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In the last month or so,
companies involved in the development of artificial
intelligence have taken a bit of
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a hit on Wall Street. There
seems to be some concern amongst investors about the future and
the impact of AI as a main
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component of our culture. It
hasn't stopped the development of the technology, but it is
kind of an interesting
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inflection point as we move
forward. To explain what's going on and how it may impact in the
future, pleasure to be joined
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once again by Wharton Marketing
Professor Stefano Puntoni, who's also co-director of the Wharton
Human AI Research Program.
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Stefano, great to catch up with
you again. How are you, sir? Hi. Dan. Great to be here. Thank
you.
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Thank you. You know, I'm obviously somebody who
follows the business side of a
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lot of these technologies fairly
closely. It has been very interesting to me to watch from
a shareholder perspective and
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see how there has been this
impact on stocks in the last couple of months because of
these concerns.
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Yeah. So in the month of February,
we've seen especially software stocks being hit quite hard. The
Standard & Poor's software index is
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down over 20% since the
beginning of February, and people have been talking about
the SaaS-pocalypse. So this idea
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that many software companies are
going to find it hard to sustain the margins and businesses they've have
had over the last few decades
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moving forward because of AI. So this is being referred to as a
SaaS-pocalypse, meaning, what, exactly?
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Yeah, this idea that
software as a service, or SaaS, is a kind of business that has
been very attractive, very high
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margin, recurring revenues, and
many companies have grown very large off the back of software
delivered that way. And there
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are questions now about the
sustainability of that industry in the face of increasingly
capable AI agents
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and AI systems. So when you dig deeper, what are
some of the actual concerns that—
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that people have right now? So last week, we were in San
Francisco, and we did a
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roundtable with an amazing group
of senior business leaders to discuss the impact of AI on
value creation. And this is one
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of the topics that came up. So I
can share, maybe, a few of the observations then that our
business leaders made about the
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impact of AI on software
companies. There were at least three strands of that
conversation as to where is the
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threat coming from. And one
threat comes from the fact that this industry presents market
opportunities. Like I said
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before, margins have been
historically very high for decades. Many customers are kind
of locked into the services
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provided by the SaaS platforms,
whether those are ERPs or CRM or lots of different types of
business solutions that
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enterprises need to run their
operations. And they're quite costly. And many customers might
not be delighted. So there's
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basically an opportunity there
to disrupt that market. That's one. The second one is the fact
that building an enterprise
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platform is much easier today. I
mean, to create those enterprise- grade software solutions used to
be extremely difficult and
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expensive. It is much easier
today with coding agents, which basically is lowering barriers
to entry, and so competition
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should be expected to be more
aggressive. And then third, companies everywhere are
rethinking their workflows,
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rethinking the way that they get
stuff done across functions and across verticals. So the idea of a
standardized workflow, which is
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really central to this notion of
the SaaS companies, because basically they sell the same
product to lots of different
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companies, might be under
pressure. In particular, what our roundtable participants were
highlighting was that moving
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forward, it may be more valuable
to have very deep expertise in a vertical rather than having very
deep expertise in how to deploy
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a standardized workflow across
verticals. Just to explain a little better, if I am providing
an enterprise customer with a
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software solution specialized on
healthcare, and now healthcare companies are rethinking lots of
workflows, then maybe that
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expertise is more valuable than
having a software that does one specific workflow in a very
efficient or standardized or
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reliable way. And so there might
be opportunities there, almost for flipping the matrix and
having competitors for enterprise
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software products or solutions
being competing more around expertise revolving particular
issues in an industry, rather
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than a specific workflow like a
CRM or whatever. And so that was what our roundtable participants
were saying. And when you think
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about it now, we have the three
forces. You have maybe not totally satisfied customers, so
opportunities to switch. You've
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got a lower barrier to entry.
