Why are software stocks going crazy? The seat-based software model is entering a period of epochal change.
The biggest story in the markets right now is the potential for AI to disrupt broad swathes of technology and data businesses. Plenty has been written about which businesses will be more or less threatened by the spread of AI, but another important driver of the recent volatility - maybe less appreciated - is that AI is starting to upend the SaaS business model that has minted billionaires over the last two decades.
AI will absolutely threaten certain "one size fits all" middleware companies where now the cost to build a decent internal tool has collapsed. Think of the scheduling app that costs a ton and that doesn't really work for your use case but wins as the path of least resistance. Those "seats" will now be picked off by an internal build spun up by a single dev (or even non-dev!) using a coding agent.
But that’s not the part that has my attention and imagination.
We are not yet in a world where someone with a weekend to spare can leverage Claude Code to build a new Photoshop, or Quickbooks, or AutoCAD, or Excel, or SalesForce, or Bloomberg. But we ARE right now entering a world where an AI agent can use that software, initially via APIs and MCPs and via other agentic workflows in the future.
This presents a problem.
Seat-based SaaS pricing is identity/time-based: a named human, paying every month. Agent-based usage is burst/throughput-based: dozens or hundreds of ephemeral “users” doing work in parallel and then disappearing.
I think about this in my own tinkering with Claude Code, as it initiates multiple agents to work simultaneously, one fetching proprietary data, another posting to Slack, another building a spreadsheet. 20 minutes later, the agents have gone poof. Now scale that to an enterprise where a few dozen humans direct armies of short-lived agents. How does Salesforce or Microsoft charge when the software is being hammered by hundreds of agents in parallel?
Something has to give. Software companies will try to capture that activity - shifting from seats toward consumption (actions, API calls, workflows, throughput), or bundling "agent capacity" per human, or moving pricing up to the enterprise level.
But we’re in an awkward in-between phase. A lot of today’s "usage" and "credits" are getting sold via AI wrapper features, where the vendor is effectively paying a toll to the underlying model provider. That changes the margin profile: it can look a lot less like classic high-gross-margin SaaS, and it’s not yet clear what the steady-state economics are once models get cheaper, vendors vertically integrate, or pricing norms reset.
Over the last several months of software earnings calls, it’s been hard to miss: this is THE big question right now. As a coda to this musing, here are a few quotes from those calls (sourced from Verity's excellent InFilings Search):
Workday (WDAY) President, Product and Technology Gerrit Kazmaier: "The reality is that usage-based pricing for us will continuously increase with the proliferation of AI. Seat-based model definitely is going to change in certain domains."
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Salesforce (CRM) CEO Marc Benioff: "We have this enterprise license agreement we call the agentic enterprise license agreement. When we first started with Agentforce, we were talking about, oh, it's going to be so much per conversation. It was this type of pricing may be transaction-based pricing, usage-based pricing, but customers have pushed for more flexibility we've moved fast to that."
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HubSpot (HUBS) CEO Yamini Rangan: "And while it's still early, our usage-based credit model is starting to scale."
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Okta (OKTA) VP of Corp Dev Monty Gray: "We're still early in that cycle of understanding kind of what's really going to happen in terms of the seat pressure actually happen versus moving that over to more software-based and usage-based."
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Analyst Question to RadWare (RDWR) CEO: "I was just curious about the agentic AI product. I'm trying to figure out how you guys are going to go to market with that in terms of just the commercial arrangement. How are you guys going to price it? I assume it's a subscription-based offering. Is it cloud-managed? ... Is it a hybrid model?"
RadWare (RDWR) CEO Roy Zisapel: "So at the high level, it's a hybrid model. It's subscription-based. It's cloud-managed. And there are multiple options. Some are per seat, and some are a certain yearly subscription per agent and usage-based on tokens, depends it's enterprise AI agent or it's a co-pilot-like operation."
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Rapid7 (RPD) CEO Corey Thomas: "Our business model is anchored on outcomes and value delivery, not seats. Our pricing is tied to the scope of environments that we protect and the outcomes that we deliver, which positions us well as the industry evolves towards outcome-based and usage-based models."
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Veeva Systems (VEEV) CFO Brian Van Wagener: "The area that's been growing substantially this year is our audiences business, which is a usage-based, so a consumption business."
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GitLab (GTLB) CEO William Staples: "The Duo Agent Platform will be introduced as a consumption model or a usage-based billing model on top of that where because every engineer that uses GitLab can now spin up one or multiple agents, we need to be able to scale the price along with that value."