What is the best idea to put available OS (linux) and Web application to client?

Question

After a year programming a web based business management system, I got my idea divided into two differents ways to do what I'm doing... I will try to explain in follow lines:

First I will describe my enviroment:

• Webserver: apache, ngynx
• Programming Language: PHP, Shell Script, Java Script, SQL
• Database: Mysql
• Operating System: Linux, UNIX (All Distros) (If manually configured works on windows)
• Authentication Server: FreeRadius

First situation

I have my application running on this enviroment that I had just described before, as my application is a SaaS app, then I have my own server to run it all and customers pay to use it as a service accessed by webbrowser.

Second Situation

The same as before but with one big difference, everything (environment) is installed in the customer, then I need to cryptography all my codes (It includes PHP and Shell Scripts). I think this situation is most difficulty, but I would like to hear it from different points of view.