Who actually holds the power in the SaaS stack

All three are right. All three are also, in the ways that matter for margin, wrong. This lesson is about untangling that contradiction: who really has power in the SaaS (Software as a Service) stack, and why the layer of the stack that customers never see is quietly becoming the layer that captures the most profit.

The stack, in plain terms

Think of SaaS as four stacked layers, each selling to the layer above it:

1. Hyperscalers (AWS, Microsoft Azure, Google Cloud): sell raw compute, storage, and networking.

2. Platform incumbents (Salesforce, Microsoft 365, SAP, ServiceNow): sell the software systems that businesses run on, plus a marketplace where smaller apps plug in.

3. Application vendors (the five-person startup, and thousands like it): sell a specific tool built on top of the other two layers, often integrated with them.

4. End customers: the businesses that actually use the software day to day.

Each layer sells "the relationship" to the customer in a different sense: infrastructure (do you exist), platform (do you fit into workflows the customer already trusts), and application (do you solve today's specific pain point). Power in this chain is not about who touches the customer most visibly. It is about who controls the switching cost.

Switching cost is the real currency

Switching cost is what it costs a customer, in money, time, or risk, to leave a vendor. It is the single best predictor of who holds power in SaaS.

• The construction startup's customers could switch project management tools in a few weeks if a competitor is better.
• The startup itself could not switch away from AWS without months of migration work and real risk of downtime.
• A large enterprise using Salesforce cannot easily switch because a decade of customer data, custom workflows, and employee training are locked inside it.

This is why AWS, Azure, and Google Cloud increasingly capture outsized margin despite being the least visible layer to the end customer. Nobody buys a t-shirt because it was hosted on AWS. But AWS's operating margin in its cloud segment has historically run well above Amazon's retail business (Amazon discloses AWS segment operating margin in its 10-KKThe average number of new users each existing user generates through referrals. Above 1.0, growth compounds on itself and becomes exponential.View full definition → filings; it has commonly been cited in the 30 percent range in recent years, and this should be treated as a disclosed but fluctuating figure, not a fixed constant). Compare that to typical software application companies, many of which operate at low double-digit margins or run at a loss while chasing growth.

The hyperscaler sells the same undifferentiated commodity (compute) to almost everyone, but locks customers in through switching cost, discount structures tied to usage commitments, and the sheer difficulty of moving data and workloads. Low visibility, high leverage.

The incumbent's weapon: the platform tax

Salesforce, Microsoft, and SAP hold power through a different mechanism: they own the workflow and the marketplace that smaller vendors depend on for distribution.

Salesforce operates AppExchange, a marketplace where third-party apps plug into Salesforce's CRMCRMCustomer Relationship Management: software and strategy to manage and analyse customer interactions throughout their lifecycle.View full definition →. Microsoft does the same with Teams and its App Store equivalent inside Microsoft 365. These platforms let a five-person startup reachreachThe number of unique people exposed to your message in a given period. Unlike impressions, reach counts each person once, no matter how often they see it.View full definition → enterprise customers it could never sell to directly. In exchange, the incumbent typically takes a revenue sharerevenue shareThe percentage of total industry sales your company captures in a given period. It measures competitive position relative to rivals in a defined market.View full definition → (Salesforce's AppExchange has historically used structures around a 15 to 25 percent revenue sharerevenue shareThe percentage of total industry sales your company captures in a given period. It measures competitive position relative to rivals in a defined market.View full definition → on subscription sales through the marketplace, figures that vary by program and should be checked against current partner terms) and, more importantly, controls the rules of access: APIAPIApplication Programming Interface: a standardised interface that lets applications communicate and exchange data without knowing each other's internal workings.View full definition → (application programming interfaceapplication programming interfaceApplication Programming Interface: a standardised interface that lets applications communicate and exchange data without knowing each other's internal workings.View full definition →, the technical doorway that lets outside software talk to a platform) limits, data-sharing permissions, and featured placement.

