貝恩+技術報告

TechnologyReport2022

TechCompaniesEatDisruptionforBreakfast

Acknowledgments

DavidCrawford,leaderofBain&Company’sGlobalTechnologypractice,andateamledbyStanleyLiu,associatepartnerwiththeTechnology&CloudServicespractice,preparedthisreport.

BainPartnersAnnBosche,MikaelaBoyd,MarkBrinda,ChristianBuecker,TessaBysong,DavidCrawford,MatthewCrupi,JasonDing,JamesDixon,GregFiore,FrankFord,JeffFortner,JonathanFrick,PeterHanbury,KarenHarris,SimonHeap,HansJoachimHeider,JoshHinkel,AnneHoecker,JesseKlein,JordanLee,NeilMalik,RakeshMehrotra,JustinMurphy,RohanNarayen,DuniganO’Keeffe,ThomasOlsen,BillRadzevych,GeneRapoport,PaulRenno,MichaelSchallehn,ChristopherSchorling,PrasadNarasimhanSulur,SeanTanaka,RaviVijayaraghavan,JueWang,andSophiaZou;ExpertPartnerSyedAli;AssociatePartnersJayBhatnagar,SukhBrar,MorganMaxwell,andNiharNaik;SeniorManagerParkerDeRensis;andEricSheng,vicepresident,DataScience,wroteitschapters.

TheauthorswishtothankBainPartnersStevenBreeden,WilliamPoindexter,andPrasadSankaran;AssociatePartnersPeterHenle,StanleyLiu,andMorganMaxwell;SeniorManagersAliciaAvery,RoxieBartholomew,DerekCroft,andNiranjanaNarayanan;ConsultantsAdrianArmas,BritannyBiggs,ColleenCulbertson,AndiFrkovich,andEvanTaylor;AssociateConsultantsMattJenkins,EzraSchwarzbaum,JoshUrquiaga,andJorgeZamudioBermejo;PracticeDirectorAlexSmyth;PracticeSeniorManagerElisabethBentleyDuffy;andJeffBauterEngel,NanetteByrnes,andDavidSimsfortheireditorialsupport.

Thisworkisbasedonsecondarymarketresearch,analysisoffinancialinformationavailableorprovidedtoBain&Companyandarangeofinterviewswithindustryparticipants.Bain&CompanyhasnotindependentlyverifiedanysuchinformationprovidedoravailabletoBainandmakesnorepresentationorwarranty,expressorimplied,thatsuchinformationisaccurateorcomplete.Projectedmarketandfinancialinformation,analysesandconclusionscontainedhereinarebasedontheinformationdescribedaboveandonBain&Company’sjudgmentandshouldnotbeconstruedasdefinitiveforecastsorguaranteesoffutureperformanceorresults.Theinformationandanalysishereindoesnotconstituteadviceofanykind,isnotintendedtobeusedforinvestmentpurposes,andneitherBain&Companynoranyofitssubsidiariesortheirrespectiveofficers,directors,shareholders,employeesoragentsacceptanyresponsibilityorliabilitywithrespecttotheuseoforrelianceonanyinformationoranalysiscontainedinthisdocument.ThisworkiscopyrightBain&Companyandmaynotbepublished,transmitted,broadcast,copied,reproducedorreprintedinwholeorinpartwithouttheexplicitwrittenpermissionofBain&Company.

Copyright?2022Bain&Company,Inc.Allrightsreserved.

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TechnologyReport2022

Contents

DisruptionintheDNA

2

ValueEvolution

5

Don’tCountOutGrowthEquityInvestors

6

HowtoCompeteandWinintheMulticloudWorld

10

Web3CouldRewritetheRulesofUserIdentity

15

US-ChinaDecouplingAccelerates,andShockwavesSpread

23

CompetitiveBattlegrounds

29

Incumbentsvs.Disrupters:TheBestDefenseIsOffense

30

NowIstheMomentforTech’sNewGrowthImperative

37

CustomerSuccess:TheNextFrontierofAI

42

ToScaletheIndustrialInternetofThings,Don’tForgetHardware

47

OperationalAdvantage

53

Is60theNew(Ruleof)40?SettingaNewStandard

ofSoftwareExcellence

54

FourWaysTechCompaniesCanBoostSalesProductivity,

EveninaDownturn

63

IsConsumption-BasedPricingRightforYourSoftware?

