AppDirect, Amazon, And The Role Of The Middleman

[Updated 5/11/17 10:21 am. See below.] Daniel Saks, co-founder of a fast-growing San Francisco tech company, says he admires Amazon for taking the friction out of “finding stuff and buying stuff.” Worn-out sheets? No need to drive to Bed Bath & Beyond, he says.

Saks likes to think his company AppDirect does the same thing for businesses buying Web-based software. The company, founded in 2009, helps software makers and re-sellers such as Microsoft, Zendesk, and Deutsche Telekom to set up their own online shops. Those self-branded software marketplaces can then offer a suite of AppDirect services to their customers, such as tech support and unified billing for all their software subscriptions.

After AppDirect was co-founded by Saks and co-CEO Nicolas Desmarais (pictured above, Saks at right), its first customers were large companies, such as Staples, that were grappling with the big transition between selling software in boxes on a store shelf to marketing software-as-a-service—applications hosted on Web servers and sold by monthly subscription. AppDirect offered a quick way for those companies to move into software e-commerce, and it has expanded significantly in that role as a middleman. As of March 2016, 30 million businesses were buying software on marketplaces supported by AppDirect, the company says.

Now AppDirect has signed on a new and very small customer—Bluegrass Cellular, a telecommunications company serving 13,000 business customers in central Kentucky. [Details added on Bluegrass’s use of AppDirect features.] Bluegrass, like large Internet service providers such as AT&T, can now offer digital business software subscriptions. The first products in its new online marketplace are Microsoft’s Office 365 and Trend Micro Antivirus. Bluegrass’s size, rather than diminishing its significance, makes the little telecom the herald of a new market opening for AppDirect, Saks says of the partnership announced Thursday.

“There are many others in that category,” Saks says. Thousands of small Internet service providers and other entities have the trust of their local communities, as well as strong relationships with regional businesses that feel comfortable dealing with them, he says. AppDirect is seeking them out as customers. “We think this will signal massive growth,” he says.

The strategy fits with a long-held AppDirect tenet. The company aims to combine the strength of local trust networks with the ability of AppDirect, as a large company, to provide a robust marketplace-as-a-service. One benefit to software re-sellers and their customers: AppDirect negotiates bulk purchases of software at advantageous prices that it can pass along to its customers, Saks says.

Another AppDirect tenet: As a middleman independent of any software maker, it can provide unbiased service for all products, Saks says.

AppDirect’s staff has grown from 350 in October 2015 to its current global tally of about 650. It has raised a total of $245 million from investors including J.P. Morgan, Foundry Group, iNovia Capital, Mithril Capital Management, StarVest Partners, and Stingray Digital.

Company revenue came to $18 million in 2014, but the private firm currently isn’t disclosing its most recent revenue figures. AppDirect customers pay a monthly fee for the technology infrastructure behind their online stores, and a transaction fee for all apps sold through its channels.

Saks says he has seen new types of companies becoming software re-sellers through AppDirect, such as FICO in financial services, ADP in business services, and Jaguar Land Rover in automotive apps.

While the sale of cloud services used to be a side project for AppDirect customers, Saks says it’s becoming more a core part of their businesses. “This is starting to represent a huge percentage of our customers’ revenue and momentum,” Saks says.

In the AppDirect ecosystem, there are often two business layers between the software maker and the business actually buying and using the software: first, AppDirect; and second, the re-seller operating an online marketplace supported by AppDirect.

The case Saks makes for these agents in the middle is that they provide extra services related to software, and that they curate a selection of cloud services that would interest a particular set of business customers. An AppDirect survey found that many small business buyers are overwhelmed by the many software options on the market, and want help sorting them out.

AppDirect has added an array of services to its customers’ online stores through a series of acquisitions. For example, by acquiring Xendo in 2016, AppDirect provided business software buyers the ability to search through their files of all types for that elusive document they can’t find.

But could AppDirect soon be facing competition from the huge company Saks admires so much—Amazon? The dominant online retailer recently announced the creation of a new digital subscription marketing option, Subscribe with Amazon. It welcomes a wide range of businesses to try it, from periodicals such as the Wall Street Journal, to video entertainment series, fitness apps—and software providers such as Dropbox. Using the self-service feature, providers can set up a branded storefront to sell their subscriptions directly to consumers. They can also coordinate with Amazon’s promotional features such as search, recommendations, and Amazon Prime.

When asked about the e-commerce behemoth treading a bit onto his software e-commerce turf, Saks seems energized rather than worried—as though he’d already given it quite a bit of thought.

For now, he says, Amazon is concentrating on the consumer market for cloud services, while AppDirect has built an ecosystem to serve businesses buying software.

“In the business use case there are a lot more complications,” Saks says. The business of selling and managing software for companies is often an offline, personal experience, he says.

But Saks sees Amazon as a possible business partner in the future. “If Amazon does want to get into the business space, they could use our re-seller channels.”

Saks sounds so enthusiastic about the prospect that it seems natural to ask him: Are you talking to Amazon about this?

“I can’t disclose that,” Saks says.

Asked whether AppDirect would entertain an acquisition offer rather than a partnership, Saks says, “Our belief is that there needs to be one independent player that can add value to the entire ecosystem.”

[Photo courtesy of AppDirect.]

Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy

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