Software as a Service: Implications for Investment in Software Development

Software as a service (SaaS) is a rapidly growing model of software licensing. In contrast to traditional software where users buy a perpetual-use license, SaaS users buy a subscription from the publisher. Whereas traditional software publishers typically release new product features as part of new versions of software once in a few years, publishers using SaaS have an incentive to release new features as soon as they are completed. We show that this property of the SaaS licensing model leads to greater investment in product development under most conditions. This increased investment leads to higher software quality in equilibrium under SaaS compared to perpetual licensing. The software publisher earns greater profits under SaaS while social welfare is also higher