Winning in SaaS: A Different Yet Familiar Playbook for AWS

Business Insider’s Eugene Kim recently reported on Amazon (NASDAQ: AMZN) being woefully behind Microsoft, Oracle and Salesforce in SaaS business applications, with rumors abounding of Amazon Web Services (AWS) potentially scooping up HubSpot (NYSE: HUBS) for a cool $40 billion (approximately 31 times its projected 2021 revenue). As someone deeply involved in the SaaS market (and with a hefty personal bet on AMZN), I cringed when I read these articles. It may seem like utopia to some if AWS were to acquire one or more pure-play business application software vendors to grow SaaS revenues, but that would be an expensive way for them to grow their SaaS repertoire and worse, it would be a temporary panacea. In fact, comparing Amazon to Salesforce (NYSE: CRM), Oracle (NYSE: ORCL) or Microsoft (NASDAQ: MSFT) is not really apt.

AWS started out leasing cloud infrastructure such as servers and storage. Seeing the market for those services evolve (to an extent which even AWS’s original architects Andy Jassy and Werner Vogels could not have imagined back in the mid 2000s), AWS has steadily worked upstream and bolted on additional platform and software capabilities to their core offerings over the years to expand customer adoption. The AWS playbook has always been to bring to the market a common denominator via infrastructure services to get in the door at as many companies as possible (especially larger enterprises) and over time, capture incremental cloud market share with more platform services and embedded software offerings. “Software first” businesses like Microsoft and Oracle are different: having originally owned the database, middleware, and business application layers, they figured out that the company that provides the underlying plumbing for the cloud could, over time, dominate the market. That realization motivated them to move downstream into lower-margin cloud infrastructure, build up their customer base there, and ultimately, solidify their market relevance.

Going back to Amazon, the common denominator approach works well when it comes to infrastructure and middleware services, which are the fundamental building blocks of all business applications. However when it comes to the applications themselves, there are too many varieties for AWS to effectively bring to market a universal solution. Most business applications are not simple ones such as email and office productivity apps (e.g., word processors and spreadsheets), but tend to address complex business processes and specialized workflows for functions such as order processing, payroll, manufacturing execution, and supply chain management. There are hundreds of categories of business applications often siloed by industry and company size, and according to analyst firm Gartner, the overall market for such applications in 2022 is over $145 billion with an average CAGR of 19% per year. And there are literally thousands of business application vendors pitching products and solutions across these myriad software categories.

Amazon’s market cap is approximately $1.8 trillion and AWS, if it were a separate entity, would command a market cap of approximately half a trillion. When dealing with such large valuations, the challenge in posting meaningful incremental revenue is not necessarily to buy out a few independent software vendors (ISVs) such as a HubSpot. Sure, buying out a large SaaS player may somewhat boost SaaS revenues and valuations in the short term, but will not necessarily be noticeable to Amazon’s overall revenues or even be sustainable (as Salesforce, having been on an aggressive buying spree, can testify with its current slump). The real opportunity for AWS in picking up a sizeable chunk of the $145 billion annual business application market is to tap into the larger SaaS ecosystem via the exact same playbook that Amazon has perfected over the past 2 decades! ??

Amazon didn’t become a $1.8 trillion company by manufacturing and owning everything it sells (i.e., “first party sales”). It primarily sold stuff manufactured by other companies and resellers (i.e., “second party” and “third party sales”).?Amazon was and still is an eCommerce behemoth that gained market share by being a cost-effective middleman. While Amazon is vilified by some for charging an eye-popping 29.6% of revenues from vendors, it indisputably opened up new avenues of revenue for these same manufacturers and distributors which were otherwise not available to them.

In the same vein, the most potent weapon for growth that AWS has is AWS Marketplace! Wall Street pundits (and even most Amazon insiders for that matter) have failed to understand its true potential. If well executed, this marketplace can be leveraged to propel AWS into being an omnipresent force in the business applications SaaS market.

To make this happen, AWS Marketplace has to become more ubiquitous – a Baskin Robbins themed destination for users to buy almost any flavor of business application software – across the hundreds of categories that exist. Today, if an average person thinks about getting a new light for their garage or a weedkiller for their backyard, they are likely to type in Amazon.com on their browser, more so than driving to their local Home Depot store. Similarly, if a sales manager looks to upgrade their CRM software or an accountant wants to migrate from QuickBooks to a new ERP system, they should be thinking of AWS Marketplace.

