The Prof G Pod with Scott Galloway
00:19:37 · S3
[00:19:37] S3: Are you tired of hearing about business, tech, and finance from the Bros? We are the Tiger Sisters, a top business podcast with the Vox Media Podcast Network. Tiger Sisters releases every Monday, and we decode money, power, and love. And who doesn't love all those things? We are the Internet's Wall Street and Silicon Valley big sisters. Tune in every Monday for late night sister talk meets boardroom strategy. Check out Tiger Sisters on YouTube, Spotify, or wherever you get your podcasts. Welcome to the Tiger fam.
00:20:08 · Scott Galloway, Scott Galloway
[00:20:08] S0: Support for the show comes from Vanta. As AI adoption grows, so do your company's security risks and requirements. New frameworks, audits, and vendors keep rolling on, but your team isn't getting any bigger. Most compliance tools promise automation, but you're really stuck doing all the work by hand, chasing screenshots, validating controls, and playing catch up when audit season comes around again. Vanta works differently. Their agentic trust platform is built to scale with you, not slow you down. With over 1,400 automated tests across more than 400 integrations, Vanta collects evidence and monitors your controls year round. You can cut your audit prep by 82%. Plus, you can access the Vanta agent everywhere you work, whether your team is in Vanta every day or living in tools like Claude or Cursor. They work around the clock from full program context, so nothing slips through the cracks. The numbers back it up. Vanta delivers a 526% ROI over three years and pays for itself in just three months. Over 16,000 fast growing companies like Ramp, Ryder, and Harvey save time and resources while scaling fast with Vanta. Learn more at vanta.com/propg and get a thousand dollars off. That's vanta.com/propg for a thousand off. [00:21:19] S1: Welcome back. Question number three.
00:21:19 · Scott Galloway, Ruth, Scott Galloway
[00:21:19] S1: Welcome back. Question number three. [00:21:22] S4: Hi, Scott. This is Ruth from Auckland, New Zealand. I've got a question about who wins the enterprise layer and really a question about whether we should be discussing SaaSpocalypse again. With OpenAI's release of Dots which can interact with I think 4,000 applications, it's clearly going after the enterprise market. With these LLMs getting towards enterprise, what's this going to mean for the incumbents? Thinking about the S and P 500, who are the incumbent technology companies that are most at risk as the LLMs look to control or dominate an enterprise? Thanks. [00:21:58] S1: Well that's sort of the question in tech. So what Ruth is referring to, last week OpenAI launched DOTS, AI agents that run around the clock and can work on their own across more than 4,000 apps. OpenAI is piloting them inside companies for procurement, invoice processing, customer support and contracts. What is the SaaS apocalypse? And just a brief refresher, the term SaaS apocalypse, SaaS meaning software as a service, refers to a major stock sell off earlier this year that erased nearly 1,000,000,000,000 in software value by early February and perhaps as much as 2,000,000,000,000 in the weeks after. For context, Thomson Reuters fell 15%, LegalZoom nearly 20%, Salesforce, Adobe, and ServiceNow each fell 7%. [00:22:41] S0: I don't know
00:22:41 · Scott Galloway
[00:22:41] S1: if that's an apocalypse. But anyways, the thesis behind the SaaS apocalypse can be explained in three parts. The first is just, you know, replacement. AI agents can do the work directly so companies will stop paying for the software built to help humans do it. The second is seats. Software companies charge for seat, meaning a recurring fee for every employee who logs in. If a company has a thousand salespeople on Salesforce, it pays for a thousand seats. When a handful of AI agents can do that work, the company needs fewer seats and the vendor's revenue shrinks even if the customer never leaves. And the third is building versus buying. Coding agents have made software so cheap to create that customers can build their own, you know, CRM software or at least threaten to, which pushes prices down at renewal and thereby putting pressure on margins. So was the fear justified? So far the numbers say no. Stripe's index of 72,000 SaaS businesses shows year over year growth above 30% at or above its twenty twenty three highs. The stocks have recovered too. The main software ETF rose 17% in the third quarter of this year. Salesforce gained 46% and Workday gained 55% according to CNBC's Jim Kramer. So where it was justified, the fear was right about where the new money is going among companies increasing their tech budgets. The share spending at least 5% of that budget on AI went from about 12% to more than 60%. So kind of the tech budgets, if it's not a zero sum game and it isn't yet, the people are spending incremental money, but at some point that spending on AI tokens is going to eat into the amount of money they spend on software. What I think has happened is the numbers, if you if you just do the numbers, wouldn't think there's an exogenous meteor called AI. I think the reason the stocks have gone down is around terminal value. And that is the market values, the market basically takes the present value of cash flows. And there was a general feeling amongst SaaS that once you were integrated or embedded into a company's workflow, you were kind of kind of be there forever. And they'd look at churn rates and say churn rates are 10, meaning you got a meaning every dollar is kind of worth, you know, in new business is worth $9 because it's gonna be 10, it's gonna be in there for nine or ten years.
