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I've been thinking more about the SaaSpocalypse, and have been trying to come up with a framework of how AI will (or will not) devour software companies.
We know that AI will obviously make software development faster and cheaper. But we don't know how that will trickle into the marketplace in the way of potential value destruction.
The basic premise is that, enabled by AI, copycats will come and erode products that have entrenched themselves in the marketplace for many years. ***But we've also seen plenty of copycat products attack incumbents over the years, and they've been largely unsuccessful***. Software is expensive, but it's not really that hard.
* [Google+](https://en.wikipedia.org/wiki/Google%2B) tried to take share from Facebook, and flopped on it's face immediately.
* Lyft debuted only 2 years after Uber, and Uber remains the champ.
* Tidal, Google Music, Apple Music vs Spotify also come to mind.
* Vimeo?
***The risk that incumbents completely disappear is pretty low, I think***. Where I would be concerned (as an investor) are products where the user base is largely unhappy - either with the product or the value proposition. Adobe users seem to use those products because they have no other choice. *I don't use any of their media editing tools, but that seems to be the consensus from what I've seen.* It makes sense that more specialized tools could come in and take market share.
***The other supposed risk is margin and profit compression***. I'm not sure if I buy that either. Incumbents will see the same cost savings due to AI. And they already have a built product that's profitable. There may also be a game theory aspect to this. If incumbents keep margins high, challengers will enter the market. If challengers enter the market, incumbents will lower prices to combat them. So the rational move may be for challengers to not enter the market, in the first place. ***Either way, revenues may come down, but so will costs...leaving profits largely unaffected.***
Here are the characteristics that I think we should look for:
* Companies that have some other barrier to entry (network effects, regulator barriers, hardware attached to the product) should continue to do fine.
* Companies that delight their customers and offer products with good value proposition should continue to lead. If the end state of the product is already "perfect", there's not much a new entrant has to offer...
* Companies that have a bunch of mediocre software products bundled to give a "sense" of value are probably in trouble. This could be the fear for Adobe (though, again, I wouldn't know from experience).
***Finally, the true end-game for AI is that more niche markets will receive much higher quality software***. If it costs a billion dollars to develop a Spotify quality platform, you need hundreds of millions of users to amortize that expense across. There's no way around that. If the cost drops by 90%, then the required user count for the platform also drops by 90%. ***There's opportunity here to find (or build) interesting solutions serving smaller market segments.***
We also have to consider this: ***In a finite world, where there's a massive winner, there also has to be a massive loser.*** In the case of AI, the winners have obviously been Nvidia (and chip makers), the data 'stewards' (Google), and the construction companies building data centers. If SaaS companies remain relatively unscathed, then what's left is the white-collar workforce.
I still think that SaaS valuations got out over their skis. In no world should an established, highly profitable company be trading above 50x earnings unless it's considered inherently safe and has low expected returns attached to it...which is fine, Costco and Walmart are trading at 50x earnings because they probably are considered safe with more bond-like expected returns. But those returns aren't why we invest in tech...