the infrastructure they’d developed for online shopping could serve as the “operating system for the internet,” according to TechCrunch. The debut of Amazon Web Services (AWS) three years later would become a pivotal event in the evolution of SaaS.
“Adobe was very much a license model when they created Creative Cloud. Without an Amazon Cloud underneath, it would have been really hard to do,” Scott Snyder, chief digital officer at life sciences services company Eversana and senior fellow at the Wharton School, told Tech Brew.
“AWS was kind of the only game in town. Eventually, then, Microsoft and Azure and Google got in, but AWS made it easy for these SaaS companies, from Salesforce to Zoom to Slack to Adobe, to stand up their SaaS platforms,” he continued.
Cloud forecast: The surge in cloud computing that followed the AWS rollout in 2006 changed the math of what it took to start a business. Companies no longer needed to make big up-front investments in data centers, software installations, and IT teams to maintain it all, according to Tim DeStefano, a research associate professor at Georgetown’s McDonough School of Business who specializes in digital technology and AI.
“Cloud computing represents a fundamental shift in the way in which firms access digital technology, and this fundamental shift has basically meant that it’s shifted the adoption of technology away from an up-front sunk investment to being able to access this technology as a service,” DeStefano said. “Small and young firms that don’t have a lot of human capital and are financially constrained can more easily access these tools.”
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On the software provider side, SaaS has allowed companies to bring in a steady revenue stream and save costs on customer acquisition, according to Icheng Robert Chiang, a consultant and professor at Fordham University’s Gabelli School of Business. That, in turn, has also led to a host of new entrants into the market.
“What SaaS has brought is the barrier to entrance has decreased dramatically,” Chiang us. “So today, we are still driven by ideas rather than the up-front capital needed to realize that idea.
Vasant Dhar, a professor at NYU Stern School of Business specializing in data science, said the SaaS arrangement has ultimately been much more of a boon to software vendors than users of the products.
“You could track how your product is being used, you got rid of a lot of piracy issues that had plagued the previous paradigm of software, and [you’re no longer] relying on those slow product release cycles—one every few years. You could do it kind of arbitrarily,” Dhar said.
Adobe officially made the switch from a traditional software provider to a full subscription model in 2012, leading to a 35% drop in its profit a year later, according to a Harvard Business Review case study. But by 2016, Adobe’s stock price had tripled as the company retooled for a new era.
AI-as-a-service? These days, SaaS companies have been rushing to integrate the latest generative AI advances into their platforms. But Snyder said this technology could also ultimately pose a threat to the SaaS model if user companies decide it simply makes more financial sense to build their own AI tools.
“People could say, ‘Well, why am I using a service—[like] a Salesforce customer service bot—when I can just build my own at a very low cost because I’ve already got the AI infrastructure set up?’” Snyder said. “Either the SaaS companies will move fast enough and keep the cost reasonable enough that the economics and the switching costs still make sense for big companies to stay on the SaaS platforms. But if the switching costs aren’t that high, these larger companies may roll out their own, and I think that’s going to be the interesting tension going forward.”
This is one of the stories of our Quarter Century Project, which highlights the various ways industry has changed over the last 25 years. Check back each month for new pieces in this series and explore our timeline featuring the ongoing series.
