Freshbooks, whose SaaS-based billing tool tracks time and expenses and sends invoices to customers via email or post, is at that tipping point. It’s grown to 900,000 subscribers using a mix of free and paid offerings. Now that there are so many users, subscribers often wind up sending bills to one another. So the company made it possible to send those invoices within the system directly, bypassing external email. Today, Freshbooks revealed that 20 percent of its subscribers had adopted this new capability — taking Freshbooks from software tool to SaaS ecosystem.

Is this how freemium pays off? In “Free,” Chris Anderson speculates that information-based businesses won’t make money from what they do, but rather because of what they do. Here, Freshbooks may not make money from every subscriber — but it can offer compelling new features because of them.

Once a SaaS provider hits a certain size, secondary business models based on network and ecosystem effects can eclipse the initial business. This makes the economics of running a SaaS provider a bit strange: Too much focus on short-term revenues may undermine long-term success, because free helps reach critical mass, where new models can emerge. At the same time, network effects may make it hard to launch a new SaaS offering, since early players can erect significant barriers to entry.

For SaaS customers, this portends a new kind of lock-in. SaaS promised us freedom from the proprietary formats and costly, custom deployment efforts of enterprise software, but network effects can constrain subscriber choice and make it hard to leave. If you want access to Salesforce’s ecosystem, you have to use Salesforce.

Freshbooks CEO Mike McDerment, understandably, maintains that network effects are more about added benefits to end users than about lock-in: “If you can add a feature that’s not possible without a network, and there’s sufficient value offered by that network, then it’s worth it to stay on the network.”

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Not in an I-can’t-check-my-messages kind of way, but in a fundamental, inboxes-will-never-be-the-same-again kind of way.

With every birthday reminder, bill confirmation, new friend, direct message, password recovery, and mailing list, the content of our inboxes becomes less and less a means of communication and more and more a record of all we do online. Email is the lowest common denominator of digital identity. It’s our web keychain. It’s the catch-all of our online lives.

But if inboxes don’t fundamentally change in order to adapt to their new role as the keeper of myriad transactions across the entire web, they’ll be obsolete.

Have a look at your inbox. Chances are much of what’s in there isn’t just traditional email conversations between you and someone else. A few hours of unscientific inbox querying and a quick analysis with Mail Trends showed that less than half of my messages in the last month consisted of such simple correspondence. The other half were records of things I’d done, people who’d followed me on social networks, bookings I’d made, confirmations of sites I’d signed up for, and so on.

Companies like Xobni and Xoopit offer email analytics, as do some Firefox plug-ins, but everyone still assumes that what’s in an inbox is predominantly conversations with people. It’s not.

Inboxes need to get smarter. My perfect email client would:

• Scan incoming messages and build a list of all the companies I’ve paid, and those with whom I have recurring payments, showing spending history.
• Keep all my logins and password recoveries for online accounts in one place, safely encrypted.
• Group and track mailing list digests, and give me controls to unsubscribe from them.
• Show me all interactions with each of my friends in one place, regardless of whether they happened on email, Facebook, Friendfeed, or Twitter. OpenID holds promise here, but has yet to be properly integrated into inboxes.
• Track and analyze transactions semantically, from upcoming travel to events I’m attending.

Today, I have to visit dozens of other sites and services to make sense of my online life. This is a waste: I already have a record of all these transactions in my inbox. I just need a better way to look at them.

Gmail offered a tantalizing glimpse of what inboxes could be, but stopped short of recognizing this shift from conversations to a digital record of our online lives. The inbox of the future looks more like logfile analysis and aggregation and less like an email platform. Today, you can hack some of this together with Greasemonkey scripts, clever Gmail filters, or add-ins from Gmail labs. But it’s not enough: We need an inbox that embraces its new role as the universal record of our online lives.

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No more. With software as a service, the focus has become whether the tool is good enough on day one and how well it will adapt over time. Take, for example, the Family Service Agency of San Francisco, which replaced its ailing paper-based system with SaaS donated by the Salesforce.com Foundation, improving productivity and accountability along the way. Speaking today at the SIIA’s eGov event in Washington, D.C., Bob Bennett, the agency’s CEO, explained how the agency turned a salesforce automation tool into a social services management tool.

The point here is that the initial feature set didn’t matter much. Indeed, in order to evaluate SaaS, those page-long feature comparisons can be whittled down to just seven critical questions:

• Adaptability: How easily can you modify the application? This can be as simple as adding fields or building dashboards, or as advanced as a programming platform.
• Reliability: How much can you depend on the system to function well? This boils down to four things: Performance, availability, scalability and security.
• Task productivity: How effectively can your users accomplish their goals? How many cases-per-minute or entries-per-day can workers do, and how many errors do they make?
• Price: How much will it cost — really? Because SaaS offerings are so varied in pricing, it’s hard to compare them. A better model is to create several benchmark subscribers (a 10-, 100-, and 1,000-person organization) and compare upfront and ongoing costs for them.
• Back-end integration: Can you plug it in to other things? Any enterprise SaaS offering will have to work with other systems, for everything from authentication to data sharing.
• Longevity: How long will the SaaS company be around, and what’s your exit strategy? With ISVs, you could ask for software in escrow. But as the sudden disappearance of Coghead shows, when a SaaS provider closes down, your entire IT systems can vanish with the flick of an “off” switch. Offers from Intuit and others to help stranded customers notwithstanding, this is a big problem.
• Ecosystem: How many third-party developers and integrators surround a particular platform with plug-ins and add-ons, and how active are they? A vibrant ecosystem means a more extensible, flexible solution.

