Google: Gmail Success Spells SaaS Superiority

SaaS and Gmail

SAN FRANCISCO — Google may dominate in search, but it’s the company’s free consumer e-mail service, Gmail, that it sees capable of teaching the enterprise some lessons.

Google (NASDAQ: GOOG) shook up the e-mail world in 2004 with the release of Gmail, it’s free e-mail service. Microsoft’s Hotmail and Yahoo ruled the roost, but their standard online storage limit was 10 megabytes — if you wanted 100 megabytes or more you had to pay.

But when Gmail debuted with a gigabyte of free storage, competitors scrambled to respond. And while it’s unclear how they’re fairing — both Microsoft (NASDAQ: MSFT) and Yahoo (NASDAQ: YHOO) have larger user bases, but don’t break out revenues for their e-mail offerings — Google has been known to crow about its successes.

“We’re making money,” Matthew Glotzbach, product management director for Google Enterprise, told

Added a Google public relations spokesman, “Gmail is absolutely profitable.”

The secret? A very favorable market for commodity storage hardware and the economics of scale — two trends that it sees encouraging enterprises to similarly trade up to software-as-a-service (SaaS) offerings like hosted e-mail.

While Google’s audacious offering was great for consumers, it was less immediately clear it would be a successful business, particularly as storage costs initially increased. As its popularity rose, the increasing amount of large multimedia files users were sending and storing on its servers meant their needs soon grew beyond the once “massive” gigabyte of storage it originally offered.

Market dynamics enabled Gmail’s free storage to keep pace, growing at such a pace that it’s essentially open-ended.

At present, Gmail storage is “up to six to 7.5 gigabytes per user on average,” Glotzbach said during his keynote address here at the Software and Information Industry Association (SIIA) NetGain conference today.

In his presentation, Glotzbach showed a graph of how storage costs have plummeted since 2004, even as Gmail’s ad revenue has risen, with the two axes crossing in 2008.

[cob:Special_Report]Google also has been reaping the benefits of its huge ongoing investment in storage for YouTube and other services, which contributes to driving down its per-gigabyte storage costs for products like Gmail.

“We get 10 hours of video uploading to Google every minute,” Glotzbach said. “As you scale, the cost trends towards zero.”

“One of the things driving that is what you can do in the cloud,” he added.

Moving to the cloud: Are enterprises ready?

Services in the cloud are experiencing tremendous growth thanks to the same benefits Google is realizing — scale and the ever-decreasing costs of storage hardware. As a result, it may seem like SaaS approaches to delivering enterprise software may be poised to beat out traditional deployed models on pure cost-savings basis.

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SaaS offers additional strengths, as well. During his keynote, Glotzbach suggested that cloud-based applications are increasingly driving innovation in the enterprise.

Compared to typical corporate e-mail clients like Microsoft Outlook, “any user under 30 would probably say consumer e-mail is more full-featured,” he said. “You have more storage space, you can access it anywhere, there’s integrated chat. That’s having an enormous impact.”

Which is not to say that’s an open-and-shut case in favor of online services: Corporate e-mail systems have security and controls that IT departments often demand.

Glotzbach conceded that SaaS providers like Google and still have work to do in convincing enterprises SaaS is as secure as traditional, on-premises software.

“Security is one thing people point to: Am I ready to trust my data to Google or Salesforce?” he said.

Instead, Glotzbach argued corporations should be much more concerned with notebook security. He said one out of ten laptops — most of which are owned by corporations — is stolen within the first year of purchase.

“Sixty percent of corporate data resides on unprotected PCs or laptops,” he said.

Glotzbach added that Google’s own IT department was “happy” to see more SaaS adoption, so more information would be stored in the cloud and not on notebooks.

The other stumbling block to more corporate adoption of SaaS is offline access, but Glotzbach said new tools like Google Gears are making it possible to run, for example, Google Docs on an offline PC or notebook.

The SaaS model is also shaking up the economics of how software is sold in the enterprise. Google sells its Premier Apps suite for $50 per user per year. Salesforce and others have similar models.

“In the enterprise, traditionally, it’s been sell as big as you can upfront, charge 15 to 18 percent for maintenance costs and maybe make an upgrade sale or two down the road,” Glotzbach said.

[cob:Special_Report]But he noted that consumers, and a younger generation entering the workforce, have access to powerful consumer applications like Gmail at low to no cost. The model of ten years ago, when technology innovation in the enterprise trickled down to consumers, has flipped.

At the same time, user expectations are finding their way into enterprises.

“Enterprise users are consumers — they’re the same people,” Glotzbach said. “They don’t put on a cape and become corporate users. They demand the same capabilities in the office they can get at home, and if they can’t get it, they’ll bring it in themselves.”

As one example, Glotzbach mentioned the iPhone’s rise to becoming the second most popular smartphone after only a year on the market, behind only RIM’s Blackberry, “and smartphones are mostly in the enterprise.”

According to online metrics firm Net Applications, the iPhone grabbed 71 percent of mobile browser usage in its first year.

“I couldn’t imagine such a land grab,” Glotzbach said. But he said it’s another example of how consumers are helping to drive corporate adoption of technology — similar to his expectations for SaaS.

“This idea of cloud computing, that we’re well aware of at Google, is that’s it’s not an ‘if’ but a ‘when’ in the enterprise space,” Glotzbach said. “And the ‘when’ is now.”

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