The Ponderings of Woodrow

The myth of "pull" economics vis-a-vis SaaS?

Charles Zedlewski is one of a handful of bloggers I selfishly wished blogged more often (before the jokes start, yes I realize I firmly deserving of that label too, of late). Every time he puts fingers to keyboard, I know I'm in for thought-provoking analysis.

With the recent rash of SaaS filings, Charles decided to look at the costs associated with the SaaS model and whether or not the "pull" aspect was in fact playing itself out.

What struck me with all three companies was the losses. The first order explanation is quite simple: all the companies spend a ton of money on sales & marketing (between 65% and 100% of revenues). Most of these businesses are the farthest thing from the oft discussed but seldom witnessed “pull model” that’s supposed to lead to superior profits.

The root cause for the losses is a little more subtle. In a recent article, McKinsey consultants asserted that the primary cause is scale. In fact they go so far as to say that these scale economies are nearly identical to those of on-premise software companies.

It's hard to argue with Charles' conclusion, which is that, at least to date, SaaS vendors have foregone margin as a trade-off for growth.

I also wholeheartedly agree with him that it's a question of scale and, Salesforce.com is approaching a point where they will need to make good on the promise of margin delivery. As long as the incremental spend translated one-for-one to the top line, one could make a logical case to continue, but now that the marginal utility of each additional SG&A dollar is driving less than a dollar in revenues, show me the profits.

Note: This is not a recommendation to buy or sell any publicly-traded security nor is it a recommendation to participate (or not to participate) in upcoming IPO offerings of Constant Contact, SuccessFactors, NetSuite or any other company. This discussion is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, maintained a long equity position in CRM and, through a passive investment in a venture capital firm, have exposure to SuccessFactors (privately held). We may, or may not, have interest in participating in the IPOs of these companies or other securities listings. At times, we may maintain derivative options as a hedge on underlying positions.

charlez charles zedlewski IPO investing saas economics salesforce.com constant contact successfactors netsuite software woodrow enterprise irregulars

Josh Greenbaum's Misbegotten Prognostications

Josh Greenbaum is a curmudgeon (and a fellow Enterprise Irregular). I don't think I'm speaking out of school here, in fact I would hasten to say he probably wears that badge with pride. Like many curmudgeons, much of his perspective can be a worthwhile reality check in an industry that tends to look on the bright side of things. As an investor, I'm usually appreciative of differentiated perspectives, contrarian viewpoints, and challenged assertions.

USUALLY.

But today I can't help but wonder how Josh got so off track with his latest misbegotten musings.

• Siebel 2.0: The end of salesforce.com

It’s finally time to call a spade a spade, or in this case, a soon-to-be has-been a has-been. Of course, doing so after the fact sounds too spiteful, so I’m going to do it well ahead of the curve. While these kind of predictions are hard to get right, I think I’m calling this one correctly, based in part on a similar call I made five years ago.

My prognostication is about Salesforce.com, and here goes: Salesforce.com is the next Siebel, the next CRM has-been, the next low-priced software buyout opportunity, unless somehow the company gets sold before its stock begins to tank or it engineers a remarkable turnaround from its current moribund strategy. It may take a couple of years, and there may be some big blockbuster announcements and a couple of good quarters in the interim, but it’s gonna happen, and it’s gonna be ugly...[continued]

I encourage you to read Josh's entire piece in its entirety. Let me now discuss with you the many ways I think he's missed the broad side of the barn here.

Josh says:...I had a similar epiphany (pun-intended, all you ex-Epiphany customers and shareholders know what I mean) about Siebel way back in ’02 (and Epiphany from the get-go, BTW). Remember Tom Siebel, the man “who could see around corners” (at least according to a glowing cover BJ from Forbes). Sometime in mid-2002 I started seeing three problems with his business model, all of which seem to be repeating themselves five years later with respect to Salesforce.com...[continued]

My retort:

Taking credit for calling Siebel's demise in "mid-2002" is akin to declaring Joe Montana was a talented QB on the day of his Hall of Fame induction. For those with neither the energy nor preclusion to look back at the state of Siebel five years ago, allow me:

• Q2'02 License revenues -- $170.1mm (down 41% YOY)
• 1H'02 License revenues -- $416.2mm (down 33% YOY)
• Q2'02 Total revenues -- $405.6mm (down 28% YOY)
• 1H'02 Total revenues -- $883.4mm (down 24% YOY)
• Q2'02 Operating income -- $37.2mm (down 66% YOY!)
• 1H'02 Operating income -- $127.6mm (down 42% YOY!)
• Q2'02 Operating margin -- 9.2% (vs. 19.8%)
• 1H'02 Operating margin -- 14.4% (vs. 18.8%)

Those numbers paint a bleak picture. Let's also not forget that Siebel was involved in those nefarious "swap transaction" that were de rigeur of the times. According to SEC filings, $50.4mm of Siebel's 1H'02 revenues were from vendors who also sold Siebel services and goods. Oh, and Siebel also announced a 16% reduction in its global workforce to boot.

