A Competitive Analysis of Software Companies


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A Competitive Analysis of Software Companies

There are themes that are far more common than you think

Throughout the past two decades, we have seen an explosion of companies in the tech sector. Perhaps we are in a bubble but one cannot ignore the massive benefits that tech companies have brought to our lives.

Of all companies commonly classified as “tech companies”, the lion’s share fell into the software realm. The two hottest categories in 2020 for venture capitalists were SaaS and Marketplaces. We have personally had the privilege of speaking with 30–40 of top VC firms in the US and learning about how they think about innovation.

There is endless material that can be written outlining the differences in business models between large software companies. The world is so so complex and as a result business tends to be as well. Luckily though, there are a few key overarching themes that stand out. In our research, we analyzed the largest 43 software companies in the United States to discover trends between each of their businesses.

Before we deep dive into software, we wanted to give an overview of the metrics we used to understand these modern-day juggernauts. In today’s day and age, it seems to make sense to classify businesses based on how “software oriented” they are. So along those lines, we clarify the two sides as such.

Hardware-oriented companies. These typically develop economies of scale and scope — especially if in network industries (think of companies such as Comcast, Verizon, etc). Intel/AMD/Oracle/Microsoft/Apple actually fall into this camp because they’re selling physical tech products. Note the tendency for industry consolidation. Apple and Windows control the operating systems that the world uses to access the internet. Intel and AMD dominate the processor market.

Software-oriented companies. These companies typically have little to no physical presence in their customers lives. They source and deliver their products through computers and technology. They are pure software companies. A few have more of a in-person presence such as Amazon. Successful software companies tend to monopolize a specific industry niche. Sometimes these niches can be huge, in the case of Google.

Every successful tech business today dwell somewhere on this spectrum. Some businesses more heavily rely on concrete infrastructure such as Comcast. Other businesses like Facebook have solely a virtual presence. Both these businesses have borderline monopolies on their specific markets.

Below are the following key discoveries and themes we found in software-oriented companies.

To predict the next great business, which we all want to do, we need to deeply understand how people interact with existing products.

This task to understand the fundamental principles and driving forces of interaction between people and their screens is incredibly complex. It transcends any singular field of study such as philosophy, economics, computer science, or psychology and draws upon insights from every single field. It’s about the study of human nature and the world.

The first step to take requires us to realize that every internet web page or mobile app is a piece of software that performs some service for us. Oftentimes in venture we define SaaS (Software as a service) as unique industry, but in reality every software firm performs a service. Businesses exist to create value and serve their customers. Every. Single. Business.

All software companies exist to connect people with each other.

Through tech companies, customers are connected to the suppliers, either directly (customers order from suppliers through a platform) or through the production of the suppliers (suppliers write software, customers all use the same software). This second use case is not intuitive. Software companies just sell software right? Yes, but a company creates more value for society through organizing teams of engineers to create a product that no single person could realistically create themselves. In reality then, the company is connecting developers/suppliers with customers. Another third category is about connecting people uniformly with other people, typically called social media. Think of companies such as Facebook, Reddit, Twitter, Pinterest, etc. The first description of business we will coin a marketplace. The latter descriptions of businesses we will coin as SaaS and the final category we will coin social media.

There are some issues with these categories but please bear with. Like we mentioned previously, SaaS can take on many forms. Some SaaS are so engrained in our lives that we hardly think of them as a software that provides a service for us. Some companies that are definitely not considered SaaS embody the exact definition. These include companies like Google (a search service for the entire internet) and Amazon (a search platform for almost any consumer good). They offer sourcing and locating services (connects a customer with the product or service the customer wants) but function in practicality as marketplaces. Social media companies tend to interact with the end-user differently, but at their core are also SaaS products and act as marketplaces for businesses to get customers.

One way to differentiate SaaS, a breakdown that venture capital investors often infer, is that SaaS is typically a software you purchase on a subscription basis that fulfills a certain need such as filing taxes, chatting with the workplace, video chatting in groups, high-end video editing (intuit, slack, zoom, adobe). We will revert to adopting the traditional definition of SaaS. Any software product that is typically sold on a subscription basis is classic SaaS.

Marketplaces have been all the hype over the past two decades and will most likely continue to be for a while.

Markets have been around ever since the concept of business has been introduced. The entire financial services industry is built around the concept of markets. Value of businesses begin and end with markets. It is logical then to understand that the explosion of technology in our modern day is essentially the technological “outlining” of existing in-person markets. Sometimes these dynamics are understood but not explicit in-person. Some marketplaces such as Uber/Didi generate entirely new markets (such as quasi-instant transportation) that are made possible through technology.

