It is difficult to discuss enterprise software without at least mentioning Microsoft, and there is no better time than now: last week the company (briefly) became the third U.S. company, after Apple and Amazon, to achieve a market capitalization of over $1 trillion, and is currently the most valuable publicly-listed company in the world.
It is one that I have been able to document stage-by-stage. The critical breakthrough was three-fold, and, as is so often the case, the three breakthroughs were really about the same existential question — whither Windows:
First, Microsoft’s leadership accepted that its nature was that of a horizontal company, not a highly differentiated vertical one built around Windows.
Second, Microsoft embraced a world where Windows was one client amongst many, and targeted its services to iPhone, Android, Linux, and Mac.
Third, and most importantly, Satya Nadella brilliantly navigated The End of Windows internally, freeing Microsoft employees to build products that customers actually wanted, not that Microsoft needed.
Here's a quote you might enjoy:
Once you remove the burden of support and maintenance — that’s handled by the service provider — it suddenly doesn’t necessarily make sense to buy from only one vendor simply because they are integrated. There is more freedom to evaluate a particular product on different characteristics, like, say, how easy it is to use, or how well it supports mobile. And it’s here that Microsoft products, particularly the hated SharePoint, were found to be lacking.
The SaaS Business Model
There are three parts of any new paradigm in technology: doing current use cases better, coming up with a new business model, and creating entirely new use cases. Microsoft, to Ballmer’s credit, was actually very early to the new business model aspect of SaaS.
Previously, enterprise software was sold on a license basis: companies bought software on a per-seat basis (or per-server or per-core basis in the case of back-end software), and when new versions of the software came out, they would potentially update — or not. Or not wasn’t great for anyone: companies would be running on out-of-date software, and vendors would not make new revenue.
What Microsoft figured out is that it made far more sense for both Microsoft and their customers to pay on a subscription basis: companies would pay a set price on a monthly or annual basis, and receive access to the latest-and-greatest software. This wasn’t a complete panacea — updating software was still a significant undertaking — but at least the incentive to avoid upgrades was removed.
There were also subtle advantages from a balance sheet perspective: now companies were paying for software in a rough approximation to their usage over time — an operational expense — as opposed to a fixed-cost basis. This improved their return-on-invested-capital (ROIC) measurements, if nothing else. And, for Microsoft, revenue became much more predictable.
This is a numbered list without actually using the numbered list format:
1. Amazon
This company and Alibaba are the two largest e-commerce companies in the world. Nothing else comes close. JD and eBay aren't competing effectively. Shopify, though, is another story.
2. Apple
Slowly but surely becoming a wearable company. Gonna put an extra blank line here.
3. Microsoft
It's amazing what a great CEO can do, even to a company as big as Microsoft. Empathy is key - this seems to be true across so many professions.
This one has two paragraphs, just to see what it looks like.
4. Tesla
Will become by far the largest company in transportation & energy sectors.
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