Date: January 21, 2010

Author: JT

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Comments Off on One Reason, Why SaaS Is Going to Only Grow

One Reason, Why SaaS Is Going to Only Grow

Energy costs.sxc - Data Center - 934551_61783350

Ask yourself, why did the economy tank last year? A popular answer is bad mortgages leading to a collapse of the financial markets…and the dominoes just fell from there. But if so, then why did Europe and Japan head into recession (by a couple quarters, at least) before the US?

If you listen to the popular economist Jeff Rubin (http://www.jeffrubinssmallerworld.com), he’ll give you an earful on why it was really triggered by 2008’s run up in oil prices. Consider that in 4 of 5 previous recessions (we can’t say about this one yet, for sure), oil spikes preceded economic recession by about 12 months each time. Interestingly, 09’s spike was nearly 500% prior spikes. I encourage you to read Jeff’s book, or at least skim the related blog post, Financial Crisis or energy Shock? You Be the Judge.

So, what happened to us as energy sky rocketed, before last year’s collapse? We started

paying attention to our energy consumption, that’s what. My family certainly did. Combined with fueling a lengthy commute, my family’s monthly energy costs exceeded our mortgage payment by $200-300/month during depths of winter. We paid attention to energy habits, and I’m willing to bet you did too.

And, if you were running a data center at the time, I guarantee you were paying attention to aggregate energy costs.

Based on comments by folks like Jeff Rubin, others, and my own observation, I think we’re destined to see $4, $5, $6/gallon gas again…fairly soon. That means triple-digits barrels of oil again and energy inflation equal to, if not exceeding, our experiences of ’08. It doesn’t take genius-level thinking to realize that as demand grows in India, China, and other developing countries, combined with decreased growth rates in new supply, that costs are going up. It’s a simple supply/demand thing.

So, what’s the future likely to hold?

The world assumes it costs nearly nothing to shuttle parts/product around the world. Yet as soon as we hit $4/gas, we began to see news reports of textile and furniture makers in the Carolinas getting busy again. It no longer made sense to ship the frame for a sofa, from China to North Carolina, so it could be upholstered, and then sent back to China. All of a sudden, as low-cost energy went out the window, so did low-cost transportation.

Costs to run data centers have never exactly been ‘cheap.’ However their operation and design has underscored by the same low-cost energy. But that’s beginning to change. Recession-driven relief has us in the midst of a lull right now. But, have no doubt, we’re going to see energy costs for data centers start climbing rapidly again—and soon. This means SaaS is going to benefit–no one will want to keep growing their own data center—if they can gain economic benefit by consolidating with other (SaaS) data centers.

According to an Intel white paper, Dynamic Data Center Power Management: Trends, Issues, and Solutions, one of the biggest challenges for data center operators today is the increasing cost of power and cooling as a portion of the total cost of operations. And this was in February, 2008. (If you run a data center, I’m preaching to the choir.)

In the past decade, cost of power and cooling increased 400%–that’s huge! Even before the latest energy spike was realized, concern over power and cooling limitations were a major concern for 59% of Intel’s survey respondents.

If you agree with me, the return of ever-higher energy costs are going to make it ever-harder for customers to continue deploying new services even as they’re being economically forced to decrease energy consumption. For SaaS providers, those able to effectively anticipate, scale, and secure cost-effective energy supplies, this makes for incredible new sales opportunities.

Consider some of the common applications companies self-serve today: email (often with BlackBerry boxes close-by), large datastores, intra/internets servers, ERP, HR, AP and, AR. Every one of these are functions that can be serviced through a SaaS provider.

There is plenty of opportunity to be had. Increased energy prices are likely to be a boon for SaaS providers. What do you think? Agree? Disagree?

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