Any software company that primarily exists to facilitate connections between customers and sellers we will call a marketplace. Some marketplaces actually have subscriptions, which contributes to further blurring of lines between SaaS and marketplace. Some examples include Netflix — a marketplace for video productions, Costar — a marketplace for commercial real estate listings (Zillow for CRE), and Roblox — a marketplace for video games.

Social media is really a marketplace, where customers are baited by the opportunity to interact with other people or their media and then sold by click or view to businesses who want customers.

Social media falls into this category of non-subscription businesses. We include social media companies because they exist as a marketplace for businesses even though they seem to be about connecting with other people. At their core though, all free sites exist because they generate leads and avenues for businesses to gain customers. As the saying goes,

“If you’re not paying for a product, you’re the product.”

Every recurrent user that logs on to a platform is a potential set of eyes and source of revenue for the platform. This is true whether the business is Facebook, Snapchat, Instagram, TikTok, Google, Amazon, Fiverr, etc.

Social media companies are ultimately a force for good.

Social media marketplaces exist because social media companies connect individuals in ways like never before. Facebook made commonplace the idea of connecting people through profiles that represented themselves on the internet. Snapchat connected people through “exploding” messages. LinkedIn connected professionals. Instagram connected people through their own images. TikTok connected through video. Other social medias connect pregnant women, singles, fitness geeks. Reddit, Medium, and Pinterest offer types of social media that are not too “people specific” and therefore offer broader, aggregated offerings that tend to be less sticky as well.

Messaging is another subset of social media that tends not be as commercialized except for WeChat. Messaging companies include Apple iMessage, Google Text, Facebook Messenger, What’sApp, WeChat, Telegram, GroupMe, Kiki (older).

Traditional marketplaces will likely excel more than social media marketplaces in the near-term in providing customers for businesses.

Social media will never disappear because people will always need to connect with other people. Increasingly, messaging will turn into a free service that is given to users in order to keep them connected with another service or offering (iMessage keeps users with apple, Facebook messaging keeps people with Facebook). Social media as we know it will continue to evolve. Soon to be gone (or already gone) are the days of standardized banner ads and flashy promotions. Society has already grown numb to them. People will always go on social media to connect with and find other people. Platforms that facilitate more genuine connections or expression will gain more traction with users. We have see increasing shifts to more selective groups of sharing (Finstas, Facebook Groups, GroupMe). This is a clear trend in social media.

Social media will struggle to reconcile its altruistic mission to connect people with the operator’s need to monetize its users. Much of the rage against Facebook seems to be oriented around how Mark Zuckerberg sells user data and views to advertisers or other unscrupulous organizations. Increasingly, social media may become more user friendly and less about advertising. A company such as Apple might find immense value in offering a social media that serves as a glue of people around the Apple ecosystem. Apple would benefit from their products getting more entrenched in a person’s lifestyle, and people would enjoy an experience of connecting with others in a free and simple way such as iMessage. People would feel safer sharing information if they knew that their activity and posts aren’t being monetized.

B2B is an extremely underserved segment of traditional marketplaces.

In terms of traditional marketplaces such as Amazon, Alibaba, eBay, Airbnb, Booking.com, Zillow, Etsy, Fiverr, Roblox, or Netflix we see that they each serve their own niche and specialty. Some of the largest physical-good marketplaces in the world such as Amazon and Alibaba dwell largely in the B2C sphere, consolidating to the point where these markets have consolidated the entire space. Even today, Amazon continues to fight with other physical retailers such as Walmart, BestBuy, BHPhotoVideo for the remaining share of physical retailing. Other marketplaces exist in their own respective niches, whether that niche is residential real estate, personal crafts, freelance gigs, games, or movies.

We have seen an increase of traditional marketplaces that sell services, such as short-term lodging(airbnb, booking.com, TripAdvisor), or contractor services (AngiesList, Thumbtack, Bark, Porch), doctor services (ZocDoc), or Fiverr (freelance services). Nonetheless, these marketplaces tend to comprise of one-off and very smaller players. We have yet consolidation at a larger scale in regards to services. A possible challenge in services is that physical goods can be represented by a picture and description, it is often harder to capture the offerings of more multi-faceted services. Nonetheless, categorizing and aggregating offerings remains a common theme in both physical e-commerce marketplaces and service e-commerce marketplaces.

There is a market for categorizing service offerings that remains ripe for disruption. Most businesses, especially in the US, have turned into high-end service companies. Less and less American firms dwell in the space of physical production and sales. If one can consolidate the revenue and sales streams of service businesses in the US and around the world, like how Amazon/Alibaba have consolidated the revenue and sales streams of physical good producers, then there will be immense value for customers. We think this is the future.

We hope that this article helped in some way. If you walk away with just one interesting insight, then we will be happy.

Jason Tang

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