The definition of a commodity is a good that is “supplied without qualitative differentiation." You can’t charge more than others for crude oil, you have to turn it at least into gasoline. And if you really want to charge a lot more you have to turn it into a plastic product.
CPU cycles and memory are the crude oil of our times. If you want to charge more for them you have to add value. If you are SaaS company that provides a complete solutions you are adding a lot of value (plastic product). Conversely, if you are a developer platform you are just a smidgen above the commodity (gasoline).
So when thinking about margin, a SaaS business might have 80-plus percent gross margin. But cloud platforms aimed at developers will wind up being in the low double digits or possibly even in the single digits using total revenues as the denominator. Put differently, the financial metrics for the latter over time will look more like a refinery or a retailer.
From a long term investment perspective though it is important to keep in mind that ultimately what matters is total cash flow. If you are Walmart you make very little margin on any one purchase but you process a lot of them. So developer cloud platforms have to be scale businesses. It’s not a surprise then that another retailer, Amazon, is the leading cloud player and recently announced their 42nd price cut.
You can have a great business as a SaaS company or as a cloud platform, just don’t mistake one for the other as how you think about financial metrics will be quite different.
