For the past ten years, the rise of software as a service (SaaS) has reshaped the enterprise-software industry. During that period, the disruptors that pioneered the model and the incumbents that transitioned to it created tremendous shareholder value. Between 2011 and 2018, the global software industry’s market cap grew at twice the rate of the overall market. Yet that growth came with a cost: industry profitability tumbled, falling by half over the decade.

The next ten years will not be any less tumultuous. As SaaS matures, the customer’s expectations around ease of use and ease of doing business will continue to rise. Platforms as a service (PaaS) from the Big Three cloud vendors (Amazon Web Services, Google Cloud, and Microsoft Azure) are gaining share and commoditizing software. And with financial markets reeling from the COVID-19 pandemic, investors are looking more closely at bottom-line health.

Customers want SaaS products and a SaaS experience

SaaS has become the default software-delivery model—and at breakneck speed. In 2010, SaaS offerings commanded just 6 percent of enterprise-software revenues. By 2018, that share had grown to 29 percent, or $150 billion globally. Yet that figure understates the true size of the market. When revenues from companies still transitioning to SaaS are counted, the total as-a-service share rises to 75 percent of all enterprise-software revenues, or more than $380 billion. Those numbers mean that companies with no SaaS offerings now represent only one-quarter of total industry revenues.

Vendors may need to specialize at the top of the stack and to partner elsewhere

In the 2020s, the headline disruption for many software companies will be the growth of PaaS. Between 2016 and 2018, PaaS revenues grew at nearly twice the rate of SaaS 44 percent a year versus 26 percent, respectively. Much of that growth came at the bottom of the software stack. The Big Three cloud vendors, with their vast scale and resources, have developed PaaS services that now rival those of the leading software vendors. The reach and financial muscle of the cloud giants allow them to innovate more quickly and to build and maintain these services at lower cost. Within the submarkets for systems infrastructure software (SIS) and application development and delivery (AD&D), the Big Three cloud vendors have seen their revenues grow by a compound annual rate of roughly 65 percent between 2014 and 2018, compared with just 4 to 5 percent for SaaS vendors.