Software vs. Services: Is There Really A Difference?

martinkihnData-Driven Thinking” is written by members of the media community and contains fresh ideas on the digital revolution in media.

Today’s column is written by Martin Kihn, research director at Gartner.

The fast-twitch distinctions between agencies and marketing software, low-margin analysts and high-margin code, are rapidly disappearing.

Inspired by their investors, software startups trip over themselves to show how hands-free they are. Meanwhile, many solutions are sold to customers who either staff up to support them or pay agencies to run them, making data scientist the “sexiest job of the 21st century,” according to the Harvard Business Review.

The software providers themselves have hardly succeeded in keeping humans off their books. Many of the more interesting companies are primarily managed services, from social analytics firm Synthesio to ad server Trueffect. Even quintessential software-as-a-service (SaaS) shops like Google quietly offer on-demand professionals to support higher-end products, such as Google Analytics Premium and rich-media creative units. And the fastest-growing teams at digital marketing startups are customer care representatives, who are essentially consultants.

It turns out there is probably no enterprise software worth using that is so simple anyone can run it.

Better Margins, Fewer Humans?

Of course, when it comes to economics, software looks more enticing than services. Software gross margins average 75% vs. 40% for services, according to PwC. And the IAB estimates that 20% of digital advertising is executed by one machine talking to another. As this number grows, it is logical to assume humans in advertising will exit stage left to make way for machines. Yet my advisory firm predicts the number of math graduates entering marketing will double by 2016. Presumably these people can be trusted to calculate the ROI of their own career, so what’s going on here?

If software is really getting more self-reliant, requiring less human intervention, then we would expect to see a shrinking investment in people. Ninjas at the top of their game, in particular, should be chop-chopping human capital. Yet exactly the opposite is happening: The top third of marketers spend twice as much as the bottom third on both software and services. The most successful digital marketers are at least 35% more likely to lean on outside services for functions like analytics and media planning.

Meanwhile, service companies are selling more software. For example, Deloitte Digital packages its own predictive models under the brand name nACT. Global holding company Publicis Groupe acquired mobile ad solution RUN, part of performance-marketing platform Matomy, and was rumored to be flirting with ad tech platform Criteo. Meanwhile, rival WPP claims to have invested more than $1 billion in technology, much of it gathered under its ad tech umbrella Xaxis.

Xaxis shows the forces at work. Calling itself a programmatic media and technology platform, it offers both engineers (280 at last count) and engineered platforms. In the past year, it acquired contextual ad-tech company Crystal Semantics and spun up a data-management platform called Turbine. Meanwhile, when the agency phased out its proprietary demand-side platform last year, Xaxis Global COO Mark Grether said, “the DSP is becoming a commodity.”

Looming Obsolescence

Here we are at the heart of the matter: commoditization. As artists, cookbook authors, and software engineers have all noticed by now, commoditization is what the Internet does best. It excels in making efforts obsolete. No sooner does a category pop up – say, tag management or portfolio-based keyword bidding – than its margin starts to drift downward. Providers and practitioners who do not relentlessly add features and skills find themselves doing business for free. We all teeter on a wave of looming obsolescence.

What does the threat of commoditization mean for the software vs. services continuum? It means that there is no end state for software; as soon as it is implemented, it starts going out of style. Engineers are needed to improve it. And the same goes for services. No sooner do marketers spin up a new SaaS solution than their enemies across town are doing exactly the same thing. To compete, they need to invest in new skills to replace their former edge, now not so sharp.

These skills can be built up in-house or they can efficiently be outsourced to agencies, which specialize in what we might call “skills on-demand.” And we are back to a cycle of more: more software requiring more services, which require more software to provide more services. Pretty soon, you’ve got what you could call a hybrid model.

When Rocket Fuel acquired [x+1] last September, part of the strategy was reportedly to round out the former’s managed-service model with [x+1]’s SaaS offering. A few months later, the company’s CEO said he’s “somewhat indifferent” to whether a customer uses its own or Rocket Fuel’s services.

What he’s describing may be a more functional model: one where the customer opts for managed service, self-service, agency-supported, or all of the above.

Follow Martin Kihn (@martykihn), Gartner (@Gartner_inc) and AdExchanger (@adexchanger) on Twitter.

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