With a 12x growth rate since 2010, it is safe to say that SaaS is a business model of the 21st century. Investors have been placing the greatest bets on SaaS companies as well. With the global Software as a Service (SaaS) market size projected to reach USD 307.3 Billion by 2026, the success of Twilio, Zoom, and Shopify is drawing the sharp attention of investors as the three SaaS vendors have been trading at 20x, 37x, and 51x their initial values. Adobe too has seen its fortunes turn, in a large part due to its transition to the cloud. “We always had the right motivation, which is: How can we innovate at a faster pace? How can we aggressively acquire new customers and how can we continue to build a more predictable and recurring revenue stream?” – Shantanu Narayen, Adobe CEO, on why they moved Adobe to the cloud In 2012, Adobe Inc. launched a Software-as-a-Service (SaaS) subscription version of its key product line, Creative Suite, causing its net income to plummet by almost 35% percent the following year. Moving to the cloud also presented opportunities for Adobe to protect itself against competing products. With more design tool competitors (like InVision and UXPin) and point solutions (like Sketch) available on cloud-based subscription plans, users could try out Adobe competitors with very little risk. These cloud-based solutions could also roll out updates and improvements whenever they needed to, as opposed to Adobe’s 18-24 month cycle of product releases. All of these factors weakened the lock-in that Adobe previously had with its users. So, why should you move to SaaS?
A Harvard Business Review study found that the existence of a previous version of the product prior to the introduction of SaaS offerings reduces the company value by an average of 3.5% compared to a new product launch with a SaaS model. Thus software vendors should look to approach the SaaS business model by creating new product lines rather than converting existing product portfolios, when possible.
One way of creating new product lines is through acquisitions. Some of Adobe’s acquisitions, like Omniture, gave Adobe the ability to add a completely new set of tools into their product offerings. Others, like the Aldus acquisition, doubled the size of the team and brought in talent like Bruce Chizen who went on to have a huge impact at Adobe. Meanwhile, the Macromedia acquisition helped Adobe to take a competitor off the map and end a crash course where the two companies were set to collide.Hence, strategic software buyers are broadening their scope to acquire new capabilities or gain access to new markets. This is part of a shift over the last four years from a historic focus on building scale in existing competencies. This trend is being driven by customers that are looking to software providers to offer them a complete set of digital transformation solutions. Artificial intelligence, cloud and data analytics remained common themes across scope deals. There has been a growth in M&A activity in North America, rising deal count in Europe, as well as an uplift in capital invested in the Asia Pacific and Australia & NZ.
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Sources: Harvard Business Review, Forbes, Business Insider, Deloitte, PR Newswire, Oracle NetSuite, Product Habits, Gartner, Tech Crunch
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