Cloud Computing: About SaaS – article 1 of 4

Cloud computing contracts must not be confused with software licences because they are in fact service contracts that adopt a somewhat different commercial model. For example, software licence agreements tend to charge upfront licence fees or periodic licence fees e.g. annual or monthly, whereas, most cloud service providers forego upfront licence fees opting instead for the long-term revenue proffered by predictable service payments.

Software as a Service (SaaS) providers tend to offer low set-up fees and look at a long-term revenue model wherein they have a large number of customers continuing to use the service for a long time. Low set-up costs to new customers offer incentives and reduces their risk and the ease of deployment via the internet means that good products have the potential for accelerated and exponential growth in customer base. SaaS service providers are often able to provide the most basic package to a customer for free as they can support themselves by allowing advertising on their sites.

Cloud service providers may look for a minimum duration and may offer further discounts to encourage customers to sign up for longer periods in order to secure long-term revenue streams. Customers need to ensure before they become contractually bound to a long-term deal, that the product offering will continue to meet the needs of its business or at least provide the potential to vary or upgrade as the business progresses…or indeed downgrade if the business so requires.

Sometimes set-up costs are sought to be recovered from a customer by a cloud service provider. For example, a cloud service provider may also look to recover some costs associated with the purchase of items such as hardware and transmission links when setting up a new customer. Likewise, there may be an initial “licence fee” payment for the software even though the customer will not actually acquire a “copy” of the software as such.

It is often argued that such passing on of initial set-up costs undermines the supposed benefits of cloud computing so most service providers do try to avoid this but for others, this makes the cost and risk of setting up a cloud computing system prohibitive. This has led larger players such as Salesforce, Google, Amazon and Microsoft, to look at offering “Platform as a Service” (PaaS) type offerings where they provide software developers with the necessary web tools and hardware platform on a rental basis. This way their revenue comes from the software developer renting space on that platform and using it as a delivery channel to customers. Although, costs are reduced upfront as it removes the need to require any initial set-up charges from customers, it is a model that runs the risk of:

  1. alienating certain developers by refusing to provide a platform for their type of software; and,
  2. being anti-competitive due to the platform provider bundling all their own software on their own private clouds.

If you are a customer in a SaaS arrangement, be aware of your contract term and your potential changing business needs and ensure that the service levels you expect from your service provider are provided for in the contract.

As a service provider, ensure you do not operate in an anti-competitive way and only offer service levels to the metrics that you can deliver on or you could find yourself in breach of contract and the law. CloudLegal can provide you with further advice if you need it!


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Author: Yvonne Morris



twitter: @CloudLegals



CloudLegal is a tech-enabled legal support consultancy which promises practical commercial and jargon-free advice. We support all company matters, commercial contracts/ Ts & Cs (including software and IT), employment & HR as well as data protection matters. We have various services including: