Table of Contents
The Beginning of SaaS
When most people think of SaaS, things like Salesforce and advanced CRMs come to mind. However, the history of SaaS actually dates back to a time when we were still using floppy disks. Concur was among the pioneers of the new software delivery channel when it moved away from physical software after the market crash in 2001. The SaaS industry has witnessed rapid growth since then and now powers a variety of business processes.
The evolution of SaaS is closely related to advancements in computing technologies, including better internet speeds, more powerful and affordable hardware, decreased storage and hosting costs, and improved core functionalities. Computing technologies, particularly hardware, progressed rapidly in the 1960s, but the costs of setting up and maintaining a mainframe computer were still too much for SMBs and even some large businesses.
That’s when the concept of time sharing was introduced at MIT by developing a Compatible Time—Sharing System (CTSS) in 1961. Time sharing computers were an early form of what we know as SaaS today that involved terminals connected to mainframe computers using a monitor and keyboard. These terminals did not have a dedicated CPU of their own, so all the data and programs were accessed from the mainframe using input/output devices i.e. a keyboard and a monitor.
Users sitting at the terminal used to send the input to the mini-computer/mainframe, which sent the output back to the monitor after processing. These systems were the beginning of both the internet and SaaS so the evolution of SaaS is closely related to that of the internet itself. These systems provided cost-efficient computing power to educational institutions, universities, government agencies and businesses.
Time-sharing systems remained in operation through the 70s and 80s. Things started to change for good after that as the cost and size of computers declined consistently. SaaS in its initial form started gaining popularity because of being a more cost-effective solution than buying and maintaining mainframe computers. In the beginning SaaS systems were text-based and simple. CRMs, accounting and payroll remained on top of the list of SaaS systems that sent and received information over the internet using a phone line and a modem, a setup that was adequate enough to send and receive text/small data.
The Pre-SaaS computing Era (1980s-1990s)
The costs of computers constantly kept shrinking in the late 80s and 90s, which played an important role in the evolution of SaaS. People were able to buy a ‘personal’ computer, minimizing the need for time-sharing machines. SaaS also adopted accordingly and found its place in Local Area Networks (LAN). Users were able to access information and applications stored on central systems using local machines connected to the same network.
LANs were an early form of cloud computing, but setting up, managing and controlling private LANs involved hiring network administrators. They were responsible for a variety of tasks, including maintaining hardware, software installation, data backup, updates, access control and security.
While large businesses were able to hire IT professionals dedicated for the task, SMBs expected these individuals to do a lot more including training other employees. Setting up and maintaining their own LANs soon became a money sink as only a handful of businesses understood how to manage them efficiently. This resulted in underpaid, overworked and oftentimes poorly equipped LAN or network managers.
These issues along with inefficient scaling of on-premise software played a major role in the shift to SaaS. The internet saw a major breakthrough in August 1994 when the first credit card transaction was conducted (for a Sting CD by Daniel Kohn). E-commerce as we know today evolved rapidly after that. Introduction of SSL (Secure Socket Layer) in the same year enabled businesses and home users to securely transmit information over the internet, which led to launching of online marketplaces such as Amazon and eBay.
Bloatware refers to software that is bundled with another software. Computer users might blame bloatware for most of their computer problems. Whether you need bloatware or not and if you even know about its presence in your computer is a different debate, but it played an important role in the popularity and adoption of SaaS. The definition of bloatware also varied from time to time. Bloatware isn’t just a trial version of an antivirus. In the old days (mid-90s), even Microsoft Paint was considered a bloatware that came with the operating system.
As more and more people began to own personal computers, software developers started bundling their software with bloatware. Storage space was an expensive commodity back then with a few hundred MB hard drives costing hundreds if not thousands of dollars. The bloatware or extra software started eating that precious space. Users found themselves in a tricky situation. They had all these extra applications and bloatware, but no storage space to install them.
This eventually led to SaaS becoming popular among home users and businesses who realized storing everything locally isn’t a cost-effective method anymore. Accessing information from a central hub using computers connected to it via the internet proved to be a more cost-efficient option that also required less maintenance.
