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As Chief AI and Software Analyst, my view of the fourth quarter and 2025 is that the software economy (XaaS) remains the primary engine of financial growth across the technology industry, as enterprises continue to standardize on cloud-first and increasingly AI-enabled operating models. The ISG Index shows that average contract value (ACV) for 2025 reached approximately $84 billion, up 29% year-to-date and 26% year-over-year in Q4. Infrastructure as a Service (IaaS) is the dominant growth driver, accounting for 77% of XaaS ACV in 2025, fueled by large-scale AI infrastructure buildouts and broad enterprise adoption. At the same time, Software as a Service (SaaS) continues to expand across IT service management, collaboration, and analytics, as IT and software budgets shift further toward cloud, cybersecurity and AI investments.
Recent volatility in SaaS market valuations reflects growing skepticism about the industry’s ability to navigate the shift toward AI-driven consumption and value- or outcome-based pricing models that are reshaping software economics. As AI introduces digital labor and reduces reliance on traditional per-seat licensing, software providers face a difficult transition from subscription-based models to consumption- and outcome-oriented pricing, echoing past platform and delivery model shifts. In my view, the challenge is less about demand for AI-enabled software and more about the fact that many SaaS providers have not clearly articulated how their pricing and revenue models will evolve to align with AI-driven usage across their applications and platforms.
For IaaS, demand in 2025 was driven by sustained investment in AI workloads, continued cloud infrastructure expansion and enterprise modernization initiatives, with hyperscalers capturing the majority of incremental ACV. In the fourth quarter, the IaaS segment delivered its strongest quarterly performance on record, generating more than $18 billion in ACV, up 32% year over year. This marked the fifth consecutive quarter of 30%+ year-over-year growth, although growth moderated slightly compared to the third quarter.
Looking at the full year, IaaS growth continued to accelerate. In 2025, the IaaS market generated $64.7 billion in ACV, up 33% versus 2024. The Americas and EMEA each recorded year-over-year growth exceeding 43%, with the Americas showing accelerating momentum. Asia-Pacific grew 8% for the full year but declined 6% year-over-year in the fourth quarter, marking its only quarterly IaaS contraction of 2025.
The Big Three hyperscalers (AWS, Azure and Google Cloud) each delivered approximately 40% ACV growth in 2025. The competitive landscape is increasingly a Big Four, as Oracle’s backlog expanded significantly on the back of multi-billion-dollar AI infrastructure deals. Substantive cloud computing and major AI technology announcements in the fourth quarter were unveiled at the annual flagship events hosted by AWS, Microsoft and Oracle.
At the same time, regional enterprise demand for digital sovereignty continued to drive both EU-focused and global hyperscalers to invest in AI- and data-intensive workloads. However, escalating capital expenditures for data centers began to raise investor concerns in December, intensifying debate around the impact of sustained infrastructure investment on forward-looking financial performance.
For the SaaS sector, enterprise software continued to evolve as providers infused agentic and generative AI into their platforms, establishing AI agents as units of digital labor focused on specific tasks and use cases. SaaS performance remained solid, with fourth-quarter ACV reaching $4.9 billion, up 6% year over year, though growth slowed from the double-digit gains seen in the prior four quarters. For full-year 2025, SaaS generated $19.2 billion in ACV, up 16%, led by collaboration, IT service management and product lifecycle management segments.
Regionally, EMEA and Asia-Pacific each posted approximately 19% growth, while the Americas grew 14% but continued to account for roughly 60% of total SaaS ACV. The top 10 SaaS providers outperformed the broader market, delivering 19% ACV growth in 2025 versus 16% for the overall SaaS segment, reflecting continued confidence that AI-enhanced offerings will translate into revenue as deployments scale.
Within SaaS, AI-centric software including data and analytics delivered 24% ACV growth in 2025, exceeding $1.6 billion in ACV, driven by the ongoing evolution of platforms infused with generative and agentic AI. During the quarter, industry consolidation and capital flows underscored this momentum, highlighted by IBM’s announced $11 billion acquisition of Confluent and Databricks’ late-stage $4 billion investment, which valued the company at an estimated $130 billion.
