Andreessen on enterprise: has he got it right?

When Marc Andreessen, he of Netscape fame speaks, Silicon Valley tech types hang on his every word. Having morphed from 'the man who took on Microsoft and lost' but ultimately made a pot of money to respected technology investor, we now hear him speak thoughtfully about the future of enterprise vendors. It's a salutary read and one that I suspect will fall on deaf ears for many enterprise vendors. 

Rather than do a full on review of Andreessen's comments, I'm going to concentrate on one aspect: Winner takes all in enterprise. 

His observations that the world has flipped such that it is the smaller vendors in the startup space who are setting the pace for innovation rings very true:

And so it has always been this kind of trickle-down model for 50 years. We think that basically about 10 years ago the model flipped. And so we think that the model flipped to a model where, today, where the most interesting and advanced new technology now comes out for the consumer first. And then small businesses start to use it. And then medium-size businesses start to use it, and then large businesses start to use it, and then eventually the government starts to use it. But this is a complete change from the way it has always worked.

The last seven years I've been tracking what has been happening in the start up accounting/finance vendor world. There we see vendors like Xero, KashFlow, FreshBooks, InDinero, Billing.com, Zuora, BrightPearl, Financialforce, Intacct (some of which have been clients) and a hundred others flourishing in the face of incumbency from Sage and Intiuit. At the medium end of the market, NetSuite shines and I have long predicted it wont be long before we see Workday as an important player in the enterprise space.

From everything I see, these new companies, and especially those at the SMB level are extracting every ounce of organic market growth and are starting to bite into the incumbency. The response has usually been one of pretending to ignore what's happening. In Sage's case, it has had at least five attempts at breaking into the cloud market, all of which have fallen flat on their face. Andreessen provides a very good reason for the shift:

So the best technology for inventory management and for financial planning and for sales-force management and for online marketing can now be used just as easily or more easily by a small business. There is an opportunity here for a shift of the balance of power for big businesses to small businesses.

And then for vendors, the companies we fund, there’s an opportunity to really dramatically expand the market, because a company like Oracle, as successful as it is, it only really has about 5,000 customers that really matter worldwide. Whereas, a company like Box or a company like GitHub could have 500,000 customers or 5 million customers that really matter, and that’s a huge change.

That's also true. The case studies I see among the smaller businesses can be summed up in one word: transformation. Technology that just five years ago would have been unimaginable for the smaller business is now available, it works, is delightful to use and low cost. Even in a recessionary economy I am seeing many businesses who 'get' the value they can create and are investing accordingly. This is across the board and not limited to a few early adopters. Instead, these are end user businesses hungry to compete and finding that the 'new' sparks them into imagining different ways to compete. Check the video at the top to get a flavor of what I mean. 

But it is the large scale enterprise where things are more murky. Andreessen asserts:

I think it’s at the software layer where the big disruption happens. I think it’s application software in particular and just sort of an extended infrastructure software. It’s like anything for which there is a — any piece of installed software for which there’s a web or a cloud equivalent, I think is in real trouble, and I think that’s just now becoming clear.

OK - so he then goes on to make the point that companies are now more comfortable with a Salesforce.com/NetSuite/Workday mix and that the old arguments around security as the big blocker are going away. So far so good. But then he says:

So the big technology markets actually tend to be winner take all. There is this presumption — in normal markets you can have Pepsi and Coke. In technology markets in the long run you tend to only have one, or rather the number one company in — the number one company in any consumer products — cars, the number one company in cars is, I don’t know, Toyota or whoever it is...

... The big companies, though, in technology tend to have 90 percent market share. So we think that generally these are winner-take-all markets. Generally, number one is going to get like 90 percent of the profits. Number two is going to get like 10 percent of the profits, and numbers three through 10 are going to get nothing.

This is where I believe Andreessen is both right and wrong. If you listen to the rhetoric coming from Microsoft, SAP, Oracle and IBM, you'd think the world only consisted of them. That's not true. In any enterprise landscape, they account for a fraction of the total apps landscape yet they all command large revenues. This is in part because they are global but also because they are relatively expensive. Ergo they claim leadership, often by number of installs or where they are installed relative to a market defined by other measures. An example might be the Fortune 500. But here comes the puzzle which I suspect will prove Andreessen to be wrong over time. 

When the last major enterprise technology shift took place, companies like McCormick & Dodge, Walker International, D&B and others ruled the world. Then along came a wee startup called SAP that disrupted the costly mainframe centric paradigm. It, along with many others, have had a very good run at the market and now have massively profitable maintenance businesses. What do we see today?

Salesforce.com is probably the best example as it is the clear market leader in cloud based CRM. Is it the winner takes all player? For now the answer must be yes but that doesn't necessarily mean it will be so for all time. I see businesses more than happy to increase their Salesforce.com investments, even if they are becoming pricey for one reason: they see value they cannot get elsewhere. As long as Salesforce.com continues to deliver what customers need and want then all is good. But Salesforce.com will need to verticalise in order to reach more of the potential market. Right now that is happening via the Force.com platform but my sense is that they need to take some verticals to themselves. 

I believe there is plenty of room for startup style businesses to hack away at many verticals in exactly the same way that Andreessen sees the same trend emerging in the 'real' world:

The classic was Walmart versus local retailer, right? Walmart’s advantage in logistics and in pricing and in data analytics was just so great that they could kill small retailers at will.

Today all the consumerized enterprise stuff is as easily usable by the small business as it is by the large business. In fact, it’s probably more easily usable by the small business than it is by the large business...

Why shouldn't the same apply to technology? Observers will argue that bulk matters and therefore it is much harder for any satrtup to make a significant dent in the marketplace. Really? Then why is Workday doing so well? Why did Plex Systems just get acquired? Why is FreeAgent crushing it in the UK contractor market?

Rather, I would argue that we haven't seen the emergence of players who can yet take on verticals from the get go and which can ramp quickly enough to get heard in the market. And because they come in at lower price points than the incmbency, they have to scale on volume to command the kind of revenues that Wall Street regards as credible. That's hard work and many will not make it.

Today, it seems that development is focused on the functional areas where it is believed there are large horizontal markets. Examples of the kind Andreessen mentions: GoodData and Tidemark in analytics have yet to find their niches. SuccessFactors was doing OK in talent management and other peripheral activities but then got acquired and is now taking advantage of better distribution. 

Of course I could be wrong and what we will see is a historical re-run as Andreessen suggests. I hope that doesn't happen because if so then I fear that the transformational promise that is almost in sight today will fizzle away. My guess is that prospect will make a lot of incumbents very happy.