The story of SaaS is just beginning. The industry we see today is nascent. Its future shape will be different. Infrastructure and Enterprise software will be dominated by large global players. SMEs and other sectors will be served by a much wider variety of SaaS. Open platforms and integrations will allow many companies and models to flourish. The winners may already have been founded. But it is far too early to say who they are today.
We are till in the early days of SaaS. The scale and revenues of traditional licence driven software companies dwarf the new service based model. Yet all the innovation is coming from the SaaS sector. No-one doubts it will be the business model of the future. All those legacy giants are scrambling to change path.
As this nascent industry matures, what will it look like? Like all new industries it will be different. The early stage, unproven no legacy animal we see today will evolve. This will be the biggest shift in the structure and power bases of the B2B software industry in the next few years. Here are some ideas on how it might shape up.
Infrastructure will become the domain of true global giants. It will be high barrier to entry, unsexy ow margin business. Big institutions and funds will love it for secure returns and heavy use of investment. HP, IBM and Huawei could evolve into these companies. Google and Amazon may also get there. Some telcos may also be able to adapt and play in this space. Software companies will take it for granted.
SaaS Enterprise Software
Core enterprise software will also be dominated by a handful of players. There will also be large vertical players with less widespread brand recognition. These will emerge through consolidation of companies with large customers bases. But broken financial models. When funding becomes tight this process will kick in.
SAP and Oracle may be among the winners but no guarantees. Either way products that look like and integrated suite will come back into fashion.
The SME SaaS sector will also see consolidation. For this sector the big players will offer a portfolio of products. Rather than an integrated suite. There will also be room for a Mittelstand of vertical or functional specialists. Companies with few outside shareholders. Mid range revenues. And a trusted reputation right across their niche. There will be few geographic plays. Global will dominate even for smaller companies.
B2B SaaS will split between open platforms and walled gardens. Open companies will use APIs and other integration techniques. This approach is already emerging today. It will be easy for startups. Complementary software or even competitors to become part of the ecosystem. They will offer customers an option to plug and play any software they choose. Perhaps Zapier or its successor will be a software provider not just a connector.
The walled gardens will survive in the market because they offer customers continuity. When the current funding cycle turns down there will be a lot of pain. Some companies and the data they hold disappear overnight. Buying the latest thing will look less attractive even if recovery is quite straightforward. Reliable supply will become as big a concern as security for a while.
Winners In SaaS
The future leaders may already have been founded, maybe they are household names today. But this is harder than it seems to predict. Some of the big winners will be from India, China or elsewhere in Asia. At least one will be from Africa. Silicon Valley will continue to innovate and play a major role. But it will not be as dominant as it is now.
The SaaS Revenue Model
Tweaks and innovation in the revenue model will continue for a while. But in time 3 or 4 main models will become established. Software companies will flock to these arguing that this is how people buy. Margins will remain high. But GAAP profitability and strong predictable cash flows will also be important. An essential part of the financial story. Companies with these characteristics will appeal to investors. 10 year track records without dividends or profit will be less popular.
One day the numbers will have flipped. SaaS will be the only way to buy and use software. Then it will be time for the next disruption.
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Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.