The 3 forces quietly dismantling the business model that made enterprise software fabulously profitable |
The 3 forces quietly dismantling the business model that made enterprise software fabulously profitable
Michael G. Jacobides is the Sir Donald Gordon Professor of Entrepreneurship & Innovation and Professor of Strategy at London Business School.
Stefano Puntoni is the Sebastian S. Kresge Professor of Marketing at The Wharton School.
Software stocks have been in freefall. The S&P software index dropped about 20% in February, and a new word has entered the business lexicon: “SaaSpocalypse.” The thesis is that artificial intelligence is poised to undermine the business model that made enterprise software one of the most profitable industries on the planet.
Software-as-a-service has long been an investor’s dream — high margins, recurring revenues, and sticky customers. Companies like Salesforce, SAP, and ServiceNow grew into giants on the back of that model. But the dream is starting to crack. Over the past two weeks, we co-hosted roundtables with senior business leaders in San Francisco and New York to discuss how AI is reshaping value creation. The threat to SaaS was a recurring theme — and their observations point to three structural forces that enterprise software companies can no longer ignore.
The first is market vulnerability. SaaS margins have been high for decades, propped up by switching costs that keep enterprise customers locked in — whether or not they are satisfied. Many companies pay hefty sums for ERP, CRM, and other business-critical platforms not necessarily because........