The Connected Web

One of the grossly overlooked benefits of sharing applications in the cloud is the ability to aggregate user metrics and behavior. This is one characteristic that separately-installed on-premise packaged software simply can't rival (one of several reasons why I argue that old-fashioned packaged software is becoming obsolete). As Ariba's CTO Bhaskar Himatsingka told me in our recent podcast interview about his company's transition to SaaS, the ability to connect customers, create communities and share benchmark analytics is an unassailable competitive advantage:

"The big distinction between having these parts be behind the firewall versus being on-demand is, all of a sudden when everybody's on the same infrastructure 'in the cloud' together, now you have the ability to connect people across these parts ... I don't even know — every time I think about it — I don't even know how I could envision doing it in an environment where the technology was behind the firewall. That is a core — it's a core necessity, that everybody logically be in the cloud, for one to be able to really establish that vibrant, ongoing, live community."

Google Maps has just announced a stunning new example of that competitive advantage applied to its own journey planning capabilities (full Techmeme coverage here). It is now crowdsourcing road congestion data:

"If you use Google Maps for mobile with GPS enabled on your phone ... [w]hen you choose to enable Google Maps with My Location, your phone sends anonymous bits of data back to Google describing how fast you're moving. When we combine your speed with the speed of other phones on the road, across thousands of phones moving around a city at any given time, we can get a pretty good picture of live traffic conditions. We continuously combine this data and send it back to you for free in the Google Maps traffic layers. It takes almost zero effort on your part — just turn on Google Maps for mobile before starting your car — and the more people that participate, the better the resulting traffic reports get for everybody."

In the past, any business that wanted to measure traffic speeds in real-time had to build a costly infrastructure of traffic speed sensors across the entire national road network. But today, Google can get pretty much the same information just by tapping into the serendipitous infrastructure of GPS-enabled handsets that mobile phone users happen to be carrying in their cars and trucks. There are limitations — as ReadWriteWeb notes, Google can't access location data from iPhone users. Nor is it an entirely new idea, the site adds: "some GPS manufacturers have been using data from their users' GPS systems to crowdsource traffic data for years." But the ubiquity of Google Maps means it has the potential to reach far more users, yielding far more real-time data points and thus more accurate information.

As the Ariba example shows, this aggregation and crowd-sourcing advantage isn't one that's limited to applications that target individuals. It applies equally well to businesses and business applications. Last month, a GigaOm article discussed the network effects that small business invoicing vendor Freshbooks is benefitting from now that it has grown close to the million-subscriber mark:

"Freshbooks has ... grown to 900,000 subscribers using a mix of free and paid offerings. Now that there are so many users, subscribers often wind up sending bills to one another. So the company made it possible to send those invoices within the system directly, bypassing external email. Today, Freshbooks revealed that 20 percent of its subscribers had adopted this new capability — taking Freshbooks from software tool to SaaS ecosystem."

Freshbooks calls this model Software as a Network, and it's helping to lock customers into the application by delivering additional functionality such as cashflow visibility and benchmarking.

The moral here is that SaaS vendors should be looking out for and exploiting those network effects, because if they don't, they won't deliver the full value to customers that the cloud model allows. A secondary takeaway is that vendors who pursue a hybrid, 'software-plus-services' model in applications that can benefit from such network effects will cut themselves off from the data and feedback residing in on-premise installations. That will leave them at a clear competitive and functional disadvantage to vendors who restrict their offerings to a pure cloud model.