Sramana Mitra has an article on Forbes.com today predicting that SaaS consolidation is highly likely, and wonders whether that’s a good thing. From the post:
The global recession, which has forced companies to cut operating costs and streamline information technology operations, has been something of a boon for the software-as-a-service sector, with major companies turning to cloud computing. Thus, I expect to see acquisitions in the SaaS space this year. SaaS companies like NetSuite, SuccessFactors and Citrix, which all recently reported solid quarters, are likely targets. Let’s take a closer look.
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My concern remains that we may be moving towards yet another "too big to fail" industry structure. If HP, IBM, Cisco, Microsoft and Oracle go around acquiring everybody and their mother, we’re in for stagnation in innovation, a precarious concentration of industry power and leverage at the very tip of the pyramid, and an overall undesirable structural evolution.
SaaS is an opportunity for smaller companies to accumulate their own muscle, roll up their own smaller kingdoms and create an alternative power structure. I would much rather see that happen, than an accumulation of everything that matters into one of the five largest players!
Interesting article, and I understand this is really an opinion piece. She would rather see smaller companies in the SaaS sector. I get it. But when it comes to consolidation, remember, it’s a choice. Small SaaS companies don’t have to agree to be acquired by the big dogs. While some companies will choose to sell to a bigger company, others out there will stick it out on their own. I agree with her outlook: with SaaS taking off, there will definitely be a wave of acquisitions. It just makes sense. But this, like any other trend in tech, will be a self-fulfilling cycle. People see that SaaS is hot right now and form a SaaS business. Bigger companies acknowledge that the trend is hot and start acquiring SaaS companies. Other people see that SaaS companies are being acquired and decide to start their own SaaS startup.
It reminds me of the time of internet company acquisitions when "we’ll build something, get users for free, then Google will buy us" was a viable business strategy. Seems like a crazy idea now, right? The reason people tried that strategy is that it was working for others. Bigger, more established companies were acquiring tiny startups just because they had users. This led to a new wave of companies that counted on the acquisition trend to keep on going. When it stopped, companies were faced with a difficult challenge: find a way to make money with all these users. Those that were able to find a way to do that survived. The rest vanished.
I think the same thing is going to happen in SaaS. There will be a wave of acquistion followed by a wave of new SaaS companies looking to be bought out simply because they’re SaaS based. The big guys will stop buying them out just on the basis of SaaS, and the small SaaS companies will have to figure out how to make it on their own.
But hey, I could be wrong. It happens.
