Tech marketplaces: Solving the last-mile billing barrier to global growth
According to an IoT Analytics report from early 2024, 1.8% of global enterprise software was sold via marketplaces in 2023 and is forecasted to grow to nearly 10% by 2030. Although this represents a minority share today, it is the segment growing at a much faster pace than any other IT sales channel.
The concept of a technology marketplace as a central hub for software distribution predates the cloud, but I believe its current surge is driven by a fundamentally new dynamic. Cloud giants, or hyperscalers, have reinvented the model by transforming independent software vendors (ISVs) into a motivated army of sales channels. What are the keys to this accelerated growth? And what is the role of the principal actors in this new era of technology commercialization?
The new hyperscaler-ISV economic symbiosis
This new wave of marketplaces is spearheaded by hyperscalers, whose strategy I see as centered on an economic symbiosis with ISVs. The logic is straightforward: an ISVโs software runs on the hyperscalerโs infrastructure. Consequently, every time an ISV sells its solution, it directly drives increased consumption of cloud services, generating a dual revenue stream for the platform.
This pull-through effect, where the ISVโs success translates directly into the platformโs success, is the core incentive that has motivated hyperscalers to invest heavily in developing their marketplaces as a strategic sales channel.
The five players in the marketplace ecosystem
The marketplace ecosystem involves and impacts five key players: the ISV, the hyperscaler, the end customer, the distributor and the reseller or local hyperscaler partner. Letโs examine the role of each.
The ISV as the innovative specialist
In essence, I see the ISV as the entity that transforms the hyperscalerโs infrastructure into a tangible, high-value business solution for the end customer. For ISVs, the marketplace is a strategic channel that dramatically accelerates their time-to-market. It allows them to simplify transactional complexities, leverage the hyperscalerโs global reach and tap into the budgets of customers already under contract with the platform. This can even extend to mobilizing the hyperscalerโs own sales teams as an indirect channel through co-selling programs.
However, in my view, this model presents challenges for the ISV, primarily in managing customer relationships and navigating channel complexity. By operating through one or two intermediaries (the hyperscaler or a local partner), the ISV inevitably cedes some control over and proximity to the end customer.
Furthermore, while partner-involved arrangements simplify the transaction for the customer, they introduce a new layer of complexity for the ISV, who must now manage margin agreements, potential channel conflicts and the tax implications of an indirect sales structure, especially in international transactions.
The hyperscaler as the ecosystem enabler
As the ecosystem enabler, the hyperscaler provides the foundational infrastructure upon which ISVs operate. By leveraging their massive global customer base, I see hyperscalers strategically promote the marketplace with a dual objective: to increase customer loyalty and retention (stickiness) and to drive the cloud consumption generated by these ISVs.
In doing so, the hyperscaler transcends its original role to become the central operator of the ecosystem, assuming what I believe is a new, influential function as a financial and commercial intermediary.
The end customer as the center of gravity
In this ecosystem, the end customer acts as the center of gravity. Their influence stems from their business needs and, most critically, their budget. Both hyperscalers and ISVs align their strategies to meet the customerโs primary demand: transforming a traditionally complex procurement process into a centralized and efficient experience.
However, this appeal can be diminished by operational constraints. A primary limitation arises in territories where the customer cannot pay for purchases in the local currency. This entails managing payments in foreign currencies, reintroducing a level of fiscal and exchange-rate complexity that counteracts the very simplicity that drew them to the marketplace.
The partner as the local reseller
The partner acts as a local reseller in the customerโs procurement process, particularly in countries where the hyperscaler does not have a direct billing entity. In this model, the reseller manages the contractual relationship and invoices the end customer in the local currency, simplifying the transaction for the customer.
This arrangement, however, challenges the marketplace model, which was designed for direct transactions between the hyperscaler and the customer. When a local reseller becomes the billing intermediary, the standard model becomes complicated as it does not natively account for the elements the partner introduces:
- Partner margin: The payment flow must accommodate the resellerโs commission.
- Credit risk: The partner, not the hyperscaler, assumes the risk if the end customer defaults on payment.
- Tax implications: The partner must manage the complexities of international invoicing and related withholding taxes (WHT).
This disconnect has been, in my analysis, a significant barrier to the global expansion of ISV sales through marketplaces in regions where the hyperscaler lacks a legal entity.
The distributor as an aggregator being replaced
Historically, distributors have been the major aggregators in the technology ecosystem, managing relationships and contracts with thousands of ISVs and leading the initial wave of software commercialization. In the new era of digital distribution, however, hyperscaler marketplaces have emerged as a formidable competitor.
