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Unlocking the $4.7 Trillion Tech Market: AI Partnerships & Cloud Marketplaces
Quarterly Insights with Jay McBain
Welcome to our weekly deep dive into technology partnerships and ecosystems.
This time I’m delighted to welcome back Jay McBain, Chief Analyst of Channels, Partnerships & Ecosystems at Canalys, for our quarterly analysis.
In today’s analysis:
The driving forces behind the $4.7 trillion technology market
Why cloud marketplaces are “on fire”
Partnering on Generative AI - who will win and who miss out
Read on for these key insights, or watch the full conversation here.
73% of the $4.7 Trillion Tech Industry Goes Through or with Partners
Jay recently valued the tech industry at $4.7 trillion. He highlighted that:
“technology is the fastest-growing industry, and it's going to double in size this decade. So we'll be talking about north of a $9 trillion market inside of this decade.”
Within this expansive growth, two constants emerge: the critical roles of services and partnerships.
"Services make up two-thirds of the entire pie. So if you are in hardware or software, having a partnering strategy, having an ecosystem strategy is absolutely critical for success."
The market is very large and complex, but partnerships are critical for every company.
"Almost three-quarters of it, about 73%, goes through and with partners".
Shifting Partner Economics: From Point of Sales to Point of Value
We see a profound shift in how large companies are communicating with their partners, transitioning from the long-standing 'margin language' to a forward-thinking 'multiplier language'.
Previously, companies had been paying partners once at the initial point of sale.
"Since August 12th, 1981, in the introduction of the first PC, we've been talking about margins. Hey, this is what you make on the front end, this is what you make on the back end. If you do a deal registration, you make a little bit more…"
The move towards subscription models triggered an essential rethink. Companies need partners to contribute to multiple 'points of value', and help them to re-earn their trust every 30 days. They need help to implement, integrate, ensure compliance, and they need to upsell, cross-sell, and enrich these contracts. Not to mention managed services that go on “forever."
Jay shared an insightful perspective on the fundamental shift:
“This customer for life has a different partner journey, has a different partner economics than just paying at the point of sale. So what if I could spread out all those payments, all the incentives, but pay out more at that point of value than the point of sale…”
This exact shift is happening now, with tech giants like Microsoft, VMware, and HP transitioning to recognize partners at the 'point of value' instead of the 'point of sale'.
And services become critical for the vendor's success on this journey. There are hundreds of services that wrap around a hardware or software product - from consulting, architecture, to implementation, security, continuity, “and those services are absolutely critical in terms of whether you're successful as a vendor."
Such a change in mindset shows the incredible value that partners add. Hyperscalers like AWS have identified $6.40 in multiplier value for every dollar of AWS consumption. Similarly, SaaS providers like Salesforce and HubSpot highlight $6.19 and $5.80, respectively.
The biggest vendors in the $4.7 trillion tech market are changing their language, focusing on recognizing, monitoring, measuring, and managing their partners based on value, not just sales volume.
Cloud Marketplaces are on Fire: Unprecedented Growth and Emerging Top 20 Players
Cloud marketplaces are witnessing an explosive rise, growing at an impressive rate of 86% compounded annually. As predicted by Canalys, they are projected to hit $45 billion by 2025. This growth is momentous, considering that these platforms started from nothing not long ago.
The majority of this burgeoning market—around 80%—is expected to be dominated by the top 20 marketplaces, not the top 20% of players. These key entities include well-known names such as AWS, Microsoft, Google, Salesforce, HubSpot, ServiceNow, Workday, Marketo, and NetSuite in the SaaS realm. Traditional giants like IBM Red Hat, SAP, Oracle, Dell, and Cisco are anticipated to have prominent marketplaces as well.
The competition for the remaining 20% of the marketplace share is intense and multi-layered. Major tech distributors like TD SYNNEX and Ingram are investing billions in developing their digital platforms, with Ingram making significant acquisitions (such as Cloud Blue) to enhance its cloud capabilities over the past decade. Other distributors like Arrow and D&H are also making substantial moves in the cloud marketplace arena.
Further layers of competition include tech solution brokers (which are now consolidating), large resellers owning customer relationships like CDW and Insight, and marketplace development firms that build white-labeled marketplaces, such as AppDirect and Vendasta. All of them are working tirelessly to claim their share of the booming trend.
Another player is the true cloud distribution layer, with the world's fastest-growing distributor, Pax8, leading the pack. They are constructing a federated marketplace that seamlessly links buyers to partners and distributors, and over a hundred other companies worldwide are following suit.
The rush towards cloud marketplaces is not just significant in terms of numbers; it also has material implications for every company's target addressable and serviceable markets in the next decade.
24% of Deals are Partner-Led: Layered Dynamics in Marketplaces
Today's cloud marketplaces are complex, and they are not only about direct transactions.