Should we even both comparing the state of Siebel when Josh "called their demise" with the current state of salesforce.com?

• Q1'07 Subscription revenues -- $147.7mm (up 56% YOY)
• Q1'07 Total revenues -- $162.4mm (up 55% YOY)
• Q1'07 Operating income -- $12.1mm (up 62% YOY)
• Q1'07 Operating margin (ex stock comp) -- 7.4% (vs. 7.1%)
• 35% INCREASE in headcount
• Deferred revenues -- $296mm (up 62% YOY)
• Off balance sheet bookings > deferred revenues

Now, let's take a look at Josh's "three problems with the business model"

Sometime in mid-2002 I started seeing three problems with his business model, all of which seem to be repeating themselves five years later with respect to Salesforce.com:

Josh says...1) Siebel’s claims to deep integration with the rest of the ERP stack were exaggerated. This lack of integration made it much easier to rip and replace Siebel, and therefore left it vulnerable to…

My retort...The world has changed. We're in a time when open APIs actually mean something. SAP and Oracle are betting their futures on the premise of object-oriented architectures. Integration, while never trivial, is a different conversation today than it was five years ago.

Josh says...2) An increasingly robust set of offerings from SAP and Oracle: while not necessarily as robust as Siebel, the value of out-of-the-box integration greatly exceeded the Siebel’s best-of-breed value-add.

My retort...Somewhere in my office, I still have a product map provided to me from Siebel about five years ago displaying the breadth of their offering. They took pride in having several HUNDRED modules. They sold on the breadth and feature-richness of their application. Salesforce does not. Salesforce has gained a $700mm place at the table because of EASE OF USE. A handful of tabs. Ease of deployment. Ease of integration. The fundamental message that drives salesforce is not functional parity.

SAP and Oracle ALREADY HAVE CRM solutions with more bells and whistles. That's not the point. That's not what buyers want. What they don't have (or at least haven't displayed yet) is a real understanding of SaaS and utility computing. They haven't shown a product or sales strategy that will allow them to deliver a pure on-demand SFA solution at a price point that competes. Maybe they will, but having just spent time listening to Oracle's OnDemand update and looking at what SAP has to offer at Sapphire, I have to ask what Josh has seen that makes him think SAP and Oracle have closed the gap.

Josh says...3) The lower-cost Salesforce.com model was looking like a much better deal than high-priced Siebel, particularly considering points 1 and 2.

My retort...As of this last quarter, Salesforce's ASP was approximately $69 per user per month. On an annualized basis, that's $828 and includes any related hardware costs (since CRM provides their stuff on a hosted basis). Compare that to Siebel's ASPs at the time of their downfall. According to this article, the annual per user cost for a Siebel license was somewhere between $12,000-$25,000. We're talking about orders of magnitude here. Is Josh presupposing that there are now offerings that offer a more compelling price to value paradigm? Seriously?

Before we continue on with Josh's claims, let's take a moment to further compare and contrast salesforce.com with Siebel.

• Perpetual license vs. subscription -- Every quarter, Siebel started anew. Such is the problem with perpetual software. You get to bank a very profitable 15%-18% in annual maintenance renewals, but to grow year over year you need to find a way to replace the other 82%-85% of revenue and then some. In the perpetual model, there are only two ways to do that...1) Find new customers and 2) Sell more stuff to your existing customers. Inherently, the ability to correctly forecast demand and, coincidentally, build the organization at the right pace, was far more difficult than with a subscription business where SfDC has an excellent idea of what it's revenue stream is going to look like month by month.

• Shelfware -- A byproduct of selling perpetual software is, and will always be, shelfware. And CRM was inarguably the most egregious area. By some estimates, as much as 60% of purchased CRM seats were never deployed. More conservative estimates put it around 25%-30%. Either way, that's a massive amount of wasted money. With SaaS, you don't have that problem, at least not for long. Customers buy seats and provision them as needed. And they stop paying for them when they don't. Simple and elegant. And MUCH different than how things used to be. For Siebel, in its heyday, it was all too easy for Siebel to offer "volume discounts" to the tune of another few hundred seats. A CIO would rationalize the purchase by saying, "well, we'll use the seats eventually." Never happened.

• Feature Bloat -- Another byproduct of perpetual licenses is the drive to upsell features [some of which are yet to be coded!]. Customers that bought call center automation were convinced to buy self-service, and e-mail marketing at a discount! Sure, they didn't have immediate use cases for deploying those technologies, but what the heck? It was AT SUCH A DISCOUNT. Meanwhile Siebel [and everyone else in the game at the time] was getting CIOs to spend millions of dollars on features they would NEVER USE.

• Customer service and satisfaction -- No software company is going to have 100% customer satisfaction. The larger you get, the easier it will be to find dissatisfied references. Intuitively, Siebel's claims of 90%+ customer satisfaction never "felt right" did they? Yet, herein was the problem. When you've just spent $20-$30mm on an enterprise-wide Siebel implementation, how do you even think about leaving them if customer service is poor? You have to justify that massive upfront purchase by working down the amortization over years. Siebel [and other perpetual software vendors] weren't heavily incentivized to keep customers happy. They knew it was all but impossible for them to leave. Can you say the same for salesforce? I don't doubt they have their share of unhappy customers. Such is life. But when you're on a subscription model, it's a LOT easier for customers to vote with their checkbooks. Yet, I defy any analyst to point toward a tangible metric which argues that's happening to salesforce. 50%+ growth and less than 1% attrition argues that very few customers are dissatisfied to the point of it being a problem.

• Financial transparency -- I can't stress the importance of this enough. As an investor, the beauty of the SaaS model is transparency. There is no need to read the tea leaves. We will KNOW when salesforce's growth is slowing. A huge chunk of salesforce's backlog is visible ON THE BALANCE SHEET. That was never the case for Siebel or other perpetual software companies. In a perpetual software model, you had no way of measuring the status of the pipeline from quarter to quarter beyond making channel inquiries. It was guesswork for not only investors, but the COMPANY ITSELF. When you run your business using a monthly renewal system, it's far more difficult to game the system. This is not to say salesforce won't ever fall short of expectations, or lower guidance. But it's all but impossible for them to miss on the order of magnitude we saw from Siebel five years ago.

Josh's final contention relates to Marc Benioff's penchant for promotion:

The parallels, unfortunately, regarding Marc’s claims for App Exchange, his one strategic ticket out of his current mess, are a little too similar. Marc has been making lots of exaggerated claims about App Exchange, the value of the VC money that has been thrown into App Exchange, and other issues regarding how well his company is really doing. I’ve written some about this, others like Phil Wainewright have weighed in, and a few more in the blogosphere (Sinclair Schuller in particular) have also noted the credibility gap that Marc is building for himself.

My retort...First of all, bravado is par for the course in enterprise software. Whether it's SAP's promise of 100,000 customers by 2010 or Larry Ellison's perpetual declarations of dominance over each piece of the software stack, there is always going to be a tendency by this industry's CEOs to put lipstick on a pig. It's ALWAYS important to challenge the assertions of any executive. They are going to try their best to slough off the problems and fluff up the opportunities. But at the end of the day, I don't hear Benioff making any declarations about how initiatives like AppExchange or Koral or Apex are going to drive near-term business results that they've failed to back up. In fact, if anything I think he and CFO Steve Cakebread have UNDERplayed their ability to grow revenues outside of the traditional SFA category.

Josh concludes with why he's SURE salesforce.com is the next Siebel...

So how can I be sure that Salesforce.com is the next Siebel? To be sure, I’m more ahead of the curve today than I was in 2002. By the time my second column had come out on Siebel’s survey hooey, the wheels were already falling off. Whereas SF.com probably has a couple of good quarters left in it. But the wagons are circling, and so far Marc’s only chance for turning things around is so unsuccessful that he’s resorted to bluster and BS about what’s really happening.

What wagons is he speaking of?

• Does Josh realize that salesforce could see a 3x-4x decline in its growth rate and still be growing faster organically than SAP and Oracle?
• Does he not see that SAP and Oracle have both found SaaS religion [in rhetoric, if not deliverables] as a result of what Benioff and company have done? Is SaaS declining in importance as a category?
• Have studies come out suggesting that fewer CIOs are interested in deploying SaaS?
• Has Marc's "bluster and BS" led to missed financial targets?
• Have bookings stopped growing 5x the industry rate?
• Is SfDC still not, BY FAR, the fastest growing enterprise applications company?
• Has SfDC stopped winning deals among SMEs, or have SAP and Oracle started to?
• Are customers unsatisfied?
• Are they not winning larger deals against entrenched ERP vendors anymore?
• Have SAP or Oracle produced a new product and delivered tangible results against them?
• Have deferred revenues stopped growing at 50% per annum?
• Are ASPs declining?
• Is there evidence of shelfware?
• Does SfDC still not have highly valued stock currency with which to make acquisitions (where is SfDC's Scopus, I wonder)?
• Is SfDC suffering customer attrition?
• Are its incubators not fully stocked?
• Have 100 of 250 ISVs not signed up for AppStore referral?
• Have companies like DreamFactory, CRMfusion, Vertical Response, Keiden and Koral not built real businesses off AppExchange?
• Has Apex been panned by analysts or customers in the early going? Have 10,000 customers not installed apps from AppExchange?

