Welcome to the Protocol Power Index, a ranking of the most powerful companies by tech industry subsector, as well as the companies best positioned to challenge them. This time: observability platforms.
Observability platforms help companies identify application performance issues, address them and proactively stop them from happening. The market is growing fast and still up for grabs: Observability competitors have raced to the public markets in recent years, garnering valuations in the tens of billions as they look to bolster their positioning.
Observability as a concept is an evolution of monitoring, as the growing complexity of enterprise networks has demanded more comprehensive (and faster) tools to right the ship when incidents do occur. Over time, the subsets of monitoring — of application performance, real users, network performance, end-user experience and so on — have been drawn closer together under the umbrella of observability. Some older companies have backed into the space in the last few years, while newer companies like Honeycomb — and then others after it — have built solutions from the ground up. Either way, if monitoring tools of the past allowed executives to answer the questions they specifically asked, observability tools allow companies to answer any version of that question down the line via more contextual data and a greater number of network touchpoints.
But which companies have the lead right now? Which ones are challenging the sector's dominance? And how do the dominant public cloud vendors fit in? We've ranked the market for you.
|Power Score: 62.00||Momentum Score: 46.0 (4)||HQ: San Francisco, CA||CEO: Douglas Merritt||Founded: 2003|
Splunk's market power is not the result of overnight success. Rather, the company built a loyal client base over time by helping reduce enterprise IT complexity, first for cloud migrations and later for hybrid and multicloud architectures. Splunk only launched its observability platform in 2020, on the heels of two major acquisitions, but its deep relationships with cloud vendors and Fortune 500 companies have enabled its success. And its FY 2020 revenue growth relative to its valuation is illustrative of a big player aiming to get much bigger still.
|Power Score: 52.48||Momentum Score: 55.0 (2)||HQ: New York, NY||CEO: Olivier Pomel||Founded: 2010|
Coming off a huge IPO in 2019, Datadog is in a good place financially, trailing only Splunk in our economic strength category. Like Splunk, Datadog's deep relationships with the biggest cloud vendors, including a recent partnership with Azure that allows for native integration, put the company within striking distance of the top of the list. Datadog falls short in its penetration of the lucrative public sector, but with its recent FedRAMP authorization and a growing emphasis on government affairs, the company is clearly hoping to make strides in the space in the coming years.
|Power Score: 47.88||Momentum Score: 50.0 (3)||HQ: Redwood City, CA||CEO: Ramin Sayar||Founded: 2010|
Sumo Logic went public in September 2020 on NASDAQ, just over a decade after its founding in Redwood City, California. Though the company has yet to turn a profit, it managed to grow its valuation by 81% year-over-year. As of April 2020, Sumo Logic managed to attract 27 clients with ARR over $1 million. These prominent clients are likely drawn to Sumo Logic's robust security monitoring features and developer-friendly open-source approach. Sumo Logic also received FedRAMP authorization in early 2021 and is now on an even playing field with many other companies on the top part of this list when it comes to winning public-sector contracts.
|Power Score: 45.99||Momentum Score: 44.0 (5)||HQ: Mountain View, CA||CEO: Shay Banon||Founded: 2012|
Elastic went public in 2018 but made a name for itself long before through its relationship with the public sector. Many federal agencies employ Elasticsearch, and as the company has expanded into true observability — which now accounts for 40% of its overall revenue — it has an opportunity to further expand both its private- and public-sector presence. Still, its recent retreat from the open-source community is likely to antagonize some developers, and it remains unclear what impact that will have on its future.
|Power Score: 44.05||Momentum Score: 42.0 (6)||HQ: Waltham, MA||CEO: John Van Siclen||Founded: 2005|
Founded in 2005 within a still-emerging market, Dynatrace had a chaotic early life. It was backed by Bain Capital Ventures through its series B round, before being sold to Compuware in 2011 and later sold to PE firm Thoma Bravo in 2014. Over the next five years, Dynatrace placed emphasis on its subscription revenue over its licensing revenue. The company was ultimately given new life as a spin-out via a big IPO in 2019; it subsequently became one of the most bankable stars in the Application Performance Monitoring (APM) space, and 99% of its ARR comes from its flagship Dynatrace Platform, which features observability and AIOps capabilities.
|Power Score: 44.0||Momentum Score: 29.0 (8)||HQ: San Francisco, CA||CEO: Bill Staples||Founded: 2008|
New Relic grew out of the first wave of monitoring platforms and has been around since 2008. The company is attempting to pivot into the observability space, and revenue has increased 25% over the last year to reach $600 million for 2020. New Relic has yet to turn a profit, though, which may concern investors considering its long operating history.
|Power Score: 42.48||Momentum Score: 22.0 (9)||HQ: Newbury, UK||CEO: Stephen Murdoch||Founded: 1976|
Micro Focus has a rather ironic name, considering the company is neither small nor particularly focused on any one product. Observability software is just one of many products offered by the U.K. tech conglomerate and consultancy. (In fact, Micro Focus has so many products that it lists them A-Z on its website.) Micro Focus' Operations Bridge AIOps for Cloud Monitoring product will still suit the needs for some corporations — it just isn't the primary focus of Micro Focus, which helps explain why the company ranks so low on the disruption ranking.
