Cloudy SaaS Apps To Puff Up To $14.5 Billion

April 2, 2012 Timothy Prickett Morgan

While there is a lot of talk about companies moving their applications to the cloud, the actual money that is being spent on clouds is more for software-as-a-service, or SaaS, applications that a company or its hosting partner runs in a cloud on behalf of customers.

According to the market watchers at Gartner, companies spent $12.3 billion on SaaS software in 2011, and this slice of the software racket is expected to rise by 17.9 percent to $14.5 billion this year and continue growing at enough of a clip to reach $22.1 billion by 2015.

“After more than a decade of use, adoption of SaaS continues to grow and evolve regionally within the enterprise application markets,” says Sharon Mertz, the research director at Gartner that tracks the SaaS space. “Increasing familiarity with the SaaS model, continued oversight on IT budgets, the growth of platform as a service (PaaS) developer communities and interest in cloud computing are now driving adoption forward.”

PaaS clouds abstract one level higher up the stack and don’t present virtualized and raw processing, network, and storage capacity to users, but rather expose file and database services and runtime environments where applications execute. (This of it as a kind of distributed AS/400 and you get a lot of the idea behind PaaS clouds.)

The North American market is the most mature in terms of its adoption of SaaS software, thanks to more than a decade of talking about application service providing and then the advent of Salesforce.com, NetSuite, and a slew of companies that can take advantage of the much lower cost of bandwidth, the much higher bandwidth, and much better distributed processing and multitenant capabilities of modern software to build SaaS apps. We might have had cheaper Internet service first with decent bandwidth, but the world is catching up and surpassing us. Still, North American SaaS software sales to businesses are expected to hit $9.1 billion this year, rising 16.7 percent. Given the large size of both the United States and Canada, Web-based video conferencing is a popular service and moreso than in other smaller countries around the globe. North American countries like SaaS variants of expense management, email, office automation, and financial management software. (Gartner did not mention customer relationship management software, but obviously this is also popular.)

Sales of SaaS software in Western Europe is anticipated to hit $3.2 billion this year, up 18.5 percent over 2011’s levels, and in Eastern Europe, the market is growing even faster at 25 percent to hit $169.4 million this year, if Gartner’s prognostications pan out. The Asia/Pacific region, which includes Australia and New Zealand (which behave more or less like North America and Western Europe) and all of the fast-growing countries along the Asian coast and Pacific Rim except Japan, are expected to spend even more aggressively on SaaS software this year, with aggregate spending across the countries (including China and India) rising by nearly 28 percent to $934.1 million. Japan still has its budgetary issues, hurt because of last year’s earthquake and tsunami, and SaaS spending will only rise by 16 percent to $495.2 million. SaaS software/service sales will heat up in Latin America, rising by nearly 27 percent this year to just under $420 million.

Still, this $14.5 billion in SaaS licensing is all only a small dent in the $3,798 billion market for hardware, software, IT services, telecom equipment, and telecom services that Gartner projects companies will spend this year. Like four-tenths of a percent or so. SaaS spending is growing nearly three times as fast as the IT market overall, and will, if these numbers pan out, represent about 5.1 percent of the $285 billion spent on enterprise software this year.