SaaS Sprawl and the Potential for Market Consolidation


I figured Edgar Winter is coming would be too obscure, but someone already did. Click to see it.

Imagine a world of unprecedented software prosperity. Business applications are booming, as companies exhibit a seemingly bottomless appetite for new software. Application developers are awash in cash flow. Entrepreneurs are founding legions of new startups, eager to follow in their predecessors’ IPO footsteps. The playbook and go-to-market for software companies has become so well refined and understood, almost anyone can execute the business model. Observers can’t stop marveling at just how big the market has become.

The golden era of software I have in mind is not today’s enterprise SaaS frenzy, but the early 1990s. PCs were just taking off and becoming de rigueur on every self-respecting corporate desktop. Aldus, Ashton-Tate, Borland, Corel, Lotus, Microsoft, Software Publishing and WordPerfect led a generation of business productivity software companies. Yet all except Microsoft found themselves dragged and dropped into the recycle bin of history. What happened and what lessons can we draw?

That market saw brutal and simultaneous waves of price compression and product consolidation. Pricing per user plummeted by upwards of 90%, even as the market continued to boom (annual PC unit sales would go on to grow more than twenty-fold over the next two decades). Practically overnight, major product categories consolidated into the “Office” suite, as did market share.

Prior to this reckoning, you might have gotten your spreadsheet from Lotus, word processor from WordPerfect and presentation software from Software Publishing, each charging upwards of $500 per seat. The first version of Microsoft Office (for Windows) gave you three $495 applications for $995 (buy two, get one free!), and the competition followed with bundles like Lotus SmartSuite and WordPerfect Office. But direct, volume licensing soon brought the suite price under $300, with retail “competitive upgrades” even lower.

Beyond the supple pricing flexibility of a near zero marginal cost good, software also amalgamates. This year’s new code gets added to last year’s, and customers get more bits for their buck. Adjacent categories blur, and once distinct products fade into features. Spell checkers were once standalone products, before being integrated into word processors, which in turn were swallowed by the Office suites. Even today, amalgamation exemplar Microsoft Office is disappearing into the maw of something called Microsoft 365 (presumably the cost savings associated with its barebones positioning are passed onto the consumer).

Is the SaaS Universe™ (theme park licensing still available) immune from these forces? I’ve written previously about “SaaS sprawl”, which is congealing on both the demand and supply sides. From a customer perspective, “companies simply have too many SaaS applications and collectively it’s gotten too hard to procure, manage, and get value out of a vast archipelago of siloed SaaS applications.” (This complexity does create new product opportunities, well beyond the proliferation of “integrations”).

But SaaS sprawl also stems from supply. We have no shortage of SaaS companies, each of whom must outcompete their many peers for customer attention as well as sales. Enduring barriers to entry are rare, given a perhaps overly prescribed business playbook, standard financial models and financing, easily accessible cloud infrastructure, and little if any technical risk. This multitude of SaaS companies are assuming today’s model – and today’s price points – will persist for the five or more years they need to get to critical mass and reap their expected paydays.

But current pricing levels are not a birthright. Software price competition is natural, even inevitable, despite the SaaS-y desire for a floor of $10/seat/month. Few of today’s SaaS companies are built to withstand an order of magnitude collapse in per user pricing, even as the market continues to grow.

If you’re a SaaS company today, it isn’t just direct competitors eyeing your business. So too are the neighbors down the street and one or two categories over. In markets with still low penetration, it makes sense to go grab market share. Your SaaS business looks to everyone else like a good way to sustain their own pricing, reduce churn and/or find some incremental net recurring revenue. And bigger companies with broader customer coverage are always looking for new things to stick in their salespeoples’ bags. Customers might even appreciate the reduction in combinatorial complexity.

History only rhymes, and unlike productivity software, SaaS is not a single horizontal market. But there are some big clusters that seem ripe for consolidation, as well as across verticals. ERP in fact was an early example of functional consolidation, one that started in manufacturing and spread to other industries.

The question for SaaS Universe™ inhabitants is are you a consolidator or the consolidated?

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