00:25:00 · Scott Galloway
But I think the feeling is that with the impending meter of AI, people are taking terminal value way down. What do I mean by that? There's no longer the same certainty that that company will be as inextricably embedded or linked inside of the company, that there's more risk to it. So the cash flows, but that hasn't shown up in the cash flow so far. When you're talking about a company like Salesforce, you're talking about an interface people are comfortable with. You're talking about training. You're talking about debugging. You're talking about events they all wanna go to. You're talking about customer relationships. You're talking about a certain level of security. If this thing blows up and gets hacked and shuts down your business, that there's someone you can sue, so it's less likely to happen. Will it probably put pressure on margins? Absolutely. But these companies aren't stupid. They're also using AI to make their products more competitive and more deft and more efficient such that they can probably lower the price. So what happens here? I mean just to give you an example, these companies usually spend somewhere between 1020% of their top line on technology. Meaning that arguably 80% of the value they add isn't in the tech itself. It's in things like client relationships, customer service, debugging, risk assessment, you know, all that stuff, events. So will it put pressure on their margins as they either don't need to spend as much on technology or other AI companies can replace them more easily? Sure. But I can tell you my company uses Salesforce and I can't imagine, I don't if the next thing free. We're just used to the user interface. We're used to the UI. So I doubt we'll now we'll also add AI. We'll spend more on AI. So at some point we probably would need to cut costs somewhere. But so far the market has said that the rumors of SaaS's death have been greatly exaggerated. Does the fear still move stocks? Yeah, but it's been moving them up. When Meta announced its own enterprise AI platform on September 28, Salesforce fell almost 5%, but Meta surged. OpenAI's Dots, however, got a different reaction. Two days after the launch, ServiceNow and Intuit were each up 4% and Adobe was up 3%. One reason could have been that OpenAI launched a marketplace the same day with 32 software partners, including Salesforce, ServiceNow and Adobe.
00:27:22 · Scott Galloway
Meaning these companies DOTS was supposed to kill, or the companies that were supposed to kill are actually its launch partners. Who's winning at the enterprise level? OpenAI's recurring revenue is reportedly reaching 70,000,000,000 and its enterprise sales have reportedly more than doubled since July. Anthropic has reportedly reached an annualized revenue run rate of approximately 65,000,000. And the incumbents that recovered did it by selling agents themselves. Salesforce's agent product, AgentForce is now 1,500,000,000 in annual recurring revenue. That's up 240% from a year ago. Who's most at risk here? Jefferies would tell you that information officers whose budgets would they would cut to pay for AI at 71% IT services and systems integrators, the consultants who install and customize software. After that came IT service management software, 41 front office software like CRM at 35% or CRM at 35%, while cloud providers came in at 6% and cybersecurity at 0%. Would imagine cybersecurity is gonna be, you know, a booming market. In the S and P 500, the clearest casualty is Intuit, the maker of TurboTax and QuickBooks. The stock is down about 55% this year, even though revenue grew 14%. So like, this is a tough one. And I think it goes back to diversification. Supposedly the next big growth market in SaaS is not going to be SaaS itself. You're not going to buy software to do your taxes, but tax enabled or AI enabled services companies. So I do my taxes with a firm called Citrin because a woman I know, Lucy Li, I think she's incredibly smart and I just trust her opinion around taxation. I wouldn't... I can see an AI company acquiring Citrin and then AI enabling the company and say, okay. You can now cut your prices by 50%. We're gonna go try and get 10,000 clients instead of 5,000. So for example, all radiologists were supposed to be out of business by now because of AI. What it ends up is that an AI enabled radiologist can do three times as many scans and then lower the prices, and it ends up. Then when scans get cheaper, people do more scans and we need more radiologists who know how to use AI. That's called economic growth or innovation, right? So it feels like the new wave is gonna be a combination of a SaaS company's focus on a vertical with... That's AI enabled, and then they offer the end service itself. They're not gonna be selling software.