67

ProductManagement:TheKeytoUnlockingReturn

onYourSoftwareR&DInvestment

72

WhenWilltheChipShortageEnd?

78

HowCompaniesCanBuildaSupplyChainfortheCircularEconomy

83

2

DisruptionintheDNA

Buffetedbyexternalfactors,technologyremainsresilientandcriticallyimportant.

ByDavidCrawford

WelcometoBain’sthirdannualGlobalTechnologyReport.

Alotcanhappeninayear.Traditionallyintech,valueisdeterminedbyinnovationandrevenuegrowth.Thisyear,macroeconomicandgeopoliticalfactorshaveplayedanoutsizedrole.Whenwewroteourlastreport,technologystockswerestillonameteoricrise.Todaythesectorhasbeenhithard(seeFigure1).

Still,CIOsandCTOsareincreasingtheirtechnologyspending(seeFigure2).Ofcourse,theremaybebudgetpressureinthefuture,butoverthelongterm,tothem—andtous—techisnotsomuchacostasaninvestmentthatspursproductivity.

Turbulenceanddisruptionareinthissector’sDNA,andoftengiverisetofreshadvances.Howeverrockythenextyearmaybe,technologywillcontinuetoplayacentralroleintheglobaleconomy,helpingtoshapehowcompaniescreatesustainedvalue.

DavidCrawford

LeaderofBain’sGlobalTechnologyPractice

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Figure1:High-growthcompanieshavebeenhithardestbytherecentmarketshift

Publicmarketvaluationmultiple

12x

5x

November2021July2022

Companieswithrevenuegrowthof40%orless

32x

9x

November2021July2022

Companieswithrevenuegrowthofmorethan40%

Notes:Publicmarketvaluationmultipleiscalculatedbydividingtotalenterprisevaluebynext-12-monthrevenueforInternetservicesandinfrastructurecompaniesandsoftwarecompanieswithmorethan$50millioninrevenueoverthelast12months;revenuegrowthbasedonJuly2022last12months/next12months;excludescompanieswithincompletedata

Sources:S&PCapitalIQ;Bainanalysis

Figure2:Despitethedrop,companiesexpecttocontinueinvestinginIT

PercentagewhoexpectITbudgettoincreaseorstaythesame

April2020

44%

April2021

75%

May2022

90%

2023

(expected)

77%

Note:2023forecastwasmadeinJuly2022

Source:Bainsurveys(n=210,April25,2020;n=188,April26,2021;n=179,May20,2022;n=187,July19,2022)

ValueEvolution

Don’tCountOutGrowthEquityInvestors

6

HowtoCompeteandWinintheMulticloudWorld

10

Web3CouldRewritetheRulesofUserIdentity

15

US-ChinaDecouplingAccelerates,andShockwavesSpread

23

6

Don’tCountOutGrowthEquityInvestors

ValueEvolution

Thisclassoftechinvestorshasbeenbatteredbythemarketdownturn,buttheir

approachhaspermanentlychangedthefinancingoffast-growthinnovation.

ByChristianBuecker,GregFiore,DuniganO’Keeffe,andSeanTanaka

AtaGlance

Inrecentyears,techinnovatorsbackedbygrowthequityinvestorshavegrownrapidlytovaluationsof$1billionormore.

Theunderlyingtechnologicalandbusinessmodelinnovationthatmadethispossibleremainsound.

Butthemarketshockof2022hasclearramifications—andoffersnewopportunities—tostars,fallenangels,andsavvytechincumbents.

