The SaaS delivery model is making inroads into the storage market, especially in applications such as backup and disaster recovery.
With the growing acceptance of the Software-as-a-Service (SaaS) delivery model, many storage software vendors are moving to gain a foothold in this emerging market. The SaaS application delivery model established its roots in the CRM, HR, billing, and collaboration application markets. Over the last few years, this delivery model has been adopted by storage software vendors as well. During that time frame, backup and disaster-recovery applications have shown the largest growth. However, we are starting to see demand in other storage application areas, such as online storage for Web content.
There are several reasons why SaaS storage providers are enjoying more success compared to first-generation storage services providers (SSPs). First, the delivery technology has matured and most customers now have experience using one or more SaaS applications. There is now less risk associated with choosing a SaaS application today than there was five years ago. Second, these offerings are less storage-focused and more solution-focused than they were in the past. The customer value is in the solution, not just having their storage hosted remotely. Third, the SaaS storage providers chose the right target markets.
Most disruptive technologies get their start at the low-end, where “good-enough” solutions satisfy unmet needs or displace existing applications. SaaS success in storage has followed that model precisely. Finally, deployment efficiencies in the area of web 2.0 services, data de-duplication, compression, enhanced bandwidth, and scalable storage built from commodity hardware make it more economically viable to deliver SaaS services now than in the past.
Customers will benefit from the SaaS delivery model by being able to deploy storage solutions quicker, and in many cases at less cost than if they implemented it themselves. The SaaS delivery model will be particularly attractive to small to medium-sized businesses (SMBs) that don’t have the technical resources to deploy and manage more complex storage solutions. The Taneja Group expects SaaS storage services will also be very popular with start-ups looking to preserve capital and pay for storage resources as they grow their business versus having large, up-front capital expenditures. Larger companies will also be able to benefit by focusing their IT resources on activities that differentiate their core business.
At this time, SaaS storage revenues are relatively minor compared to the more mainstream storage software market. However, we believe this market has reached an inflection point and is poised for a more rapid growth phase.
Over the next few years, storage software vendors will be positioning themselves, via both acquisitions and internal development, to transition their software business and the associated hardware revenue into a combination of software licenses and SaaS delivery models.
Clarification: SaaS Storage
All SaaS applications, such as e-mail, CRM, and collaboration, consume storage. Therefore, one could think of any SaaS application as a SaaS storage application. However, for the purpose of our analysis we are limiting the definition of a SaaS storage provider to traditional storage software applications such as backup, archiving, disaster recovery, and data management.
SaaS Vs. ASP Vs. SSP
What is the difference between SaaS, application service providers (ASPs), and SSPs? From our perspective, SaaS is just the latest name for what used to be referred to as an ASP. There may be subtle differences and enhancements to allow more efficient delivery; however, they essentially provide the same service.
About five to seven years ago, SSPs were supposed to be “the next big thing.” With relatively cheap bandwidth, they SSPs were going to remotely manage the world’s data. Unfortunately for these first-generation companies, the market was not ready to relinquish control of their primary data, and most SSPs are no longer in business.
Success Factors
Some people might say that SaaS applied to storage is just another name for an SSP and that “those who forget the lessons of history are doomed to repeat it.” However, the market has changed considerably since the early SSPs. We believe that the SaaS storage market has experienced early success and is poised for significant growth due to enhancements in all of the following areas:
Remote delivery acceptance: Probably the biggest factor slowing adoption of first-generation SSPs was acceptance of the remote delivery paradigm. Very few companies wanted to risk releasing control of their primary data and placing it remotely. However, during the last few years remote delivery technologies have matured, especially in the area of security. With these enhancements, SaaS applications are becoming more mainstream.
Today, most people use a hosted service for their personal email, and most companies have one or more remotely hosted SaaS applications. Customers are more comfortable with the technology used to deploy these solutions and no longer fear they will be on the bleeding edge. First-generation SSPs may have just been ahead of their time.
