Hello and welcome to Eye on AI…In this edition: the ‘SaaS Apocalypse’ isn’t now…OpenAI and Anthropic both launch new models with big cybersecurity implications…the White House considers voluntary restrictions on data center construction to save consumers from power bill sticker shock…why two frequently cited AI metrics are probably both wrong…and why we increasingly can’t tell if AI models are safe.
Investors need to take to the couch. That’s my conclusion after watching the market gyrations of the past week. In particular, investors would be wise to find themselves a Kleinian psychoanalyst. That’s because they seem stuck in what a Kleinian would likely identify as “the paranoid-schizoid position”—swinging wildly between viewing the impact of AI on established software vendors as either “all good” or “all bad.” Last week, they
swung to “all bad” and, by Goldman Sach’s estimate, wiped some $2 trillion off the market value of stocks. So far this week,
it’s all good again, and the S&P 500 rebounded to near record highs (although the SaaS software vendors saw only modest gains and the turmoil may have claimed at least one CEO: Workday CEO Carl Eschenbach announced he was stepping down to be replaced by the company’s cofounder and former CEO Aneel Bhusri.) But there’s a lot of nuance here that the markets are missing. Investors like a simple narrative. The enterprise AI race right now is more like a Russian novel.
At various times over the past two years, the financial markets have punished the shares of SaaS companies because it appeared that AI foundation models might allow businesses to “vibe code” bespoke software that could substitute for
Salesforce or Workday or
ServiceNow. Last week, the culprit seemed to be the realization that increasingly capable AI agents
from the likes of Anthropic, which has begun rolling out plugins for its Claude Cowork product aimed a particular industry verticals, might hurt the SaaS companies in two ways: first, the foundation model companies’ new agent offerings directly compete with the AI agent software from the SaaS giants. Second, by automating workflows, the agents potentially reduce the need for human employees, meaning the SaaS companies can’t charge for as many seat licenses. So the SaaS vendors get crushed two ways.
But it isn’t clear that any of this is true–or at least, it’s only partly true.
AI agents aren’t eating SaaS software, they’re using itFirst, it’s highly unlikely, even as AI coding agents become more and more capable, that most Fortune 500 companies will want to create their own bespoke customer relationship management software or human resources software or supply chain management software. We are simply not going to see a complete unwinding of the past 50 years of enterprise software development. If you are a widget maker, you don’t really want to be in the business of creating, running and maintaining ERP software, even if that process is mostly automated by AI software engineers. It’s still too much money and too much of a diversion of scant engineering talent–even if the amount of human labor required is a fraction of what it would have been five years ago. So demand for SaaS companies’ traditional core product offerings are likely to remain.
As for the new concerns about AI agents from the foundation model makers stealing the market for SaaS vendors’ own AI agent offerings, there is a bit more here for SaaS investors to worry about. It could be that Anthropic, OpenAI, and
Google come to dominate the top layer of the agentic AI stack—building the agent orchestration platforms that enable big companies to build, run, and govern complex workflows. That’s what OpenAI is trying to do with
the launch last week of its new agentic AI platform for enterprises called Frontier.
The SaaS incumbents say they know best how to run the orchestration layer because they are already used to dealing with cybersecurity and access controls and governance concerns and because, in many cases, they already own the data which the AI agents will need to access to do their jobs. 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. They might be right. But they will have to prove it before OpenAI or Anthropic shows it can do the job just as well or better.
The foundation model companies also have a shot at dominating the market for the AI agents. Anthropic’s Claude Cowork is a serious threat to Salesforce and
Microsoft, but not a completely existential one. It doesn’t replace the need for SaaS software entirely, because Claude uses this software as a tool to accomplish tasks. But it certainly means that some customers might prefer to use Claude Cowork instead of upgrading to Salesforce’s Agentforce or Microsoft’s 365 Copilot. That would crimp SaaS companies’ growth potential, as this
piece from the
Wall Street Journal’s Dan Gallagher argues.
SaaS vendors are pivoting their business modelsAs for the threat to SaaS companies’ traditional business model of selling seat licenses, the SaaS companies recognize this risk and are moving to address it. Salesforce has been pioneering what it calls its “Agentic Enterprise License Agreement” (AELA) that essentially offers customers a fixed price, all-you-can-eat access to Agentforce. ServiceNow is moving to consumption-based and value-based pricing models for some of its AI agent offerings. Microsoft too has introduced an element of consumption-based pricing alongside its usual per user per month model for its Microsoft Copilot Studio product, which allows customers to build Microsoft Copilot agents. So again, this threat isn’t existential, but it could crimp SaaS companies’ growth and margins. That’s because one of the dirty secrets of the SaaS industry is that it’s not that different from running a gym: your best customers are often those who pay for memberships (or in this case, seat licenses) they don’t use. With these new business models, tech vendors likely don’t get to enjoy as much of this unnecessary spending.
So SaaS isn’t over. But nor is it necessarily poised to thrive. The fates of different companies within the category are likely to diverge. As some Wall Street analysts pointed out last week, there will be winners and losers. But it is still too early to call them. For the moment, investors need to live with that ambiguity.
With that, here’s more AI news.
Jeremy Kahnjeremy.kahn@fortune.com@jeremyakahn
