Here are some highlights from the Executive Summary.  Hard to argue with
any of this, except maybe #8.....

CM
............................................
Outlook: we've learned 10 key lessons in the past 18 months

It's been 18 months since we published six company initiations and an
extensive FITT report
entitled Software-as-a-Service (SaaS): Opening Eyes in 2007; Half the
Market in 2013
(November 16, 2006). Since then, the market for SaaS has developed
significantly. The
overall themes we highlighted in that last report continue and many are
strengthening.
Several new dynamics have also emerged. In this new FITT report, we
broaden and deepen
our analysis with the benefit of 10 key lessons:

1) The trend is real and here to stay: Fundamental drivers are
increasingly demonstrated
with greater efficacy (stack efficiency, innovation advantage, higher
customer success,
application access everywhere, customer preference, etc.).

2) There are many more companies than expected: Our research shows there
are more
private companies leveraging the SaaS model at profitable scale;
although evidence
shows that it takes time (and significant investment) to hit escape
velocity.

3) Platforms are forming as cloud computing moves front and center:
There is a more
pronounced push towards platforms-as-a-service. Cloud computing
platforms are
emerging that enable corporate IT, ISVs, SIs, and independent developers
to build and
deliver SaaS applications over the Internet (without the heavy
investments in
infrastructure). CRM's Force.com, Google's App Engine, Amazon's EC2 web
services
are all gaining awareness.

4) Software and Internet heavyweights are starting to respond: Some are
investing
more than others - Google, Yahoo!, SAP, Microsoft, Oracle. However, the
heavyweights' entry into SaaS has been tentative at best so far. We see
various
struggles (similar to the reason for SAP's delay in BusinessByDesign).
Structural
misalignment, time-to-market with R&D impediments, cannibalization
threats, and
business model hurdles may all be potentially too high to overcome.

5) SaaS companies remain difficult to value: Despite wide coverage on
Wall Street and
an increasing number of publicly traded securities, it remains difficult
to value these
companies. Subscription revenue recognition models during periods of
growth distort
economic profit levels and variances across business models (such as
cash pre-payment
terms) also complicate matters in regard to Free Cash Flow. In this
report, we analyze
the lifetime value of by performing a lifetime value of the customer
base of SaaS
companies, along with their customer acquisition patterns. We hope this
will spur
appreciation for their inherent high profit leverage. We think investors
should also benefit
from the recognition that this shift is generational and requires an
appreciation for the
deferred nature of the SaaS business model.

6) Category leaders are emerging and racing ahead: With increasing
aggression,
companies such as Salesforce.com and Omniture are attacking their
niches. We see this
as an appropriate strategy. In our view, scale benefits and first-mover
advantages are
more pronounced in SaaS than traditional software due to the stronger
network effects.

7) SaaS multi-tenant technology is advancing faster than anticipated:
The capabilities
within multi-tenant SaaS are advancing faster than we anticipated
(Google, Omniture,
Netsuite, and Salesforce.com) Innovation at the metadata layer will
enable multi-tenant
applications to be as functional as on-premise applications from legacy
software vendors
- and increasingly more so in many areas.

8) Little impact on traditional software? Not unexpectedly, we have seen
traditional
software heavyweights post generally solid results (Oracle, SAP, and
Microsoft, and
other smaller application companies) thus far in this consolidating
space. The first
successes of SaaS companies have been to extend the capabilities of
traditional
software or to replace software with very poor usage rates.

9) Market concentration through consolidation in SaaS has appeared: We
see
consolidation being used as a step-function to market leadership. With
the latest merger
announcement in the Talent Management space, we now have seen five major
consolidation moves (i.e., Omniture-Visual Sciences, Concur-Gelco,
Cisco-Webex, and
Ariba-Procuri) within SaaS sub-segments to create additional market
power over the next
player in the category.

10) Ecosystems appear to be changing: Thus far, it appears as though the
traditional
software industry ecosystem is under a state of change. The larger SI
providers appear
to be only dabbling and seem reticent to significantly push SaaS, as the
services
attached are still relatively small. However, all major SIs have
initiatives to engage with
many SaaS vendors.

Risks

A significant, visible data security lapse could deflate customer
confidence: Momentum
in the uptake and acceptance of SaaS would be seriously curtailed if
there was a high-profile
case of a security lapse that costs a customer significantly. While the
industry has had some
minor cases (including a phishing scam), it has not had a catastrophic
event that has eroded
confidence.

Larger traditional software vendors could make faster, more aggressive
investments:
Traditional legacy vendors have brought to market SaaS offerings, albeit
largely
unsuccessfully. If these vendors were to attack the market more
aggressively, and risk
cannibalizing some business in the short term, that they could
eventually be successful in the
space and pressure the pure-play SaaS vendors.

There is lumpiness associated with expansion-related challenges: Our
SaaS coverage
group is and expanding human capital and infrastructure to support high
growth rates and
therefore undergoes organizational strain that can often lead to poor
execution.

Hugo

thank you for sharing. Btw, a couple of weeks ago, Merrill Lynch
issued a research note in which they analyze some key players in the
cloud business:
http://www.financialpost.com/money/story.html?id=562877
http://markusklems.wordpress.com/2008/07/05/merill-in-the-cloud/
(a friend sent it to me, I think it is not public)

-- Markus