There are PLENTY of questions in front of SfDC. I'm not yet convinced AppExchange is going to be a major league platform. We have no way of knowing whether Apex will lead to significant growth in the partner community. As an investor, I struggle with when we should demand more of the company's monthly revenue to flow through to net income instead of fueling further growth. I ask myself if they're spending enough on R&D. I'm all for asking questions, I'm just not for misbegotten prognostications.

Note: This is not a recommendation to buy or sell CRM, ORCL, SAP or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over maintained long equity position in CRM but did not maintain a position (long or short) in ORCL or SAP . We also may, at times, carry derivative options on underlying positions as a hedge.

josh greenbaum salesforce.com sfdc prognostication saas crm investing woodrow enterprise irregulars

Salesforce.com corrals Koral

Sometimes the best acquisitions are those that don't make headlines.  For all the pomp and circumstance that Oracle buying Hyperion or Google buying DoubleClick received, I believe one of the most potentially significant acquisitions of the last few weeks got far less fanfare. Last week, Salesforce.com announced the acquisition of privately-held Koral.  While terms weren't disclosed, I've heard unconfirmed chatter that total considerations were between $10mm and $20mm.  Even at the low end, that's a nice return for founder Marc Suster and his angel investors; who reportedly put a little more than $1mm into the three-year old, 9-person firm.  Koral's products have been rebranded ContentExchange, and Suster has joined Salesforce as product group VP. 

This deal garnered very little attention from the investment community, which wouldn't be surprising were it not for the attention last year's Kieden deal garnered.  While the Kieden deal was worthy of attention, I believe Koral's technology represents a much larger expansion of Salesforce's market opportunity in the long run.

What is Koral?

I had the chance to see Koral firsthand at Ismael's Office 2.0 Conference last year. In a sea of "me too" companies, Koral was one of a select few that stood out as having a differentiated approach toward solving a real business problem. Credit that to Suster and his team for having been through the startup game before. They obviously realize that cool technology isn't enough. Workers don't need a new spreadsheet app when Excel works just fine. But they DO need more efficient ways to search for unstructured content, manage files, share collaborative workspaces and handle versioning. Think of Koral as a Web 2.0 collaboration suite [yes, its "competition" would be Microsoft Sharepoint Services, Adobe Connect Professional and WebEx Connect].

Koral addresses each of these pain points in a way that's intuitive.

• Creation and sharing – Koral provides a private workspace that eschews a hierarchical file structure. Hierarchies are an absolute must for structured content, but they are arguably the biggest barrier toward fast and fail-safe retrieval of unstructured content within a corporate network. With Koral Share, you can create a document and drag and drop it into the workspace. From there, you can add contextual tags [or accept Koral's recommend tags] and manage/monitor who can read, edit and retrieve the document.
• Subscription and versioning – The Koral workspace is driven by a subscription mechanism. Users can choose to subscribe to individual documents, or authors, or metatagged groups. For example, a field sales rep can subscribe to any content that is tagged "sales." When you're subscribed to a document, there's never a worry that you're about to access an out-of-date version. The days of a sales rep launching an outdated version of a product demo or marketing presentation are over thanks to Koral.
• Search – How many times have you tried to dig up an old presentation or document, and struggled to remember either the file name or the folder location? Koral's centralized workspace and tagging make real language search and retrieval an easier process. The combination of tagging, full-text indexing and a frequency-of-use algorithm [how often is the document accessed? How many times does the search term appear? Is it in the title or only deep down in the document?] produce effective search results.  Another interesting feature is the ability to preview any type of content before downloading it; helpful for today's mobile workers [although maybe not as helpful now that laptops come with 80- to 160 Gig hard drives :) ]

A lot of you are probably thinking, "OK, this sounds great, but traditional enterprise content management [ECM] solutions do all of this and then some." True, but what sets Koral apart from other collaboration tools I've come across is EASE OF USE. The cardinal rule of K.I.S.S. reigns supreme for a lot of today's workforce; particularly field sales representatives who are the natural low-hanging fruit here given Salesforce.com's position in SFA. The reason SfDC enjoyed such tremendous uptake in SFA isn't because it's got a richer feature set or is less expensive than traditional CRM. The reason it's been deployed is because it's EASY TO CONFIGURE and INTUITIVE.  Sales reps don't want 20 tabs to manage their contacts and deal pipeline. They want the minimum amount of functionality that serves their purpose, and they want it to work with little training or configuration. Koral does for unstructured content management what Salesforce has done for traditional SFA process management.