The Rise and Fall of ASPs
An Application Service Provider might look similar to a SaaS provider, but there are some noteworthy differences between them. Both host applications, but an ASP has more similarities with legacy software than web-based software. ASPs made similar promises as today’s SaaS providers, but most of those promises didn’t materialize, including cost efficiency, seamless upgrades, remote and easy deployment. For example, SaaS offers self-service capabilities, while ASPs had to create each instance or login manually.
ASPs lacked scalability modern businesses need and only a few vendors found success with the model. SaaS apps offered scalability, versatility and cost effectiveness, and providers successfully developed apps using multi-tenant architecture by leveraging modern technologies like virtualization. Advancements in virtualization technologies and a high level of scalability led to the downfall of ASPs in early 2000s. ASPs started becoming slower and it became clear that SaaS is the future of delivering software over the internet.
From the First SaaS Company to Salesforce and Beyond
Concur is considered to be the first major SaaS provider. It was established as a traditional software company that delivered its travel and expense software on CDs and floppy disks, which were available for sale in brick-and-mortar stores. Concur went public in 1998 with its old sales model with a market cap of $8 million after the 2001 crash. The company had to do something in response and to stay competitive.
It transformed itself into a pure SaaS business and started selling its software over the internet, which expanded its market to everyone on the globe. The result was $600 million annual revenue in 2014 (after 13 years). SAP bought Concur later that year for $8.3 billion, which is considered to be history’s largest SaaS acquisition.
Salesforce on the other hand was the first purpose-built SaaS vendor aiming to achieve rapid growth. Founded in 1999, the company was established purely to offer SaaS solutions and did not have to experiment with physical distribution. The company now offers a range of solutions, including CRM, Sales Cloud, app exchange, chat platform and other web services.
Surge of broadband, browsers, and other technologies transformed the company into an industry leader that is one of the most valuable tech companies today with a $296.58 billion[i] market cap (November 2021) from $1.7 billion in 2004.
1996: Headquartered in California, CallidusCloud founded, which is now SAP Sales Cloud
1999: VMware launches VMware Workstation, beginning the era of virtual machines
1999: Salesforce launched, becomes a pioneer in delivering apps via the cloud
2003: University of Cambridge students develop Xen, a type-1 hypervisor that allowed multiple OSes to run on the same hardware. The project is currently developed by the Linux Foundation and supported by industry giants including Intel, AMD, AWS, Huawei, Citrix, Bitdefender, Alibaba Cloud ARM Lts, and epam
2003: Web 2.0 is born, offering rich multimedia capabilities, dynamic interfaces and user-generated content
2000-2006: Amazon Web Services evolves from a free service to a cloud computing infrastructure, launched as a business unit in 2006
2006: Zimki launched by Fatango (London-based), becoming the first PaaS service, Rackspace Cloud IaaS launched
2007-2008: Netflix, Dropbox launched, private cloud becomes a popular in enterprises
2008: NASA introduces OpenNebula, the 1st open-source platform for deployment of private/hybrid clouds
2008: The first platform compatible with Amazon Web Services API offered by Eucalyptus
2008: Google Launches Google App Engine (GAE), a PaaS solution for developers to host web apps
2008: Microsoft announces Azure, which now covers SaaS, PaaS and IaaS
2011: IBM SmartCloud launched for enterprises and includes SaaS, PaaS and IaaS
2011: Docker announces open-source container software, Adobe releases its Creative Cloud Suite
2012: Google releases preview for Google Compute Engine (GCE) before officially launching it in 2013 as an addition to GCP (Google Cloud Platform)
2012: Oracle launches Oracle Cloud offering SaaS, PaaS and IaaS solutions
2017: Alibaba in collaboration with Huawei and Tencent go all out for building data center in China
2018: Leading data centers start transitioning to 400G speeds, which are expected to go above 1,000G soon
Rapid Growth and Future Prospects
The dot com burst in early 2000s and Great Recession a decade later lead to significant hit to traditional software, which was delivered on a physical medium. SaaS in the early 2000s was perceived as unstable, closed and a software delivery model for small businesses and startups. Better internet accessibility, more capable hardware and affordability helped change this perception. SaaS was not considered too viable for large businesses or enterprises, which at that time preferred end-to-end software solutions to manage complexity.
