Research and Development 2017, Executive Summary

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The Softletter Benchmark 53 are all publicly-held companies and most of our basic business metrics are derived from documents these companies are legally required to provide to investors.

(BTW, if you wondering why the report is showing 2015 results in 2017, the answer is that complete fiscal results for 2016 will only be available in the latter half of 2016 because some of our Benchmark 53 companies have fiscal calendars that run from June to June.)

We have completely revamped our Benchmark 50, now the Benchmark 53, to reflect the profound changes the software industry has undergone over the last several years. The profiled are now broken into eight segments that provide a representative overview of industry trends and performance. Below are listed the current members of the Softletter Benchmark 53. This list is periodically updated to reflect changes in company status and viability.

The Big Four

  • Microsoft
  • Google
  • Apple
  • Oracle

As we said in last’s year R&D analysis, we understand that the inclusion of Apple may be questioned by some, but considering that Apple is one of the largest sellers of Apple software, the largest reseller of iOS apps (with 30 point margin per sale), and that iOS apps generate about 70% of all app revenue, we believe it’s very apropos to include them in our benchmark list.  Reinforcing this is that last year, Apple’s “Service Revenues” (basically software) now accounted for $20B of the company’s overall revenue, the only segment of the company’s portfolio where revenues rose (yes, smartphones, Mac, and iPads all saw revenue declines. We also believe that over time, Apple’s software will generate increasing amounts of revenue for the Cupertino giant, particularly as interest in device independent software portable software environments grows. We’d like to point out that other companies are arriving late to the party we started when we began to predict the rise of  devices independence, as this quote from Ben Thomson of the Stratechery blog makes clear:

[…] the key to Apple actually delivering on its services vision—is to start with the question of accountability and work backwards: Apple’s services need to be separated from the devices that are core to the company, and the managers of those services need to be held accountable via dollars and cents.

We’ll again and for the last time note that IBM is missing from the list. The reason is that Big Blue is now primarily a consulting firm, not a software publisher and increasingly not even a producer of “machines.”

SaaS Sales and Marketing

  • Endurance, which purchased Constant Contact
  • Marketo
  • Netsuite
  • Salesforce
  • HubSpot
  • Cvent
  • LivePerson

The second cohort is SaaS Sales and Marketing. This is a dynamic market sector that includes 1200 pound gorilla, NetSuite, and other vibrant firms such as Marketo and HubSpot. Please note that this is the last time NetSuite will appear in the Benchmark 53 as the company has been purchased by Oracle (which funded its start in the first place).

SaaS Enterprise

  • Workday
  • Zendesk
  • Veeva
  • Demandware
  • ServiceNow
  • Benefit Focus
  • LogMeIn

Third is SaaS Enterprise. When Softletter began covering the rebirth of SaaS in 2004 and 2005, the concept of “enterprise” SaaS sounded comical to many people. But today, the reign of server-based enterprise software is coming to an end. Investment in on-premise software is over (yes, there a few increasingly rare exception but not enough to count). These days, when companies look for systems to help manage company-wide needs, they begin with a SaaS search. Only if one is not available will they look for an on-premise alternative.

SaaS B2B/C Verticals

  • Angie’s List
  • Wix
  • Pandora
  • Blackbaud
  • Qualsys
  • Realpage
  • Callidus

Fourth is SaaS Verticals. This group ties back to the beginnings of the SaaS revival after the ASP collapse of 2001. SaaS established itself by occupying niches and new markets that could not be reached by on-premise products. It is a myth that corporate and CIO acceptance fueled its growth.

Mobile B2B

  • Millenia Media
  • Medl
  • Glu Mobile
  • Turbine
  • Perion
  • Intellicheck
  • NQ Mobile

Next is Mobile B2B. Mobile applications are growing rapidly, but they face a unique set of business challenges. Growth must come from one of two primary sources. The first is very high volume sales, as there’s tremendous market resistance to paying high prices for apps (ask the poor GPS firms that attempted to sell $50+ mapping systems to iOS and Android owners.)  Note that Apple price caps products in the App Store at $999.00. The second is services built upon network effect data, something that can’t exist unless sales or use volume creates it. Until recently, not enough publicly-held mobile B2C firms existed to justify creating this category.

Mobile B2C

  • NQ Mobile
  • King Digital
  • Fitbit
  • Electronic Arts
  • Zynga
  • Majesco
  • Yelp
  • Renren

Mobile B2C is the most unstable group in the Benchmark 53. The category is dominated by gaming companies, and trends (and revenue) can vanish as quickly as a plant zombie meeting a mulcher, then reappear in new and very profitable guises. It will be an interesting category to track.

Social Networking

  • LinkedIn
  • Facebook
  • Twitter
  • Snap Interactive
  • MeetMe
  • Jive Software
  • Sina

We now come to Social Networking. Making its debut is Jive Software, who replaces MediaBistro, whose reporting habits were too unstable for our taste.

On Premise

  • Microfocus
  • Autodesk
  • Red Hat
  • Progress
  • Symantec
  • Nuance

Finally, we come to our legacy group, On Premise. We expect this group to be relatively quiet financially (and to shrink), but in the meantime we think it will be a useful yardstick to measure the rest of the industry against. One area of potential growth for on premise is in the area of portable backup for data and portable work environments. Over the years, as people move their computing environments to the cloud, paranoia about the safety and portability of your data will increase, replacing the traditional worries about the fact that you really should backup your PC/laptop/tablet regularly but never do. We expect a market for quick backup of cloud applications and data to local resources to be a future growth area.

Research and Development Analysis

R&D tends to be a stable metric, except when the industry is living through interesting times, as it is now. In the space of nine years, beginning in 2007,  SaaS and mobile apps completely disrupted a development, infrastructure, and distribution system that had been in place since the late 70s. In a placid environment, R&D as a percentage of revenue generally hovers between 12% to 18% of total revenue. (But don’t be fooled by the executive summary. Within the categories, there are some startling differences.)

But in an industry undergoing disruption, the numbers can gyrate wildly, as a look at the complete Benchmark 53  makes clear. Numbers in Social Networking and Mobile B2B and B2C are all over the place. Note the numbers we’ve assigned to Groupon. The social couponing firm has a unique aFor a sense of the good old days, snuggle on up to On Premise with a plushie, some nice herbal tea, and perhaps watch an episode of Family Ties on Nickelodeon.

Why do R&D numbers vary so widely in these segments? For several reasons. These include:

  • A company’s core product or service is under attack and it’s trying to code its way out of the mess.
  • A market segment is opening up and the firm’s geeks are attempting to out-innovate the competition and build overwhelming market share by filling the feature tick lists ahead of everyone else.
  • Someone in upper management is bored, has a brilliant idea, and the R&D staff has been taxed with creating the next entrepreneurial miracle.

Another reason is the “vacuum” effect, first created back in the dawn of time by Computer Associates, now CA. CA was known for buying out slow growing companies, investing a minimal amount in their development, and generating revenue from installed bases.

There are other reasons, most of which are usually related to the above.

Executive Summary, R&D, 2014 – 2015

Research and Development



Big Four 14% 13%
SaaS Sales and Marketing   16%     17%
SaaS Enterprise 25% 22%
SaaS B2C Verticals 15% 15%
Mobile B2B  20%  19%
Mobile B2C 33% 37%
Social Networking 32% 37%
On Premise 19% 18%

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