Jessica Davis: How AI Usage Models Are Disrupting MSP Revenue Predictability

[00:00:12] The managed services business has run on one number for almost 20 years. A flat price per user per month. That predictable revenue is exactly what pulled private equity into the channel. AI is quietly breaking it. AI runs on tokens, token costs move with usage, and a flat per seat price stops fitting. So here's how the split the channel is about in it.

[00:00:37] In a poll my guests just ran, roughly 40% of MSPs say they're not touching their pricing at all. While about 60% are already reworking it and can't agree on what comes next. So the industry is divided straight down the middle on the one question that decides who's still standing in three years.

[00:00:57] For two months on The Daily Show, I've argued this exact break. That seat plus consumption pricing threatens the model and the value flows to the vendor. This week's guest, her own Omni Report landed making a version of the same case. So today isn't about who's right. It's about what the operator actually does about it. Welcome to the Business of Tech Lounge. This is where we break down what's changing in the IT services market, what it means for providers and vendors, and what to actually do.

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[00:02:24] Jessica Davis is a principal analyst in the managed services practice at Canalys, part of Omnia, where she covers AI adoption, cybersecurity, and the M&A wave reshaping the channel. Close to 30 years as a technology journalist before that, and the analyst behind benchmarks like the MSP 501 and MSSP 250. She just published an Omnia report, the coming disruption of the MSP business by AI, and ran a fresh poll on MSP pricing that we're going to dig into.

[00:02:53] Jessica, welcome back to the show. Thanks for having me, Dave. I'm super excited to be here today with you and to talk about this poll and the what you've been talking about for the past several months, really. Well, we didn't even plan it. The polling just worked out perfectly because you've got a number that you just put into the field, and it's kind of the cleanest picture that I've seen of where the channel actually is on pricing.

[00:03:18] The poll asked a very simple question. Will AI token pricing change how you price services? 255 MSPs answered end of June into early July. 40% said no. They're holding per user per month. The other 60% are moving. That's hybrid pricing, tokens plus per seat, you know, all of the... I'm sorry, tokens plus pricing. Those two are the single biggest answer at 19%. 17% are reevaluating but haven't picked a model.

[00:03:48] 13% are looking at consumption only and 11% at outcome only. I want to pair that for the context of this with the data that we see from the business of tech. In our read of the MSP web positioning across the broad market, roughly two-thirds of firms don't mention AI on their site at all. And of those that mention AI, they name a vendor around 90% name only Microsoft co-pilot.

[00:04:13] So that 40% holding the line may not necessarily be defiance. A lot of them simply have an engaged AI in a way that forces the pricing question. So you ran this, right? The 40% holding per user per month. Is your read on this that those are disciplined MSPs that are protecting their predictable revenue? Or are they the ones that haven't done the token math yet? Like what do you... What is the data telling you about where they're at?

[00:04:41] Yeah, that's a great question, Dave. And I think there are like two main camps and the 40... There's like the rational 40% where AI is mainly an internal efficiency tool and their costs are bounded or pooled. And customer value is like predictable bills and repricing would happen at renewal.

[00:05:08] And then there's the vulnerable part of that 40% where AI is still subsidized during pilots. The margins aren't measured by client service. There's unlimited machine activity that's sitting at a seat-based price. So I think there is a combination of factors that goes with that 40%. Some people are not ready to acknowledge the threat that exists yet.

[00:05:37] And some people are recalibrating. I think the 60%... I was really surprised really to see that 40% number of people who weren't even considering repricing this yet. And perhaps they're more conservative than the others, the 60% that see the mismatch that's coming.

[00:06:07] And it's not here yet. Maybe it's sort of arriving. Maybe. It's a good theory. And I was... Because I was with you, right? I looked at that and I sort of said, okay, it's either not adoption or... Like there's another piece. I want to offer... Get your take on something that I've been mulling is another portion of this. And that's the kind of vendor approach to that. Because when I look at what's going on, the vendors themselves are falling into a spectrum, right?

[00:06:34] If I can use Microsoft as a classic example, their E7 licensing now per seat with a usage component. But by the way, it does not extend to the lower tiers, right? So if you're a SMB customer, say on an E3 or an E5, maybe you're not dealing with that. In the MSP space, I use... Because they've both been on the show recently, I use Atera and ConnectWise as my two sort of counter examples. When Gil Peckerman was on the show, he talked about how Atera is fully absorbing that, right?