Jay highlights a new emerging buyer behavior:
“In less than two years, the majority buyer of that $4.7 trillion [market] will be a millennial. These are iPad kids, digital-first, very open to digital technologies like marketplaces, but they also buy seven layers of everything they buy.”
They are not just purchasing one product or service. An average deal in the marketplace includes seven layers of technology, from security to backup, to now the emerging generative AI layer.
What's compelling here is the role of partners in these transactions. Partners are not merely resellers but are instrumental in designing, configuring, pricing, quoting, and finalizing these seven-layer deals. They are at the heart of the buying process.
“24% of all this activity, that is, $45 billion in a year and a half that's going through marketplaces, 24% of the deals are partners clicking ‘buy’ on behalf of the customer,” says Jay.
But partners don't always receive a margin for it, because they are not the sellers of record. This raises a question: Why would a partner do this without the reseller's margin? Jay explains that partners help put together seven layers of the tech stack. “It makes sense that they go in and build that and click buy on behalf of the customer,” he adds.
This leads to a profound insight for vendors: If they are one of those seven layers being selected by partners, they should meaningfully incentivize these partners who chose them.
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AI $15Bn Opportunity: Who Wins and Who Misses Out?
In our analysis of AI trends, Jay McBain suggests that AI is currently experiencing a significant hype cycle, drawing parallels with the previous excitement around the Internet of Things (IoT). While some companies and partners reaped substantial rewards from IoT, others completely missed the trend.
Unlike many technologies, Generative AI is not a standalone product. Instead, it's "being embedded in all the major business applications."
While AI presents an incredible $15 billion services opportunity, not everyone stands to gain. So what does this mean for partners across various business models?
Global System Integrators:
With their focus on security, compliance, cost-efficient storage, and computing, they're in a prime position to capitalize on generative AI's early years.
ISVs and SaaS Companies:
The vast ocean of 200,000 ISV SaaS companies will be beneficiaries as generative AI brings a new technological twist to their products, opening doors for new conversations with customers, product enrichment, and upselling.
Digital agencies, accountants, and lawyers will seize opportunities in specific sectors like marketing, where generative AI will play a crucial role in content creation and automation.
“If the generative AI is built into a marketing platform like Marketo, Eloqua, Pardot, HubSpot, it's probably going to be the digital agency thinking through generative AI content creation and how these automated bots are going to work within the marketing strategy and marketing framework.”
Who Will Miss Out
Since generative AI isn't sold as a standalone product, resellers face an uncertain future with nothing tangible to sell.
“470,000 resellers kind of don't have a SKU to sell.”
VARs and Managed Service Providers:
With no clear path to sell or build managed services around large language models, these players may struggle in the initial years of generative AI.
Those channels rooted in earlier technological eras may find limited opportunities in generative AI, at least in the short term.
Generative AI is a complex and nuanced playing field whose winners will be determined over time. AI will become a part of every product, and it’s still to be seen how successfully companies will monetize it.
“I'll pick on Salesforce, Einstein GPT. They want to charge you for, in addition to your CRM license. Are they going to be successful five or 10 years from now? Continue to charge for it? Or is it just going to slip into the main product, part of the main price? And I would say the latter is probably more likely. It will turn into a feature and function of every other piece of hardware and software.”
Integration and Data: The Game-Changer in the Age of Generative AI
Given that 80% of recent G2 research respondents want AI to be embedded in the products they purchase, integration has become paramount.
Jay highlighted that an "integration-first buyer" is now a driving force across every part of the industry. He draws an insightful comparison: "91% of people won't buy a car today unless it offers Apple CarPlay or Android Auto." This demand for seamless integration is no longer an added bonus; it's the expectation in tech.
Real-Time Data Transfer into Large Language Models (LLMs)
Highlighting a rising demand, Jay points out that customers will want SaaS products to provide more than just user-friendly APIs. They will be seeking real-time data transfers into the LLMs they use or develop. Whether in sales, marketing, or other domains, the expectation will be immediate access to data that fuels system learning, customization, and continuous enhancement of their models.
Customers will need each element of their multi-layer solution to work seamlessly and feed data into their Gen AI engine. So everything from chatbots to RPA engines has access to real-time information.
“I'm going to be asking every single one of those in my own 7-layer solution to go and make sure that the data in real time is being fed into our Gen AI engine. So that the system is learning and it's customizing and it's getting better.”
Until Our Next Quarterly Insights with Jay
We wrapped up this quarter's analysis on a positive note as Jay shared results from recent surveys from Canalys:
“Partners are investing more in marketing, they're investing more in hiring. Even as big tech has laid off 500,000 people, the average partner is still hiring. The tech industry took the world out of recession in 2008 and 2001…”
Next quarter we'll meet again with Jay McBain. Expect a deep dive into the accelerating trends in Gen AI, the updates on growing cloud marketplaces, results on the tech industry's push to pull the world out of recession, and more.
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