Navigating Tech Trends: Understanding Commoditization Risks in Core Technology

In the dynamic technology industry, it becomes imperative to not only ride the waves of emerging trends but also to navigate the underlying currents that pose potential risks. One such risk that demands our attention is the ever-looming specter of commoditization in core technology. Whether you're contemplating a new tech job at an ISV or making strategic technology investments, understanding the intricacies of commoditization, gauging unique advantages, and pinpointing the lurking threats are critical aspects that will shape the trajectory of your journey.

How did we get here?

While the subject of this article is not entirely a new phenomenon, there has been a significant acceleration in the pace of what is called commoditization in the tech industry. Furthermore, the primary source of commoditization risk for specialized ISVs, once predominantly associated with mega-vendors, has expanded to encompass hyperscalers. This shift is noteworthy because hyperscalers are not merely technical platforms; they also function as commercial platforms, altering the dynamics of the landscape.

Decoding Commoditization and associated risk for ISVs: A Supermarket Analogy

To comprehend the implications of commoditization, one need not be immersed in the intricacies of technology. Imagine standing in your favorite supermarket aisle, faced with a choice between a store brand and a branded version of crackers or some other food you like. The price differential is evident, but the crux lies in assessing the delta of quality relative to the cost. This scenario resonates in the tech industry, especially when a premium product competes with a lower-cost alternative.

If for example a cracker supplier is selling their premium crackers through Costco who has a Kirkland version of the crackers, then risk for the premium supplier is a factor of two things: 1) How good do the other crackers taste? And what is the price difference between the products? If difference in value is small and difference in price is large then this is a big problem for the sellers of the branded version. Conversely, if you’re on the other side this is exactly what you will emphasize (e.g. “half the price and tastes almost the same”).

Looking Back on Prior Bundled or Embedded Tech Feature Trends

If we take a stroll down memory lane and recall separate products which have now been bundled for years, many come to mind. For example, compression formats like .zip, which previously required dedicated software for conversion between uncompressed and compressed formats. There was also software for the reading/displaying of PDFs and generating PDFs. There were helper applications in browsers. Fast forward to today and we find the functionality held in separate software of yesteryears has transitioned into basic features with ubiquitous availability. These functionalities are now considered basic features and no longer being sold as specialized software.

What's on the horizon? What technologies will become embedded into software packages, and what will be bundled into the foundational offerings of hyperscalers? While this trend seems to have impacted ISVs of non-functional features (e.g. performance, backup, data integration, security) it will not stop there.

Dynamics for ISVs partnering with the hyperscalars and mega-vendors

There is great value on both sides of ISV partner ecosystem. The ISV can have access to an expansive ecosystem which sometimes includes a commercial platform. A robust ISV partner program provides options and serves as a competitive differentiator. Thus, fostering the expansion of third-party solutions using a strong ISV partner program becomes imperative, including the provision of API documentation, certifications, training, and even help in the facilitation of sales. This priority is not just the mega-vendors such as Apple, Microsoft, SAP and SFDC but also hyperscalers such as AWS and Azure.

However, this landscape is not without its challenges. ISVs not only contend with competition within their peer group but also sometimes face competition from in-house offerings of hyperscalers and mega-vendors. The scenario can be easily illustrated by reviewing examples like the one we see with Microsoft’s Power BI and its Azure computing platform relative to Analytics ISVs with the presence of both inherent synergy and competition.

Navigating "Coopertition": Reviewing the Case of Azure, Power BI and Analytics ISVs

Microsoft Azure, in its quest for widespread consumption in analytics use cases, welcomes ISVs to offer their analytics products on its marketplace. While this collaboration fosters good consumption and addresses generates demand for data storage and processing, it also exposes these same customers to Power BI as a low-cost alternative. This sets the stage for a unique dynamic – "Coopertition," where cooperation and competition send different messages to the same customers. In this case also Power BI is kind of a “store brand” being sold in a different aisle at a lower price.

