The $1 or $10 billion company

Salesforce.com has earned a bit of press today, announcing that their forecasted FY2008 revenues would be higher than they previously estimated.  Last month, the On Demand CRM vendor forecast FY2008 revenues to be between $700 and $710 million, and today they have raised that to a range between $710 and $720 million. 

The subhead to this story is the release of the AppStore, which is alternately called the "iTunes for Salesforce.com" and the "Amazon.com superstore for Salesforce.com" in internal memos.  Basically this is a way for Salesforce to provision customers with the myriad applications within the AppExchange on a single Salesforce.com bill. 

What I like about this:
1) By creating a billing and collection service for AppExchange vendors, Salesforce.com is relieving ISV's of the burden of these onerous tasks.  In so doing, Salesforce.com eliminates a distraction from what they want their ISV's to do - namely innovate on their platform. 
2) A single bill is something customers want.  Think about all your cable, mobile, and long distance bills.  It's nice to have them all in once place.
3) This signals a strong focus on monetizing the AppExchange.  For Salesforce to go completely vertical in growth, they must leverage the Internet as a sales and distribution arm like no company has done in history.  AppExchange promises this, sporting over 400 applications today that are essentially off Income Statement R&D and S&M, while driving the overall value of the customers investment in the CRM application.  A converged billing solution shows foresight and attention from management in addressing this much larger opportunity.

What I'm not sure about:
1) While a converged billing solution is fantastic for everyone, it does not necessarily address another problem: micro-billing.  This is the situation unique to composite applications where an end user might be using web services from several different vendors.  Currently, each vendor bills for maximum usage and chokes off the ability of the end user from using more and more AppExchange apps.  What has to happen is a trusted and reliable way to send even micro-pennies to vendors based on the usage of their product, rather than force the whole cost burden upon a user.  This announcement suggests they are looking at this, but it lacks any detail around the solution.

What I don't like about this:
1) The cost.  The one way to screw this up to a fair-thee-well is to price the billing solution such that it isn't cost-effective for an ISV to use the system.  Right now, Salesforce could command up to 45% of the revenue from an application sold via the AppStore.  Why not encourage ISV's to populate the AppExchange by subsidizing the AppStore cost?  The network effect applies to the AppExchange, so why not do everything possible to enhance that value?  What you give away in revenue today is more than made up by the volume of tomorrow.

Risks:
Can Salesforce balance the demands of running a CRM company with that of blazing the trail of the eBay of On Demand applications?  The former strategy will get them to $1 billion in revenue, the latter $10 billion.  Why?  The direct salesforce can only scale so far so fast, and the market is big but not as big as the market described by the various applications in the AppExchange.  Furthermore, the ability of the AppExchange to address that market is similarly larger via the Web 2.0 buying methodology of "try it for free" and then feel the upward pull into paid-for and supported versions. 

The AppStore billing solution is set for December 2007, however the AppStore will launch in February of 2007.  Revenue estimates are not there yet, but need to be considered.

Conclusion:
Salesforce.com continues to be the most interesting enterprise software company around.  It will be instructive to see how Marc Benioff steers the course between being a new take on an old business (CRM) and creating something the world has never seen before (the AppExchange).  Based on what I've seen and heard thus far, I think they have a really good shot at achieving both. 

Comments

[Mongo]

Does any enterprise really care about micro billing? What application in App Exchange is designed for 30 minutes of one time use? Not really sure why that is an issue or where the demand for micro billing is coming from.

Also, why is the cost so much of an issue? This is capitalism, isn't it? Salesforce is trying to drive revenue for their shareholders. Also, they are providing a prebuilt and growing channel for small ISVs to sell too. Fortune 500 customers they would have had to spend endless dollars selling to otherwise. AND Salesforce has automated the billing and collections process! Those two line items are a huge deal for small companies. That being said, is 45% the right number? Time will tell.

But yes, this is the leverage they will need to fullfill their ambitions and enable Benioff to buy the rest of Hawaii.....

[tjrsfca]

Hey Mongo,

Good points from a more near-term view. I perhaps get my head in the clouds when envisioning the opportunity before SFDC. Perhaps not - I would agree that the channel they are developing is highly attractive to ISV's, but I want them to take it further by going completely vertical with ISV adoption. There is no competition right now, and here is their chance to dominate this field and win hands-down. It isn't unlike the desktop opportunity Microsoft capitalized on 20 years ago. SFDC has a chance to be the de facto On Demand platform but they need a game-ending number of applications in the Exchange. If there were, say, 10,000 applications in the exchange all written to the same SFDC data model, UI, etc... There would be a powerful virtuous cycle attracting customers and ISV's to such a degree that competing On Demand platforms would be suffocated. Today, SFDC has 400+ apps. They need more and fast to be the $10B company they could be. By priming the pump today, they can take a small cut down the road of an exponentially larger pie.

re: Micro-billing. That's just another facilitator to the massive On Demand pollyanna I envision.

[dr]

VMware beat Salesforce to the 'itunes of packaged applications', with the launch of the launch of its Virtual Machine Marketplace at VMworld last month, e.g. http://blog.eweek.com/blogs/eweek_labs/archive/2006/11/08/MorningCoffee20061108.aspx

Does anyone worry that Salesforce may drop the ball on keeping its main CRM application competitive if they spend all their time & effort building a broader application hosting platform (and the resultant support burden). Should they spin off the CRM component so they can keep focus?

[tjrsfca]

DR-

It's certainly a challenge and part of the tightrope Mr. Benioff needs to walk. Over- or under-investing in either business can be the difference between the $10B or $1B company.

But spinning out the CRM piece might not be necessary right now. Part of the charm of the industry at the moment is that "good enough" features addresses 80% of the market.

The other point I've heard Marc make is that the CRM application is not the "secret sauce" of the company. As I've posted elsewhere, the secret to SFDC is the dynamic between the database, application, and tools. In this light, the CRM application is just one of many web-native applications SFDC will enable.

At the last analyst day, Marc underscored this point by saying he could just as easily named the company Database.com and had a stock ticker of "SQL."

[dr]

I bet that would really annoy Mr Ellison :-)

[Mongo]

Despite its name, Salesforce is not about CRM. It's about a new way to build, deliver and consume software. If Software.com wasn't used by a telco software company during the bubble, I'm sure Benioff would have changed the name of the company already. CRM functionality was just the hook to get their foot in the door. The grand plan has ALWAYS been the platform play. They never have been nor ever will be leading edge in CRM functionality. So keeping the CRM piece "competitive" as you say is relatively simple if you agree with me on their true path.

Btw, Database.com isn't bad, but not sexy enough and too limiting in its scope. Although you are technically correct about the core of the system.

[dennis]

hmmm... SFDC becoming the next $10B company by becoming this hybrid B&N / software spectrum of an enterprise salesforce by leveraging their on-demand platform... interesting but I think their focus needs to remain on delivering value to their customers.

Right now, their model T approach of offering CRM, as long as it's only delivered online, seems to limit the options of strong inhouse IT departments in the enterprise.

goog or yhoo acquiring crm seem more plausible to me around the future of SFDC as these these kids find ways to leverage their data centers / economies of scale. Google is going to need to diversify their portfolio and i think with the monopoly money (goog stock) they have now, CRM seems like a reasonable target to diversify their consumer-based revenues.

my $.02...