Inthelastdecade,technologycompanieslikeAirbnb,Snowflake,Stripe,andCrowdstrikeledawaveofdisruptionthatreorderedestablishedindustriesandinventedwholenewones.Alongtheway,theycreatedastonishingvalue.InJune,thenumberofprivatebillion-dollarstart-upsexceeded1,100,accordingtodatafromCBInsights,amorethantriplinginfiveyearsoftheseonce-rareunicorns.Asagroup,theyreachedavalueofroughly$4trillionto$5trillionbeforetherecentmarketcorrection,accordingtoCBInsightsandCrunchbase.

Thisexplosionhasbeenbackedbyanewwaveofgrowthequityinvestors.Whilemanytraditionalventurecapitalistsnarrowedtheirfocustoearly-stagecompaniesthathavenotyetachievedproduct

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$532B

$409B

$382B

TechnologyReport2022

marketfit,thefundingofanewclassofinvestorspioneeringadifferentmodelofinvestmentgrewsignificantly(seeFigure1).Thesegrowthequityinvestorsdeploylargeamountsofcapital—oftenexceeding$100millioninasinglefundinground—tohelprelativelymaturecompaniespursuebreakthroughinnovationandscaleatanunprecedentedpace.Theyoftendoubledowninlaterfund-raisingrounds,positioningthemselvesaslong-terminvestorsbyholdingtheirstakesthroughtheinitialpublicoffering(IPO)andbeyond.Asaresult,newlymintedgrowthspecialistfunds,hedgefunds,refocusedVCfirms,andothergrowthequityinvestorshavebecomethefinancialpartnerofchoiceformanyfast-growthcompanies.

Thankstothisnewmodel,inrecentyearscapitalceasedtobealimitingfactorforaprivatecompany’squickscaling.Some30%ofcompaniesthatwentpublicin2020hadraisedmorethan$100millionbeforetheirIPO,comparedwith7%in2015.ThismadeitpossibleforSpaceX(valuedatapproximately$125billion)andShein(atapproximately$100billion)togrowtohugevaluationswhilestillprivateandhelpedUber’sIPOreach$70billion-plusandKuaishouTechnology’sdebutintherangeof$150billionto$160billion.Oncepublic,growth-backedsoftwarecompaniescontinuedtoperform.Amongsoftwarecompanies,growthequity-backedtechcompaniesaccountforonly8%ofrevenue,but19%ofgrowth,14%ofsalesandmarketingspending,and13%ofresearchanddevelopmentspending.

Growthequity’sfirstbigtestcamein2022.ByMay,asinterestrateshithigh-growthstocksandtheIPOmarkets,thecumulativemarketcapitalizationofthefastest-growingsoftware-as-a-service(SaaS)

Figure1:Intechnology,growthequityhasincreasedfasterthanallotherinvestmentsegments

Investmentintechnology,byinvestmentsegment($B)

$1,004B

Growthequity’ssharegrewto27%in2021

from19%in2017

$294B

201718192021

VentureGrowthequityBuyoutPublic

Notes:Growthequityinvestmentsincludegrowth,expansion,andlate-stageventurecapitaldeals;2022dataasofMay26

Sources:S&PCapitalIQ;Pitchbook;Dealogic

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stockshadfallenalmost70%,accordingtoMeritech.TechIPOvolumeinthefirsthalfof2022fell80%fromthesameperiodayearearlier.Thenumberoflate-stagefinancingroundscollapsed.High-profileinvestorsbegantospeakofblackswansandtoughtimesahead.Companiesthatoncecouldn’thirefastenoughstartedlettingpeoplego.Today,bothKuaishouandUbertradewellbelowtheirofferingprice.

Wasthisthegrowthequitybubblebursting?

That’sanunderstandablequestiongiventhe2022crashinvaluationsforhigh-growthassets,butgrowthequityhasfundamentallyalteredtechinvestingoverthelastdecade,andthereisastrongargumentthattheunderlyingchangesthatledtothecreationoftheassetclassremainsound—astechnicalinnovationwillcontinuetocreateopportunitiesforfast-scalingcompanies.

