The SaaS consolidation trend

Consolidation. It’s the name of the game in the world of software. And as software manifests itself as a service (SaaS), the service companies are following the same path of consolidation.

If previous trends are any indication, we can expect the following:

Rapid innovation, which causes disruption.

Innovators battle it out with competition.

Some survive, some don’t and either get acquired or die.

History as an example

Let’s look at one example, the enterprise infrastructure software world. In 2000, there were a dozen or so companies — some startups and the big iron players such as IBM and Sun — trying to own the market. One company, BEA, starting making headway.

They acquired a smaller competitor, WebLogic, and this became the cornerstone of their revenue. They expanded and grew to be the big fish in the pond of enterprise infrastructure software with $1.5 b in revenue. (At the time, I believe they set the record for a software company reaching the $1 billion mark.) Then a bigger fish — Oracle — swallowed BEA. The enterprise infrastructure software (installed type) is now completely consolidated within the larger giants such as Oracle and Microsoft.

Or, let’s step back in further. Back to the future of the 1980s. Word processing was the killer app for PCs. Wordperfect quickly beat out competitors such as Wordstar and Multimate to be the king of the hill. Wordperfect’s stickiness was in its macros, keyboard shortcuts that, once you had learned them, you were reticent to try any other word processing app. Then along came Microsoft Word. With the inside track on DOS and then Windows APIs, Microsoft was able to displace Wordperfect as the predominant word processing app.

There were still holdouts: the legal profession in particular was dragged kicking and screaming into the new world. The killer death blow came when Microsoft cannibalized their own app and subjugated it to be part of its Office suite. And with that and a little magic known as OLE (object, linking and embedding), Microsoft could make drag and dropping from Excel, Powerpoint and Word seamless to the user.

The rest, as they say, is history. In the 2000s, search went through the same competitiveness, until Google, through a better search algorithm and little bit of luck as it stumbled upon the concept of Adwords and Adsense, beat out the competition.

Business Intelligence went through its innovation phase in the 2000s as well, and by the end of the decade, the major players were swallowed up.

What’s next?

So what can we expect to see in the world of SaaS (Software as a Service)? Mulesoft was recently acquired by Salesforce for a whopping $5.6 billion.

The interesting sidebar on this acquisition is that it came one year after Mulesoft went public. What motivated Salesforce to wait a year? Why didn’t they swoop in prior to IPO to offer a premium that would have saved them a few dollars.

Could be a few explanations. Perhaps the team at Mulesoft was more eager in testing the waters of the public offering. It could also be that Salesforce was — at least allegedly — a target of a takeover itself at the time Mulesoft went public. Perhaps Salesforce had its hands full.

Other significant acquisitions include Appdynamics scooped up by Cisco, just prior to Appdynamics IPO (the usual timing for these mergers). A study by a San Francisco firm tracked 95 software companies from 2005 onward. Seventy-eight percent — over three-fourths — of those companies have been acquired in the time period.

SaaS, I believe, is heading the same direction.

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The death of a Software Salesman

I don’t know if this take on Splunk is fair or not but it does help to underscore an important point that I have been trying to get across about the proverbial pail of cold water that has been dumped on the traditional software company’s sales force.

This Alphasights article spells out in excruciating detail what challenges lie ahead for Splunk, a company that started as a “Google” for log file searches, and claims to “turn machine data into answers.”

I worked with Splunk’s CEO Doug Merritt years ago at SAP, where we were both members of the senior management team.

I was impressed by Doug’s intelligence, his drive and his zeal.

But here’s the one sure thing, sure for Splunk or any other software company making the transition to SaaS (software as a service). The change is more difficult than adhering to new GAAP revenue recognition requirements. The change is a vast cultural shift.

First and foremost the glory days of selling to IT are over.

This was an easy sell, all things considered, where renewal rates were almost a given and service and support was automatic.

The sales cycle was long, to be sure — usually 6-9 months. And often the customers started with modest pilots.

They also had to contend with selling vaporware and bloatware and dealing with the consequences of holding the customers’ hands as they awaited new features and bug fixes, which could take months and sometimes years.

But they loved this model, because it was a perpetual license where the commissions were up front. And once they had them locked in, renewal was a cakewalk.

It’s not so easy on the SaaS side. That’s because first of all, the relationships that software vendors have built with IT are only part of the story. Today, lots of people can influence what software or service they want to use, because of the rampant viral adoption.

In this world, they are competing to continually maintain the relationship with the customer, and they do so knowing the barrier to change, or the switching cost, is considerably lower for a customer than it was for that customer acquiring installed software that locked them.

The upgrades and new features are iterative and this requires constant connection with the R&D group who are spitting out bug fixes, new features etc. as they complete them, rather than bundled once a year.

The vendors acutely know their customers are not going to overpay as they did in the past, because they use Elastic Computing to subscribe to only the compute resources they need for any application.

And they know, again, that the customer can switch at any time, making it important for them to be realistic in setting expectations in the sale.

All the big guns — SAP, Oracle, Microsoft, Adobe — in the software world are well on their way to making the transition. But they have been at it a long time. Interesting that Microsoft Office 365’s revenue surpassed it’s traditional installed Office version last quarter. This is a seminal moment.

The opinions in this article are mine (George Paolini). I have no investments in Splunk and no affiliation (other than as a reader) with AlphaSights.

All cloud, every day

Is there any room left for full on-premise, term license or perpetual license? Short answer: no.

Meanwhile, Microsoft claims to have surpassed Amazon in cloud? Is this truly an apples to apples comparison, though? My guess is Microsoft is mixing SaaS (Software as a Service) to IaaS (Infrastructure as a Service).