When I saw the Koral demo at O2O, my first reaction was, "it's the ANTI wiki."  Don't get me wrong, I love wikis and think they're powerful tools for certain kinds of knowledge management. But they're not optimal for all users; including field sales reps who have neither the time nor the interest in feeling their way around the wiki landscape.  Over the last few months, I asked at least half dozen buddies who are in software sales to take a look at Koral. Universally the responses were positive, with the general reaction being, "why don't we have a tool like this?"

For many of them, now they do. Tying Koral's functionality into the core SFA functionality of Salesforce is a no-brainer. As Phil Wainewright says,

Further confirmation of the strategic importance of collaboration was to come within the ensuing few days. Microsoft's CEO Steve Ballmer called Sharepoint "the definitive OS or platform for the middle tier," followed by Cisco's acquisition of WebEx, which led Tim O'Reilly to describe collaboration suites as "the next generation of must-have enterprise software." Behind the scenes, Salesforce.com was already ahead of the game, because as we now know, it had already completed the Koral acquisition.

That's game-changing for Salesforce.com because collaboration is becoming the largest and fastest-growing segment of the SaaS sector — faster even than Salesforce.com's own CRM segment — and with a much larger potential reach, because it touches every employee in an organization rather than being restricted to specific departmental roles. Becoming a content management player adds a completely new and much larger opportunity than Salesforce.com's existing CRM market, brings it into direct competition with some heavyweight players (TechCrunch lists them) and, suggests Ismael Ghalimi, opens out an intriguing roadmap into Office 2.0 territory.

Remaining questions and observations:

1. Validation of AppExchange as an outsourced R&D platform – Last year, when the Kieden deal was announced, I posited that Salesforce was effectively leveraging AppExchange as outsourced R&D; and the Koral deal is further evidence to that end. Like Kieden, Koral put a significant amount of focus on integrating with Salesforce. That pre-existing integration significantly reduces the technology risks of the acquisition; we already know Koral and Salesforce work well together. Salesforce got to see Koral's momentum and its functional footprint long before it had to undertake financial commitments to the idea. As a Salesforce investor, I sincerely hope we see more of these kinds of deals in the future.
2. Infrastructure costs – Storing unstructured content, indexing and versioning it, plus adding a sophisticated audit trail involves a lot of cycles and storage. We're not talking about indexed flat files here. What are the infrastructure costs of supporting this on a scaled basis? Will Salesforce offer this as a truly hosted solution, or will this be a subtle departure from the current go-to-market strategy? Is the incremental margin profile of ContentExchange banded more than the sale of its traditional CRM apps? Will SfDC leverage something like Amazon's S3 in a formal manner to provide the needed storage infrastructure at affordable costs? I believe SfDC is still wrestling with these questions internally, which is why they've put off announcing pricing until later in 2007.
   
3. Specialization of the sales force? – SfDC has become a large company and, with that, comes a natural evolution of the field sales force. Global account overlays make sense. Vertical specialists will, over time, make sense. Will offerings like ContentExchange be better served with specialized reps or should this be in everyone's bag?

Related Enterprise Irregular content:

• Dennis on his initial reaction to Koral 
• Dennis on the re-discovering the importance of Koral's approach 
• Dan Farber on the acquisition
• Ismael on Koral equaling ECM for the masses
• Phil on why this is a game-changer [both positively and negatively] for SfDC 
• Zoli on why Koral's ease-of-use makes it attractive to the non-Wiki crowd 

Note: This is not a recommendation to buy or sell AMZN, ADBE, CRM, CSCO, GOOG, MSFT, WEBX or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over maintained long equity position in CRM, CSCO and MSFT but did not maintain a position (long or short) in AMZN, ADBE, GOOG, or WEBX . We also may, at times, carry derivative options on underlying positions as a hedge.

koral salesforce.com collaboration m&a sfdc crm saas investing woodrow enterprise irregulars

 

Salesforce.com Wealth Management: Interesting opportunity...but hardly a Bloomberg Killer

Merrill Lynch's wealth management advisers could have used the new Wealth Management Edition of Salesforce.com last week as the markets suffered their worst losses in recent memory. Brokers make their money on the down days; by reassuring client's that the sky isn't falling and ultimately instilling a sense of calm in the eye of a downturn.

