Uncapped with Jack Altman
· Bret Taylor, Jack Altman
[00:00:00] S1: The reason why a system of record has always been the most valuable is that it’s the anchor tenant of your technology deployments. If you wanted to create a workflow for quote-to-cash or something like that, you had to integrate with your ERP system and your CRM system. As a consequence, the companies that owned those databases could either develop that functionality as an add-on, a new SKU. Or if it was a third-party company, they would often be a part of the ecosystem, like Salesforce’s AppExchange or whatever the marketplace equivalent is for SAP. You ended up with a lot of value in those systems, which meant switching costs were really high because that system plus all the partners that integrated with it created gravity and high switching costs. Similarly you end up accruing a lot of value either by collecting rent from your ecosystem or developing premium add-ons on top. It became the sun in the solar system for each of the different lines of business that these systems of record were sold into. Then you’d get scale, sales capacity scale. The larger you grow, the more salespeople you have, you can reach more and more people. Then there’s the proverb: “No one gets fired for buying IBM,” which obviously is a somewhat dated expression. But it was like, “Hey, if you’re going to put in a new ERP system, no one’s going to blame you for choosing SAP because everyone chose SAP.” [00:00:00] S0: If you choose something new and it doesn’t work perfectly, big trouble.
· Jack Altman, Bret Taylor
[00:00:00] S0: If you choose something new and it doesn’t work perfectly, big trouble. [00:00:00] S1: So all those things accrue. But then the question is, now that a lot of those things start getting chipped away with AI agents… First, could you just vibe code it in a weekend? Does it change build versus buy? That’s one risk. Does it change when you come up on that renewal? Are you going to make a different decision? Secondly, I actually think the more fundamental thing is: what is the role of that system of record if AI agents are doing most of the work? Rather than people clicking around on an ERP system to onboard a vendor, if you just delegate to an AI agent to do it, all of that is invisible to you. All of a sudden it goes from being an application to a database. Similarly, if you imagine a CRM system, and rather than having people staring at it all day to manage their leads, contacts, and opportunities, you just say, “Hey, generate me some leads.” [00:00:00] S0: In other words, does a system of record have a place in the world if nobody logs into it?
· Bret Taylor
[00:00:00] S1: It does, but the real question is how valuable is it? How important is it? Going back to my metaphor of a solar system, how important is that gravity versus the gravity of the agents running around it? It’s just really interesting. If you imagine you’re running a sales team, how much do you value the database of leads versus the agent that generates the leads? In ancient history—three years ago—those are the same thing. But now you’re like, “Gosh, I actually probably care more about the lead generation. How it’s stored and tracked is maybe a more tactical part of it.” That’s true of every system of record. I just know CRM systems pretty well. If you look at ITSM, which is what ServiceNow plays in, or ERP systems, which is Workday, SAP, Oracle, et cetera, all these questions start coming up. What’s interesting though is I think every single one of those companies could transform and benefit from AI. I really do believe that. You saw what Microsoft did in the cloud transformation. They went from being dependent on Windows revenue to Active Directory and Azure and all those other things. But it was really awkward. Folks like you and me back in the day used to probably dismiss Microsoft. I certainly did. I didn’t foresee them becoming as powerful as they are today. But it was good leadership, good technology. But I don’t think the market knows who is Siebel Systems and who is Microsoft in this landscape of software companies. Probably no one knows what Siebel Systems was. That was the company that Salesforce beat to become the cloud CRM. So can you actually develop this ecosystem of agents around your platform and will it become more valuable than the platform you had? On top of it, you have the existential risk of, is the value of software just going to zero? I don’t necessarily believe that. But you look at all of that, and if you’re just an investor in public markets, you’re like, “I’m going to sit on the sidelines. I’m going to let the market play out a little bit.” I think that’s what’s going on with a lot of these.