But the reality is that despite having been launched almost a decade ago, AWS Marketplace is nowhere near having this level of mindshare. Therein lies AWS’s real opportunity in SaaS.??

Think about this for a minute: if AWS were to show SaaS bookings only from first party products, that would be a shortsighted (and slow) way to grow the business and win market share. This is because no matter which SaaS products AWS chooses to build or acquire, those products would overall still be a small part of the total addressable market for business applications. Despite its size and tremendous cash reserves, Amazon just cannot gobble up every single business application out there! But AWS Marketplace can most certainly endeavor to sell most, if not all, of that software to businesses by entering into reseller relationships with those ISVs.

Now, granted not every SaaS vendor will agree to fork over 20%+ of their sales price to AWS Marketplace but that’s something that AWS can evolve over time. Amazon has always been a patient company – putting market share and mindshare ahead of short-term profits. A similar line of thinking would serve them well in the SaaS market.

If AWS sticks with the old Amazon playbook of helping prospective software buyers find the best option, and giving them a “good deal” (as good or better than what they can secure on their own if they were to buy directly from the SaaS vendor), they will sell heaps of business application licenses as well as associated offerings that tend to go with every SaaS license – namely, support, training, and implementation services – all of which will bring in incremental revenue to AWS – way more than what they can achieve by acquiring one or two (or ten!) SaaS vendors. In other words, the market for enabling an ecosystem where software is discovered, evaluated, and purchased is much bigger than the market for specific SaaS products.

Certain business applications also come with higher security and compliance requirements (e.g., FinTech, InsureTech, GovTech apps). Hence selling more business application software will inevitably bring in customers that will need more infrastructure to provision and run the new software in a private or hybrid cloud scenario. That will further uplift sales of AWS’s core infrastructure offerings.

However for AWS to execute well on this opportunity, they have to solve at least two major problems in the near term:

1.????Rapidly establish the right kinds of multi-year revenue partnerships with many of the popular SaaS vendors out there. This is critical because software buyers need more choices.

2.????Once those choices are there, AWS Marketplace has to implement a way for prospective buyers to discover the best software option based on their specific requirements and pain points, so buyers are more incentivized to come there instead of going directly to a SaaS vendor’s website or buying from a third party reseller. As a case in point, the amazon.com website offers user reviews as a way for a prospective buyer to figure out if Widget-A is better than Widget-B. That approach works well for commodities. In the case of business applications, reviews are superficial and do not quite cater to end-users’ detailed requirements. A much more contextualized and prescriptive guide is required.

Let’s start with problem #1: AWS does not have revenue-share partnerships with most business application ISVs. For example, if a marketing director were to go to AWS Marketplace and search for “BI software” (BI is a common acronym for business intelligence software), they would see arcane options that do not make sense to most BI software purveyors or practitioners.

The default sort order on AWS Marketplace is “Relevance” and yet the same product is shown multiple times on page 1. See screenshot below - the top 4 choices shown are all “Zoho Analytics On-Premise”. How is that relevant to a user? Furthermore, most cloud users would furrow their eyebrows when they see an on-premise option being shown as the most relevant one for their SaaS needs. In fact, some of the products shown are not even real BI applications, they are point solutions for functions as specialized as MS Office user audits (e.g., the sixth product shown is “M365 Manager Plus”) or other niche products such as “Voice for SaaS” (#8 on the list) which enables software companies to create integrations with Amazon’s Alexa products.?Many of the other products shown simply do not cater to mainstream BI software buyers.

This same inexplicable scenario applies to the other handful of business application software categories shown on AWS Marketplace. If one were to click on the “Categories” drop-down field on the AWS Marketplace home page, they would see mostly infrastructure software such as network monitoring, backup and recovery tools, operating systems, and application development suites. There are only about ten business application categories shown in the drop-down – see screenshot below:

Out of hundreds of business application software categories that exist, why AWS Marketplace has opted to only display these ten categories is unclear.

Taking another business application category such as “CRM”, many of the popular CRM software options one would expect to see are simply not displayed. Instead, the products shown are integrations, add-ons or disparate packages with arcane names such as “Mautic packaged by Bitnami” or Magento packaged by Bitnami”. Most sales and marketing personnel would not be familiar with these names whereas the brands they would be familiar with such as Salesforce or Sugar CRM, are surprisingly missing (or one has to scroll way down to see any of them).