|Power Score: 36.27||Momentum Score: 18.0 (10)||HQ: Austin, TX||CEO: Sudhakar Ramakrishna||Founded: 1999|
For those outside the observability industry, SolarWinds has become synonymous with the 2020 hack that exposed the sensitive data of a slew of high-profile clients. That reputational damage, along with a nearly $19 million loss in the first half of 2021, highlights the tough road ahead for SolarWinds, which plays into its low momentum score. Still, it managed to produce 9% revenue growth in FY 2020 — a real achievement, all things considered.
|Power Score: 27.95||Momentum Score: 71.76 (1)||HQ: San Francisco, CA||CEO: Christine Yen||Founded: 2016|
Honeycomb helped pioneer the observability field, but it hasn't necessarily reaped all the rewards for that hard work. That's starting to change, as the company came out on top of the momentum rankings, despite ranking next-to-last on our Power Ranking. In February, Honeycomb announced the close of a $20 million series B funding round. It said it would use that money to further invest in R&D and build out its engineering team, which has nearly doubled year-over-year. Honeycomb has punched above its weight for quite some time now, and sooner or later we expect it to start climbing the Power Rankings.
|Power Score: 21.15||Momentum Score: 29.41 (7)||HQ: Boston, MA; Tel Aviv||CEO: Tomer Levy||Founded: 2014|
Logz.io offers a suite of monitoring products on its open-source platform. The company was founded in Tel Aviv and opened its U.S. headquarters in Boston in 2018. While its valuation is still relatively small compared to some of the competitors on this list, Logz.io has managed to attract big-name clients such as Dish Network, Siemens, British Airways and ZipRecruiter. The company most recently raised a $23 million series E funding round in November 2020, which followed a larger $52 million series D from May 2019. Its appearance in the middle of the momentum ranking suggests there's more to come.
Explore the Data
The Protocol Power Index is designed to view power through a holistic lens that reflects how modern tech companies amass and exercise their strength. To do so, the Power Index takes into account 30 metrics across five categories — Economics, Leadership, Innovation, People and Politics & Policy — and synthesizes them into a single Power Score. Read our full methodology statement here.
What happens next?
Three forces stand to shape the companies operating in the observability software space in the coming years: big cloud bundling, security vulnerabilities and enterprise cost-cutting.
The threat of dominant public cloud providers looms large.Microsoft, Amazon and Google have ready-made monitoring and observability platforms available for use through their cloud services. Their dominant market positions could limit the opportunity for incumbents that specialize in this space.
- The public cloud providers haven't made growing their share of the observability market a huge priority, but there's always the possibility that they ramp up customer acquisition efforts as the revenue opportunity grows.
- The cloud players could bundle their observability platforms with other already-popular services. This would make it difficult for standalone observability platforms to effectively compete. It would also make it harder for those companies to attract new customers. For instance, less tech-savvy companies tend to want solutions, which could steer them toward a plug-and-play service offered by a public cloud provider.
Security is a big issue on two levels. Observability platforms need access to critical, sensitive software systems, making them vulnerable to security issues — both real and perceived.
- Perception issues can arise for the entire observability industry, harming companies through no fault of their own. For instance, the high-profile SolarWinds hack tainted the perception not only of SolarWinds, but the entire monitoring industry. Observability and monitoring are closely linked, and both require access to a company's network to function properly.
- The perception issues created by security breaches can limit adoption, particularly by larger, older companies that tend to be late in the software-adoption cycle.
- Perceived security issues could push clients to more established names, regardless of whether those companies have better security practices. Public cloud vendors could therefore benefit from a perception of security risk within the broader observability market.
And observability budgets are easily cut. Because the software is often seen as nice-to-have rather than need-to-have, the sector may be more vulnerable to IT budget cuts during an economic downturn than other parts of the industry.
- Global enterprise software spend has grown fairly steadily over the years, but that doesn't mean the industry is immune to disruptions. For instance, at the start of the coronavirus pandemic, Gartner projected that global IT spending would decline by 8% in 2020 due to economic disruptions. This didn't turn out to be the case, but it nevertheless shows that the industry has the potential to suffer from broader economic shocks.
- Cash-strapped enterprises might also be more inclined to opt for observability software as part of a larger software bundle from a big cloud player. Large enterprises often agree to certain thresholds of spend per year with these cloud providers, and part of that could be allocated toward an observability service at a discounted rate. This pricing dynamic could steer enterprises toward the offerings of big cloud providers, even over a potential best-of-breed offering from a standalone provider. It would also reduce operational complexity, as the enterprise in question wouldn't need to manage as many concurrent software licenses.
To rank the competitors, we've developed a formula that encapsulates 30 criteria. Those criteria span five groupings that factor into power: Economics, Leadership, People, Innovation & Politics and Policy. We then developed two systems for weighting the criteria — one for measuring power and the other for measuring momentum — such that companies can be scored on a 0–100 scale. Read our full methodology here.