AI Threatens Two-Thirds of SaaS Giants: Who Will Survive the Storm?

The Transformative Impact of AI on SaaS

Ariel Cohen, at the helm of Navan, highlights the radical transformation that AI is imposing on the Software as a Service (SaaS) sector. He compares this revolution to the one that SaaS itself inflicted on traditional software companies. Infrastructure companies like Twilio could benefit from this evolution, particularly by transforming call centers through AI. However, SaaS companies that were born with AI face significant challenges, even though some, like Navan, are successfully navigating this new environment.

Analyst Pat Walravens from Citizens reminds us that at the turn of the millennium, less than half of the twenty largest software companies survived the advent of the cloud. He anticipates a similar scenario with AI, predicting that two-thirds of current SaaS companies may not survive this new technological era.

A Historical Analogy: SaaS Facing AI

The impact of AI on SaaS is comparable to the effect SaaS had on traditional software companies a few decades ago. At that time, giants like Sun Microsystems, Computer Associates, PeopleSoft, and Siebel Systems were absorbed by other entities or lost their influence as cloud-based software companies took over. Walravens emphasizes that while these companies did not go bankrupt, they were integrated into other structures.

Potential Winners and Losers

According to Walravens, software companies can be divided into two main categories: infrastructure and applications. Infrastructure, which encompasses back-end tasks such as data management and communications, appears to have a more promising future. Cloud communication companies like Twilio, which recently saw its stock rise after announcing its fastest growth rate in three years, and Bandwidth, are well-positioned. This is due to the trend of companies replacing their call centers with AI-based solutions.

David Morken, CEO of Bandwidth, stated that AI simplifies the creation and replacement of software while making the underlying infrastructure more crucial. Inbal Shani, product lead at Twilio, added that the company operates at the infrastructure level, which is becoming increasingly essential as AI integrates into customer interactions.

Challenges for Application Companies

For application companies, the era of AI represents a more complex challenge. These firms, which sell software for specific tasks like payroll processing or support ticket management, are more vulnerable. Companies like SAP, Workday, ServiceNow, Atlassian, and Adobe have seen their stocks decline over the past year. Walravens notes that certain parts of their businesses may be disrupted by AI, even if other aspects are already integrated with AI.

Assessing the Resilience of SaaS Companies

Walravens proposes several criteria for assessing the resilience of SaaS companies in the face of AI. A positive indicator is rapid organic revenue growth, signaling that the company's AI strategy is effective. Two other criteria include the business model and the ease with which products can be replicated. A consumption-based pricing model is generally more resilient than a user-based model, which is typical of SaaS companies.

He warns that if a company's product can be easily recreated with tools like Claude, OpenAI, or Cursor, this represents a major risk. This is why companies like Asana and HubSpot are feeling increased pressure.

Customer Trust in SaaS Companies

Despite the challenges, customers continue to trust large SaaS companies, largely because they handle sensitive data. Walravens concludes that if these companies can provide the AI solutions their clients desire, they will remain the preferred choice, as this minimizes risks.