It seems AWS Marketplace’s catalog of business application software and corresponding search and discovery capabilities have been largely forsaken or compiled by an ineffectual dolt (or an untrained AI bot.) Or perhaps AWS Marketplace is a victim of AWS’s technical roots, and therefore the products it shows are technical in nature (more relating to virtual machines, container packaging and secure integrations) that an IT specialist would seek rather than solutions that speak fluidly to business application end-users or even, procurement personnel. Without that fluidity, self-service buying on the Marketplace (and associated scale) goes out the door!

In this area, AWS’s most formidable competitor is Microsoft Azure. Which is why, it wouldn’t be too surprising if Azure leaps past AWS in the coming years in overall cloud market share with their sharper focus and better execution in marketplaces by offering more relevant options to end-users.?Microsoft’s cloud marketplace is already segregated based on user personas. They have a marketplace for technical applications (Azure Marketplace) and one for business applications (Azure AppSource). The product options available are still somewhat stunted but more pervasive than AWS Marketplace. Furthermore, Azure AppSource has given Microsoft a head-start already in more clearly organizing and powering their way into more and more business application categories.

Generating meaningful SaaS revenue will require AWS Marketplace to get their act together quickly, incentivize more SaaS vendors to list their products with them while giving up a portion of their revenue for the entire duration of the buyer’s initial contract, as well as renewals – the latter is something many ISVs may be reluctant to do. But gaining revenue share on renewals should be a non-negotiable element for AWS since what makes SaaS businesses so attractive is the contractually recurring nature of the revenue versus a one-time transaction.?Hence to keep their own valuation high, AWS Marketplace will need to ensure they get paid a portion of the upfront revenue as well as the renewal license dollars so it can show Wall Street the revenue growth from current and new subscriptions that get signed and renewed on its marketplace.

So, the trillion dollar question is, why would mainstream business application ISVs work with AWS Marketplace and agree to give up a portion of their revenue? The most obvious but vacuous answer is that it is an “industry standard fee” for marketplaces. That sort of answer commoditizes the value that AWS Marketplace could bring to ISVs. A more logical reason is that ISVs would have a hole in their GTM model – a hole that would keep getting bigger. If AWS Marketplace is the de facto destination for software buyers, ISVs would miss out by not having a presence there. Furthermore, if ISVs can attract more qualified prospects and sell more licenses than they can do on their own (or via another cloud marketplace), most would be happy to list on AWS Marketplace even with a higher fee. A secondary, but equally valid reason is reduced COGS and overall better margins when working with AWS Marketplace. ?From the perspective of the ISVs, by not having to utilize as many sales reps and account management personnel (or, paying them a hefty commission on net-new deals or renewals), the total cost savings and higher profit margins should amount to a value far greater than the percentage they give up to AWS Marketplace. Also, many popular software vendors already have a pre-existing partner or affiliate channel where they give a certain revenue portion to independent resellers that bring them new customers. Playing to these factors will ultimately sway more business application ISVs to view AWS Marketplace as their primary GTM channel, rather than the afterthought that it currently is.

Going back to the earlier point of multi-year revenue, AWS Marketplace should seek to address the pain points and costs that SaaS vendors incur in renewing their software licenses. It takes significant customer handholding with specialized account managers and customer success teams to penetrate accounts adequately, build a dialogue with relevant personnel including functional champions, budget-owners, procurement personnel, end-users and prospective end-users, identify usage gaps and offer up free training to get contracts to renew and expand. All of these incur cost. If AWS can offer a compelling option that would take care of the renewals (as an extension of Amazon’s legendary customer service function), more vendors would be persuaded to give AWS a portion of the renewal revenue, making AWS Marketplace’s revenue as SaaS-like as first party sales.