The key point, however, is that features on day one don’t matter as much as the efficiencies and cost savings you can squeeze out of the SaaS tool within 30 days of adoption — and how confident you are that those efficiencies and cost savings will endure.

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Elastra’s not the only one building a path to hybrid clouds. VMware this week announced a “private cloud” offering at VMWorld Europe that lets applications run both in-house and atop clouds, just as long as those cloud providers also use VMware. Others, like Enomaly, have been tackling the problem as well.

To build a hybrid cloud, you first need to bundle up all of the web servers, databases and configurations that make up the application — what Elastra calls a “deployment.” This deployment is portable, able to run in a cloud or in-house, because it defines not only the components but also how they interact and grow. Then you need to set rules as to where and how that deployment can run according to your specific security, capacity and business requirements. For example, a deployment that deals with credit cards might only be able to run on a PCI-compliant platform.

What’s been missing up until now is a way to fulfill the second part. With the launch of an open beta for the Elastra Enterprise Cloud Server 2.0, IT managers can set policies as to which applications can run where, such as:

• Which capabilities, such as PCI compliance, a cloud must provide in order for a particular deployment to run.
• How big or small the application can be.
• How to marry a component (such as a JBoss server) to the available resources (such as a size of EC2 virtual machine.)
• How to grow the deployment when certain events happen.

Stu Charlton, Elastra’s chief software architect, thinks early adopters of hybrid clouds will be enterprises migrating their applications into the cloud for development, testing, QA, and stress-testing, then bringing them back in-house for production.

In the end, infrastructure-agnostic application deployments like those built on Elastra, VMWares, and Enomaly help sever the umbilical cord that links legacy applications to their underlying infrastructure. With the addition of policy-based management, they become candidates for cloud deployments. Which is very good news for cloud providers.

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Since the launch of App Engine, Google’s been collecting feedback from developers. It’s added SSL support, a status dashboard, and a memcache API, and is working on other features, such as a task queue and additional programming languages.

Google’s taken a lot of flak over the question of cloud lock-in, and Pete Koomen, the Product Manager for App Engine, says the company is trying to be as open as possible. “We want to encourage openness,” said Koomen, pointing out that there are no special hooks between App Engine and other Google services. “The more proprietary the APIs, the easier it is for developers to lock themselves in,” he said.

Making App Engine a paid service is another step toward establishing the developer ecosystem we described in December. While Google wouldn’t confirm our suspicions, Koomen did point out that it’s possible to write an App Engine application restricted to only those within your own domain. If that ecosystem prediction comes true, Google will have a platform for writing, running, and selling software to millions of Google Apps users. Think AppExchange for small and medium-sized businesses.

Here are the details on the new pricing for developers who go beyond their free quotas:

• $0.10 per CPU core hour of computing
• $0.10 per GB of inbound traffic and $0.12 per GB of outbound traffic
• $0.15 per GB of data stored by the application
• $0.0001 per email sent by the application

Google will continue to offer free accounts, although their capacity will be reduced from where it is today. Koomen said the goal is to make a “well-written” web application — that handles about 5 million page views a month — free, and for developers to pay beyond this amount.

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That’s a lot of data. Having millions of people with cameras taking a picture at the same time gives Photosynth a lot to work with. I’m going to make an educated guess how much.

There are around 2 million people going to the inauguration (an astonishing 0.6 percent of the entire population). Let’s assume that one-tenth of those people are in eyeshot of the event, having cameras whose pictures are a useful vantage point.

How big will those picture files be? Well, the cameras at the event have a wide range of resolutions (and file sizes), with modern cameras clocking in around 8MBytes. I’m going to assume around 800 KBytes, compressed, which is fairly typical from what I see on Flickr.

That’s 38 Gigabytes of pictures Photosynth could have to chew on if this project gets attention.

Think about it another way: If each person there with a camera takes 50 pictures, some 250 million images — around 18.6 terabytes of data — is going to make its way to Flickr, Picassa, and other cloud storage areas.

In other words, the inauguration may represent the greatest influx of user-generated content onto the Internet, in one day, ever.

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This puts Salesforce on a collision course with community monitoring startups. After all, monitoring a conversation is one thing, but responding to it is another entirely — the domain of CRM, something Salesforce knows better than almost anyone else.

Get popular on the Internet, and you’ll have thousands of close personal friends who want you to pay attention to them. Unless you’re a social media rock star like Chris Brogan, who claims to be able to use Twitter at scale, you’re going to need some help.