[00:07:03] So they don't plan on passing the consumption portion onto their MSPs at all. On the ConnectWise front, they're not actually doing it from a token perspective. They're doing it from an outcomes base. So like for example, they're going to bill based on ticket closures that they're able to do. And so there's an element of me that says, well, maybe the confusion here is also the fact that it hasn't flown all the way down in the way that the MSPs are used to consuming.

[00:07:31] Or it's too complicated to wrap around it. Have you got a sense in conversations doing this research, like how much that vendor decision is factoring in? Yeah, I agree with you, Dave. And I think that the fact that there's a spectrum among the vendors and that the answer they've come up with is different shows that the market hasn't settled on anything yet.

[00:07:59] And I think about when Enable was talking about this at their Empower event as well. They were not setting the pricing yet, but they were limiting the amount of queries that MSPs would have with their assistant so they could measure how much was used.

[00:08:23] And they could eventually settle on a price for what was going to happen and settle on what their costs would be. Because this is an evolving situation where we're figuring out what the value is we get or the token costs that we have, I think we're going to see some movement all along the spectrum. Yeah.

[00:08:54] I think you're right. So I also then I want to say, let's take a look at that 60% reevaluating, right? So hybrid is the biggest answer in that pile. But I'd be remiss if I said, but we haven't decided is almost as big, right? And so I kind of look at that as which again, I want to get your take. Do you think the channel is actually moving or just anxious? At this point, I think the channel is anticipating.

[00:09:21] I would say, you know, if I had to choose between those two anxious, maybe maybe what I would choose. But but I think I think the channel is reevaluating the pricing. I mean, just as the vendors are reevaluating it and they don't have a clear answer yet, MSPs aren't going to be able to to gauge their costs practically until the vendors figure out what how they're going to be charging MSPs. They sort of have today's answer.

[00:09:50] But but like you said, it's along a spectrum and. Chances are that will evolve as well. And so I think it it's smart to. Wait before establishing.

[00:10:09] Yeah, this is absolutely how we're going to price everything for the next 10 years based on what what the what the costs and what the value is today, because it keeps changing. So let's let's layer the vendors in a little bit more with a little bit more nuance. Right. Because you've got a new report that lays out for vendors that are going after it at the same time. You frame them as as competing to become the strategic layer that the MSPs are going to run their operations and A.I. through.

[00:10:38] Kaseya pitching Kaseya intelligence as A.I. built in, not bolted on, where they're delivering a message of consolidate onto Kaseya. Kaseya. ConnectWise renames its platform and its A.I. acquisition into the ConnectWise platform and is selling A.I. agents to MSPs directly. Enable goes the open route. So they're doing MCP servers that let those A.I.'s like Claude and Copilot act on its data. And they floated the term managed information provider.

[00:11:08] Pax 8 is playing the vendor neutral orchestration with its agent store and its managed intelligence provider platform. And on top of all that, I got to layer in. Omnia forecasts a $267 billion A.I. opportunity for channel partners by 2030 up from about $59 billion this year. Big opportunity if the partner is the one who's able to capture it. So I kind of want to get your read on that.

[00:11:34] Four vendors, four versions of the let us be your control plane. MSP's got to pick one, right? Does picking a control plane buy them real A.I. capability? Or does it hand the value layer and the customer data to the vendor? Like, what's your take there? Yeah, that's such a good question, too. I and just to be clear and just to back up for a second, you know, I chose those four companies because they all had events at the beginning of the year.

[00:12:04] And so we were looking at what they said during those events. Snapshot in time, really. And and of course, these things evolve. But yeah, I think that's a risk. I think it's a risk. Or MSPs to be pushed, and I think you've been arguing about this as well, Dave, that that could potentially push MSPs into reselling instead of offering a managed service.

[00:12:33] I think it's tricky right now because the IT services business has is potentially more commoditized than it's been. If we're going to fewer users because the customers are getting more efficient, then then that further breaks down the cost, the the pricing model that that has been around for 20 years that you talked about.

[00:13:04] So there's there's a whole lot of forces happening at the same time, and it's hard to keep them in in your head at at once.

[00:13:12] But yeah, I think that's a real risk that that that MSPs need to figure out what the premium services that they're going to be offering in the age, what those are going to be, and how they're going to keep that value and provide that value to customers and not end up getting squeezed into a reseller kind of relationship where their margins are much thinner than. Then, you know.