Technologicalinnovation

Innovativetechnologywillcontinuetohelpbuildandscaledisruptivebusinesses.Cloudcomputingputshighlyscalabledatacentersandadvancedcapabilitiesatthefingertipsoffledglingcompanies.Cloud-nativecompanieslikeSnowflake,Databricks,andGitLabcatapultedtosuccesswithtoolsforclouddataanalytics,artificialintelligence,andDevOps.Theirtechnology’smodularity,thewayapplicationscommunicateviaAPI-basedarchitectures,hasbuiltanecosystemofcomplementarysolutionsthatcollectivelycompeteagainstthemonoliths.Andthenextgenerationiswaitinginthewings—nascenttechnologiesliketheInternetofThings,quantumcomputing,artificialintelligence,virtualreality,autonomy,newspace,andweb3.Notallwillsucceed,buttheonesthatdowillbecomethenextgenerationofgrowthequity-backedleaders—usingmassiveamountofcapitaltoscalerapidlyintomassivemarkets.

Innovativetechnologywillcontinuetohelpbuildandscaledisruptivebusinesses.

Businessmodelinnovation

Businessmodelinnovationhaschangedhowtechnologyisboughtandsold.SaaScustomersnolongerhavetoinstallandoperatetechnologypurchasesthemselves.Thankstoopen-source,freemium,andproduct-ledgrowthmodels,today’sfrontlineuserscanbothtryandbuytechnology.Otherbusinessmodelinnovationshaveloweredthebarrierstoentryinindustriespreviouslyconsideredimmunetotechdisruption,includingfinancialservices,healthcare,andevenspace,intheprocesscreatingawell-understoodplaybookandanecosystemofexecutivesandinvestorsexperiencedinrunningandinvestingbasedonit.

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Thisflywheelofdisruptionisacceleratingasinnovationscombinetocreatemoreinnovation,aconceptcalledrecombinatoryinnovation.ThinkofhowGPS,cellphones,anddigitalmapstogethercreatedreal-timenavigation.Eveninaworldwheregeopoliticaltensionsincreasinglyaffectthetechnologyindustry,innovationtodayremainsaglobalmarket,nurturingarichworldwidecompetitionofideas.

Stepstotakenow

Whilethenewmodelofinnovationhasalreadyspreadstrongroots,themarketshockof2022willhaveramifications.Once-risingstarswillhavetofocussooneronuniteconomicsandapathtoprofitability.Fallenangelsthathaven’tliveduptoexpectationswouldbenefitfromthinkinglikeaprivateequityinvestor:Whatcosts,products,orcustomersegmentswouldtheycut?Whatassetswouldtheysellinordertoconcentrateonthecore?

Incumbenttechleadershaveauniqueopportunitytofundamentallyrethinkcorporateinnovationpatterns,and,afterdoingtheirhomework,aggressivelypursuemergersandacquisitions(M&A),partnershipswithinnovators,andtalentacquisition.Threestepsareparamount.

1.Developtheskillstosensedisruption.Noindustryorcompanyissafefromdisruption.Investincustomerrelationshipsanddeeplyunderstandtheirneeds.Ensureyourcustomerandcompetitiveintelligenceisuptothetaskofmonitoringthelandscapeandinformingyourstrategy.Assesswhereyoucanpartnerandintegratewiththenextgenerationofcompanies,includingtheuseofcorporateventurecapitalasameanstobetterunderstand,partnerwith,andcultivatetheecosystem.

2.Committomajorinvestments.Mostcompanieswillneedtobecometech-native.Thatmayrequireneworganizationalstructures,talent,culture,andbudgeting.Rationalizeyourinnovationbetsbyfocusingresourceswhereyoucanwinandcuttingsubscale,half-heartedefforts.ReevaluateyourM&Astrategyforanenvironmentinwhichbuyingthewinnerswillremaindifficultduetogrowthequity-backedvaluationsandfounderswhoseesellingtoabigcorporationaslessattractive.

