Three Waves of Enterprise Software
Evaluate software evolution across delivery, economics, and product quality
- Difficulty
- Easy
- Time to result
- ~days to results
- Steps
- 5
- Confidence
- 94%
The Three Waves of Enterprise Software model separates changes that are often collapsed into the single label of SaaS. The first wave consists of large on-premises suites sold through expensive enterprise sales processes, with CIOs making decisions for users. The second wave changes distribution and economics: software arrives through the internet and customers pay subscriptions rather than purchasing perpetual licenses, but the underlying experience may remain cumbersome. The third wave changes the product and adoption mechanism itself. Software must be good enough to persuade its actual users, who can increasingly trial and adopt tools without centralized purchasing. The analytical value comes from checking three dimensions independently—delivery, business model, and user experience—rather than assuming that subscription billing automatically represents complete product innovation.
Origin
David Rosenthal introduced the model by adapting the first-, second-, and third-wave framing used for coffee. He positioned Atlassian as an early third-wave enterprise-software company after Microsoft-, Oracle-, and Salesforce-style predecessors.
Core principles
- 01Delivery innovation does not necessarily improve the underlying product
- 02Subscription billing alone does not create a true service
- 03The buyer-user divide protects weak enterprise products
- 04User-controlled purchasing makes product quality decisive
- 05Later waves can preserve prior innovations while changing the basis of competition
How to run it
- 1
Map the first wave
Identify the incumbent on-premises products, their license structure, and the executive buyers targeted by their sales organizations.
Pro tip Separate the purchasing stakeholder from the employees who use the software daily.
Watch out Market leadership does not prove that users like the product.
- 2
Test for second-wave change
Determine whether a challenger moved delivery online and replaced upfront licenses with recurring subscriptions.
Pro tip Ask what changed beyond hosting and billing.
Watch out Desktop software that merely stops working when payments stop may not be a fundamentally different service.
- 3
Test for third-wave change
Examine whether the product experience, onboarding, and adoption path allow users to choose and champion the tool themselves.
Pro tip Look for organic team adoption rather than only executive procurement.
Watch out A polished interface alone does not establish a self-sustaining adoption mechanism.
- 4
Identify the new basis of competition
Decide whether the market now rewards sales reach, delivery convenience, or genuine product quality and usability.
Pro tip Use customer behavior and retention to verify the claimed advantage.
Watch out Different customer segments may remain in different waves simultaneously.
- 5
Evaluate the next disruption
Look for entrants that preserve the useful economics of earlier waves while removing their remaining user or adoption constraints.
Pro tip Study low-end and bottom-up entrants that incumbents initially dismiss.
Watch out Do not assume every later entrant is superior merely because it uses newer technology.
In the wild
Microsoft, Oracle, and SAP represent the first wave of large on-premises suites sold through heavyweight sales processes. Salesforce represents the second wave by delivering software online and charging through subscriptions, even though users could still find the product cumbersome.
→ The framework distinguishes commercial and delivery innovation from improvement in the underlying user experience.
Atlassian lacked the resources for enterprise selling, so Jira needed to win users directly. Online purchasing, organic team adoption, and strong product quality jointly changed both the buying process and the product's role in selling.
→ Atlassian competed through product-led adoption rather than replicating incumbent sales organizations.
Common mistakes
Calling every subscription product SaaS innovation
Recurring billing can be attached to essentially unchanged desktop or on-premises software. Inspect delivery and product behavior separately.
Ignoring the buyer-user split
A product can succeed because it satisfies procurement or a CIO while frustrating its actual users. Track who chooses, pays for, and operates it.
Treating waves as rigid dates
The waves describe competitive mechanisms, not universal historical boundaries; several mechanisms can coexist in one market.
Is it for you?
Best for
It is best for founders, investors, and strategists comparing incumbent enterprise suites with SaaS and product-led challengers.
Not ideal for
It is not ideal as a complete competitive analysis when regulation, services, procurement, or proprietary data dominate product choice.
From the transcript
“I think Atlassian is the third wave, uh was the first company of the third wave of enterprise software.”
“Business model innovation, but the product is still not that great.”
“the transition to as a service happens uh in two steps.”
From the episode
The Atlassian IPO