The exponential growth and improved functionality of SaaS since the 2000s has made it a desirable option for large businesses as well as SMBs. The prices have come to a point where we can say it has leveled the playing field for businesses of all sizes. SaaS offerings are available for almost any business app one can think of and its adoption continues to grow. A majority of tech industry giants including Amazon, Microsoft, SAP, IBM and Oracle have already moved to SaaS and the rest are following their footsteps.
Another reason behind the recent popularity of SaaS are open integrations and APIs, which are expected to grow in the future. More avenues for integrations allow SMBs to streamline their processes and eliminate data duplications, which ultimately results in improved productivity and competitiveness.
SaaS has evolved into a much more flexible and scalable software delivery model, allowing businesses to customize the software according to their unique requirements. It has become a necessity for businesses of the future that want to stay ahead of the curve by seamlessly connecting business processes and software solutions.
Growing SaaS Adoption
According to recent statistics[ii], the SaaS market is expected to grow despite the recent pandemic and will be worth around $145.5 billion by the end of 2021. The market experienced a pause in growth during the COVID-19 pandemic (2019-2020), but that’s just temporary and experts believe the SaaS growth will resume following an upward trajectory. A growing number of businesses now want to reduce use[iii] of traditional expensive software and move to the cloud in the next 1.5 years.
What originally started as a means to enable SMBs to take advantage of cloud technologies has evolved into a global phenomenon, thanks to scalability, flexibility and cost-effectiveness SaaS has to offer.
Current and Future Trends in the SaaS Industry
From AI to centralized analytics and enhanced mobile optimization, businesses have started realizing the benefits of integrating SaaS with other technologies. The following trends are expected to shape the sector in the future and are already having a profound impact on the industry.
From autonomous vehicles to self-learning chatbots, AI-based machines and software is not a matter of sci-fi movies anymore. By 2027, the AI market value is expected[iv] to reach $733.7 billion and on track to becoming a game changer. AI is well on its way to disrupt the SaaS landscape like SaaS disrupted the ASP landscape. However, this time around AI is going to improve the key characteristics of SaaS. Combining both enables businesses to extract more value from their IT investment and allows them to personalize services, supplement human effort and improve security.
A sub-branch of Artificial Intelligence, Machine Learning is primarily being used in SaaS to automate tasks like AI-enabled live chatbots and SaaS onboarding. But that’s just the beginning and new innovations are expected to automate major chunks of internal business operations, online customer experiences and customer services. ML-SaaS merger allows users to train their software by learning from tasks and interactions, and by digging deep into contextual data.
Compared to horizontal SaaS that mainly focuses on a specific industry or sector, Vertical SaaS refers to fully customizable solutions targeted at clients within certain industries/supply chains. Retail analytics, healthcare analytics and logistics analytics are some examples of vertical SaaS, which require highly specialized and customizable, yet cost-effective solutions.
White labeling SaaS software refers to developing fully-featured software and selling it to other vendors who can customize it to their liking and then resell it under their own brand name. White-labeled SaaS software or tools can also be part of embedded Business Intelligence tools in which a company integrates a solution from another provider into their own software.
White-labeling is especially valuable to startups and small businesses that want to gain market share in less time, using less financial and human resources. Such businesses can focus more on adding value, more features and branding when the core platform is already available. In addition to selling white-label software, the vendor can also increase revenue by selling platform frameworks to startups and other businesses.
Intense competition and saturation in the SaaS industry means it’s not easy for startups and small tech businesses to gain market share. Micro-SaaS refers to small SaaS innovations usually coming from small teams in the shape of complementary add-ons. This helps them avoid cutthroat competition and encourages innovation at a micro scale by adding a missing feature or improving functionality of existing features. These miniature or niche innovations can prove to be valuable to different businesses in different industries, and encourage a culture of constant innovation.