In my opinion, the marketplace model strikes at the core of the software distribution business by offering a more efficient platform for transacting digital assets. This leaves distributors to compete primarily on their advantage in handling tangible technology assets.
Key trends: Two noteworthy cases in marketplaces
The strategic use of cloud consumption commitments: A key driver accelerating marketplace adoption is its integration with annual and multiyear cloud consumption contracts. These agreements, in which a customer commits to a minimum expenditure, can often be used to purchase ISV solutions from the marketplace. This creates what I see as a threefold benefit:
- The customer can leverage a pre-approved budget to acquire new technology, expediting procurement.
- The ISV can close sales faster by overcoming budget hurdles.
- The hyperscaler ensures the customer fulfills their consumption commitment, thereby increasing retention.
The integration of professional services is the missing piece: A traditional limitation of marketplaces was their focus solely on software transactions, excluding the professional services (e.g., consulting, migration, implementation) required to deploy them. This created a process gap, forcing customers to manage a separate services contract.
While I have seen the inclusion of some professional services packages directly in marketplaces, this is not universally available for all ISVs. As a result, professional services remain the key missing link needed to complete the sale and offer the customer a comprehensive solution (software + services) in a single transaction.
Key actions for the ecosystem
This new wave of marketplaces is expected to continue its accelerated growth and capture a significant share of the technology distribution market. Assuming this transition is inevitable, I offer the following strategic recommendations for the ecosystemโs key players.
ISVs: Adapt the commercial model to the channel
I believe ISVS must incorporate the costs associated with the partner channel into their marketplace pricing strategy. When a sale requires a local reseller, the ISVโs commercial model must account for a clear partner margin and the impact of withholding taxes.
Iโve seen that failure to do so will disincentivize the partner from promoting the solution, potentially blocking the sale or, more likely, leading them to offer a competing solution that protects their profitability.
Hyperscalers: Resolve global billing friction
To realize the full global growth potential of the marketplace, hyperscalers must overcome the obstacle of international billing. The solution lies in one of two paths:
- Direct investment: Establish local subsidiaries in strategic countries to enable local currency invoicing and ensure compliance with regional tax regulations.
- Channel enablement: Design a financially viable model that empowers and compensates local partners to manage billing, assume credit risk and handle administrative complexity in exchange for a clear margin.
Customers: Establish governance and clarity in the billing model
The very simplicity that makes the marketplace attractive is also its greatest risk. The ease of procurement can lead to uncontrolled spending or the acquisition of redundant solutions if clear governance policies are not implemented.
It is essential to establish centralized controls to manage who can purchase and what can be purchased, thereby preventing agility from turning into a budgetary liability.
Customers must also verify whether a transaction will be billed directly by the hyperscaler (potentially involving an international payment in a foreign currency) or through a local partner. This distinction is critical as it determines the vendor of record and has direct implications for managing local taxes and withholding.
Partners: Proactively protect your profitability
From my analysis, the primary risk for a partner is financial; specifically, a loss of profitability when a managed client purchases directly from the marketplace, as this eliminates the partnerโs margin and creates tax uncertainty. Attempting to resolve this retroactively with a penalty clause is often contentious and difficult to enforce.
The solution must be preventative and contractual. A partner of record agreement should be established with the client at the outset of the relationship. This agreement must clearly stipulate that, in exchange for the value the partner provides (e.g., consulting, support, local management), they will be the designated channel for all marketplace transactions.
This protects the partnerโs profitability, prevents losses from unmanaged transactions and aligns the interests of the client and the partner, ensuring the partnerโs value is recognized and compensated with every purchase.
Distributors: Differentiate your value
Faced with diminishing relevance due to hyperscaler marketplaces, distributors must redefine their value proposition. Their strategy should focus on developing an ecosystem of value-added services on their own platform to encourage direct customer purchases and compete more effectively.
The final frontier of frictionless growth
The shift to marketplace distribution is an undeniable force that will reshape how enterprise technology is bought and sold globally. However, the true promise of this model (frictionless, one-stop procurement for the end customer) remains constrained by the very complexities it seeks to eliminate: international billing, channel compensation and tax adherence.
The transition from a domestic (US-centric), direct-sale mindset to a truly global, indirect channel model is the final frontier. Those who solve the โlast mileโ of global channel and billing complexity will be the ones to truly own the future of enterprise software distribution.
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