During the PC era, the technology stack was controlled by Microsoft Windows and Wintel – the “Wintel” era. We are now entering a new era, called variously ‘Cloud’ or ‘SaaS’ or ‘Enterprise 2.0’.
In this era everything is different – the stack, the players and the potential for value creation. Let’s outline the basic shape of this emerging era, in particular defining what makes up the new stack.
The New Stack Has 3 Layers
At the Top – SaaS: these are the end user services that we actually interact with, such as Basecamp. This is the “final mile”. This is what we used to call application software, vertical systems or value added systems. Although SaaS is sometimes also used to describe the layer below, we prefer to label the top as SaaS and the middle as Cloud Computing. Typically this layer has had thousands of companies. These are our bootstrapped Gritty Entrepreneurs.
In the Middle – Cloud Computing: this is the Cloud where we witness the “sound and fury” of BigCos battling it out – Amazon, Google, Microsoft, IBM and others. This layer is the most fluid and where all the deals are. This layer can be seen as two layers, but the difference is very blurry. Some SaaS companies create some “middleware” that they position in this layer. Some start-ups create middleware as their primary focus, with an end game of getting acquired by one of the Cloud BigCos. Over time, these will tend to get rolled up into a few big platforms that compete by providing higher levels of abstraction for developers.
At the Bottom – Core Technology: this is what we might call “traditional Silicon Valley”, hard core patent-protected technology sold to big companies that use it as part of their stack. Arista, the latest venture from Andreas Bechtolsheim falls into this category.
Spectators And Players
Most of us are spectators in the Cloud Computing game. It is fun to watch the big guys duke it out and ReadWriteWeb will continue to report on that. Entrepreneurs need to understand the strategies of the big players who will be their “platform partner”. But we all have lots of opportunities to be players at the top of the stack, in the SaaS layer. This is where there are low barriers to entry, massively reduced R&D costs and incumbents who will be slow to embrace SaaS for fear of cannibalizing their core business.
Has The Stack Value Inverted?
Traditionally, value was at the bottom of the stack, which is why Microsoft and Intel were so dominant in the past. With a few notable exceptions like SAP, the top of the stack tended to be smaller companies.
It is possible that this has inverted, that the real value is now at the top of the stack and not at the bottom. For example, Arista will probably be very successful, but their market will be limited to the few companies who build huge data centers. Those clients will place huge orders but will also have a lot of negotiating clout.
Lock-In And Network Effects?
So maybe the value is all in the middle now? This is certainly where all the action is today. The two big questions at this layer are:
1. Lock-in? How easy will it be to move your SaaS service between Amazon AWS, Google App Engine, Microsoft Azure and other contenders? Today there is quite a lot of technical lock-in, you cannot move from one to another without some re-coding. But is that a big deal? No, because a) any Platform that jacks up prices will get hammered by their competitors and b) when you do need to move, it may require some coding changes but the move is transparent to end users. So, very little lock-in.
2. Viral Network Effects? Market leaders will get a lower cost of sale, but there is no social media viral effect at the Cloud Computing Platform layer.
Without Lock-In or Viral Network Effects, this layer will be commoditized. It will be very, very big but it will be a thin margin commodity business that is all about scale.
So The SaaS Cream Floats To The Top?
This is our theory. The value is with the small SaaS companies in the “final mile” interacting with end users. This is what we are seeing with our bootstrapped Gritty Entrepreneurs.
What About Players Across Layers?
Next week I will be at Dreamforce, the Salesforce.com annual event in San Francisco. Salesforce.com is the SaaS pioneer that defined the market. At some stage they decided that being on the top layer only was not enough and they created their Force.com “platform” on which others could create applications.
IBM also operates at many layers of the stack. But they do so with separate divisions that would be large companies in their own right.
It will be interesting to see how this stack evolves and specifically how well Salesforce.com succeeds with their mission to operate at both the top and the middle layer.
