Ben Kepes for Forbes writes: The SMB cloud accounting space is, contrary to what people might think, a very interesting space. New entrant Xero has got a lot of attention, some serious investment and gained a real global foothold. At its latest reporting period Xero had 250000 individual businesses as customers globally.
At the same time there is the dominant existing player Intuit, whoseQuickbooks product fuels the bulk of US SMBs. Intuit has had a cloud product for years, Quickbooks Online, but it has been a fairly sub standard product until recently.
What changed recently was Xero gaining lots of attention – while dabbling in the US mrket until now, Xero picked up around $200M of funding and flagged that it was serious about entering the US market in a substantive way. It’s also flagged a US listing (to add to its existing New Zealand and Australian public listings)
Seeing the very real risk that Xero introduces, Intuit has finally decided to get serious about its cloud product. Taking a leaf from Clayton Christensen‘s book the Innovators Dilemma, Intuit has decided to actively begin disrupting its existing legacy products in order to reduce the imapct of external threats. In essence they’re disrupting themselves before Xero does it for them.
And Intuit’s Q2 results announced this week show that its executing on this change. The company announced that Quickbooks Online has now got 561000 business paying for it, of those 561000, 45000 were added in the last quarter alone.
Previously Xero’s CEO Rod Drury has gone on record criticizing Intuit for not breaking out Quickbooks Online revenue. He’shad to review that critique and is now toning it down to reflect more upon the money Intuit is spending on marketing and the limited impact that he believes this is having on growth:
@benkepes @crepetto that’s new. Thanks. So all that marketing spend for 30% FY13 growth? SMBs super hard to reach aren’t they
— Rod Drury (@roddrury) February 13, 2014
It’s a fascinating look at market dynamics. An incumbent was arguably resting on its laurels for a number of years. An upstart managed to grow to scale while the incumbent was napping and finally the incumbent wakes up and begins to respond. Intuit has an existing customer base across all its business products of close to 1.2 million businesses. This is a significant number and the question is whether the company will be able to continue converting users of legacy products onto QBO at the same time as adding new businesses into the platform. In terms of the second point, it all comes down to mindshare – while not a hard metric, only a couple of years ago almost no one I spoke to in the US had heard of Xero. Today that has changed and the first thing that people generally ask me when they find out I come from new Zealand (the home of Xero) is whether I’ve heard of the company.
However, at least in the US market, Xero hasn’t yet got significant coverage. Of its 250000 global customers, it is saying close to 100000 are in Australia. My assessment would be that the company is still under 50000 paying customers in the US, a tiny footprint that they’re going to be anxious to grow rapidly. The company will no doubt be hoping that a US listing off the back of global revenue will help them gain the credibility in the US to start building those numbers.
Xero is building this awareness through a number of means – strong ties with accountants, high profile investors and executives and an immensely strong ecosystem of add-on partners. This is the key area for Intuit – it has existing mindshare but it’s executed poorly on building the ecosystem of third party add-on products. If I were inside Intuit I’d be investing a lot of development in building out the Quickbooks Online API and engaging with developers to both provide more valuable functionality for customers but, perhaps more importantly, to build a defensive wall to protect itself from the very real threat which is Xero.
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