Coop's Corner

Some time back, Marc Benioff had this crazy idea he was trying to sell about turning software into a service. After the collapse of so many application service providers during the Internet bubble, who was this guy kidding?

As it turned out, Benioff's only mistake was that his idea was slightly ahead of its time. Salesforce.com went on to become one of the most successful software companies of the decade.

So it is that I've become intrigued about the prospects for a start-up called Zuora that's taking a page out of the Salesforce playbook. Coincidentally, it was founded by a Salesforce alumnus. Zuora offers what its founder, Tien Tzuo, calls "on-demand subscription." The idea is quite straightforward: Zuora will handle subscription billing, thus freeing customers from having to invest time and resources grappling with the administrative chores related to billing procedures. Zuora makes money by charging a small percentage of the bills collected by the company.

In theory, it's a sweet idea, especially for start-ups that need to pour all their sweat and muscle into staying afloat. As my colleague Rafe Needleman pointed out when Zuora made its debut earlier in the year:

CEO Tien Tzuo

(Credit: Zuora)

"The whole idea of running a billing service for Web 2.0 companies is very smart. Small companies building Web apps shouldn't be saddled with creating billing software from scratch any more than they should write their own accounting software or e-mail apps...The downside to the model...is not so much a lack of customers but a lack of knowledge among potential customers that they should be working on integrating a Z-Billing-like solution sooner rather than later."

That's the biggest question mark hanging over this company. When I spoke recently with Tzuo, he acknowledged the point, but quickly added that nobody will know whether he's too early until after the fact.

"It's definitely a bet," he said. "Do you wait for people to want it and build the technology? It's never clear."

By way of example, Tzuo raised the what-might-have-been scenario for Quokka Sports, a now-defunct digital supplier of sports entertainment content, which at its zenith, generated $50 million in sales.

"(CEO) Al Ramadan started that company a couple of years early," he said, adding that Quokka might have survived had it launched later. "But it took online advertising another couple of years to get going. He was early. So was Opsware, for that matter."

Tzuo, who spent nine years working at Salesforce, said his former company wasn't an easy sell in its early days and required missionary work by Benioff for about seven years.

"It's only in the last couple of years that the tide has turned," he said. "Now we want to do same thing--not just for other software companies but for the entire economy."

Venture capital firm Benchmark Capital is buying into the idea. The company led a $6.5 million first round of funding in Zuora. Benioff is also an investor in his company.

"We think this business model is the future," Tzou told me. "It's the same stuff we had to do at Salesforce. You sit down with customers, one at a time."

If this is Henning Kagermann's strategy, SAP faces a desperate future.

In an interview with The Wall Street Journal, SAP's boss downplayed the potential challenge posed by Web-based computing, arguing that businesses are conservative organizations. At the risk of putting words in his mouth, Kagermann's argument is that SAP's success depends on the business world being too hidebound to figure out that there are viable alternatives. In doing so, he draws the invidious comparison with younger software companies that don't operate on the same scale as an SAP. From the WSJ:

(Credit: SAP)

But the most important features for the managers who buy business software are still a system's security and reliability, and whether the system helps a business comply with an ever-growing number of government regulations, says Mr. Kagermann.

Systems bought by individuals or departments don't have the company-wide perspective necessary to meet these goals.

That's not to say there isn't a role for software from companies other than the SAPs and Oracles of the world. But Mr. Kagermann says that these systems will complement, not replace, traditional business software.

I'm not buying it.

As with any generalization, there's at least a small amount of truth. There were fits and starts during the transition from mainframes to minicomputers to client-server to Web-based computing. But Kagermann's self-serving exaggeration doesn't hold up to closer scrutiny.

Are corporate IT managers so stuck in the past they can't figure out they have a computing alternative? That doesn't jibe with the experience of the last three decades of computing history.

Benioff: Who's laughing now?

(Credit: Dan Farber/CNET News.com)

The way it usually works is that yesterday's "upstart" becomes tomorrow's "traditional" supplier. I understand why SAP wants to foster the belief that Web-centric computing has limited application in the business world. But the desperate argument that "serious stuff" is the purview of the old software guard just doesn't square with the facts. Kagermann's too experienced an executive not to understand what folks like Marc Benioff are trying to do.

While Salesforce has a lot of ground to cover before ever getting close to challenging Microsoft as the world's top application platform provider, I don't see anyone ridiculing Benioff anymore as a marketing meshuggana. (In the early part of the decade, Benioff was famous for taking his "end of software" shtick a bit too far.) No matter. He's since had the satisfaction of seeing his gamble pay off with the embrace of Web-centric computing. (For more, check out my colleague Dan Farber's recent post.)

Consider the following:

• Salesforce now claims more than 80,000 developers and 69,000 custom apps built.

