Ah, the year 2000. Coldplay, Eminem, and Beyonce are tearing up the charts. How the Grinch Stole Christmas has cinched the top spot on the domestic box office. Words like “iPhone” and “Coronavirus” are meaningless. A company called Amazon is growing at a rapid clip, and—
What’s this over here? Washing out from the raging sea of the 90s tech bubble, a business steps into the 21st century with a novel idea: software as a service. How do you say that name? Salesfish? Oh. Salesforce. Well, good luck with that.
Of course, we know things worked out pretty well for this bold new business. But how did the subscription model go from relative obscurity to the point where you can now subscribe to an elevator?
On-premises solutions and the 90s
The modern subscription business model emerged under a unique set of circumstances. The 90s saw an enormous surge in tech spending and investment.
Though computers had existed for decades, computational powers had reached a new peak. Al Gore had just finished inventing the internet—or so legend has it, anyway—putting unprecedented power in the hands of businesses and individuals.
On-premises software licensing improved business growth by making once obscure tools accessible to the average person. And with all the startups splashing onto the scene, business was good.
Well. We know what happened next. Low-interest rates and eager investors flooded the market with dot-com startups. The tech bubble grew, and grew, and grew. Then it popped. Microsoft profits plummeted by 42%. Oracle, one of the leading CRMs at the time, experienced a dip of 59.8%—a crash it’s still, to an extent, struggling to climb out of.
Not all tech businesses folded in the burst, but most were limping by the new millennium. By 2000-2001 the majority were disoriented, struggling to remain solvent.
A frightful time to launch a tech business. Or so one would think.
In walks Salesforce
In the 2000s, obscure CEO Marc Benioff staged the most theatrical protest Silicon Valley had seen to that point. Marching in front of Siebel Systems—acquired by Oracle in 2005—the CEO, alongside actors, held anti-software signs. “Red rover, red rover, software is over,” they shouted.
Later that year, Benioff would hold an investor party in which participants broke up physical pieces of software and threw them in the garbage. One can assume there were also hors d’oeuvres.
These stunts were all designed to call attention to Benioff’s idea:
Make software accessible all the time, remotely, by the cloud. No more large one-time licensing fees for tech that only dates itself the next year. Instead, get a monthly subscription, and enjoy constant access to evolving technology.
And the subscription model for software—at least as it’s seen today—was born.
How, you might be wondering, was it received? Here’s what journalist Jay Green had to say:
“At this point, Salesforce.com is nothing more than an ant at Siebel’s picnic. With 150 customers to Siebel’s 1,000, it can hardly be considered a threat.”
To give Green credit, Salesforce was small. The element of recurring billing in the software niche hardly existed as a concept. What are the odds this small subscription business can take on the giants?
Well, Siebel is now defunct, and Salesforce is worth around $150 billion.
Why the surprise?
Now it’s hard to imagine why anyone would question the merits of recurring revenue. After all, subscription pricing models have existed for centuries. In the early 2000s—and for hundreds of years prior—subscription businesses like newspapers and magazines were doing fine. Why not software?
Context is important. As Green pointed out, Salesforce was David standing against more than a few Goliaths. Tech accessibility was also a factor. The power of the cloud was only just becoming clear.
Cloud computing was first introduced as a concept in 1963 when DARPA approached MIT with $2 million, and a request to build a system that would allow “two or more people to use a computer simultaneously.”
It was a long, long road from there. In fact, modern cloud computing as a form of subscription management didn’t really emerge until 1999, with the emergence of, you guessed it, Salesforce.
Before this, the tech wasn’t there. Internet access was spotty and unpredictable. Salesforce landed at exactly the right time. It emerged as a disruptor in a vulnerable market, taking advantage of new technology in a novel way.
It wasn’t that people doubted monthly recurring revenue could be a valuable concept on which to hinge a business model. They simply had no reason to believe it could work for software. Salesforce proved it was possible.
The evolution of software as a service
SaaS now has an estimated global value of $3 trillion. Customer subscriptions continue to rise, not just in software, but for other services, including cars, meal plans, and more. It’s a concept that works. Rampant success has changed the discussion considerably.
Experts now predict that the SaaS industry will continue to grow at a rate of almost 20% annually.
A moment in time?
So yes. The state of SaaS is looking good, and it’s all thanks to the “ant at the picnic.” New SaaS businesses don’t wonder if subscriptions work as a concept. They focus on how to maximize them. They invest in a subscription management solution, focus on customer relationships, and hope for the best.
And yet, with the proliferation of subscription businesses, it’s easy to wonder if we are simply in the middle of a wave, not so different from the 90s tech bubble.
Many new arrivals to the subscription market got here on the strength of the Covid economy. People needed consistent access to items and services, and a new wave of subscription businesses rose up to fill those needs.
But as things become more normal, will that wave of businesses recede?
Undoubtedly, some will. Nevertheless, consistency remains at the core of how subscription businesses operate. Good software at a compelling monthly price will have its place for the indefinite future.
