When we decided to focus on selling to enterprises five years ago at Box, we saw some exciting emerging trends: workers needed tools that were far simpler to use; cloud-delivered technology meant that IT departments could spend less time maintaining infrastructure and play a more strategic role in organizations; and with enterprise incumbents getting far too comfortable with the status quo, a massive opportunity opened up for startups to respond to the rapidly changing needs of customers.
A lot has happened in the five years since. Workers not only went around archaic software by bringing new, unsanctioned services into their organizations, but IT departments finally paid attention. The iPad launched, and created the ever-morphing tablet category, demanding an all-new set of applications along with it. And CIOs finally warmed up to the cloud, sending incumbents scrambling.
Perhaps most intriguingly, sentiment is finally catching up with opportunity. Whereas “enterprise” was glaringly absent from Paul Graham’s “Frighteningly Ambitious” list of startup ideas early last year, this won’t happen again in 2013.
In just the last quarter, Workday had an unparalleled IPO and is now valued at just around $9 billion. Meraki, just a few years after transitioning to focus on enterprise, was gobbled up by its main competitor, Cisco, for $1.2 billion. Eloqua, too, was swept up for around $900 million by Oracle as it wages battle with cloud rival Salesforce.
And as we look ahead to the next five years, we’re realizing that the scale of disruption is far greater and deeper than we originally imagined. The advantages and opportunities we saw in 2007 were just vibrations on the surface of much more violent tectonic shifts.
We’re about to witness a decade-long changing of the guard, and nearly $1 trillion dollars of enterprise value is up for grabs.
From Wintel To The Four (Or Five) Horsemen
The rise of PCs produced an enterprise IT model that was quite profitable for Microsoft and few others. But today, this model is quickly crumbling. Wintel is giving way to a whole new set of technology platforms, driven primarily by mobility, and the software buyer of 2013 is far more concerned with supporting and securing the devices that leave the office than those that stay within.
“Mobile” doesn’t just introduce a new endpoint for software delivery in the enterprise; it topples the long-standing architecture of the enterprise software world, and with it, long-standing monopolies.
Innovation led by Apple, Samsung, Google and others is irreversibly changing the technology makeup of today’s organizations. While Windows still dominates desktops with ~90 percent market share, they’re behind in smartphone and tablet categories with single-digit penetration. And it’s not just that people are buying more mobile phones and tablets. They’re actually buying fewer PCs in aggregate, as well.
Only five years ago, a CIO could deploy software from Microsoft and not wince about integration concerns, but today that’s far from the case. In speaking with hundreds of CIOs, they all share a common concern: Legacy vendors won’t move fast enough to support these new platforms at the rate they’re being adopted by employees.
Startup vendors have proliferated in the enterprise at an unexpected rate, solving problems the incumbents can’t. Services like MobileIron, Airwatch, Good, Lookout, OpenDNS’s Umbrella and Divide secure these devices as they enter the enterprise; Parse and Appcelerator have evolved how mobile enterprise apps are getting built; and software like CloudOn, Domo and Notability are engineering the next wave of killer apps that make these devices productive in an enterprise context.
In all of these cases, a new landscape is emerging for the CIO to contend with – or embrace – and it’s driving an all-new IT architecture of the future.
Rise Of The Cloud Stack
In the previous predominant IT architecture (client-server), leading vendors built an expertise at selling entire application suites: everything from content management and CRM to ERP. It was a very attractive, and almost necessary, offer for IT buyers – mixing and matching independent solutions was wildly impractical if not impossible. Each new system implemented took on significant fixed and variable costs, as well as new skills and talents required. Integration? Just give up now. Companies like Microsoft, Oracle and IBM championed a vision of buying all, or most, of your technology from a single provider.
Bill Gates, circa 1997: “Customers wanted somebody who integrated the user interface and made all the software work together. That is just more attractive than having piece parts that people buy separately.”
Or take an equally self-interested pitch from Larry Ellison: “It’s incredibly difficult and expensive to make these systems communicate at all.” His solution? Buy up the market and tie all the solutions together.
The consequence of this aggregation was that startups had little chance to compete for customer wallet share. Vendors once dominated by being “good enough” at everything, but truly amazing at nothing; today that no longer satisfies customers.
And an emerging “cloud stack” is leveling the playing field. The synergies customers (theoretically) once achieved by buying from a single vendor can now be achieved by buying from multiple vendors.
A customer interaction on Facebook can spawn Zendesk tickets, which then propagate inside of Salesforce; employee records from Workday can be seamlessly loaded into Salesforce’s Work.com; financial analysts can navigate customer data in Zuora visually using GoodData. A new level of openness has emerged with cloud solutions, allowing better results to be driven from all applications. And each new cloud solution can often be implemented with an order of magnitude less cost and support than its on-premise counterpart.
Exploding Markets And Expanding Pies
Previously, if you had a large enough IT staff, you could support the costly and breathtakingly large deployment of Oracle Financials or EMC’s Documentum. But organizations with only a handful of employees – millions of businesses worldwide – were out of luck.
For enterprise vendors, the cost of selling to SMB customers simply wasn’t worth the contract value; and for businesses, the upfront infrastructure and licensing fees were cost-prohibitive. But with cloud solutions, a small and medium-sized business operates on the same technology that its far larger counterparts use, only at a fraction of the cost.
Today, viral marketing, freemium, and lower-cost acquisition are causing startups like Wave, Base, and Xero to attract hundreds of thousands of SMBs globally to solutions that would have never taken off a decade ago. Together, these companies will dramatically expand the market size of business software – the SMB cloud market is estimated to be nearly $50 billion by 2015 – while addressing a space that is virtually inaccessible to incumbent players.
And the pie isn’t just expanding to include businesses of different sizes; it’s expanding to include new geographies, too. With the cloud, you’re inherently global on day one, making an international focus key to success. Markets like Brazil, Singapore, Japan, India and Europe will experience growth rates of SaaS adoption that surpass the U.S. in the next five years. Companies like Zendesk, Netsuite, and Salesforce already see significant portions of their revenue coming from overseas.
Thanks to the emergence of an all-new IT architecture and the rise of the cloud stack, once-loyal customers are ditching slow-moving incumbents for a new guard of enterprise vendors. Meanwhile, customers that were never served by the old guard are getting access to best-in-class technology for the first time. We’re just at the beginning of this shift, but it will be one of the most profound and disruptive turnovers in the history of technology.