• Momentum builds on itself and developers don't waste time on hard-luck cases. By locking arms ever more closely with Google, Salesforce only reinforces the impression of a winner.

Though it doesn't necessarily mean SAP is going to wind up suffering the fate of digital equipment and the other computing dinosaurs, this is the way new ecosystems get built. That old warning from Santayana about forgetting history is worth recalling here. The only hope for Kagermann's thesis is if corporations purposely hire more "C" students. And that's not going to happen.

Earlier Tuesday, a Google executive by the name of Rishi Chandra made the argument that the move to cloud computing was just a matter of time.

""The next 10 years of innovations are going to be in the cloud. Enterprise software is not going away, but there is a transition taking place," he said during a conference taking place in Boston.

(Credit: CNET Networks)

I don't know whether it will be 10 years or not, but that's the trend. Nobody still seriously argues that it won't be easier to run word processors or spreadsheets off a central network of remote servers. The tech world has been inching that way in fits and starts for the last couple of years. And nowadays, there is a roster of big-name companies delivering business applications via the cloud. Besides Google, the list includes the likes of Microsoft, Amazon.com, and Salesforce.com.

But the IT industry has more tempered expectations for the likely timetable. Earlier in the year, Richard Jones of the Burton Group told IT BusinessEdge that "organizations have to move from traditional client/server and SOA-based applications" that are dependent on static allocation of resources. He went on to explain that:

There has been a political and attitude change with CIOs. Some was forced on them. The CFO has gained more power and the business metrics were pushed on (IT). And so some of them have gone to the model grudgingly. They can't argue against numbers. Some see the economies of scale. That's a good trend. Now instead of static services, you can go out over the Internet, where essentially any service you need to run can be found. You can look at the cloud as a timeshare. Politically, the boundaries have broken down a bit faster.

As always, the reliability of the underlying network is the biggest uncertainty. The infrastructure remains under construction. As a reminder, the real world recently reminded everyone that crystal balls don't always account for the unexpected.

On both Friday and Monday, Amazon was up and down--a source of no small annoyance for customers such as yours truly looking to buy stuff. Also, in February, Amazon's S3 storage service experienced a major outage. A couple of months later, the company's CTO offered the brilliant insight that "everything fails all the time." Now, that's helpful. True to form, during this latest brown-out Amazon hid from the press, leaving customers and outsiders to speculate about what caused the glitch.

I'm not trying to dump on Amazon. but IT directors are the epitome of creatures of habit. If they are going to participate in this grand cloud computing transition envisioned by Google, Amazon, and others, they'll need a lot more assurance--especially when it comes to privacy, security, and scalability--before venturing into uncharted territory.

With Google teaming up with Salesforce.com, might Steve Ballmer be tempted to phone up Marc Benioff and strike a similar deal? The short answer is no. The longer answer is more complicated.

Google's agreement to integrate its office productivity applications with Salesforce's customer relationship management software obviously is a big deal. In his prepared remarks, Eric Schmidt laid it on thick with his rehearsed line about the "old" business model being replaced by the "new" model. (Gee, I wonder who he has in mind?)

But industry politics are only part of the story. This new axis marks another signpost in the tech industry's slow march toward a future in which more--maybe one day, most--software applications eventually reside on the Internet. This hasn't escaped Microsoft's attention. Ray Ozzie recognizes that this is cloud computing's time.

Marc Benioff: Living on Cloud 9 in a Microsoft-free future.

(Credit: Dan Farber/CNET News.com)

But my sources maintain that promoting Salesforce as the new industry platform isn't in the cards. Instead, Microsoft plans to go its own way and we should expect to see something out of Microsoft along the lines of what Google did with its app engine.

When he addressed financial analysts last summer, Ozzie offered an idea of a future of multilayered services where massive data centers underpin a cloud infrastructure services layer upon which all of Microsoft's online services would run.

"Among other services, this fabric has an efficient and isolated virtualized computation layer. It has application frameworks that support a variety of app models that are designed for horizontal scaling. And it has infrastructure that manages the automatic deployment and load balancing and performance optimization of the apps that it's managing running on its infrastructure.

It also supports several types of horizontally scalable storage types like files and database and searchable storage that are needed for different types of apps that you put onto this platform. And of course, you know, another key element is networking services where to efficiently serve up apps and content to Internet users worldwide in a very low-latency and efficient manner.

The next layer up from there is something that I refer to as the live platform services layer. And these are services that are designed specifically to serve the needs of apps, of our apps predominately, that targets individuals and very small businesses, unmanaged users. These are generally ad-monetized applications and because of that, there's synergy in sharing data and features among the apps at this level. And so they all share many, many of these services.