I attended last week's luncheon where Marc Benioff announced the Salesforce Wealth Management Edition amid much fanfare. The event was widely covered by mainstream media, so forgive me in advance if you've already read the basic highlights of the announcement:

• Wealth Edition is a tailored, customized version of the core SFA app geared toward wealth managers and stock brokers
• Merrill Lynch, the mysterious 25,000-seat customer, is a partner and was the guinea pig for much of the beta development [and it sounds like they got their 25,000 seats for a tidy discount as a result]
• Thomson Financial and Dow Jones were featured partners, as many of their best-selling information services and tools are embedded into salesforce as part of Wealth Edition
• Wealth Edition will retail for $500 per user per month; 2x the cost of Unlimited Edition
• Benioff and his partners are targeting Bloomberg

Let's take a moment to look at the last statement a bit more, shall we?

Benioff and his partners are targeting Bloomberg.

Boy did the mainstream media and sell-side analyst community take this bait hook, line and sinker. Take a look at some of the headlines following the event:

• Infoworld: Salesforce puts Bloomberg in its sights
• BusinessWeek: An Assault on Fortress Bloomberg?
• DM News: Salesforce set to challenge Bloomberg
• eWeek: Salesforce.com announces 2.0 strategy, wealth management edition

I can't blame the media for taking this at face value. After all, Salesforce has been on a roll and the luncheon at the Pierre Hotel was tightly coordinated, convincing and, in fact, had plenty of significant tidbits thrown in for good measure. And if that weren't enough, Benioff tried to visually beat us all over the head by having a "history of the financial services" display which went from a ticker tape machine to a Bloomberg terminal to, you guessed it, a workstation running Wealth Edition.

At face value, setting its sights on Bloomberg makes a lot of sense:

1. Bloomberg is ubiquitous; with arguably the best brand name in the financial services industry
2. Thomson Financial and Dow Jones, Salesforce partners in the venture, are major competitors to Bloomberg
3. Bloomberg is expensive, at $1,500 per terminal per month
4. Bloomberg's user interface, in my opinion, leaves something to be desired

This makes for a compelling argument that goes something like this...there are 3 to 4 million financial planners and wealth management advisers in this country who have no alternative but to pay Bloomberg exorbitant fees. Yet, because of a lack of competition, Bloomberg hasn't had to innovate and thus, the market is ripe for an alternative. Enter Salesforce, who provides a user-friendly version at your desktop for a mere 1/3rd of the price of a Bloomberg terminal.

Sounds great, but here's the not-so-dirty-little-secret that makes this equation completely flawed...Bloomberg isn't on the desktop over every wealth manager. Far from it. In a typical office full of say, two dozen brokers, you might find three or four Bloomberg terminals between them. In most offices, the terminals are a shared asset that augments the tools brokers use in their main workspace [e.g., their PCs, contact management software, phones, research portals]. And, if anything, Bloomberg can be accused of having TOO MUCH information, with literally thousands of screens and data sources accessible if you know where to look.

So the math is flawed...Bloomberg may "only" have 235,000 terminals deployed but that doesn't mean there are 3.7 million unserved wealth managers. I would contend those 235,000 terminals conservatively cover 1 to 2 million of those wealth managers at a minimum.

But don't blame Salesforce for doing the marketing bait-and-switch; it's actually a smart business move. In its core market, CRM doesn't really compete with SAP or Oracle directly; or I should say they rarely do, yet, it's not stopped Salesforce from marketing against the ERP behemoths at every turn. Bloomberg is, in many ways, the SAP of the financial data and information sector.

Let's not confuse my post with a lack of enthusiasm for the Wealth Management Edition. Having seen the demo with my own eyes, it's damn impressive. I have many friends in the wealth management business, and it's 99% about relationship management. Information has become a commodity. An average internet user can get as much information on Yahoo! Finance as a broker might have had access to just 10 years ago. If the Wealth Management Edition works as well in a real-time environment as it did in the demo, it will greatly reduce the friction between a broker's ability to coordinate a deluge of market-driven data with his clients' interests and priorities.