· Jack Altman, Bret Taylor
[00:00:00] S0: Totally. You can never know for sure who’s going to turn into the next Microsoft, but you can try to think about who has the structural ability to expand. Who’s got the right, with customers, to make the expansions? And then which products will be easier? In the database question: is it easier for today’s databases to build agents on top? Or is it easier for a modern agent to say, “I’m going to go build a database at some point because I can do that and I’ve got the customer relationship”? How do you think about what creates the rights to expand? [00:00:00] S1: I think all the incumbents have a right to win in a lot of ways. In the same way we talked about why a system of record is powerful, you could say the same logic for all the agents running on top. The dynamic that plays out though, not just with AI, is when a new technology comes out—like the web browser or the smartphone—rarely is the expertise on how to do exceptional things with that technology at the incumbents. There’s this thing in enterprise software, a phrase called “best of breed” and “best of platform.” Best of platform means, “Hey, we’re a Microsoft shop. We just buy Microsoft stuff.” It sounds silly, but actually there’s a lot of logic to it. You get good procurement leverage, everything works together. [00:00:00] S0: You don’t have to deal with a ton of people. [00:00:00] S1: There’s probably some benefits, all sorts of things. What ends up happening when new technologies come out is the pendulum swings from best of platform to best of breed.
· Bret Taylor, Jack Altman
[00:00:00] S1: There’s probably some benefits, all sorts of things. What ends up happening when new technologies come out is the pendulum swings from best of platform to best of breed. [00:00:00] S0: It’s much easier to get a 10x experience. [00:00:00] S1: A hundred percent. Also just think of pre- and post-web browser enterprise software. You’re running client-server Windows software. It’s a completely different skillset to make a web application, as you and I know. So at the time, there’s this window where best-of-breed competitors are light years ahead of the incumbents and it’s a race. Basically, can the best-of-breed upstarts get scale in time before the incumbents figure out the technology. That’s what’s going on right now. I would argue very few of the incumbents have any credible, decent AI technology, but they will. It’s inevitable they will. [00:00:00] S0: You know what I don’t understand? Why is that? What’s the real reason for it? These companies have infinite resources, roughly speaking. They ought to be able to hire who they want. They ought to know what the products could look like. They ought to be able to try them. Why is it so hard for legacy companies to catch up quickly, versus an AI startup with 50 engineers that seems to outperform the teams that are 10x bigger at a big company? Is it cultural? Is it systems?
· Bret Taylor
[00:00:00] S1: I like the phrase “strategy tax.” I don’t remember who to attribute that to, but we could pull up ChatGPT and ask. The idea is that in these moments of big platform shifts, what were your strengths can become weaknesses. Let’s take Siebel Systems and the birth of the web browser. They have an on-premises CRM system. When you say, “Okay, let’s compete with this cloud-native CRM system in Salesforce,” you start to say, “I don’t want to just start from scratch. We’ve got all these assets. How do we do it in a way that takes advantage of all of our assets?” All of a sudden you’re like, “Okay, let’s not just build a great product. Let’s transition from this product to that product. What if someone wants on-premises too? That’s our strength. We should play to that strength.” You start basically making all these decisions that sound really clever because you’re playing your strengths. In practice, if the technology wave is bigger than the category, which I think the web was as an example, you end up basically chipping away at having a pure-play value proposition. It can also happen with business models. At that time, you’d have perpetual license software. Moving to software as a service, that’s a huge change for a business to make. For your customers, it goes from being CapEx to OpEx. For you as a company, it changes to ratable revenue. Shantanu did this at Adobe. Very few companies can make that transition. You have to sell it differently. You have to compensate salespeople differently. Revenue recognition is different. So you have the product strategy tax, you have the business model strategy tax. Even with the incentives of salespeople there’s a strategy tax because you don’t want to just have your business collapse overnight. It’s so easy for a clever Silicon Valley person to say, “Just pivot.” If you’re a public company, you have to go in front of your investors every single quarter and be like, “Yeah, hey guys, I know our revenue just went off a cliff, but trust me, it’s going to turn around next quarter.” You don’t survive that. You compound all those things and all of a sudden you’re like, why does a 50-person company succeed? They have none of those. All of the advantages that you had all of a sudden become anchors that are holding you back from actually doing the right thing.