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Spreadsheet Assassins

A short history of “software as a service”

Today, nearly every consumer product is trying to wedge its way into our monthly bank statements. It’s not just the hundreds of streaming video services that have replaced the cable bundle. There are now subscriptions for toothbrushes, socks, underwear, shaving razors, lightbulbs, doorbells, Taco Bell, dog pee pads, New York Times games, and of course X (formerly known as Twitter). Luxury car makers BMW and Tesla have had the gall to consider charging customers monthly fees for access to features like heated seats. Soon, the day will come when an already satirical $300 “smart” toaster will require a $5/month ransom to keep its firmware operable. When every consumer product becomes a digital interface, even the things we own can be held hostage, or taken away.

In recent years, software itself has undergone this phase change. Popular tools like Microsoft Word and Adobe Photoshop are no longer programs you buy but subscriptions you pay to access, increasingly through a web browser, monthly or annually, in perpetuity. While hardware companies still juice their sales with new product versions every few years, software is now one product, continuously updated. This booming sector is called “software-as-a-service,” or “SaaS,” as it’s affectionately known by its crass operators. Far beyond consumer applications, enterprise SaaS products have ensnared the digital plumbing of major industries and public infrastructures. Today, the category is worth over $3 trillion collectively and touted by Silicon Valley’s favorite venture capital blowhards as the most profitable business model in history.

Why does everyone want to be in SaaS? One reason is that investors are addicted to it. Time and again, the public stock market values companies with “recurring” revenue many times higher than the volatility of one-time license or hardware sales. Over the past decade, SaaS has grown five-times faster than the average non-SaaS company, spawning a plethora of venture-backed, browser-based tools vying to organize all kinds of tedious business workflows. Their colonizing ambitions often hide behind cutesy names like Shopify (e-commerce), Snowflake (data cloud computing), Mailchimp (email automation), Toast (restaurant sales), MindBody (fitness studios), or OpenGov (local municipalities).

Even with a small customer base, SaaS companies can print money for years, while doing little to improve their products.

Investors also prize the SaaS model’s minimal upfront costs. While most companies require physical offices, factories, or raw materials to produce their product, a digital interface runs on a few human programmers and a monthly bill from Google or AWS, whose power-hungry, water-guzzling “cloud” data centers now have “a greater carbon footprint than the airline industry,” according to anthropologist Steven Gonzalez Monserrate. As a SaaS startup scales, sales and customer support staff pay for themselves, and the marginal cost to serve your one-thousandth versus one-millionth user is near-zero. The result? Some SaaS companies achieve gross profit margins of 75 to 90 percent, rivaling Windows in its monopolistic heyday. Even the reigning credit-card duopoly of Visa and Mastercard wield a mere 51 percent net margin.

But this golden goose has finally stumbled in recent years. First, the pandemic tech bubble poured gobs of venture money into every possible remote-anything startup, flooding the market with an oversupply of vendors. Then came the “SaaS crash” of 2022, when cost-cutting enterprises realized they were paying more for software than health care, while 53 percent of SaaS licenses went unused. Now, the rise of AI-powered developer tools threaten to deliver 90 percent cheaper copycats of popular SaaS products. Business Insider dubbed it “the final phase of software eating the world,” invoking VC Marc Andreessen’s obnoxious catchphrase. In this case, software is eating itself—a kind of digital cannibalization—and it feels like a fitting conclusion. Because there’s also long been an open secret in SaaS: the value proposition behind many of these products is bafflingly thin.

As one CEO of a content management platform recently put it: “The biggest incumbent in [business-to-business] SaaS is some spreadsheets and one additional headcount.” Or, another CEO of a customer success management platform: “Every SaaS application pitch ever (including ours): 1. Your data is in lots of places 2. So you use spreadsheets 3. We bring it all together 4. Profit.” Or, another CEO-turned-MAGA ghoul, who invests in dozens of whatever-management platforms: “Find a commonly used spreadsheet (eg cap tables) and turn it into a dashboard (eg Carta). Replace email attachments with workflows. Spreadsheets are the long tail of datasets that don’t have their own SaaS tool yet.” Why let a business-critical workflow exist in some generic document, easily shared across systems and possibly fulfilling every task requirement, when you could corral those actions into a gated domain, gussy up the UI to imply value or progress, and charge a monthly subscription for it?

The ambitions of SaaS didn’t used to be so bloodless, or narrow-minded. Salesforce arguably launched the category in the early 2000s with its browser-based customer relationship management tool. The company’s “End of Software” campaign promised to empower knowledge workers with applications they could access from anywhere, and automation to replace time-consuming manual data entry. Less discussed was the Faustian bargain of moving your data and workflows into a proprietary system. “In the future, all software will be delivered in the cloud,” founder Marc Benioff said in an interview. “Businesses will be freed from buying infrastructure that goes out of date, depreciates in value, and requires a hefty investment to keep running. People will access all the services they need via the Web and have them upgraded without doing a thing.”

For all this philosophical talk, the real cheat code in SaaS has always been a first-mover advantage. A platform like Salesforce touts itself as a “single source of truth” because it only succeeds if users treat it as such. (The common mantra on revenue teams goes, “If it’s not in Salesforce, it didn’t happen.”) Most SaaS management software is simply a way to keep people and tasks aligned; a seven-figure software license can do that, but so can a seven-cent Post-it note. More than the quality of any given code, the value of the largest SaaS companies is their locked-in network effects. Once a piece of software has entrenched itself in the bowels of corporate IT infrastructure, it’s a nightmare to dislodge. Imagine the switching costs to migrate millions of records, replace thousands of systems, navigate hundreds of data privacy approvals, and retrain every employee, while keeping a local government or hospital running. Consider the colleges and school districts terrorized for decades by a crappy EdTech software, courtesy of a regional sales rep and nephew of the head administrator. Even with a small customer base, SaaS companies can print money for years, while doing little to improve their products, often letting the core service and basic functionality degrade, like so many city landlords sitting on old buildings and prime real estate.