Additional Cases with Hyperscalers as partners and competitors: some open-source examples

Numerous open source-based products offer their solutions to customers through hyperscalers. However, many hyperscalers already have (or will introduce) their own distinct "store brand" versions for some of the products. Examples are provided below:

These situation highlight a crucial reality – hyperscalers are not merely deployment platforms and commercial vehicles but can be competitors on some level. Each hyperscaler is an important partner but may have competitive products or features, blurring the full nature of the alliance.

Articulating value to prevent being “bundled out”: Strategies for ISVs

As a vendor of a premium product how can we articulate our differentiated value and guard against getting “bundled out” of the stack? Here are a few ways to handle objections related to this:

1. Leveraging Agility and Focus:

The sheer size and scope of companies with a multitude of offerings often diminishes their competitiveness when marketing a commodity solution, especially in areas that are not part of their top corporate focus areas. In some cases, hyperscalers or mega-vendors bundle a commodity version as a token offering. ?While the product may serve customers as a low cost or bundled option, it doesn't hold significant business priority. On the other hand for smaller premium vendors, it is all they do. They typically have a sharper focus, often deploying specialized engineering resources to ensure positive customer outcomes. Getting the same attention from a larger company can be challenging.

2. Selling the value of Quality itself:

In scenarios where customers can only use one of something, quality becomes paramount. A cheaper alternative may be enticing, but in restrictive scenarios, the ability to consume large quantities or multiple quantities is limited. For example, there is no value to have multiple solutions in the same area for master data management, CRM, ERP, or HR systems. The vendor of the premium product can underscore the importance of quality over quantity (price per unit).

There are all kinds of analogies that can be used to convey this. For example, a customer residing in a small apartment needing only one couch and offered the option to purchase a three-piece set for the same price gets no value from the unneeded items. When our customers lack the desire and ability to consume more than one of something, presenting this type of pricing argument becomes less compelling. Getting a better couch in a space that fits one couch means removing the old one as there is no value in possessing another couch. Low cost or free things can take us space too.

3. Selling against solutions that minimize true cost and risk

Freemium, Bundles and Money-Back Guarantees may sound enticing, but are they genuinely risk-free? Delving deeper reveals hidden costs in terms of total cost and opportunity costs.

Opportunity Cost is the calendar days and months lost while trying out a free option that might not pan out. This trial period, while offering lessons learned, delays the ultimate realization of the desired outcome of the project, extending the project's length.

Total Cost encapsulates the expenses related to implementation, configuration, testing, and user training. Even if you get the money back or don’t pay during the freemium period, you won't recoup everything.

A good illustrative analogy might be the scenario of undertaking a painting project with paint that comes with a money-back guarantee. If, upon completing the painting of a room, you discover that the paint is of subpar quality or the wrong color, you might get a refund for the cost of the paint. However, the paint might account for only a fraction (10-20%) of the entire painting project cost. Receiving a refund does not restore the room to its original state or cover all incurred costs. In situations where the overall project cost is significant compared to the expense of the input material, the emphasis on selecting inputs of superior quality, durability, or those with fewer associated risks becomes increasingly vital.

4. Selling where your competitor has the home field advantage

We’ve all seen examples of companies that sold well into a platform where the platform owner is also competing, such as Microsoft Office on macOS or Slack on Windows. Despite having the home field advantage like Teams on Windows and iWork on macOS, it doesn't always mean dominance for the platform maker.

Examining enterprise software in analytics as an example can provide insights. Take Microsoft's Azure platform with Power BI, mentioned earlier. While there is engineering synergy with Azure, Power BI isn't available as a fully managed SaaS on AWS or GCP. This could pose challenges for users with substantial data in AWS or GCP leading to potential data charges if they were to use the fully managed SaaS.

Another illustration as an example involves Salesforce and Tableau (acquired in 2019). While Salesforce, a prominent platform, sources vast customer data, its reporting and analytics capabilities were suboptimal beyond simple analysis. The acquisition of Tableau has indeed brought some synergies, yet such acquisitions of this type tend to bring a less independent perspective, impacting corporate investment focus and attention to specific use cases and integrations outside of those deeply connected with the core platform.

The lesson here for ISVs is that you can win against the competition that has a home field platform advantage and especially thrive when integrations are needed between various mega-vendors and hyperscalers because of independence. ISVs are better equipped as a road team to work with multiple platforms to meet customer needs.