Welcome to OpenForum. Join our global community: Sign up, Login or Learn more

Palantir - Product or Services Company?

Palantir’s business model, like the company itself, is slightly furtive. By analyzing its pricing and operations, we have to ask: Is Palantir a Product or Services Company?

Photo of Hanhan Wang
4 4

Written by

Palantir provides premier data analytics products that have become essential for the CIA, FBI, military, hedge funds, and retailers. For example, the Pentagon used Palantir software to track patterns in roadside bomb deployment and was able to conclude that garage-door openers were being used as remote detonators. Founded by the Paypal mafia, backed by Peter Thiel’s Founders Fund (he apparently has a giant palantir in his living room), incubated at In-Q-Tel, Palantir was recently valued at over $10B.

Palantir’s technology is its competitive advantage. No other system allows users to draw associations between disparate data sets and to visualize the connections as easily or as quickly. On the back end, Palantir’s infrastructure uses cutting-edge data processing algorithms to search through huge data sets at lightning speed.

Palantir’s business model, like the company itself, is slightly furtive. They sell two main products: Gotham (aimed at military and government customers) and Metropolis (aimed at finance and retailers). However, pricing is quite opaque, except for this price list from the GSA Advantage ordering system, as reported by Hacker News (Source: http://news.ycombinator.com/item?id=8325441)

A typical Gotham installation consists of:
  1. $564K      Price for a Palantir server, assuming 4 cores
  2. $112K     Software Updates and Maintenance for server, per year (first year free)
  3. $100K    Training, assumes 50 users
  4. $600K    Engineering Services for integration. Assume 2-3 deployed engineers for 1 year
Total: 1.5M for 50 users

Next, looking at Palantir’s job listings, it’s even more obscure. They’ve made up their own titles for some positions.
  • Designer - At Palantir Office
  • Software Engineer - At Palantir Office
  • Forward Deployed Software Engineer -  Customer Site
  • Deployment Strategist - Customer site
  • Product Expert - Customer site

But wait -  Is the company a product or services company?

This structure looks more like an Accenture consulting team, rather than a Silicon Valley product company. By bundling the product and services, Palantir can obscure where their allegiances lie.
Financially, it’s obvious from the breakdown that the engineering services are the highest margin. Assuming you can pay FDEs $100K/year with lucrative stock options, Palantir has a 60% margin per deployed engineer. Moreover, customers often keep FDEs longer than required because they are miles better than their own employees. Operationally, however, Palantir’s thought-leaders are the product engineers, who come up with advanced data processing algorithms. I speculate that these special titles are a HR move to compete for the best talent in the Valley. Top engineers wouldn’t respect working at a technical services company, so Palantir must re-brand as a product company to attract the best technical talent. This approach has been highly successful as Palantir is seen as a Silicon Valley darling.

The company states that they practice value-based pricing, which allows them to maximize WTP for each customer. For example, on the government side, Gotham’s only comparable product is the U.S. Army’s in-house Distributed Common Ground System that cost of $2.3 billion. A leaked document cites a 2012 study where 96% of the surveyed war fighters in Afghanistan preferred Palantir. So we can assume that Palantir can charge up to and over 2.3B for their product - to the Army alone.  

Today, Palantir’s expanding to retail/CPG companies as they look for new-market opportunities with shorter selling cycles than government. Unlike the government, these companies do have comparison points to IBM BI, SAP, and in-house solutions. As they enter this industry, Palantir should expect to see its margins decrease due to increased competition, especially since IBM BI may even underbid just to keep out Palantir. It will be interesting to see if these lower margins will eventually spillover to the government side, as greater transparency should identity the true value for data analytics products.
 

4 comments

Join the conversation:

Comment
Photo of Joe

Interesting post, Hanhan - definitely put your finger on an important dynamic tension between product and services.

Large commercial and government organizations have inherently unique IT architecture, which is a huge pain because it means services are always required to put new software into place if it's going to interact with existing architecture. The reality is that there will always be a services component with these complex deployments.

Usually, the services component is handled by a systems integrator, which you mentioned. The problem is that Accenture, like any consulting firm, charges customers by the hour rather than by the outcome. And these costs are a significant portion of the total system costs - rule of thumb is a third. So to your point about margin erosion with commercial customers, Palantir may still look cheap when you don't have to price in a systems integrator.

Furthermore, when IBM sells software to a company, the customer must shoulder the risk of cost and time overruns for Accenture. Since systems integrator gets paid by the hour, their incentives are basically aligned to take as along as possible, and you wind up with situations like this one: http://blogs.wsj.com/digits/2013/01/02/accenture-led-venture-sued-over-software-project/

A software project estimated to cost $17 million and take 11 months instead mushroomed to $37 million over three years, and ScanSource said it still doesn’t have a Dynamics software [Microsoft's CRM] up and running. Accenture has estimated it will cost $29 million more to complete the ERP project, according to ScanSource’s lawsuit.

$17 million budget growing to $66 million and 3+ times as long? This is a really bad case, but unfortunately it's not entirely uncommon. This is a commercial customer, by the way.

By contrast, Palantir charges one price for the system and for getting it up and running. In this way, Palantir's incentives are aligned to get it done as efficiently as possible: the longer they take to get it up and running, the more expensive it is for them.

I think this outcomes-based approach will be differentiating and will allow Palantir to keep charging for it in commercial markets.

Photo of Hugh

Very interesting post. I know several people who have worked with Palantir software. They consistently state that it is easy to use and highly versatile. I think a key to Palantir's success is that they have developed a solution that is can easily integrate with a wide variety of data sets without a huge amount of customization. As you point out, Palantir pairs its robust software solutions with well trained "consultants." I would guess that as customers begin to use the software and understand the value of their data they develop increasingly sophisticated requirements. In turn, this requires increasingly customized solutions and additional support from Palantir. This provides Palantir with a long term, problem solving focused, relationship with their clients.

Photo of Anisha

Nice post! I was curious to read because I had a chance to meet with several Palantir folks recently. You are right that they are a company of 'engineers' mostly. A majority of recruits are engineers and highly technical, from what I understand. Another interesting thing to note is that it appears that a bulk of Palantir's revenues now come from commercial clients instead of the CIA, FBI and government. I do wonder how they will branch out into CPG, pharma etc., domains they don't have much expertise in. Do you see them building a competitive advantage in these sectors with the kind of talent capacity they have currently?

View all comments