I spoke with a group of investors last week about the importance of the emerging field of platform technology. They were interested in investing in a company that was looking for additional late round funding and they wanted to know a few things. What is the market for this new technology? Who will buy it? Isn’t the market already saturated with applications and application technology?
Those were fair questions, especially coming from people who managed other people’s money. One of the most difficult things to do in a situation like this is to make an estimate of the future because to do the job right you must ignore what’s out there already and imagine new markets, new niches, and new opportunities.
It reminded me of the introduction of low calorie beer in the 1970’s. There is a school of thought that says there is no market for a new product until the product exists, until someone declares its existence. I am told that market studies in that era indicated that about one in ten people would be interested in a beer that tasted about the same but delivered fewer empty calories to the mid-section.
One in ten is not a big number despite the size of the beer market, because you have to find that ten percent and make product available to them at the point of purchase. It was a classic long tail dilemma — a big-ish market underserved because it might be too costly to go after. Fortunately, for the beer market, low calorie beer got launched and it was a big success, more people wanted the new beer than the market estimates forecast.
Nevertheless, rather than growing the beer market in absolute terms, the introduction merely fragmented it — where a beer maker once sold one kind of beer, it now had to make, package and market two. If you were a brewer you were faced with a Hobson’s choice of doing nothing and losing market share or introducing a new product through product line extension pretty much to tread water. It would be decades before the gourmet beer craze rejuvenated the beer industry.
I thought I could detect some of that thinking behind the questions the VCs were asking me. Is platform technology going to bring more customers into the market or will it simply compete with the established producers? I think the case is with the former argument though there will, inevitably, be competition with existing products. The market for enterprise software is driven by economics and it is more driven by economics today than ever before — and at least part of the drive is simply the result of the success of on demand solutions.
On demand software showed business enterprises that their critical systems could be delivered at prices that are orders of magnitude lower than conventional solutions. Some of that is simply a reflection of a flat earth, globalized landscape but it’s mostly about economies of scale. The secret to the success of on demand platform technology will be in opening up new software categories to commercial exploitation. Those categories involve many of the smaller applications that companies routinely build for themselves because, like the ten percent of the beer drinking population, the market is too fragmented — that’s a classic long tail situation.
However, if those long tail applications were all that awaited exploitation by platforms, investors might justifiably be apprehensive about investing. Fortunately for investors and platform providers, there are many more niches that have historically been underserved or completely unserved where economics can drive major adoption — a classic opportunity for disruptive innovation. Three areas to consider are education, law, and healthcare.
The thing that unites these three areas is paper. Far too many of the business processes in these segments are still paper based because there has never been a critical mass of money to drive development of applications for these fragmented markets. Legal filings, medical records, and student activities of many types are paper bound because there is no economically feasible software based solution to support their business processes.
In my experience, when counties need to expand storage for legal filings even as basic as a property deed, they build a building; ditto for hospitals and medical records. The cost, overhead, and delay involved in real estate transactions or healthcare can be directly traced (in part) to human labor and records management and, more importantly, to moving paper based information into electronic systems for wide-scale use.
There are about 5,000 hospitals in the United States each of which uses all sorts of software from operating room scheduling to clinical laboratory systems to systems that manage patients on a ward. You might think that’s a pretty big market but you also need to consider the number of software companies trying to make a living there.
SAP has a bit less than 20,000 customers and I don’t know how many seats deployed; before Siebel was bought by Oracle they said they had about 4,000 customers and four million seats deployed; Salesforce.com has more than 350,000 seats and 18,000 companies as customers. Still think healthcare software is a big market? Healthcare is a balkanized mess of competing vendors whose products must integrate across numerous departmental and technical boundaries. If this isn’t a long tail market, I don’t know what is.
At the end of the day doctors and nurses are still saddled with seemingly endless reams of paper based charts and reports; their time is unnecessarily taken up with managing paper, and the computerized, globally accessible electronic medical record is a pipe dream. The cost of managing paper based medical processes is knowable and can’t be small. If I was an investor wondering where platform technology was going, I wouldn’t worry about finding a market. There are still a lot of business processes that need disruption.