[00:13:40] Yeah, I and that's I think you're highlighting the bit that I kind of want to spend spend us a little bit more time on because I think the piece that I'm not hearing enough providers under talk about and understand is there's kind of two major forces that I'm looking that I don't think we have clear answers to if I had a clear answer, I'd say it.

[00:13:56] The first is, is that if the promise of AI is increased productivity, there's a risk of the per user deliverable to your customers either slowing or flatlining entirely. Because you could see a world where the end customer is able to do more with the AI technologies, get more out of their people, but not have to hire as fast. So that could level, it could mean plateauing. It also could mean a reduction in their speed.

[00:14:26] I'm not necessarily on the job destruction train, but I would be remiss if I didn't say that that was a factor there too. But let's assume it just slows the hiring or they can be more deliberate or they can plateau. One of the joys of the managed services model had always been the customers continue to grow and hire. You as the managed services provider also reap the rewards of that by more seats being now under management. That may slow.

[00:14:51] And then you layer on top of that the fact that there may be a new cost component to this that's in the software delivery component that you've then also got to manage on behalf of the customer. Yes, you'll be able to do financial management against that, but the vendors, the SaaS vendors, the platform vendors of your customers start capturing more of that.

[00:15:14] Like when you're thinking about this, Jessica, like how much of this do you think is going to fall into the category of things that we can do in like good project management? Like I think we could do workflow implementations that are really good, interesting project work. And then we're going to see a pile of kind of thin ops, like help you manage your spend.

[00:15:38] But I think at the expense of some of those per month, per seat per month pieces, like when you're looking at those kind of pricing landscapes, where are you circling as these are areas where there's a lot of risk? Yeah, and there's so many pieces to this, right? And so, and yeah, there's so many directions you could possibly go in here.

[00:16:03] I think there's the element that a lot of vendors are focusing on right now is internal help desk efficiency, right? And making MSPs more productive with what they have, automating tickets, automating tier one, tier two tickets, the autonomous help desk type of vision.

[00:16:30] And that's an area where I think MSPs are going to get squeezed. And I think there has to be a second track. And I think smart vendors maybe will help MSPs capture this, which is the premium services, the monitoring, management of the AI operations in customer sites.

[00:16:58] It's the opportunity, the second track, I think is the opportunity that hasn't been pursued as strongly. And certainly looking at your review of MSPs who have AI services on their websites, it's not something that a lot of MSPs are pursuing aggressively right now either.

[00:17:24] Speaking to a few MSPs, very smart, sophisticated MSPs at PAX 8. A few of them told me that no, they haven't heard any demand from their customers yet for AI. And so they keep talking to them about AI, but there's sort of a mismatch there too.

[00:17:48] But I think it's going to be one of those instances of working on it, working on it, working on it. And then all of a sudden you're an overnight success. Right. Because I think there's going to be a point where customers are really going to need the assistance with AI.

[00:18:09] And if you've been in front of them all this time, pitching your AI expertise, you're going to be the one that they choose for that business and not some startup firm who's just selling AI services and not selling services for the rest of the technology stack. Well, I think you're 100% right. And I think that what's interesting about this is I think I want to be very clear about what the business of tech data is saying.

[00:18:37] So we went out and looked at MSP websites to say, are you positioning AI on your website? And literally our criteria was, do you mention it? Is it on your website? And I want to differentiate that from back-end operations, right? So it's one thing for an MSP to be investing in their own systems to use AI. Our data is about, are you telling your customers anything about AI? And those are two different positioning.

[00:19:03] Because there's an interesting period of time that we may be in where an MSP is going to be able to invest in their own automation, see a rise in profitability, see them able to do more with that. But at some point, customers will want those same efficiencies and then the market changes a little bit. And I would be remiss if I didn't say that the ultimate success of an MSP investing heavily in automation is the elimination of people.

[00:19:30] That if you take that to its ultimate extreme, the system is delivered by as few people as possible, right? And that does become the ability to drive it to commodity. So we might even see a very bumpy progression over time. And I think that the piece that I'm particularly worried about for this space is a little less of their ability to run it internally and a little more about at some point, customer demand will flow faster, right?

[00:19:59] And there will be more ask for it. And if you're not positioned to answer those questions, you're going to be in a real position around that, right? And so I think that that's kind of the area that we want to focus on. But I think the other thing that we want to look at is we agree that the model is kind of under some stress, right? We've kind of both been nodding, going, okay, there's a lot of pieces where this is something.

