New data: Software as a Service industry revenue up 23% this year as shift to the cloud continues

Global revenue in the Software as a Service (SaaS) industry topped $43 billion in the first half of 2017 — up 23 percent from a year ago, making up nearly 70 percent of the overall cloud market, according to new data from the IDC market research firm.

The numbers illustrate the massive, ongoing shift from traditional software to cloud-based apps and subscription services inside many companies.

The other two primary cloud segments are also expanding rapidly, grabbing a larger share of the market even as the SaaS sector continues to grow.

  • Infrastructure as a Service (IaaS), the base layer of cloud computing and storage, grew 38 percent to $11.2 billion in revenue in the first half of 2017, according to IDC’s Worldwide Semiannual Public Cloud Services Tracker.
  • Platform as a Service (PaaS), higher-level services for developing, running and managing applications, grew 50 percent to $8.5 billion in revenue.

“Businesses now think ‘cloud first’ when it comes to their IT strategy and software footprint, since the benefits of cloud are clear and have been broadly demonstrated in most industries,” said Eric Newmark, an IDC program vice president for SaaS and enterprise applications, in a summary of the findings.

Now, he explained, the SaaS market is entering a new phase.

“Many companies have picked the low-hanging fruit, in terms of apps that could be easily moved to the cloud, and are now evaluating the migration of their next set of larger strategic systems (i.e. ERP, supply chain applications, etc.) to a SaaS model,” Newmark said. “These projects, coupled with companies’ efforts to embrace digital transformation, will continue to fuel strong SaaS growth.”

About 73 percent of organizations expect to shift nearly all of their apps to Software as a Service by 2020, according to a report this year by BetterCloud, a SaaS operations and management company.

The boom in the SaaS market can be seen in the growth of newer companies such as workplace collaboration service Slack, which says it now exceeds $200 million in annual recurring revenue, with more than 6 million daily active users. Slack says 2 million of its users are on paid plans, including employees at companies representing 43 percent of the Fortune 100.

The growth is also evident at established SaaS companies such as Salesforce, which recently said it became the first enterprise cloud software company to surpass a $10 billion annual revenue run rate. In its recent investor presentation at its Dreamforce conference, Salesforce said 24 companies are now paying more than $20 million annually for Salesforce services, up from three companies at that level four years ago.

Traditional software vendors are also adjusting. Microsoft has re-energized its software applications business by shifting to a subscription-based cloud model. Revenue in Microsoft’s Productivity and Business Processes division, which includes Office 365, rose 28 percent to $8.24 billion in its latest quarterly report, including a 42 percent jump in Office 365 commercial revenue. This contributed to Microsoft reaching its goal of a $20 billion commercial cloud run rate ahead of schedule.

In its own report, research firm Gartner predicted that SaaS revenue will reach $58.6 billion in 2017, up 21 percent. Gartner said SaaS growth has exceeded projections in each of the past two years. Looking ahead, the firm sees that growth continuing, projecting total SaaS industry revenue of nearly $100 billion by 2020.

All of this adds up to growing competition. More and more technology vendors are hoping to grab a piece of the SaaS market, from startups to tech giants such as Amazon Web Services, the early leader in infrastructure and platform cloud services. AWS has expanded its footprint with subscription-based collaboration services such as WorkDocs and Chime — one sign of the battles ahead in the SaaS market.

Editor’s Note: Salesforce is a GeekWire annual sponsor. 

Freelance writer Deena Zaidi contributed research to this report.