Even small, network-enriched electronic gadgets are getting huge 

Feature August 8, 2007

Software as a Service, or SaaS, is usually associated with stationary computers. But its greatest potential may lie in interfacing with portable electronic devices – including some as big as a Buick – whose capabilities, value, and revenue potential can then be expanded without limit. CMU professor Bob Monroe, a veteran of SaaS pioneer Ariba, has been tracking the evolution of online service delivery. In this, the second in a series of articles highlighting Monroe’s analysis, he explains how device makers can benefit from the SaaS revolution.

By Peter Longini, Managing Editor

To the thousands of companies currently in the software producing business, the fast-growing Software as a Service business model, or SaaS, represents a sea of change in the competitive landscape – one that more and more of them are being pulled into, whether they want to or not. In essence, SaaS involves taking the data and computational capabilities which were previously sold on CDs for installation on their customers’ hard drives, and offering them instead online, housed in the service provider’s data center, sometimes thousands of miles away. For software makers, perhaps even more than for their customers, that’s a really big deal.

But what if your company is actually a device maker – a producer of stand-alone business or consumer electronics whose users see them as digital cameras, weather instruments, workout trackers, security monitors, or music players instead of as specialized computers? Does SaaS have any real significance for you? Unless it’s a truly dumb device like a can opener, Bob Monroe -- a professor in Carnegie Mellon’s Tepper School of Business and former Applications Architect at Ariba -- thinks it does. And he’s been keeping a close eye on the evolution of SaaS-based businesses for some time.

According to Monroe, the essence of that significance lies in deciding how your device – if it were periodically connected to a Web site on the Internet – could be made more interesting, powerful, and valuable to the user than it would be as a stand-alone piece of equipment. As a corollary, it also means figuring out how to generate revenues and profit from that extra value as customers use your device, and then creating the capability for reliably delivering it to them, 24/7.

Network-enriched devices

Already, there have been instances where the income realized through sales of a device has been rivaled, or even eclipsed, by the service income that same device allowed its users to generate. And in other cases, a complementary software service has driven demand for its hardware component through the roof. Take the case of iPods – Apple’s elegant little MP3 players. They’ve set the standard for personal music players. But a key to the iPod’s success has been the company’s online store for music and video downloads. The iTunes store not only enhances the iPod’s value to consumers and substantially increases sales of the device, it also represents a major new revenue stream to Apple of its own.

Or consider Tivo, the digital home video recording system. “Tivos are probably sold at a loss on the units themselves, but they don’t work unless you also sign up for the service,” Monroe pointed out. “The service tells you what’s going to be on each channel and at which times. But they have also tried to generate other services and capabilities, like quietly finding out what you have enjoyed and recording things for you it thinks you might like. The service uploads everything you’ve watched, how long you watched it, whether you watched it multiple times, and so on. Then they run various algorithms to suggest programs that other people have watched who have patterns similar to yours. It’s a fairly complex service, and you pay $13.95 a month for it. But the device becomes a lot more valuable when you incorporate the service with it.”

Cell phones are another classic example, although SaaS works there a bit differently. “The big customers for the cell phone makers are actually the network service providers,” he noted. “You may go into the Verizon store to buy a Motorola or an Ericsson or a Nokia phone, but to a certain extent, Verizon’s just acting as the distributor for that phone. They probably sell it at a loss. That $49 you’re paying for it is not what the cell phone really costs Verizon; they actually purchased it from Nokia or Ericsson for more than that. But when you buy it there, you also sign a contract. The service contract is actually what you’re paying for, but you have to get the device to receive it.”

Of course, many cell phone makers have now added such attractive offline features as cameras, calendars, music players and mini-computers to their products, and eventually, such non-traditional mobile phone services as Internet access, information on demand, the ability to pay for purchases, ordering up television shows, and others, may come to represent an even greater value to customers and their service providers than talking on the phone. But for now, at least, their greatest value remains giving users entrée to the telephone network and charging them accordingly. 