Will the price point stick? I'm skeptical, if only because it's 2x the price of the Unlimited Edition yet I don't believe it includes access to the partner services from Dow Jones and Thomson. All in, this is a significant monthly investment to commit to. But here's the great news, in addition to Merrill Lynch's commitment (25,000 seats), there were at least two other CIOs of major banks at the event publicly inquiring about the product. If SfDC gives a healthy discount but nets even 1% of the addressable market (i.e., 30,000-40,000 seats); you're talking about a significant incremental revenue stream.

Consider:

• $500 list price per user per month
• X 50% Discount
• = $250 per user per month
• X 35,000 seats
• = $8.75mm per month
• X 12 months
• = $105mm annual opportunity

Given how effective SfDC has been selling its services, and given the early commitment from Merrill Lynch and the quality of its partners, it's easy to see what kind of financial opportunity this could represent, even at a sizable discount per seat. When you consider that it's but the first in a series of new targeted editions for different financial services roles; the askew competitive positioning is almost forgivable. Almost.

Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained long equity positions in CRM, SAP and YHOO but did not maintain a position, long or short, in any of the other companies mentioned. We also may, at times, carry derivative options on underlying positions as a hedge.

crm wealth management sfdc salesforce.com saas benioff software irregulars bloomberg woodrow

NetSuite: Oracle's next meal or the Street's next SaaS darling?

Phil Wainewright today asks whether NetSuite will become part of  Oracle's M&A rampage or whether Larry (NetSuite's largest shareholder) will instead allow the company to come public, as many have expected.

Phil isn't alone in asking the question. I've asked it several times in the last few years. But the one thing neither Phil nor others [myself included] have considered is whether or not Evan Goldberg, Zach Nelson and the other NetSuite stakeholders have provisions against an Oracle takeover. While Ellison has a majority equity stake, that doesn't preclude the other founders from having some type of provision within the partnership documents that gives them leverage in any negotiations with Oracle.

Given the importance of SaaS and Oracle's willingness to embrace the maturation of the traditional perpetual license model; I can't see how NetSuite would be allowed to come public UNLESS there are provisions in place that preclude Ellison from forcing the issue.

Related Threads:

• Netsuite Ponders IPO
• Reviewing the Next Big Things from Enterprise 2006
• Zach Nelson discusses future of SaaS
• NetSuite-ening the Pot?
• Private Company Spotlight: NetSuite

Note: At the time of this writing I, and/or funds I maintain discretionary control over, did not maintain a position, long or short, in ORCL.

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The Myths and Realities of salesforce.com's competitive landscape...

Salesforce.com (CRM) is on a roll, having guided the Street to expect $700mm in Calendar 2007 (FY08) revenues; implying 40%+ revenue growth.  If SfDC successfully meets its guidance, it will put in among the top 40 software companies in the world and well on its way to the mythical $1 billion mark which has been a true rarity over the industry's history. I'm not going to discuss the stock or its valuation [that's for you to decide], but the revenue trajectory is particularly impressive for two reasons:

1. The industry has matured...we're no longer in the days when dozens of industry players are growing 20%/30%/40% per annum. 40% growth off a $500mm base was one thing in 1999, it's entirely another in 2007.
2. The growth has been organic [primarily]...SfDC isn't growing through acquisition. Yes, they acquired Sendia and Kieden, but combined they make up a very small component of SfDC's revenue base.

SfDC has been a hot topic among the Enterprise Irregulars lately; from SIs embracing SaaS to Apex to ApexConnect to the recent earnings results.  During one particular thread, the subject of SfDC's competition came up; and I was surprised by the lack of consensus. The reason for the lack of clarity on some of my EI counterparts is understandable for several reasons:

1. Salesforce's marketing machine works very hard to skew the reality
2. The big incumbents work equally hard to skew the reality
3. The SaaS upstarts try (but often fail) to skew the reality
4. The 2nd tier on premise hangers on are well served to downplay the reality

So here's my quick and dirty take on Salesforce.com's competitive landscape:

• Big ERP (Oracle and SAP) -- To hear Marc Benioff tell it, his company competes against the old way of software computing. There's a reason the SfDC logo is a "no software" button. And it behooves Benioff to portray SfDC as the David who's going to take down the duopolistic Goliaths in Redwood and Waldorf. And that mentality (and marketing messaging) extends throughout the entire DNA of the company. Yet, this is more about tomorrow's inevitability than today's reality.

For every Cisco (which went from 7,500 to 15,000 subscribers last quarter) there are thousands of small deployments. As of last quarter, SfDC had 27,100 customers and 556,000 subscribers...that's an average of 20.5 subscribers per customer. Compare that to SAP (12 million users, 36,200 customers).