Target market: Like Willie Sutton who robbed banks “because that’s where the money is,” first-generation SSPs targeted the most mission-critical applications at large enterprises “because that’s where the data is” (the money too). Although SaaS technology has become more acceptable, most large companies are still reluctant to release control of their mission-critical data. The success of second-generation SaaS vendors is based in large part on choosing a target market (consumers, SMBs, and Internet start-ups) that are not only accepting of the technology, but also do not have the resources or time to deploy these solutions themselves.
Most disruptive technologies start at the low-end, providing “good-enough” solutions compared to the current state of the market. Now that SaaS storage services have established a foothold in the consumer and SMB markets, we expect to see additional adoption at larger enterprises as IT managers understand how SaaS services can be used to reduce their time to deployment as well as cut the cost of maintaining applications.
Target applications: Another big difference between first-generation SSPs and the new round of vendors applying the SaaS delivery model to storage is their focus on the storage applications (e.g., data protection versus management of primary storage). The value customers are seeing in SaaS storage services is not in the storage or the management of that storage by someone else; rather, the value is in the storage application and what it can do to help the customer be more successful.
Online backup/recovery is the SaaS storage application that has had the most success to date. Customers have historically been more willing to place their secondary copies of data in off-site locations. With disks replacing tape for quick recovery, it is not surprising that companies are deploying SaaS data-protection services. While there were SSP vendors offering backup services in the past, we believe the other success factors were previously missing, which prevented these companies from gaining broader market acceptance.
SaaS storage services are not just limited to secondary storage. There are several vendors that are providing inexpensive primary storage services for Web application content. The difference is that these SaaS storage providers are targeting emerging Internet applications and not mission-critical production applications in Fortune 1000 enterprises as the early SSPs did. Many Internet start-ups prefer the pay-as-you-grow model of SaaS storage acquisition. They would rather invest their limited capital and technical resources in development of their applications than deploy their own storage. Therefore, Internet start-ups are more appropriate consumers of these primary storage services than traditional large enterprise customers.
Deployment efficiencies: Another factor that has contributed to the success of the SaaS storage vendors has been technological advances that make delivery of SaaS storage services more-efficient and cost-effective, and therefore more economically viable for more customers than they were in the past.
Web 2.0 services are making it faster, easier, and more secure to develop applications that can be used remotely than earlier-generation client/server applications. Web 2.0 services also allow vendors to mash applications together, enabling them to easily grow their solution portfolios, and providing them quicker time to market for their SaaS services as compared to earlier client/server development architectures.
Data de-duplication and compression technologies, which were not available to first-generation SSPs, have significantly reduced the amount of data that needs to be remotely stored. These enhancements, combined with increasing bandwidth, make more remote storage services possible than what could have been implemented just five years ago.
SaaS Storage Services
In terms of SaaS storage services, the growth has been primarily in backup/recovery. Taneja Group believes the cost of disk storage has decreased to a point where it is now an attractive option for customers looking for more reliable data protection, with faster restore times. Most consumers and many SMBs have very little or haphazard data-protection schemes in place today. SaaS-based backup/recovery provides enhanced online data-protection capabilities generally enjoyed by only by larger companies at a price point that is both affordable and cost-effective for this target market. While most of the initial growth has been in the SMB market, medium-size enterprises and branches of larger enterprises are also starting to deploy SaaS backup/recovery services.
Over the last two to three years, growth of SaaS backup/recovery revenue has been substantial. However, the SaaS portion currently represents only about 3% of the overall data-protection market. Although SaaS represents a very small percentage of this market, the Taneja Group expects this application area will be one of the primary SaaS storage growth drivers into the future.
As customers start to adopt new deployment models, such as SaaS storage services, they will look to limit their risk. Backup, recovery, and archiving represent less risk than other storage applications because they use secondary storage. Customers still have the primary copy of their data. We believe there will be a natural evolution of SaaS data-protection services—from simple backup and restore to hosted application recovery where companies’ applications can be restarted at a hosted site with minimal disruption to their business.
Data protection is a labor-intensive operation with very little unique competitive advantage. As more companies start looking at the service level improvements and the cost savings associated with SaaS delivery, we expect to see more adoption by larger companies.