Using a combination of keyword search, web crawling, and visualizations, companies such as Visible Technologies, Radian6, Techrigy, and Cymfony help you track your newfound popularity by measuring and organizing conversations with anyone who’s interested in your brand or your company. Others, such as Keenkong, are still in stealth mode.

But monitoring thousands of conversations across Facebook, Twitter, MySpace, YouTube and blog comments is only part of the challenge. You still have to respond to them. If you automate your responses, you sound inauthentic. Imagine sending a message on Twitter and getting a 140-character form letter in return: You’d unfollow that person pretty fast. So you need to assign the task of following up to a human.

This moves community management tools from the world of social network analytics into that of customer relationship management. And while some of these startups have basic CRM features, that’s still a world Salesforce dominates.

While Service Cloud, which looks like the fruit of Salesforce’s 2008 acquisition of Instranet, initially targets customer service interactions, it’s a small step from there to marketing and sales interactions across social networks. Ultimately, Salesforce is building a tool that companies can use to engage with their markets across all online channels. Providers of community monitoring tools know they’ll need to pay attention to the new gorilla in their midst.

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A bigger question is why microblogging companies are getting any investment at all. If Twitter can’t find revenues with the vast majority of market share, why would an open-source version make money? Identi.ca founder and CEO Evan Prodromou says open source gives the company “commercialization options that Twitter doesn’t [have].” For example the company can charge a fee for public or private implementations, or be the basis for microblogs on other web sites.

Identi.ca has some other tricks up its sleeve, too. Their APIs are Twitter-compatible, so they should work with third-party features like search, hashtags and analytics. And it’s a federated model: You can run an identi.ca instance privately, or share messages with other identi.ca servers. That allows hybrid public/private deployments that may sit better with enterprise customers.

Yammer and Present.ly have gone after those enterprise customers, and Socialtext recently added a Signals function for employee messaging. But Identi.ca’s taking a different path. “I don’t want to be a tiny company where we get paid for 100 percent of the installs, but have a tiny base,” said Prodromou. “I’d much rather see tens of millions of installs, and make conversions off a relatively small percent of them.”

Nor is Prodromou fazed by the Twitter imitators. “I think we’re over the hump of the yet-another-micromessaging-tool wave of the summer of 2008,” he said. “The more people know about Twitter, the more entrepreneurs and CIOs there are looking for a platform like ours on which to build.”

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You might think the deal is just cloud roll-up: Reasonably Smart was a very small startup. David Young, Joyent’s CEO, said the company–whose backers include PayPal co-founder Peter Thiel– is in “a strong financial position that supports making strategic acquisitions.” Dig a bit deeper, however, and the deal is more than just a roll-up. Joyent gets an open platform with which to attract developers while preparing the company for the looming threat of Google and Microsoft.

Joyent, along with other infrastructure-centric clouds like Amazon’s EC2 and Rackspace’s Mosso, let subscribers see their machines. Because they virtualize at the hardware level, these clouds support a wide range of development languages. Users aren’t locked in: They can take their applications out of the cloud and run them themselves. But this model also means customers have to worry about operating their virtual infrastructure, undermining the promised scalability of cloud computing.

By contrast, service-centric cloud models like Google’s App Engine, 10Gen and Microsoft’s Azure hide the infrastructure from developers. A subscriber doesn’t worry about scaling. Instead, they fret over lock-in — the inability to leave their cloud provider when things go wrong because they’re dependent on its proprietary features.

With Reasonably Smart, Joyent can strike a balance between infrastructure and service. Developers write applications in JavaScript, using extensions for things like I/O and storage. These applications can run on a developer’s desktop, in a private data center, or in a cloud. Of course, Joyent’s betting its operational expertise will convince people to run it in their cloud. It’s a service model, but one that subscribers can leave if they want to.

Joyent CTO Jason Hoffman remarked last year at our Structure conference that he wanted an open cloud model that could scale indefinitely, independent of infrastructure concerns. “We intend to keep this new Joyent offering completely open-source,” he said of today’s acquisition.

The move toward service-based clouds is part of a trend that will shape cloud computing in 2009. This year, Google and Microsoft will roll out production-grade clouds that have features like search, mapping, licensing, social graph and authentication baked right in.

To compete, infrastructure clouds need to round out their open offerings with built-in services while trying to retain the openness of their infrastructure heritage. Amazon, which has plenty of services, from SimpleDB to S3, continues to extend its offering with value-added services like CDNs, billing and management consoles — even at the expense of its ecosystem of existing vendors that have built similar tools atop EC2.

That makes Joyent’s acquisition look, well, reasonably smart.

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The approach is similar to AdWords: You set a daily budget, and when your application exceeds its free quota for that day, additional capacity comes out of the budget. The cost is split across processing, storage and bandwidth.

It’s easy for Google to offer a free daily quota because App Engine isn’t built around virtual machines the way competitors like Amazon’s EC2 are: You’re not paying by machine, because there aren’t any machines. Competition from Google’s free quota model may encourage other clouds such as Amazon to introduce free cloud computing quotas for small-traffic applications; meanwhile, Google is carefully launching an ecosystem for developers to build and sell their cloud-based software.

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