Currents of Disruption: Subscription Model Upends Software Market

 In Market and Investment Insights

The evolution of the enterprise software market continues with the advent of artificial intelligence, as shown by a recent visit to Salesforce.com’s Dreamforce event in downtown San Francisco, says Denny Fish, co-portfolio manager on the U.S.-based Global Technology strategy.

Key Takeaways

  • Leading Software as a Service, or SaaS, companies are evolving into platforms in their own right, increasing their ability to avoid being disrupted and to remain the disruptors.
  • Artificial intelligence is being layered on top of platform offerings by developers to further improve performance and productivity.
  • More applications attract more users, bringing in more developers to increase functionality, which further expands the customer base, creating a virtuous network effect.

Denny Fish: I’m Denny Fish, Co-Portfolio Manager of the Janus Henderson Global Technology Fund. We’re actually here at Dreamforce. This is Salesforce.com’s Annual User Conference. Salesforce.com is the pioneer in software as a service, which has been one of the most powerful trends in enterprise software over the last 10 to 15 years. The reason we’re here today is this is part of our process, doing diligence on the company as well as the ecosystem, but equally as important, the health of the ecosystem and the other publicly traded companies that actually participate in this space as well. We continue to believe that this is one of the more interesting secular themes in technology on a go-forward basis.

What we try to do is we try to do on-the-ground grassroots research. Our goal as analysts and portfolio managers is to be deep industry participants and have a high degree of domain expertise. The only way you can do that is by getting into the weeds in these conferences.

“And that only applies…it’s the same underlying technology for voice and chat.”

We go to all of the major tech conferences. We have at least one person on our team on the road every week, and we’ll actually have three people here this week.

Effectively, software as a service is the delivery of software over the Internet. You don’t put any code on your PC, you don’t put any code on your on-premise servers, everything’s hosted in the cloud. And what’s really important about that, there are two significant disruptions from that, the technology delivery model, as I just mentioned, relative to prior-generation software. But then also the move to a fully subscription-based model. So you’ve had business model disruption as well as technology disruption. And importantly, the software market is, you know, a multi-hundred-billion dollar market, and we’re still only partially penetrated into that market, so SaaS still has a really long runway of growth ahead of it, across multiple sectors. And importantly, we actually feel like we’re now moving into the next generation of software as a service offerings and that relates to offering solutions based on artificial intelligence or machine learning, because these companies are really well positioned, given the relationship with their customers and the amount of data that they’ve collected over time to offer unique value propositions.

A really important part of the Salesforce.com’s story and the reason the company has gone from, you know, $2 to $3 billion when it went public back in the mid-2000s to almost a $120 billion in market cap today is it truly is a platform.

“Is it built on Force, or?”

“It is.”

“It is. OK, that’s what I thought … and it’s effectively verticalized?”

What we mean by that is that it effectively allows for third parties, third-party independent software vendors, to develop against the platform and then sell their applications to the Salesforce.com user base. It also allows for customers that actually subscribe to Salesforce.com to enhance the platform for their purposes, too. And what’s important about that, you get a virtuous network effect between customers, between Salesforce.com and third-party software vendors that have bet their livelihood on the platform.

One of the most important reasons that we come here every year is because we’re actually trying to invest in companies that are disrupting as well as companies that are being disrupted. And if we’re ultimately going to be wrong about an investment, it’s normally because the disruptor has turned into the disrupted. And so we’re spending a lot of time as companies grow and mature and become larger, to make sure that they’re still, you know, innovating at the same pace that they’ve innovated historically and that we don’t see signs of them potentially being disrupted in the same way that they’ve been disrupting the software industry for the last 15 years.

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Technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic conditions. A concentrated investment in a single industry could be more volatile than the performance of less concentrated investments and the market as a whole.

C-1018-20006 12-30-20