Platform as a Service/PaaS
Windows Azure at the moment supports the PaaS model, so in other words consumers can build and deploy cloud applications created by using programming languages and tools supported by the provider. The consumers don’t have to manage or control the underlying cloud infrastructure i.e. network, servers, operating systems, or even local storage.
Infrastructure as a Service/IaaS
Windows Azure will support “VM role” sometime in the near future which should put Microsoft in the IaaS arena along with Amazon EC2.
With the IaaS model the consumer is provided the ability to provision compute, storage, networks and other fundamental computing resources. The consumer can choose to deploy and run arbitrary software without having to manage or control the underlying cloud infrastructure, while still maintaining control over the operating system, storage, deployed applications and certain networking components.
A picture is definitely worth a thousand words, here is a high-level overview I put together to help visualize the Cloud service models in terms of the scope of management
Software as a Service/SaaS
On-Premise model is by far the most used model among ISV’s to deliver applications to their clients. Each time a new client is brought on-board, the solution is deployed to the client’s on-premise location. From thereon, the client needs to manage and control the entire breadth of the infrastructure i.e. network, servers, operating systems, storage, individual application capabilities and even datacenter logistics.
So something like this:
SaaS is all about providing customers the ability to use the software vendor’s applications running on a cloud infrastructure which are accessible from variety of client devices. The customer doesn’t have to deal with the hassle of managing/controlling/securing the underlying cloud infrastructure except for application configuration settings/customization.
Using the SaaS model, the ISV can now provide the goodness of Cloud computing in addition to providing their clients with high scalability and reduce costs by resource pooling and taking advantage of a multi-tenant model. From an application developer perspective, you should be able to leverage and use SaaS as long as the cloud service provider supports IaaS/PaaS. So the answer with Windows Azure is yes again, you can use SaaS with Windows Azure.