3.Getgoodatscaling.Anincumbentmayneverbeasinnovativeasafounderabletoraise$100million,butitdoeshavevaluableassetsadisruptermaylack:businessecosystems,customers,andoftenastrongcorebusiness.Establishedcompaniesthatfigureouthowtounlockuntappedpotentialinthoseassetsandscalethemcanborrowapagefromtheunicornsandsetthemselvesonawholenewgrowthtrajectory.

Savvyincumbentscancompetewithgrowthequity-backedsuccessstories.GoogleCloud’ssustainedinvestmentandinnovationinanalyticshasenabledBigQuerytogotoe-to-toewithSnowflake,forexample.AndDynatraceincubatedRuxit,acloud-nativeobservabilitytoolundertheCompuwarebannerthatisnowitscoreproduct,helpingitcompetewithgrowthequity-backedDatadog.

Whetherasdirectcompetitors,complementarypartners,oracquirers,companiesaresmarttooperateontheprinciplethatgrowthequity-backedbusinessinnovationisheretostay.

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HowtoCompeteandWinintheMulticloudWorld

ValueEvolution

Afteracrashinvaluations,multicloudinfrastructuresoftwarevendors(ISVs)and“hyperscaler”cloudserviceprovidersbattleforthecloudsoftwaremarket,eachbringinguniquestrengths.

ByMatthewCrupi,MarkBrinda,MorganMaxwell,andBillRadzevych

AtaGlance

Themulticloudsoftwaremarkethasgrowntremendouslyinrecentyears,butnotallcompaniescansurvive.

ThreefactorswilldetermineanISV’slikelihoodtosucceedinagivenmarket:whethercustomerswillpayforpremiumfunctionality,whethertheywanttoavoidlockingintowalledgardens,andwhetherhyperscalers’benefitsofscaleprovideauniqueadvantage.

Afterthevaluationsofmulticloudinfrastructuresoftwarevendorsshotintothestratosphereoverthepastthreeyearsonlytostartcrashingdowntoearthinlate2021,investorsandenterprisecustomersareleftwondering,whowillsurviveandthrive?

It’soneofthemostconsequentialquestionsintechnologyrightnow,becauseithassignificantbearingonwhowillwinthecloudsoftwaremarket:multicloudinfrastructuresoftwarevendors(ISVs),hyper- scalercloudserviceproviders,oron-premiseoriginators(seedefinitionsofthesethreegroupsin“CloudSoftwareCompetitors”onpage13.)

MulticloudISVs’rapidgrowthinvalueindicatedanexpectationoftransformativemarketpenetrationandmassiverevenuegrowthoverthenextfewyears.Indeed,revenuegrowthoftopmulticloud

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37

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ISVshasexceededthatofbothhyperscalersandon-premiseoriginators,increasingbyamedianof44%from2019to2020and50%from2020to2021(seeFigure1).Theirmarketvaluationsincreasedbyamedianof157%from2019to2020and25%from2020to2021.SomeISVsenjoyedvaluations50timeshigherthantheirannualrevenue,morethantripletheaveragesoftwaremultiple.

Itwasn’tsustainable.Asmacroeconomicchallengesdraggeddownthestockmarketoverall,multicloudISVvaluationsdeclinedevenmoresteeply,evenastheirrevenuegrowthoftenexceededexpectations.Intime,itwillbecomeclearwhetherthisisanovercorrectionoraresetthatbetterreflectsintrinsicvalue.Howeverthatplaysout,it’sincreasinglyclearthatthecompetitionbetweenmulticloudISVsandhyperscalerswilldeterminethefutureofthecloudsoftwaremarket.Asinvestorsandenterprisesevaluatetheircloudstrategies,here’sourguidetowhatwilldeterminethewinners.

Threeswingfactors

ThestrengthofamulticloudISV’sadvantageinasegmenthingesonthreecharacteristics.

?Customers’willingnesstopayapremiumforbest-of-breedsolutions.MulticloudISVshaveanopeningtodifferentiatethemselvesinpartsofthecloudstacklocatedfurtherfromhyperscalers’coreofferings.CustomersalreadychooseISVswhentheyneedbest-in-classtechnology,andforcertainkeypurchasecriteria(seeFigure2).