This is sometimes called a "platform tax": the incumbent does not need to build every feature itself. It lets an ecosystem build features, then takes a cut and retains the customer relationship at the account level. Microsoft's long-running bundling of Teams with Office (which drew a formal EU antitrust complaint from Slack in 2020, and led the European Commission to open a formal investigation in 2023 under EU competition rules) is a textbook example of a platform incumbent using distribution power, not product superiority, to win.

Where the startup's leverage actually comes from

The five-person startup is not powerless. Its leverage comes from a different source: specificity and switching pain it creates *downstream*.

If its construction management tool becomes deeply embedded in how a general contractor schedules subcontractors, tracks permits, and invoices, that contractor now faces its own switching cost, one layer down the chain. The startup's power is real but narrow and hard-won: it must prove daily value to avoid being cloned by Salesforce itself (which can, and often does, absorb popular AppExchange functionality into its core product, a practice sometimes called "platform envelopment").

This is the central tension of building on someone else's platform: distribution now, extinction risk later.

Regulators are starting to notice the stack, not just the endpoint

Historically, antitrust regulators focused on whether a single company had a dominant market sharemarket shareThe percentage of total industry sales your company captures in a given period. It measures competitive position relative to rivals in a defined market.View full definition → in one product category. Increasingly, in the US and EU, scrutiny is shifting toward stack-level power: control over the layers other companies must pass through.

The EU's Digital Markets Act (DMA, in force since 2023, enforced by the European Commission) designates certain large platforms as "gatekeepers" and imposes specific obligations, like interoperability and data portability requirements, precisely because ownership of a platform layer confers power that ordinary market-share analysis misses. Microsoft, Google, and Amazon's cloud and app-store businesses have all been part of DMA discussions or scoping, though which specific services are designated has evolved and should be checked against the Commission's current gatekeeper list (European Commission DMA overview).

In the US, the FTC (Federal Trade Commission) has similarly scrutinized cloud and platform bundling practices, though US law has traditionally required proof of consumer harm that is harder to establish for infrastructure layers than for visible price gouging.

A simple way to read power in any SaaS deal

When assessing who holds power between two companies in this stack, ask three questions:

1. Who controls the data? Whoever can lock in or export customer data controls switching cost.

2. Who controls distribution? Whoever the customer discovers the product through (a marketplace, a platform, a direct sales team) has leverage over the seller.

3. Who is fungible? Compute is commodity but locked in by contract terms and migration cost. Applications are differentiated but easily cloned by the platform above them. Rarely is either party in a position of pure, uncontested power.

Applied to our opening scene: the startup owns the *emotional* customer relationship (support, product decisions). Salesforce owns the *operational* relationship (where the data lives day to day). AWS owns the *existential* relationship (nothing runs without it). Margin flows disproportionately to whoever's failure would be catastrophic and whose replacement is hardest, which is usually the infrastructure layer, even though it is invisible to the end customer.

🎬 [VIDEO: "How AWS, Azure, and Google Cloud Actually Make Money" - youtube.com - search for recent explainer content from a reputable tech business channel breaking down hyperscaler margin structures and how cloud pricing locks in enterprise customers]

Key Takeaways

• Power in the SaaS stack is determined by switching cost and distribution control, not by who the end customer sees or talks to most.
• Hyperscalers (AWS, Azure, Google Cloud) capture outsized margin despite low customer visibility because compute lock-in is expensive and slow to unwind.
• Platform incumbents (Salesforce, Microsoft) extract a "platform tax" from smaller vendors by controlling marketplace access and can absorb successful third-party features into their core product.
• Small application vendors build real but narrow power by making themselves hard to remove from a customer's specific daily workflow, not by competing on infrastructure.
• Regulators (EU's DMA, US FTC) are increasingly targeting platform-layer and gatekeeper power, not just traditional market-share dominance, reflecting how stack position, not visible market sharemarket shareThe percentage of total industry sales your company captures in a given period. It measures competitive position relative to rivals in a defined market.View full definition →, now drives competitive advantagecompetitive advantageA lasting edge over competitors: a resource, capability or position they cannot easily replicate, letting a firm earn above-average returns over time.View full definition →.