SaaS death knell storyline illogical, but margin compression is here

Nvidia CEO Jensen Huang said the storyline that software is dead due to AI--generative AI, agentic AI and everything in between--is "the most illogical thing in the world, and time will prove itself." The exact timing of sorting out software winners and losers may be tricky.

Speaking at Cisco's AI Summit, Huang followed up on what was a rout of enterprise software stocks. Enterprise software was a key topic at Cisco AI Summit where OpenAI, AWS, Google and a host of others riffed on AI developments. Any publicly traded company that sold software was taken out to the woodshed. Software vendors 5-year returns after Tuesday’s wipeout. 

• Salesforce down 16%.
• ServiceNow down 5%.
• Workday down 37%.
• Adobe down 44%. 

It’s as if these software vendors did absolutely nothing over the last five years. 

Why?

Anthropic open-sourced a set of plugins for enterprise search, sales, finance, data, legal and marketing, customer support and product management. In a blog post, Anthropic outlined Claude Cowork with plugins:

"Plugins work for any use case, but they're especially powerful for tailoring Claude to specific job functions like sales, legal, and financial analysis.

A sales plugin, for example, could connect Claude to your CRM and knowledge base, teach it your sales process, and give you commands for everything from prospect research to call follow ups. You define what goes in the plugin once, and Claude pulls from that context whenever it's relevant."

 

Huang argued that the reality is that enterprise software is a tool that will be more useful with AI. Businesses aren't going to build something that's already created and useful.  Systems of record will remain systems of record. Huang said:

"Remember what software is. Software is a tool. There's this notion that the tool -- the software industry is in decline, and will be replaced by AI. You could tell because there's a whole bunch of software companies whose stock prices are under a lot of pressure because somehow AI is going to replace them. It is the most illogical thing in the world, and time will prove itself."

 

Huang is right today. Tomorrow the jury is likely to be out.

Saw this one coming

The Anthropic news about plug-ins for Claude is convenient to explain the SaaS sell-off, but correlation doesn't equate to causation. 

The reality is this SaaS meltdown has been building for a while. It's quite possible that the SaaS sell off was the capitulation point. If you've been looking hard enough you would have seen the following:

• Enterprise customers are done with software vendors that don't drive value.
• Software bills go up every year just like healthcare. 
• And margin compression has been building.

This storyline sounded a bit familiar since I've been hearing it since at least 2024. Constellation Research CEO R "Ray" Wang noted margin compression is going to hit enterprise software in 2024. At the time, Wang said:

"Across the board in almost every market and every industry, an inflection point on margin compression is here."

 

A few milestones leading up to SaaS-ageddon include:

• Among CxOs, SaaS platform fatigue setting in
• Pondering the future of enterprise software
• Exponential Efficiency in the Age of AI
• Here Come the AI Exponentials
• AI Exponentials Will Rule the World
• The road to AI Exponential will be bumpy

Wang also noted that SaaS vendors were getting greedy and driving up annual contract value to hit quotas instead of deliver value. The game now is to find software vendors that help you consolidate and cut spend. Think Zoho, which could disrupt pretty much every software market where it plays. Think ServiceNow. And yes, think Anthropic. 

Wang said in his 2024 post. 

"Customers seek vendors who can help them consolidate their vendor landscape AND reduce total spend across the board.  With the mantras of exponential efficiency in full force and a hope for AI arbitrage driving exponential cost reductions, CXO's are under a lot of pressure from their boards to lower their overall spend."

 

All you have to do is pick the vendors that will adapt and thrive in this new agentic world. We are at that AI exponential efficiency phase of the game.

A few thoughts:

• The SaaS sell-off is about margin compression and what SaaS vendors will be able to charge. Today, the view is SaaS will be able to charge nothing and go extinct. So long, fat margins. The reality is somewhere in between, but the margins will still be pretty damn healthy. There are more than a few software vendors that will be able to adapt and be happy to enable compressed margins. 
• There's still the reality that not every enterprise is going to spin up homegrown (or AI generated code) applications for everything. Businesses need to keep their core businesses the main thing. Huang addressed this point already.
• Enterprises will need governance compliance, security, systems of record and all those annoying things that go along with running a business. Enterprise software provides that scaffolding. 
• If software goes away who will the LLM giants actually sell their APIs to? Anthropic and OpenAI need SaaS vendors.