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While cloud technologies are often greeted with caution by traditional value-added resellers who wonder how the business model could ever work for them, a new report from IDC finds that software as a service (SAAS) continues to gain momentum against packaged software sales. The IDC report says that SAAS revenue will grow five times faster than revenue from traditional packaged software through 2014.

IDC says that the SAAS market saw worldwide revenues of $13.1 billion in 2009. The firm is forecasting that market will reach $40.5 billion by 2014, representing a compound annual growth rate (CAGR) of 25.3 percent. What’s more, by 2012, IDC expects that less than 15 percent of net-new software firms coming to market will ship a packaged product (on CD). By 2014, about 34 percent of all new business software purchases will be consumed via SAAS, and SAAS delivery will constitute about 14.5 percent of worldwide software spending across all primary markets.

Maybe that’s why Microsoft’s message at its recent Worldwide Partner Conference was that the software giant was “all in” with the cloud, even though it was revealed just days later how heavily dependent the company still is on revenues from packaged software. Still, Microsoft executives at the partner conference told channel partners that Microsoft and its partners would make the transition from packaged software to SAAS together.

The IDC report notes that SAAS technology these days is running the gamut.

"The SAAS model has become mainstream, and is quickly coming to dominate the planning – from R&D, to sales quotas, to partnering, channels and distribution — of all software and services vendors," says Robert Mahowald, vice president, SAAS and Cloud Services research at IDC. "Enterprise IT plans are rapidly shifting to accommodate the growing choices for sourcing most or all IT software functions, from business applications to software development and testing, to service and desktop management, as SAAS services become available from established vendors and new models for accessing functionality in the cloud creates lower-cost options and more tailored models for consuming IT services."

Additional key findings from IDC’s most recent SAAS study include the following:

  • By 2012, nearly 85 percent of net-new software firms coming to market will be built around SAAS service composition and delivery; by 2014, about 65 percent of new products from established ISVs will be delivered as SAAS services.
  • SAAS-derived revenue will account for nearly 26 percent of net-new growth in the software market in 2014.
  • Traditional packaged software and perpetual license revenue are in decline and IDC predicts that a software industry shift toward subscription models will result in a nearly $7 billion decline in worldwide license revenue in 2010. As a result, a permanent change in software licensing regime will occur.
  • SAAS segment mix will shift toward infrastructure and application development and deployment/PAAS, and away from U.S. dominance. IDC expects that by 2014, applications will account for just over half of market revenue. This shift will happen in part as a result of increasing IT cloud spending by enterprise IT groups and commercial cloud services providers relative to end-user spending.