These are services like identity services, contact lists, this is the layer where our social graph of your relationships lives, your presence and rendezvous, communication services. Perhaps most importantly, our advertising platform infrastructure lives at this level.

So whether it's hosting our Live offerings for individuals or our service-based offerings that are more targeted for enterprises, or apps that are partners or customers will provide--this platform will ultimately be used by and will benefit all of the audiences that we as Microsoft serve because each audience is undergoing some transformation that's relevant to them from software-based solutions to software plus services, or services alone."

Kip Kniskern last week found a Seattle-area job posting (since removed) that called for candidates to something akin to an answer to the Google App Engine type service. Until now, Microsoft could be its deliberative self and take its time figuring all this out. After today's Google-Salesforce pact, there's new urgency to do it sooner, rather than later.

In the meantime, not everyone believes Salesforce and Google are about to set the world on fire. On the Zoho blog, Sridhar Vembu dished that Salesforce "pulled the plug" on a joint project to make Zoho work with AppExchange and then offered to buy Zoho outright. I should note that the Zoho products also compete against offerings from Google and Salesforce. I later spoke with Vembu, who argued that the companies' different pricing models, not to mention their different corporate cultures, will put a strain on the nascent partnership.

"Salesforce costs $700-1,000 per year per user, more than 10x Google Apps subscription cost. When Salesforce resells Google, if it confines itself to its CRM user base, even assuming that it retains the entire Google Apps subscription cost, it is at best a 10% improvement. It is almost a loss leader for Salesforce."

Yet, when a smaller company has a larger company's product as a "loss leader," the situation is inherently unstable. Now, Salesforce can aim for an entire company's employee base for Google Apps, not just the CRM users, but then such a deal would marginalize the CRM component in the whole equation (both from a revenue perspective as well as from the effort expanded to win the deal). It is hard to see Salesforce marginalizing its own product in order to sell the Google suite."

Maybe. In the meantime, though, Google has gobs of money and can afford to test whether Salesforce will give its apps greater entree into the business world. (And if the experiment blossoms into a success, expect the "Google to buy Salesforce" rumor to again make the rounds.)

When I asked Benioff after Monday's press conference whether he believed Google's application suite was better than Microsoft Office, he kept a straight face and said yes. Give a good salesman his due but at this point Google's apps don't really need to best Microsoft in a feature-by-feature competition. For Google, every user it can steal away from Microsoft is worth the trouble. If Google wins over enough of them, Eric Schmidt can always tell his minions to add more features. Life on the cloud is a lot easier to manage.

Here are some other useful links to reference for different takes on this story:

Larry Dignan

Erick Schoenfeld

Robert Scoble

Dan Farber

Ben Worthen

"Blue Horseshoe likes software as a service"

(Credit: Dan Farber/CNET News.com)

Along with my colleague Dan Farber, I sat down with Salesforce.com's Marc Benioff this week for a wide-ranging Q&A. You'll be able to read the entire interview Monday morning, but what with Bear Stearns' Friday meltdown and the ensuing panic in the stock market, it was apropos to get Benioff's take on how Wall Street's tribulations might impact the tech business and, more specifically, Salesforce.

It is interesting to note that the last time Wall Street and the economy headed south, market forces took the model for ASPs, or application service providers, with it--for a time, at least.

ASP's were all the rage in the late 1990s, and a clutch of start-ups took advantage of easy access to capital and an infrastructure buildup. But when the dot-com bubble burst, so did most of their hopes, and bankruptcy became the byword.

Benioff plays down the potential impact on Salesforce of any prolonged macroeconomic slowdown. But he's dealing from a position of relative strength. Salesforce recently announced a spectacular fourth quarter. What's more, Benioff has built the company into more than a ASP.

In our interview, Benioff talks, among other things, about his ambitions to turn Salesforce into an application development platform. He also discusses the nascent competition from Microsoft.

Here are some excerpts:

If there's a protracted slowdown or recession, what will it mean for the tech business?
Benioff: We haven't really had any technology companies report numbers or make statements to the effect that this was affecting them yet. Maybe we will see it at some point, but you get where you read about it, and you see it on CNN, and, of course, the stock market has a 200 point bear sell-off. I think that's why it's on everybody's mind. But so far, tech companies haven't reported that it's an issue.

Does this kind of economic climate, where there's lots of uncertainty, make it tougher for someone selling software as a service?
Benioff: With software as a service, you pay as you go, so the risk is mitigated over time. If it's not right for you, for whatever reason, you're not as far into it as the old model. The old model was, you bought everything--the software, the hardware, the implementation--and then you had to make the determination: is this the right product for me?

Does the sales pitch change a lot because of what's going on in the economy?
Benioff: I don't think it does today, but maybe over time, it will. I don't think we're far enough in this. Technically, at least, we're not yet in a recession.