Show me a profitable business application-as-a-Service (SaaS) company.
There is a lot of trade talk about the success of Salesforce.com. Here is a company with a $3.2BN market cap as of Oct 26, 2008 currently trading at 24 down from 72, 5 months ago.
In 2007 – SF.com  posted a net income of $480K on revenue of $497M. Compare this to BMC Software,  a software vendor that provides system and service management solutions for the enterprise. BMC has a current market cap of $4.2BN, trading at 23 down from 39, 3 months ago. In 2007 – BMC Software posted $215M net income on $1.5BN in sales.
In plain language – Salesforce.com does not or cannot charge high enough prices for their services to sustain long-term profitability and growth.   At low price points; Free Open Source on inexpensive hosting becomes a highly-competitive alternative, especially for an SME.
Five years ago – the barrier to entry was application functionality but today, Free Open Source line of business applications like Sugar CRM Community edition are mature, full-featured applications with very little, if any, missing features and some unique advantages that Open Source offers.  Salesforce.com imposes a unique IP address/user constraint which can be very annoying. In SugarCRM, if you get User logged out when IP dynamically changed, just change 1 line in config.php

Suppose you need a CRM system (if you’re a large shop, you already have one – like Siebel). We’re a small group of 5 guys – and we were using Salesforce.com with one of our business partners and wanted to use SF.com for our own business. The cost is $325/month or almost $4,000/year for 5 users. You can get 90% of the functionality from Sugar CRM for the cost of a onetime installation (which will take less than an hour of your time or about $150 if you pay someone) and $15/month for the hosting (if you use dreamhost.com, like we do). That’s a net savings of $3,000 / year.  dreamhost give us 700GB – more than SF.com, and the response/time is at least as good.
I know you’re saying that dreamhost.com at $15/month can’t compete with the scalability, reliability and service levels of SF.com. Maybe,  maybe not – but if you want muscle – consider Mosso.
For $100 per month, Mosso will sell you 80 GB of SAN storage, 2000 GB of bandwidth, a control panel to create sites, email accounts, databases, etc. and customer support.
Mosso says it takes radically different approach to Web hosting, using enterprise-level architecture. It deploys each website across clusters of servers, so when a server crashes or a hard drive fails, the other servers in the cluster pick up the slack without downtime. Their promise: for every 1 hour of downtime, they will reimburse you for 1 day off your bill.