Earlier in his career, Monroe worked with Kodak, whose near-death experience over the past decade illustrates how SaaS can save and transform a large, well-established maker of materials and devices into something more. “Kodak is an interesting case study because they were basically a photographic processing and supplies company,” he said. “But they realized they had to do more than that to survive in the digital age. So they got into printers and digital cameras. And one of the things they did in the late ‘90s was to start services like what is now the Kodak Easy Share Gallery. They make cameras with docking stations that plug into your computer and send you right to the Gallery, which is an online, web-based service they operate. You upload your photos and you can order prints through it, you can show them to other people, you can edit them – you can crop, take out red eye -- do all sorts of other things before you get them printed and sent to you.”

But making that transition was a wrenching experience for the company. “They were excellent at what they did,” Monroe acknowledged. “But changing their mindset to thinking what they would do if they had a digital camera, instead of just turning film into prints, was a huge leap. It went beyond just the fact that they didn’t have the capability to build the software; they didn’t even have the capability to think that way. Thinking of different ways you could use a particular kind of device if it were hooked up to a ubiquitous network where you could download software and have huge amounts of processing and network bandwidth and a data center to do it, is challenge Number One: changing the mindset.”  

New capabilities

Other challenges quickly follow. Once you begin to realize the possibilities that a network-enriched device could present to customers, you face the classic product management problem of figuring out the right thing to do – determining precisely what sort of offering would actually meet real market needs. It is the basic product issue that all suppliers, regardless of their industry, constantly face, according to Monroe. And SaaS is no exception.

But for device makers, that’s also the point at which an even greater challenge presents itself: execution. “The next big challenge is building up the resources to provide that capability,” he said. “You need to develop an operational capability you probably don’t have in your organization. You probably don’t have a lot of people in-house who can run a big data center, who can build an entire system that’s going to have very high availability, that’s going to have redundancy built into it, that’s going to be secure.”

Of course, some of that capability can be outsourced – you don’t necessarily need to create an entire data center in-house from scratch, Monroe acknowledged. But even if you do outsource those operations, you’ll still need to understand their issues and build your systems to support large-scale operations – something that can be a big stretch for most device makers.

Quick fix

The final challenge in making the transition from traditional device maker to a SaaS-enriched device maker is adopting a different attitude toward the pace of product rollout and the need for perfection. “When you’re building devices – especially expensive electronic devices that you send out in the field – a you put a great deal of effort into getting them right; making sure that they work properly, making sure that they don’t have any bugs, making sure they’re perfect because it’s extremely expensive to fix once it’s in the field,” Monroe said. “If you have to do a recall, if it breaks, if it doesn’t work, people will say ‘this is junk; I’m never buying something from this company again.’ So the cost of a bug can be very, very high.”

But that doesn’t necessarily apply to SaaS providers. “If you look at most of the companies that provide services over the Web, they take the absolutely opposite point of view; they release early and they release often,” he said. “If you go to Google and look at their applications, most of them say ‘beta’ underneath. They update things daily. They’ll make a change and if they find a bug, they’ll fix it on one or two percent of the servers. Then they’ll watch for a while and if it works, they’ll roll it out to more. Then, if it hasn’t melted down or broken things, they’ll give it a try.

“The really successful service providers over the Web have a very experimental approach to figuring out what would be useful. If they try something and it takes off, they’ll put resources behind it. If they try something and nobody wants it, they move on and try something else. However it’s done at a very different pace than a typical device maker, which typically takes much longer in development for each product and really tries to make sure it’s perfect before it gets out the door. But making sure everything’s perfect before it gets out the door has not really proved to be a winning strategy in online services,” he said.

“Their approach is sort of ‘Aim! Fire! Ready! and if I miss, then Re-aim and try again.’ It’s not going in blindly and just trying any random, stupid thing. It’s more like: observe, learn, fix, and try again. Get the cycle to be very quick; admit that this is a whole new kind of product you’re giving people, and that you don’t really know how they’re going to use it yet. So put it out there, let them try it, and then quickly update and fix and improve. Watch and learn and run with the winners. Then orphan off the things that don’t seem to have any traction.”

However, as fast as it has become, that network-driven pace of innovation is likely to pick up even more as the reach of wireless Internet service continues expanding. “Clearly the ubiquity of the Internet – which is moving beyond just wires connected to computers on desktops toward a Wi-Fi world – will open up a lot of new possibilities for device makers,” Monroe said. And for companies which can learn to provide the service component, it’s a change that can bring huge rewards along with it.