Incidentally, Microsoft reduced their transaction fees from 20% to 3% in July and Google followed suit in September. Microsoft’s actions are not completely altruistic. In speaking with multiple SaaS vendors, they are wary of listing on Azure AppSource when Microsoft owns several business applications such as Dynamics 365 and the Power platform that directly compete with them. The reduced fee is a way of enticing them to come onboard. AWS does not suffer from this handicap yet (that’s another reason why it shouldn’t acquire business application ISVs). Hence rather than following suit, AWS Marketplace would do well to hold firm on their higher listing fees citing a different (higher) level of value-add in winning new deals and renewing licenses. Of course, one could argue that to rapidly build up business application listings in the short term, AWS Marketplace could well afford to go lower and even take a 0% fee to get more vendors onboarded and only charge a portion of renewal license revenue and any upfront add-on services (a dirty little secret in business application software is that implementation services can cost as much as or even more than the software license.) The long game here is that if AWS Marketplace attracts, educates, and serves business application users with more relevant application choices, they will buy, and when they do so in increasing numbers, more ISVs and their partners will flock to AWS Marketplace eventually putting AWS in the driver’s seat.??

Now looking at the second problem, why would business application end-users and buyers come to AWS Marketplace? Here, the motivation needs to be viewed separately for larger enterprises versus SMBs (small and medium businesses). Many enterprises are getting into multi-year agreements with cloud infrastructure providers, and they are inherently incentivized to buy from them to satisfy their contractual obligations. However if the incumbent cloud platform’s marketplace does not carry the software that meets their needs, they have no choice but to go elsewhere (often, buying directly from the ISV or a reseller or another cloud marketplace). That’s currently a missed opportunity for AWS Marketplace across its 310,000 active customers for most business application categories.

For SMBs (as well as enterprises that haven’t fully migrated to the cloud), it’s a different story. They do not have allegiance to any cloud platform and are simply looking to get educated about the SaaS products that are most pertinent to them and secure the best deal possible. That’s why there is an entire ecosystem of thousands of “value added resellers” (VARs) and systems integrators (SIs) that provide education and consultation to these SMBs, help them choose the right software and obtain favorable pricing and contract terms while retaining a portion of the revenue as their commission (similar to an insurance broker that works with you to understand your life insurance needs, narrows down relevant policies and sells you the right one – all without charging you anything). ISVs are largely happy to relegate “smaller deals” to these VARs to work on and close while they keep the “bigger deals” for their own sales reps and customer success teams. This VAR/SI ecosystem is one that AWS Marketplace should look to evolve and own (while enabling these VARs and SIs to offer ancillary services such as implementation assistance, specialized add-on functionality, training and support as well as drive renewals – all on the Marketplace.)?

The two biggest things ISVs look for when investing in a new channel is an incremental source of qualified demand (deal pipeline) and net-new revenue. To deliver on these fronts, AWS Marketplace needs to attract a significant volume of demand from companies that are looking to buy business application software. This demand is currently concentrated within search engines, social media sites, a handful of software selection platforms and associated user communities. AWS would do well to invest across all these sources to divert qualified user traffic to AWS Marketplace. That will enable AWS Marketplace to rapidly get the audiences it needs to promote and sell business applications, while enabling a competitive differentiator viz-a-viz other cloud marketplaces (justifying a higher listing fee) and building a deeper level of loyalty with ISVs and VARs.

The recurring theme here is for AWS Marketplace to rapidly invest in partnerships that produce the milk and not necessarily buy a cow. AWS Marketplace currently does not rank highly on search engines for most “buyer signal” keywords across the myriad of business application software categories it should endeavor to tap into. Attempting to rank organically takes time. More importantly, both Microsoft (owner of Bing) and Google (NASDAQ: GOOG) have a leg-up when it comes to search engines and can easily rank their own cloud marketplaces higher than AWS Marketplace. Identifying inflection points driving user demand and establishing partnerships to insert itself into the value chain for ISVs, VARs and ultimately business end-users, enables Amazon to hold its own and grow demand and manage supply for business applications – much like it does on the retail / ecommerce front.

In summary, AWS has a hugely untapped opportunity but also has its work cut out for it. The biggest risk for investors that are wanting to bet on Amazon’s SaaS revenue potential is execution risk. Infrastructure software vendors already cite AWS Marketplace as a big reason for their success, but will business application ISVs follow suit (especially given the confusing structure, lack of discovery capabilities and nascent demand within AWS Marketplace for business applications)? Chasing acquisitions like HubSpot, while tempting in the short term, is ultimately a distraction.?Will Adam Selipsky and his lieutenants understand these dynamics and shift gears fast enough? That fundamentally will be the catalyst for them to prevail in the business application SaaS race and bring AWS to a $2 trillion valuation, independent of the mother ship.