OK, so I was a bit delayed in pulling out my crystal ball this year. But now that I’ve done it, I see plenty of overlooked trends on the horizon that will impact the enterprise-tech market in 2019. Some of these trends relate to freely available, open-source software and cybersecurity, topics I wrote about last year. But there are some new areas to discuss as well: the “open cloud”, for one, and the new, pay-as-you-go business models that are shaking up the enterprise market.
This year began with plenty of market and global economic uncertainty—Brexit, anyone? But I still believe it could not be a more exciting time for companies in the booming enterprise-IT sector. Here are my predictions on what will shape the market this year.
2019 will be another blockbuster year for open-source and cloud-native IPOs and M&A deals.
Last year saw some groundbreaking activity in the open-source space, led by IBM’s $33 billion acquisition of Red Hat; the $5 billion merger of Cloudera and Hortonworks; and the successful IPO of Elastic (fellow open-source company MongoDB went public in 2017.) Broadly speaking, the licensing of open-source technology started out a couple of decades ago as a pet project for engineers to democratize access to software. But it quickly transformed into a proxy for cutting-edge software developed by the likes of Google and Facebook, and it’s now used by large enterprises everywhere.
More to the point here, open source is also now shaking up the financial world in terms of value creation. We are still in the early stages of a secular shift from proprietary, closed-source software controlled by one vendor to cutting-edge, open-source cloud software influenced by the community. But with several late-stage, open-source IPO candidates in the pipeline, like Datastax, Databricks*, Couchbase, Redis Labs and Hashicorp, to name a few, and with cloud-vendors and IT software behemoths looking to partake in the open-source goodness, 2019 will continue to be another blockbuster year for open-source companies that have captured developer mindshare . . . with one new twist!
The open-source battle moves to “Open Cloud” with a focus on the $50 billion database market.
Up until a few years ago, most IT software was deployed on-premise or in a private cloud environment. Leading open-source companies–Cloudera, MongoDB, Elastic and others– differentiated their premium offerings from free, open-source versions with gold-level support, specialized enterprise-grade features or some combination thereof. But now, with several Fortune 2000 companies accelerating their cloud journeys, albeit to hybrid- or multi-cloud models, the battle for leading open-source companies has moved to cloud-native models.
In this new era, value is placed on extreme scalability and performance and quick time-to-value rather than specific open-source features or support. AWS–the cloud kingpin—has started providing support for the most popular open-source projects including Hadoop, Elastic, Redis and now Mongo, while Microsoft has taken a partner-friendly approach with the likes of Databricks*. Meanwhile, Google Cloud is innovating around its own open-source Kubernetes engine. Whatever the flavor of the day, it’s clear that for open-source startups to survive and thrive, they have to up their game in a cloud-native environment and provide a seamless, multi-cloud experience and rapid time-to-value over the cloud providers themselves. The keys to the kingdom for the $50 billion database market are still undeclared, Oracle is nowhere to be found in this cloud-native world, and the game is on.
Pay-as-you-go models go mainstream alongside annual subscriptions–not as predictable, but perhaps more profitable.
Wall Street took a few years to get comfortable with annual recurring- revenue business models and set its sights on KPIs like billings and backlog, as opposed the original, perpetual software-licensing and maintenance models it previously tracked. I predict this year will see the emergence of pay-as-you-go models through which customers index their software spend to their underlying cloud infrastructure expenditures on a consumption or “pay-as-you-go” basis, just like a utility. (This is a topic I’ve written about it before, including in a post last year called “Swipe Right for a Cloud Instance.”)
Emerging software companies like Snowflake, Databricks* and many others that are cloud-first have already adopted this pricing model, which has helped drive their growth to date. While it may lack the predictability of annual recurring model, this method may be more profitable as easier customer onboarding and consumption-based pricing relies on well-designed products meant to grow organic usage vs. expensive sales and renewal cycles. Wall Street and strategic acquirers have some work ahead of them to figure out how to forecast long-range, discounted cash-flow models based on volatile transaction pricing structures; executives also need to figure out how to appropriately compensate sales and customer-success execs accustomed to an annual, recurring-software sales model.
Digital transformation moves the security battle up to the application layer and the “Internet of Things (IoT)”.
Corporate digital-transformation initiatives have sped up the pace of application innovation from months to days to hours, with apps now quickly reaching consumers across new touchpoints including wearables, health-monitoring devices and the like. But as the speed of these releases accelerates, security often becomes a problem. The expanded “attack surface” at the application and IoT layer needs a new set of security solutions for DevOps teams – also known as DevSecOps—and IoT security, which I predict we will see emerge in 2019. DevOps teams will frequently take security into their own hands as part of their agile software-development cycles, while following security best practices with the advent of DevSecOps solutions in 2019.
Voice and video analytics will transform business functions.
Last year saw the emergence of robotic process-automation solutions to automate highly repeatable, but often low-end. business processes – mostly focused on cost optimization. At the same time, voice analytics – think Alexa, Siri, Google Home – have advanced dramatically and gained traction in the consumer domain. I believe 2019 will see the application of voice analytics to business functions ranging from sales, customer success and customer support, and this technology will materially transform business productivity–not just cut costs. Whether it’s deep learning applied to sales conversations to ramp sales-rep productivity, or analyzing “customer tone” to route support calls to the right people, voice will transform the enterprise. At the same time, deep learning around images and video has seen interesting applications in radiology and other fields to drive faster and more accurate health diagnoses. This year may mark the advent of a new era of deep learning and AI applications leveraging video and voice across many business functions and industry verticals.
Europe will remain a fertile ground for enterprise cloud-native startups.
Alongside Israel, Europe now contributes materially to startup creation, and we expect the trend to continue in 2019. Unencumbered by legacy infrastructure and tapping the booming market for engineering talent, as well as country-specific innovation policies, many European-founded companies including Elastic Search, Datadog, Dataiku*, Collibra*, UiPath and many others have captured investor interest in 2018. We expect many of these companies and other new startups to build out R&D organizations in Europe, and then “hop the pond” to the U.S. to build out their go-to-market infrastructure here, and attack the larger U.S. enterprise-IT market. This is a major investment theme for me and one I wrote about earlier this year in a series of “Hop the Pond” blog posts.
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