Digital transformation is constantly happening across almost all industries as businesses look for ways to streamline operations and get deeper insights. By 2022, investment in analytics-centric SaaS is expected to increase[v] by around 23%, making analytics a core component of many SaaS solutions. This will aid business leaders in data-driven decision making and give them a competitive advantage.
Centralized Analytics acts as single points of truth and enables businesses to gain deep insights using modern interfaces like performance dashboards. All team members get access to important information they need to make more informed decisions. SaaS combined with Centralized Analytics allows users to access important information anytime, from anywhere and using almost any device.
APIs, Integration Capabilities
Application Programming Interface (API) refers to a software intermediary that enables two different applications to communicate with each other by adhering to certain standards (usually REST and HTTPS). APIs are considered to be more of a product than just a piece of code and made for specific audiences. APIs have become a fundamental part of development, thanks to the explosion of all types of SaaS products and rapid adoption.
APIs enable users to make the most out of their data and IT investment by allowing different platforms to communicate, fetch data and automatically update records. These connectors harmonize data with the existing infrastructure. In the early days of SaaS, businesses had to acquire APIs to integrate cloud-based solutions into systems they were already using. A growing number of SaaS providers now offer much greater integration capabilities. For many businesses, integration capabilities are the deciding factor when comparing different SaaS solutions because they need to make sure it works seamlessly with their existing solutions.
Low-code or No-Code Capabilities
Low-code or no-code SaaS platforms allow tech startups with few financial resources or less technical experience to get started quickly and bring their software to life. These platforms are not meant to be a replacement for developers, but having to write less code certainly helps developers focus more on adding more value and accelerates innovation.
Migration to PaaS
With customer retention becoming a priority over customer acquisition (costs more), SaaS is expected to migrate to PaaS (Platform as a Service). This allows users to build their own apps/add-ons on top of existing platforms, saving them from coding from scratch. Major advantages of migrating from SaaS to PaaS include improved agility, scalability and security.
Enhanced Mobile Optimization
Mobile devices have become the number one source to search for information and we have already entered a mobile-driven age. Businesses also know this and are shifting to mobile-friendly software. SaaS providers have also been adopting accordingly to the trend of mobile-friendly software, which has accelerated even further during the recent pandemic.
Mobile optimization is no more an option and is becoming a necessity for modern businesses. SaaS enables businesses to meet the needs of today’s mobile market, which requires a mobile-first functionality and design. Some key areas of innovation in the area include mobile app personalization, responsive features, better accessibility, in-app feedback and immersive mobile experiences.
With a greater focus on automation, Artificial Intelligence (AI) and the Internet of Things (IoT) gaining pace, SaaS is expected to become a norm in the future. IT is evolving into a business partner instead of purely technical stuff, which is redefining the roles of CIO and technology in business. Businesses are incorporating AI into their processes and tech stacks in which SaaS will play a big role.
The new revolution is digital, and it’s already here. SaaS as we know today is a result of decades of innovation, constant evolution of hardware and cloud computing technologies and new concepts that are bound to shape the future. With AI and machine learning being the next ‘big things’, businesses are realizing the importance of digital transformation and data-driven existence, which indicates a constant rise in SaaS software innovation.
[i] “Market capitalization of Salesforce”. Retrieved from https://companiesmarketcap.com/salesforce/marketcap/
[ii] “Public cloud application services/software as a service (SaaS) end-user spending worldwide from 2015 to 2022”. Retrieved from https://www.statista.com/statistics/505243/worldwide-software-as-a-service-revenue/
[iii] “Migration of software delployment in US-based organizations 2020”. Retrieved from https://www.statista.com/statistics/1127593/software-use-organizations-by-type/
[iv] “Artificial Intelligence Market Size Worth $997.77 Billion By 2028”. Retrieved from Artificial Intelligence Market Size Worth $997.77 Billion By 2028
[v] “Public Cloud Soaring To $331B By 2022 According To Gartner”. Retrieved from https://www.forbes.com/sites/louiscolumbus/2019/04/07/public-cloud-soaring-to-331b-by-2022-according-to-gartner/?sh=17117d365739