And then you've got a shifting in the value propositions sought
after by— in this industry. And
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all that together could lead to
undermining the position of many of these SaaS companies. Now,
our round table participants did
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not think that this company
would cease to exist. They thought that you would still
need the foundation layer, so to
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speak, and that they would not
want to have all the data dependent on one particular AI
solution vendor, whether that is
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Anthropic, Open AI, or Google, or
whatever. And so maybe they would— they would want to
retain, but the margins could be
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expected to decrease quite
considerably. Yeah. And part of this, from what I
understand, is also a discussion
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about pricing as well, correct? Yeah. So there was a
discussion about that, too. At
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the center of that has been— in
the media and across companies— this idea that maybe there's
pressure to shift away from an
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input-based pricing model— for
example, the number of users— to a more output-based pricing
model, which is more like, you
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know, the benefit that the
software is supposed to provide to the company. And some AI
companies are trying to push
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this output-based pricing, which
might undermine the profitability of some of the
SaaS companies, because that
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input-based pricing is quite
profitable. And our participants at the roundtable were a little
skeptical that this would be
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happening very fast and across
lots of different software solutions. The reason being that
to be able to price on outputs,
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you need to be able to measure
outputs reliably and in detail. And for many of those complex
organizational workflows and
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organizational outcomes, it's
quite difficult to do. And so in the case of some of them, like—
I don't know, maybe call centers
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or whatever, where you have
clear output metrics, objectively measured, reliably
measured, trackable over time—
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then maybe that is going to
happen, or there'll be pressure towards that. Maybe it won't
happen, but it will still
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decrease the margins, even if
you stick to an input-based metric. But for some other—
imagine some legal services or
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whatever, it might be difficult
to actually move there, because it might be difficult, for example,
to track the quality of the
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output. So we'll have to see. I think that's a little
bit of an open question, I'd say.
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I would think that
presents an interesting, you know, scenario, when you're
talking about the software
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developers versus the companies
that want to use the software, because the companies that use
it, they obviously want a
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dynamic of the number of users.
That's kind of what we've seen built around technology on the
internet anyway. So does this
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present, you know, kind of this
unique dynamic as we look at the development of this technology
moving forward, as to how both
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sides of the technology are
really looking to to move this forward? Yeah, there's going to be very
interesting competitive
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dynamics. And I'm not a
professor of strategy, I'm a professor of marketing, so it's
a little bit beyond my expertise.
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But you can imagine, you know,
if you go back to your standard frameworks and competitive
analysis, like Michael Porter's
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Five Forces, or something like
that, the arrival of these very powerful AI agents and the
competition, the convergence of
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competition from AI and other
tech sectors into software, you're going to basically see
changes in dynamic competition.
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It's not only the SaaS companies
are feeling the pressure. In many situations, also, their clients
are feeling the pressure. So
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you're going to have competitive
pressures across the value chain, not just in one
particular area.
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So then, with this discussion
going on, is this kind of an important shift moment when we
think about the importance of
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artificial intelligence moving
forward? Or is this, I guess, just a little bit of a bump in
the road?
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It is— I mean, it's impossible
for me to say whether the depressed value of software
stocks is going to be more of a
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permanent feature or something
that will change, but I have to say that I think that the month
of February was— might, in the
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future, might be looked at as a
bit of an inflection point. Up to few weeks ago, I would say
that AI was a very important
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topic, mostly sold on its
potential. What Nate Silver calls "the white paper phase."
It's like, you know, this is
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going to happen, and you ought
to pay attention. And I think what we've seen over the last
few weeks is going to
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be maybe a change where now
we're talking about impact and not potential. So there have
been some discussions about, you
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know, Eric Brynjolfsson from Stanford
arguing that we're starting to see the impact on productivity
statistics. Controversial, but
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maybe we are. We've seen coding
agents and other types of agentic workflows becoming much
more powerful and more widely
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adopted. We've even seen the
massive role that AI is playing on geopolitics. Just look at the
latest drama around Anthropic
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and the Department of War. And
so there's been few signs that we might be moving in from the
stage where, oh, this is a
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powerful technology people ought to
pay attention to, because in the future it will have an impact to
use the power of technology, and it is
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having an impact now. Stefano, great to have you back
with us again. Thanks very much
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for your time today. Thanks, Dan.
Great to be here. Thank you. Stefano Puntoni,
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marketing professor
here at the Wharton school.