Figure1:Infrastructuresoftwarevendorsgrewquicklyandwerehighlyvaluedthrough2021,butthey’vebeenhithardthisyear

MedianrevenuegrowthamongtopISVs,

on-premiseoriginators,andhyperscalers

50

44%

–2

2020–21

2019–20

MedianchangeinmarketcapitalizationamongtopISVsandon-premiseoriginators

157%

25

15

–7

–18

–56

2019–202020–212021–22

ISVOn-premiseHyperscaler

Notes:Marketcapasof12/31/19,12/31/20,12/31/21,and5/12/22;forprivatecompanies,valuationsbasedonlatestpubliclyannouncedfundinground;hyperscalersaren’tincludedinmarketcapanalysis

Sources:S&PCapitalIQ;Pitchbook;Barclaysanalystreports;Bain&Company

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Figure2:CustomerschooseISVsforhigh-qualitytechnology,andhyperscalersforreliability,integrationwithexistingIT,andcost

Percentageofnewcustomerswhocitethisreasonforchoosinghyperscalersorinfrastructuresoftwarevendors

RelationshipwithvendorReliability/uptime

CompatibilitywithexistingITfootprint TotalcostofownershipCompatibilitywithexistingITskills

Price/cost

ImplementationcostSecurity

Long-termROIVendorsalesandsupport

Implementationlength

ImmediateROI

Alignmentwithcloudvendor(s)Technologicallead/lagFeatureset

Advantageforhyper-scalers

AdvantageforISVs

0

20

40

60%

ISVHyperscaler

Note:SurveyconsistsofrespondentswhoreportedplanstoadoptanewhyperscalerorISVin2021fordatabase/datawarehouse,containerplatform,infrastructuresoftware,oranalytics/businessintelligence/bigdatasolutions

Source:ETRTSISsurvey,January2021

?Strongcustomerpreferenceforcloudinfrastructureflexibility.MulticloudISVsolutionsthatworkconsistentlyacrosscomputingenvironmentsarewellsuitedtobuyersthatwanttoavoidvendorlock-inandsimplifytheirmulticloudorhybridenvironments.

?Relativelylimitedbenefitfromscale.ISVsaremorelikelytosucceedwhenthiskeyadvantageofhyperscalers’platformsisn’tcritical.

ThefutureofISVs

ThesethreeswingfactorshelpclarifywhenISVsarebetterpositionedtowin,whenthey’llfacefiercecompetitionfromhyperscalers,andwhenhyperscalershavetheadvantage.

?ISVsareinagoodpositiontowinwhenbest-in-classtechnologyandcloudinfrastructureflexibilityareparamount.Examplesincludecybersecurityandappmonitoring.Incybersecurity,despitehyperscalers’movestobolstertheirofferings(suchasGoogleCloudPlatform’s$5.4billionMandiantacquisition),multicloudISVswillbeformidablecompetition,wellpositionedonallthreeswingfactors.Cloudflare,forexample,hasuppedthegameforwebperformanceandsecuritywithitsdifferentiatedsoftwarearchitectureandinnovation.Thecombinationhaspoweredthecompanybeyondinvestoranalysts’revenuegrowthexpectations,morethantriplingitstotaladdressablemarketestimatefrom$32billionin2018justbeforeits2019IPOtoover$100billion.

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CloudSoftwareCompetitors

Threemajorcategoriesoforganizationsarebuildingoutthecloud’sinfrastructure,middleware,andmanagementsoftwaremarkets.

?On-premiseoriginators.On-premisenativesprovidinginfrastructureandanalytics,includinghardware,software,andmiddlewarelayersofthetechnologystack.Exampleswithon-premiserootsincludeVMware,avirtualizationcompanythathasmovedfromon-premisetomulticloud,andTeradata,whichnowofferssoftwaresubscriptionsinthecloudinplaceofanon-premise,hardware-centricproductportfolio.