[00:20:24] Your report says that the winners use AI to sell new things, right? Cyber resilience, compliance, governance, and not to do the same work cheaper. I buy in completely. But of the MSPs you're talking to, like what shares of those do you think are going to be able to make the pivot and go along with those versus the ones who will try to compete on price and lose? Yeah, I haven't done that research yet.

[00:20:52] From my perspective, there's a lot of smart MSPs out there. And I am surprised at the number who hadn't, at the 40% that hadn't looked at their pricing yet. So, and I don't, I want to be an optimist and think that more than that, we'll be able to pivot.

[00:21:15] But I think, I think the fact that, that 40% aren't looking at that at all concerns me. And I think it's something that they should be looking at and considering things have been felt. Right. And this could go by before you've realized what happened.

[00:21:44] And so I don't want to put a number on it, but I'm concerned. And I hope that every MSP listening out there is going to be looking at this carefully soon. Yeah. I think all your listeners probably already do, Dave. Well, I would hope so. But, and so let's, we'll put both spins on it for a quick moment there, right? So the, the optimistic view of this is, hey, this area of confusion is your opportunity, right?

[00:22:12] The half-bust empty version is, is the like, hey, this is all the risk that's going to happen to you. Both can be true at the same time. And I think what, what I think we would both agree with also is, is the, you know, both of us are bad at timing, right? Like we don't know how fast any of this is going to happen. I could see a world where customers move incredibly fast, start seeing success. I could also easily highlight the incredible pushback we're seeing on AI across the culture, right?

[00:22:41] In terms of like, you know, the, the society is pushing back, pushing back on data centers. There may be a real desire to not move fast by end customers because of concerns like that. So there's tons of variables on the timeframe. I think the, the real piece that we want to look at is like, hey, what is the different paths of movements? Let's kind of throw this out a little bit, right? So, so you've been thinking a little bit about the different ways that the vendors are approaching this.

[00:23:11] Have you given some thought to the way that those models will fall out in particular ways for the MSPs? Like, are there, are there, is it related to size? Is it related to maturity? You know, we can definitely see the vendors are trying different plays. Have they been telling you anything about where, why they're choosing the ones they do for different markets? No, they haven't. They haven't been telling me that at all.

[00:23:38] But, but pulling back a little bit, I'm thinking about on the, on the other side of what you were just saying. When I think about how fast the market is moving, I'm thinking about how fast AI is moving. And, and aside from the cultural concerns, I mean, I remember speaking with an executive at a vendor who was telling me, yeah, we, we put together a product plan six months ago.

[00:24:06] But by the time six months happened, you know, that plan was really obsolete and we, you know, had to change everything around. So that's the speed that I'm thinking about when I'm thinking about the speed of AI. It's not so much our acceptance of the changes. It's what's possible with what's coming out.

[00:24:30] What I have heard, I mean, I think some of the more innovation, innovative companies right now are the, the MSPs themselves, including, you know, the, the big roll ups and including some smaller MSPs who are maybe not as constrained by.

[00:24:50] Uh, uh, uh, uh, uh, uh, corporate things as, as, uh, some, some big companies and can be more experimental with what they're doing. Um, and I know, um, uh, uh, uh, CJ from CRN had that big story about MSPs putting together their, you know, perhaps writing their own stacks instead of buying tools from vendors, which is something I've heard about as well.

[00:25:20] For a while. And I think that's a really interesting thread that, uh, vendors may not have anticipated a year ago. Um, and it's a question of, you know, is, is this something that is realistic or is it not? Uh, and lots of people would like to think it's not realistic, but it certainly is interesting.

[00:25:44] Um, so when I think about how quickly AI is changing things, um, um, I'm, I'm thinking about those possibilities, those disruptions that we haven't even considered yet. Um, aside from the pricing too, uh, well, it's interesting because you, you bring up an angle that I'm not necessarily, I hadn't necessarily thought about even coming into this because one of the values of a well positioned MSP or IT service provider.

[00:26:13] Is that they're helping their clients guide through the tumult, right? To understand the various components. And if we think about the fact that on one side of the equation, things are moving very quickly, right? Vendors able to deploy new software, new capabilities, security rollouts. But what we're both sort of saying is, is, Hey, the market itself on end customers may not be moving that fast, right? Maybe more, maybe more reluctant or is, or you're hearing that they're not asking for it.

