Investors went on a wild ride last week, briefly wiping out $2 trillion in stock value, over fears that AI agents from companies like Anthropic and OpenAI could steal business from established software vendors — but the market seems to have overreacted.
AI Isn't Replacing SaaS, It's Evolving It
The financial markets have a history of overreacting to perceived threats to the SaaS (software as a service) industry. The latest scare involves AI foundation models potentially enabling businesses to create custom software, thus reducing the need for traditional SaaS solutions like Salesforce, ServiceNow, or Workday. Last week, concerns grew that AI agents could directly compete with SaaS vendors' AI offerings and automate workflows, reducing the need for human employees and, consequently, seat licenses.However, it's improbable that most Fortune 500 companies will want to develop and maintain their own bespoke (custom-made) software for tasks like customer relationship management or human resources. Even with AI-powered automation, managing enterprise resource planning (ERP) software can divert resources and engineering talent, according to experts. This suggests demand for SaaS companies' core offerings will persist.
There's more reason for concern regarding AI agents from foundation model makers potentially dominating the AI agent market. Companies like Anthropic, OpenAI, and Google could control the agent orchestration platforms, which are the frameworks for building and managing complex workflows. OpenAI is attempting to do this with its new agentic AI platform for enterprises called Frontier.
SaaS Companies Adapt to the AI Landscape
SaaS companies argue they are best suited to manage the orchestration layer, citing their expertise in cybersecurity, access controls, and governance. They also often possess the data AI agents need to function. Plus, because most business workflows won’t be fully automated, the SaaS companies think they are better positioned to serve a hybrid workforce, where humans and AI agents work together on the same software and in the same workflows.Even if foundation model companies gain ground, it doesn't spell complete doom for SaaS. Anthropic’s Claude Cowork, for instance, utilizes SaaS software as a tool to accomplish tasks. This means that while some customers might prefer Claude Cowork over upgrading to offerings like Salesforce’s Agentforce or Microsoft’s 365 Copilot, the underlying SaaS infrastructure remains relevant.
SaaS vendors are also adapting their business models to address the potential decline in seat license sales. Salesforce is pioneering "Agentic Enterprise License Agreements" (AELA), offering fixed-price access to Agentforce. ServiceNow is shifting to consumption-based and value-based pricing models, while Microsoft is incorporating consumption-based pricing into its Copilot Studio product. These changes could impact SaaS companies' growth and margins, as they may not benefit as much from unused licenses.
The Bigger Picture
- The market initially reacted strongly to the perceived threat of AI, with Goldman Sachs estimating a wipeout of some $2 trillion in stock value.
- SaaS companies are exploring new "Agentic Enterprise License Agreement” (AELA) pricing models to adapt to the changing landscape.
- A study by researchers at the University of California Berkeley found that AI tools are leading to work "intensification," with employees completing tasks faster but also facing increased workloads and cognitive demands.
- Wall Street analysts believe that the fates of different companies within the SaaS category are likely to diverge.