?Multicloudinfrastructuresoftwarevendors(ISVs).Cloud-native,hybrid-native(combining

on-premisesystemswithcloud),oropen-sourcesoftware-as-a-service(SaaS)companiesofferingsolutionsthatintegratewiththehyperscalers’cloudinfrastructure.ExamplesincludeDatadog,Snowflake,andTwilio.

?Hyperscalers.Thelargestcloudserviceprovidersthathavebuiltagrowingportfolioofservicesrunningontopoftheirownplatforms.ExamplesincludeAmazonWebServices,MicrosoftAzure,andGoogleCloud.TheseserviceseithercompetewithorcomplementsolutionsfromthemulticloudISVs.

?ISVsandhyperscalerswillengageinfiercecompetitionwhenbest-in-breedtechnologymaybebeneficialbutnotnecessary.Examplesincludedatawarehousinganddatabasemanagement.Indatawarehousing,webelievemulticloudISVscancontinuecarvingoutleadingpositionsinthemarket,butdoingsowillrequireovercomingstronghyperscalerpresenceandinvestment,aswellasmanagingthecomplexrelationshipbetweenISVsandhyperscalersinthosemarketseg-mentswheretheybothcompeteandpartner.Snowflakehasenjoyedaspectacularrise,includingthelargestsoftwareIPOatthatpointinhistory.Similarly,Databrickshasdemonstratedexceptionalstrength,reaching$800millioninannualrecurringrevenuein2021,80%morethanin2020.

?Hyperscalerscouldcapturethemajorityofprofitpoolswhentheyhaveadistincttechnologicaledge,asignificantleadinthemarket,oranoverwhelmingadvantagefromscale.Thismayincludeareaswithinartificialintelligence(AI)andmachinelearning(ML),suchasAIdeveloperframeworksorvisionandnaturallanguageprocessing.HyperscalersgetdifferentiatedbenefitofscalefromtrainingAI/MLsolutionsonlargedatasetsandacrossmultipletools.Inthissegment,customersarealreadyvotingwiththeirdollars,spendingaround60%oftheirAI/MLbudgetsonhyperscalers’tools,comparedwith25%onmulticloudISVsolutions,accordingtoa2022Bainsurvey.WestillexpecttoseeISVswinninginareasofAIfurtherfromthehyperscalercore,however,includingcasesinvolvingproprietarydataordomain-specificfunctionality.

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ImplicationsforISVs,hyperscalers,andon-premiseoriginators

Asthecloudservicesindustrymatures,multicloudISVsshouldplayalargerroleinthemarket,buthyperscalerswillmaintainastrongcompetitiveposition,andon-premiseoriginatorshaveanopportunitytocarveouttheirownvaluableniche.

On-premiseoriginatorshavetwoimportantstrengthstodrawupon:alargeinstalledbaseofcustomersandwell-knownbrandnames.Ratherthantryingtobeathyperscalers,weexpectmoreon-premiseoriginatorstoformpartnershipsandinvestinmakingtheirleadingsoftwareofferingsworkseamlesslyontopofhyperscalers’platforms.

Criticalquestionsforon-premiseoriginatorstoconsiderastheycrystallizetheirstrategies:

?What’sthesourceofourcompetitivedifferentiationfromhyperscalersandmulticloudISVstoday?Whatwillitbeinthefuture?

?Howcanwepartnerwithhyperscalerstokeepcustomersfromseekinganewsolution?

SuccessfulmulticloudISVswilldisproportionatelyinvestinproductslocatedfurtherfromthehyperscalercorethathavehybridormulticloudrequirementsandlimitedbenefitsfromscale.Bymaintainingafocusoncustomerneedsanddeliveringbest-in-classsolutions,theycancontinuetowin.Onewildcardtowatchisregulation.Ifregulatorsrequiremorestandardizationandinteroperability,that’slikelytobenefitmulticloudISVs.

CriticalquestionsformulticloudISVleadershipteams:

?Dohyperscalersviewourmarketsasmust-winbattlegrounds