Software Blog (beta)

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. 

A SaaS bear growls

Lee Gomes of the WSJ Online writes a critical piece about SaaS.  (Subscription required)  His central theme is that

"Software as a service" is one of those trends that rolls through the technology world every few years, promising an end to everything that people don't like about business as usual in the multibillion-dollar world of corporate technology. Typically, these new approaches deliver on some, but not all, of the promises, often while creating new problems of their own.

He cites the well discussed issue that SaaS applications are not fit for the enterprise.  He uses Salesforce.com as his exemplar and cites a survey from AMR that indicates 36% of SaaS customers found the experience fell below expectations.  I would very much like to hear more about WHY this happened.  Was it a simple expectation mismatch?  After all, SaaS applications market themselves as brain-dead-simple.  It seems that 36% did not find their implementation brain-dead-simple.  Put another way, 64% did find it that simple.  Maybe this is good news for SaaS!

Perhaps the 36% were all Fortune 500 accounts, and this was localized to large enterprises.  But we aren't given that insight.  Mr. Gomes cites the number of SI partners on Salesforce.com's web page as evidence that these implementations are quite hairy and require professional services to deliver the return.  My take is that a complex enterprise will certainly want things a certain way, and there will always be a home for some services.  What would be telling is the average SI bill for an enterprise SaaS install compared with the traditional model?  Without that data, it's just not possible to make a bear call on SaaS based on these premises. 

The fact is, SI's such as Accenture and BearingPoint were huge off-balance sheet sales forces for Siebel (or SAP or anyone else for that matter).  Salesforce.com and other SaaS providers will need to figure out a way to motivate SI's not to sell competitive offerings, despite having a value proposition that directly cuts revenue out of an SI's pocket.  It is a conundrum that faces all On Demand software providers: what to do with the powerful players you basically deprive of revenues? 

The stakes for this argument are high, as Salesforce.com is a growth stock and depends on powering into and through the enterprise sale.  If they cannot, they will not sustain their valuation and will crash.  Stay tuned.