We do not, however, see the SaaS storage market limited to just data protection or secondary storage. Other applications—such as security, management, reporting, as well as primary storage for Web content—all show growth promise as potential SaaS storage services.
For example, companies such as Amazon and Nirvanix have recently launched SaaS services that provide online storage for Web services content. We do not believe this SaaS storage service will initially displace primary storage for more traditional mission-critical applications. However, it does provide an attractive option for many Web 2.0 start-ups. For these companies, the attraction is capital preservation and a “pay-as-you-grow” model, where limited resources can be spent on product delivery versus infrastructure purchases.
SaaS Storage Providers
One of the primary growth drivers in the SaaS storage market has been backup-and-recovery applications. Until recently, this market has been dominated by smaller vendors such as Arsenal Digital, Asigra, Iron Mountain Digital, eVault, Mozy, ROBObak, and others. Strong growth combined with forecasts that SaaS deployments will account for 25% of software revenues within the next five years, have prompted vendors such as Amazon and Symantec to introduce SaaS storage offerings, while other vendors such as EMC, IBM, and Seagate have chosen to acquire some of the emerging leaders as a way to enter the SaaS storage market. It is not surprising that the current data-protection market leaders (e.g., EMC, IBM, and Symantec) are aggressively moving to a SaaS delivery model as a way to grow and protect their existing revenue streams.
Taneja Group believes the strategic reason for the leaders in storage software to enter this market is to establish a SaaS portal to allow them to sell other storage software (in addition to backup) as SaaS services. Most of these vendors are establishing a SaaS delivery infrastructure of security, authentication, usage tracking, reporting, billing, and branding that will allow them to deliver these services directly or through channel partners.
As this market enters the growth phase, we expect other SaaS storage vendors such as Asigra, eVault, ROBObak, and Iron Mountain Digital to be potential acquisition candidates by larger IT providers such as Dell, Hewlett-Packard, Hitachi Data Systems, Sun, and others.
Opinion
Taneja Group believes the fundamentals are now aligned to allow for more efficient delivery of SaaS storage software services. Growth acceleration and market consolidation are clear signs that the SaaS storage services market has reached an inflection point and is poised to enter a more rapid growth phase.
The following three reasons have contributed to companies of all sizes adopting SaaS storage solutions:
- Accelerated time-to-deployment;
- Delivery of services not previously available; and
- Pay-as-you-grow purchasing.
In recent years, the SaaS delivery model has been adopted for storage applications such as backup, disaster recovery, and even storage of primary data for emerging Web applications. Our research indicates that yearly management and maintenance costs to deploy storage services can often exceed the initial software purchase prices by as much as four to five times. SaaS storage services provide a cost-effective approach for delivering applications such as backup, archiving, and recovery. Customers considering SaaS alternatives for internally deployed solutions must make sure to compare the fully burdened cost to deliver these services, not just the initial hardware and software acquisition costs.
With SaaS storage services, smaller companies can now deploy solutions typically only enjoyed by larger companies. Larger companies can save their limited IT resources to be deployed on projects that provide more competitive differentiation. All companies enjoy a more predictable pay-as-you- grow licensing model, where the provider is now responsible for the delivery and the ongoing management and maintenance of the SaaS storage solution.
For storage application vendors, the SaaS delivery model will expand market opportunity, allowing them to reach customers in the consumer and SMB markets. Today, more than two-thirds of all SaaS revenue is derived from companies with greater than $1million in revenues. While SaaS storage services are currently dominated by consumer and SMB customers, we anticipate that very soon the customer distribution will mirror the broader SaaS market.
In addition to revenue growth possibilities, we believe SaaS storage services will provide a more predictable and evenly distributed revenue stream than the current software license model.
Taneja Group believes the acquisition of smaller SaaS providers by larger IT vendors, combined with the introduction of new services, will fuel the growth of SaaS storage services in larger companies, due to the service and support associated with these larger vendors. As these vendors expand their SaaS offerings with products from their existing software portfolios and acquisitions, we expect to see an increase in the number of available SaaS storage solutions as well as increased adoption by companies of all sizes.