Rent-seeking has become an explicit playbook for many shameless SaaS investors. Private equity shop Thoma Bravo has acquired over four hundred software companies, repeatedly mashing products together to amplify lock-in effects so it can slash costs and boost prices—before selling the ravaged Franken-platform to the highest bidder. Anti-monopolist author Matt Stoller has called Thoma Bravo the “bridge trolls of enterprise software,” and its recent forays into cybersecurity arguably caused the worst software hack in American history. After years of dismantling Solarwinds, a ubiquitous network management software, Thoma Bravo and Silver Lake dumped $286 million of shares in December 2020, the day before the company disclosed a staggering malware breach. The “Sunburst” cyberattack exposed data from California hospitals, the Department of the Treasury, the U.S. nuclear weapons agency, and dozens of other agencies and major companies. While the root cause is still under investigation, multiple lawsuits and reports describe a culture of cost-cutting and frequent security lapses. “Typically Thoma Bravo raises prices and cuts quality, but the affected constituency group—corporate IT managers—don’t have a lot of power or agency,” Stoller writes of this precarious stalemate, with potential geopolitical implications. “Their superiors don’t want to think about a high-cost but low-probability event, especially if every other big institution would be hit as well.”

A missed payment can pull the plug on an essential service, or block access to a critical, life-impacting dataset.

But how low probability is it, really? It’s not hard to find examples of shoddy software and “SaaS capture” affecting vast swaths of society. In the Kafkaesque realm of health care, software giant Epic’s 1990s-era UI is still widely used for electronic medical records, a nuisance that arguably puts millions of lives at risk, even as it accrues billions in annual revenue and actively resists system interoperability. SAP, the antiquated granddaddy of enterprise resource planning software, has endured for decades within frustrated finance and supply chain teams, even as thousands of SaaS startups try to chip away at its dominance. Salesforce continues to grow at a rapid clip, despite a clunky UI that users say is “absolutely terrible” and “stuck in the 80s”—hence, the hundreds of “SalesTech” startups that simplify a single platform workflow (and pray for a billion-dollar acquihire to Benioff’s mothership). What these SaaS overlords might laud as an ecosystem of startup innovation is actually a reflection of their own technical shortcomings and bloated inertia.

Despite increased competition, more companies than ever are trying to crack the lucrative SaaS market. Over 1,500 software startups are focused on billing and invoicing alone. The glut of tools extends to sectors without any clear need for complex software: no fewer than 378 hair salon platforms, 166 parking management solutions, and 70 operating systems for funeral homes and cemeteries are currently on the market. Billions of public pension and university endowment dollars are being burned on what amounts to hackathon curiosities, driven by the machinations of venture capital and private equity. To visit a much-hyped “demo day” at a startup incubator like Y Combinator or Techstars is to enter a realm akin to a high-end art fair—except the objects being admired are not texts or sculptures or paintings but slightly nicer faces for the drudgery of corporate productivity. Each year, untold numbers of aspiring nuclear engineers and environmental scientists join the ranks of software developers and product marketers, writing and selling SaaS code for problems that might not exist.

The recent market turbulence has led some to wonder where the ceiling may be. “We’ll spend $1 Trillion on enterprise SaaS next year per Gartner,” notes one serial VC and founder of the annual SaaStr event, in a recent Linkedin post. “Can it really get to $10 Trillion? The entire U.S. economy is only $27 Trillion.” On the flip side, IT managers and knowledge workers have to be wondering if the alleged convenience of these apps are worth the lock-in costs, which compound over time. In SaaS, a missed payment can pull the plug on an essential service, or block access to a critical, life-impacting dataset. And the price of that monthly bill will only rise, likely faster than the rate of inflation.

As popular as SaaS has become, much of the modern economy still runs on the humble, unfashionable spreadsheet. For all its downsides, there are virtues. Spreadsheets are highly interoperable between firms, partly because of another monopoly (Excel) but also because the generic .csv format is recognized by countless applications. They offer greater autonomy and flexibility, with tabular cells and formulas that can be shaped into workflows, processes, calculators, databases, dashboards, calendars, to-do lists, bug trackers, accounting workbooks—the list goes on. Spreadsheets are arguably the most popular programming language on Earth. The hundreds of millions of global users of Microsoft Office and Google Suite far outnumber JavaScript’s roughly twenty million developers. In many cases, spreadsheets—the cockroaches of corporate IT—continue to thwart the hordes of twentysomething SaaS sales reps, sending mass emails and making cold calls from converted warehouses in Austin or Antwerp.

Whether it’s SaaS, superapps, blockchains, or whatever format comes next, the trajectory of recent Silicon Valley “innovation” remains the same: a hint of genuine productivity and a heavy dose of old-school land-grabbing and value extraction. Software in its many varieties impose a growing tax across modern life, whether for the lowly consumer aghast at a three-figure toaster subscription, or the Fortune 500 CEO, handed a list of dozens of six-figure software tools. The grift seems to be reaching a climax, and the bubble can’t pop soon enough.