The applications segment grew 11% in 2025, driven by widespread announcements and deployments of AI agents and agentic platforms, including offerings such as Oracle AI Agents. Front-office applications, including commerce and CRM, showed mixed performance, with ACV growth of 4.4% for 2025 but accelerating to 8% year over year in Q4. Commerce was a notable weak spot, declining 8.7% in ACV for the full year and falling 23% year-over-year in Q4.
Back-office applications posted modest overall growth of 6% ACV in 2025, with significant variation across subsegments. IT applications were a standout, growing 44% in ACV, while ERP Financials grew 9.3%. In contrast, ERP Services declined 6.2% for the year. Human capital management rebounded sharply in the fourth quarter, posting 24% ACV growth, though it finished 2025 down 2% overall.
Within middle-office software, collaboration emerged as the fastest-growing SaaS segment, delivering 55% ACV growth in 2025, despite a 13% year-over-year decline in Q4. The expanding role of AI in agentic workflows, as seen across platforms from Microsoft, Salesforce and Zoom, is accelerating the shift toward more conversational, action-oriented AI experiences within SaaS applications.
Finally, IT software, including IT service management, recorded 44% ACV growth in 2025, supported by continued market consolidation. Notable activity included Vista Equity’s acquisition of LogicMonitor, ServiceNow’s more than $12 billion investment program in 2025 encompassing acquisitions such as Armis and Veza, and Veeam’s $1.7 billion acquisition of Securiti announced in the fourth quarter.
Overall, SaaS exited 2025 with steady underlying growth, but heightened public-market scrutiny drove significant compression in valuation multiples. As AI continues to reshape the SaaS model, providers are experimenting with a range of pricing approaches to better align monetization with AI-driven value and usage, increasing complexity for enterprise buyers navigating procurement and contract structures.
Our vertical analysis of the software industry, spanning both IaaS and SaaS, shows broad-based strength in 2025, with every major industry segment delivering more than 20% ACV growth. Banking, financial services, and insurance accounted for 19% of total ACV. The fastest-growing industries were Healthcare, representing 10% of ACV and growing 32% in 2025 with IaaS up 37%; Retail and CPG, accounting for 15% of ACV and growing 31% with SaaS up 18%; and Business Services, which represented 16% of ACV and grew 37%, driven entirely by IaaS.
As business applications continue to move deeper into vertical industries, they are increasingly infused with AI capabilities. This verticalized, AI-enabled application layer is the segment to watch, as it is where enterprises are expected to derive the next wave of differentiated value.
The ISG Leaderboard positions software providers based on annual contract value signed over the past 12 months. The Big 15, consisting of companies with revenues above $10 billion, remained stable in 2025, with hyperscalers continuing to drive the majority of growth. AWS, Microsoft, Google Cloud and Oracle continue to lead, with Oracle gaining traction across AI and cloud infrastructure as well as its applications portfolio, including Oracle Health.
In the Building 15, which includes providers with revenues between $3 billion and $10 billion, performance was led by companies such as Atlassian, CrowdStrike, Palo Alto Networks, Snowflake and Workday. Snowflake stood out, reporting 37% year-over-year growth in remaining performance obligations to nearly $8 billion, reflecting strong enterprise adoption of its AI Data Cloud.
The Breakthrough 15, representing providers with revenues between $1 billion and $3 billion, saw continued momentum from Databricks, Palantir and HubSpot, with Cloudflare and Shopify joining the group for the first time. Databricks continues to expand its ecosystem through partnerships and accelerating enterprise adoption. The Booming 15, consisting of providers with revenues under $1 billion, includes emerging players such as CyberArk, DigitalOcean, Nemetschek and Vantage Data Centers.
Macroeconomic signals remain mixed, with tariffs, extended enterprise decision cycles, U.S. H-1B visa constraints, and geopolitical uncertainty, particularly in Europe, weighing on parts of the technology industry. However, these pressures are more muted in the software economy than in services. We are closely monitoring how AI-infused applications translate into higher SaaS ACV as enterprises gain confidence in outcomes from the latest generation of products.
The shift is clear: AI is no longer an add-on but a foundational capability. While this transition presents a near-term headwind for segments of SaaS as providers adapt pricing and revenue models to new AI-driven economics, underlying demand remains strong. Supported by continued IaaS momentum and steady SaaS growth, ISG is raising its software industry growth forecast to 20% for 2026.
Watch the replay of the Regional Results: ISG Index 4Q25 Quarterly Webcast.
Regards,
Mark Smith