What is the market value of Saas

I got to thinking about how Google might offer subscription based pricing for the software as a service offerings that they are busily beta testing, acquiring and planning, then it suddenly occurred to me that actually it is not gonna be like that at all, that would be far to easy.

When google brought contextual advertising to the marketplace they also revolutionised the value proposition. They didn't for example fix pricing rates per word/term or whatever, no they did something much more clever than that, they let the market determine the price, one effectively bids for advertising context. It is one of the key early factors making google so successful in online advertising. Actually this effect goes back a long way, if you look at how corn has been priced through the ages it has been determined by the market just about forever. Service providers who think they can set market price will come unstuck when competition appears, as it is the consumers who determine pricing not producers, just check out Adam Smiths work (Wealth of Nations) in the late 18th century if you want a good overview, but I digress ...

Now lets fast forward some way and look at what Google is building. They are building a huge infrastructure and platform , this platform will probably run software as services, things like google apps etc... So how are they going to price the non-advertising funded Saas? Businesses won't want advertising. To date advertising has been the way that Google resells it's infrastructure and intellectual property. It doesn't take much of a step for them to shift that a little and sell the infrastructure directly as Saas fractional units or usage. They could also employ their genius bid systems and let the market decide the price of their Saas based on consuption and demand just like they have with Adwords. Question is how will any competitor be able to compete with that? That would be a massive challenge even for Microsoft, can you think of a way anyone could compete with that?.

Thanks to Dennis's value conversation and zolis comments that put this thread in my mind.

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