[00:26:39] That puts the MSP in an interesting position of friction on one side to move fast friction on the other to not. Right. And so we need to actually understand that you may be doing two different movements at the same time. I will tell you anecdotally without research, I'm hearing exactly the same thing from a number of MSPs who are starting to tell me, Oh, we are actively looking at replacing some of our smaller tools with our own code bases, right?

[00:27:06] That they've actually started writing software and implementing it saying like, well, we've been able to eliminate two of our smaller software vendors because we just write code that did that. And I will smile and go, those are software vendors that I used to call that. That's more a feature than a product that I looked at and said like, that was a feature some vendors should have put in. It's easier to do that. I know my own backend, you know, at MSP radio, we've written a lot of now integration code that before we would have waited for somebody to write us a tool.

[00:27:36] Now we've just written that technology ourselves. It's backend software versus something that we put out for production, but you could see that being the glue. Give me a little bit of your take about the changing role and the friction there. Like if we're viewing this from the lens of if you're managing friction, maybe we're both misreading it and saying managing friction may be the most valuable portion of all of this. What's your take there? Yeah, I mean, I think that's totally true.

[00:28:06] Isn't that what MSPs do? They're managing friction on behalf of their customers. They're taking on this stuff that is too overwhelming or too much for their customers to deal with and figuring out how to make it into not that, into how to make it workable workflows that make work happen without having to worry about the technology underneath.

[00:28:35] And if AI can help MSPs do that, I think that's fantastic. I think, you know, it's so interesting to me, MSPs really are, so many MSPs are builders and they've come into this AI space as builders as well. I love watching, I love looking at how you run the backend systems at your organization, Dave.

[00:29:03] You know, having been in the media business myself, I'm sort of jealous about how technical you are with that stuff. And I'm always interested in seeing what you're doing there. But that aside, I personally find it super exciting to see MSPs building with AI and seeing what they're coming up with to bring to their end customers in terms of AI and how they're automating their own processes with AI.

[00:29:33] It's, I mean, it's kind of a renaissance. It's kind of an exciting time as far as that's concerned as well. We're back to basics a little bit and it gives a lot of people a lot of opportunities. I want to play with an idea here, sir. I'm going to argue the other side of your own poll for a minute, right? What if the 40% that's holding on to per user per month are the smart ones, right?

[00:29:56] And some of this token urgency is the vendors manufacturing a problem to move everybody onto consumption models that happen to benefit the vendor. Like, is there a position here where holding the line is actually the right call? That's super interesting, too. I mean, I think personally, if I were an MSP, I would not be changing my pricing tomorrow.

[00:30:25] I would be waiting to see how the value changed that I was delivering to customers. I would be looking to see how my costs changed. I think the problem, I think the winners will be those who are carefully measuring their costs and any new costs and measuring the value that they're delivering and paying close attention.

[00:30:54] It's a time for smart pricing principles and not like knee-jerk reactions of, yes, we're going to flip this switch on hybrid or we're going to flip this switch on consumption. It's analyzing all the pricing first and all the inputs that go into it and the outputs. Right there is the insight, right, too.

[00:31:18] And by the way, that was even before we even talked about the fact that the frontier models and the open source models are starting to stratify in terms of price levels. There might even be real value in there, but you nailed it exactly with the takeaway here. It's not necessarily that you need to move and change everything right now. You need to be really considered on this. Now, I know you can find your report, The Coming Disruption of the MSP Business by AI through Omnia and the pricing poll on your LinkedIn.

[00:31:45] What's the best way for people to reach out and continue the conversation? Yeah, so I am on LinkedIn. Feel free to reach out to me. Connect with me there. And that's my LinkedIn. I'm the original. As the producer said, I am the OG, Jessica Davis on LinkedIn. So, yeah. It's always the best way. Jessica has some of the best polls and some of the best information out there. Really encourage you to follow her and reach out if you've got questions. Jessica, always so much fun to have you on.

[00:32:14] Really appreciate you joining me today. Thanks so much, Dave. Always great to be on. And I want to thank our sponsors, ABC Solutions, Rhythms, and Transit AI. Transit AI, if you've got network engineers on your team, this one's for them. Transit AI is a cross-platform SSH client with an investigation-only AI assistant for your switches, routers, and firewalls. The whole idea is restraint. The AI can look, read, and propose, but it can never change your gear on its own.

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