What's interesting on this front is that both sides help perpetuate the myth. SAP and Oracle doth protest too much, and are intimately aware of everything SfDC does. Neither wants to lose a major enterprise customer to them, and they have both tried hard to downplay the significance of SaaS while at the same time portraying themselves as emerging participants in the services-driven delivery model.

Clearly, over time, SAP and Oracle will compete more directly with SfDC as they move downmarket while SfDC continues to push upmarket. But for now? Talk to bag carriers at all three vendors and ask them how often they face off against each other.

• Microsoft Dynamics -- Dynamics generated $919mm in revenues during FY06, which included approximately $470mm in license revenues. Although MSFT doesn't break out the individual components of Dynamics license, they did attribute the majority of license growth to new seat additions for Dynamics CRM. Why don't we hear more about MSFT vs. SfDC? 1) SfDC doesn't market against Microsoft aggressively. 2) Dynamics is too small a portion of Microsoft's overall business for many to pay attention to.

• Sage Group -- As an American I am guilty of paying too little attention to Sage. My friend Dennis Howlett does good work keeping tabs on them, but we here in the U.S. forget that they're not only one of the major players in Europe, but generated more than $600mm in U.S. revenues this fiscal year. Sage drives much of its growth through acquisition, and is unapologetic about it. But when you look at its CRM portfolio, you realize that Sage is squarely in the SfDC competitive cross hairs. ACT! and Saleslogix are two of the major incumbent brands among SMBs...many times when an SMB is making the decision to buy SfDC, it's coming at the expense of Sage brands (and the de minimous organic growth for Sage would lend credence to that assertion). What percent of SfDC wins come against Act! and Saleslogix? I don't have accurate data there, nor should we expect that data from either side. The incumbents don't want to admit to losing share to the SaaS juggernaut, and SfDC would much rather focus on the wins against the big boys (which are perceived by the market as more significant).

• The other mid-market incumbents (Pivotal, Onyx) -- Pivotal and Onyx used to be kings of the midmarket; finding a niche just under the realm where Siebel, Clarify and Vantive dominated. Today, both vendors have been swallowed up (by CDC and M2M Holdings, respectively) as the acquirers look to capitalize on the predictable cash flows their maintenance revenues streams provide. Pivotal was consolidated into CDC in 2004 while M2M acquired Onyx earlier this year. At the time of the acquisition, Onyx was floundering, generating a meager $2 million in license revenues in its last publicly disclosed quarter (Q1-06).

• Other SaaS plays (NetSuite, RightNow, others) -- SfDC is the largest and most visible SaaS vendor, but it's not the only one. I've written quite a bit about both RightNow and NetSuite, both of which compete head-to-head against SfDC frequently enough. NetSuite hasn't shown the ability to scale into Global 1000 enterprise deployments, but is a competitive alternative among small businesses and departmental bake-offs. RightNow, via its acquisition of Salesnet, is seeing SfDC more often. There are lots of other SaaS startups out there, one or two of which are eventually likely to become THE threats to SfDC's dominance (just as SfDC was once the little engine that could fighting against the on premise status quo).

• Homegrown and Custom -- CRM has been around for so long, and has become such a prominent component of the enterprise application topography that we mistakenly presume it's ultra-saturated. Yes, a great many companies (large, medium and tiny) have implemented some measure of SFA functionality. But don't underestimate the amount of greenfield opportunities that exist, particularly among small businesses. I can't tell you how many conversations I've had with companies that would be categorized as SMBs who admit in an honest moment that most of their sales prospect and pipeline management is done through email and Excel. The appeal of buying a service and paying for it monthly with limited upfront costs has helped drive adoption among the homegrown crowd; something that even the lower price point, on-premise CRM vendors had difficultly doing.

Salesforce.com has maintained for some time that its mix of business is roughly 1/3rd large enterprises, 1/3 medium-sized enterprise and 1/3 small businesses. Hardly scientific, but logical to accept when you look at the basket of vendors they're competing against.  From a trend perspective, SfDC is going to face off against SAP and Oracle increasingly in the coming years. SfDC is moving up market, and broadening its reach in a variety of ways. Meanwhile Oracle (which already has a strong foothold in the mid-market via J.D. Edwards and Peoplesoft) and SAP (also a surprisingly large SMD presence and a major focus for future growth) are moving down market. But, for now, as much as the vendors themselves and Wall Street would like to think otherwise, SfDC is beating up on a lot of other folks a lot more than they are giving Henning and Larry's crew fits.

Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained long equity position in CRM, CSCO, MSFT and SAP but did not maintain a position, long or short, in any CHINA, ORCL, RNOW or Sage. We also may, at times, carry derivative options on underlying positions as a hedge.

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