True SaaS provides a Net-native application that was built to be delivered and consumed on the Internet. Fake SaaS is an old client/server application that end users were tired of owning and managing, so they outsourced the care and feeding of the app to a third party. Typically a legacy application served up by an ASP will have a bolt-on Web UI to make it remotely accessible.

End users should care about the distinction because if they didn't like their legacy application before and thought it was too expensive to own and a pain to administer, ASP (fake SaaS) is not going to fix these issues. It will probably be more expensive to own and the ASP just becomes another layer for the customer to fight through to make the application work for the business. Upgrade cycles don't go away and remain just as difficult, the ASP is now doing the work but the customer will still pay for it.

Legacy vendors care because they don't have an answer for modern SaaS. They are looking for a stop gap, loss leader to maintain their market share. They are taking their old technology, throwing it in an ASP-style datacenter somewhere, slapping subscription pricing on the it, and calling it SaaS. They are afraid of losing account control to true SaaS alternatives. Obviously, this isn't in the best interest of the customer and gives SaaS a bad name.

True SaaS vendors care because the legacy, ASP vendors are marginalizing the real benefits of SaaS by pushing a fake.

Service-now.com is a cash-flow positive, four-year old provider of an IT management SaaS application. Our annual recurring revenue is at about $20 million and we will be profitable this year. Obviously we've been growing very quickly. We've been able to accomplish what we have in short order because we offer true SaaS and leverage data center automation and virtualization to keep our operations efficient.

In regards to cash flow, of course this would be a problem for ASPs. They are trying to force old technology to work on the Internet. They must bear the same burden of owning, maintaining and upgrading traditional applications. In the end, somebody has to pay for this and if the customer won't, the ASP will eat it. Big vendors may be able to sustain these losses for a time but the shell game will come to an end when customers realize there is a better, cheaper way.

Here are a couple of additional resources on this topic:
Slideshare - "SaaS vs. ASP in the ITSM market"
Blog post - The second death of ASP. Questions to ask your "SaaS" vendor