Outside the Lines

Google is well known as a one-trick pony.

Almost all of the company's revenue comes from its search engine, which last quarter accounted for more than $5 billion. New initiatives, such as the Chrome browser, Google Gears, and Google Friend Connect, are focused on building a mostly open-source Internet operating system out of Google technology in order to funnel more user data and targeted advertising opportunities into the Googleplex financial engine.

It's easy to draw parallels to Microsoft, which gradually built the dominant 20th century operating system and applications platform. Bill Gates and company realized that attracting developers to the Windows platform was key. Google is following that advice with its open-source projects and allowing its mad scientists to try to remake the early 21st century software world and take on Microsoft.

Microsoft has led the way with productivity software, gaining a more than 90 percent share of market with Microsoft Office. Google is hoping to replicate Microsoft's office suite success with Google Apps. It's far less feature-rich than Microsoft Office, but Google Apps Premier edition is far cheaper at $50 per user per year.

For some companies, Google Apps is "good enough," and its cloud-based, collaborative core is an advantage--no Microsoft SharePoint server required. Even with a few enterprise wins, Google Apps is a puny business. According to a Fortune article, Google brought in about $4 million with its Google Apps business in 2007, compared with $12.2 billion for Microsoft Office. Google Apps is a profitable business, according to Matthew Glotzbach, enterprise product management director at Google.

Since early this year Google has been touting 500,000 active business customers, primarily small businesses, using at least one of the Google Apps, and more than 10 million active users. In addition, thousands of universities, with more than one million active users, are using Google Apps, the company said. So far, Google's biggest wins are Valeo, a leading automotive suppliers, with 32,000 users, and the District of Columbia, with 38,000 employees.

However, the vast majority of Google Apps users are not paying customers. The company maintains that "hundreds of thousands" of users are paying the $50 annual fee. The $50 per-user-per-year Premier Edition offers several features lacking in the free Standard Edition, including Postini messaging security, APIs for integrating Google Apps with IT infrastructure, 24x7 support, 99.9 percent uptime guarantee for e-mail, Google Video and 25GB of storage per account.

At this point, Google is underplaying the number of Google Apps business customers. The company has been saying that it is adding 3,000 businesses a day, which amounts to over 1 million per year. The reality today is that Google has more than a million Apps business customers. In addition, the Apps suite continues to fill out, most recently with Google Video.

It took Microsoft years to build a base of applications and developer ecosystem for Windows and Office. Google faces the same uphill climb for Apps and its fledgling Web operating system. The company hopes to ride on the backs of the younger generation that has grown up on the Web and identify with the Google brand. As the Google generation moves into positions of purchase authority within businesses, Google is betting that those decision makers will shun Microsoft, especially as Apps product features improve. Of course, the resilient and relentless Microsoft will respond to Google's challenge when it is more than a $4 million or even $20 million blip.

Sridhar Vembu, CEO of AdventNet, is not afraid of going up against Microsoft Office or Google Apps. He is also the CEO of Zoho, which recently announced that it had achieved 1 million registrations (between 300,000 and 350,000 log on to the service monthly) for its cloud-based set of productivity applications. Vembu is now making a financial case that Zoho is better positioned than Google to take on Microsoft in the upcoming office suite sweepstakes.

Vembu's analysis is based on a comparison of revenue per employee and profit per employee metrics. "The gap in revenue per employee between Google and SAP and Salesforce.com, for instance, indicates that Google would more likely be more interested in what eBay does or in monetizing YouTube than in Zoho or Salesforce.com's barely profitable business. Companies invest in what generates the best return on investment," Vembu explained to me.

In an e-mail explaining his financial analysis, Vembu wrote:

We simply don't believe Google has the rational business incentive to go deep into the business/IT software category. The lower revenue and profit per employee figures would be tolerable if there were huge growth opportunities there; but when very successful companies like Adobe and Intuit pull in revenues well shy of a Yahoo, when even the enterprise software leader SAP is the same size of Google (Google makes more in profit per employee than SAP makes in revenue per employee), it is fairly clear this market is not going to make a material contribution to Google's growth and profitability objectives. So what is Google's plan here? It is fairly obvious they are in it to put Microsoft on the defensive on its home turf, so that Microsoft's offensive capability in the internet is diminished. It is also perfectly clear why Microsoft wants to be an Internet player--as Google has shown, it is a higher margin business even than its monopoly-profit core business.

"Google's margins are a once in a lifetime occurrence, and Google will move in that high-growth direction--that's why Microsoft is so desperate about search. It has a higher growth rate. We are more worried about Microsoft than Google. Microsoft will address the Internet, but pulling down Office margins is a challenge for them. No company peacefully accepts a lowering of margins," Vembu said. "Our intention is to help erode Microsoft's profit margin, coming in from below." Zoho has built a more comprehensive suite of cloud-based apps than Google or Microsoft, and most of them are currently free to users.

Vembu cites the cost of sales and support as a drag on revenue per employee and profit per employee. "If salesforce is a proxy, it would be difficult for Google to justify the investment. More costs are associated with support than in R&D, even with on-demand software. The moment you have paying customers, the expectations are different, and Google is finding that out with recent Gmail problems," Vembu said. In addition, he noted that selling into small- and medium-size businesses is difficult, but the margin is higher than for large enterprise accounts. Adobe Systems and Intuit, for example, have more revenue per employee than Oracle or SAP.

Zoho's revenue per employee is mostly nonexistent given most of the Zoho suite is currently free and not-ad supported. Vembu estimates Zoho's revenue per employee will be in the $200,000 to $250,000 range when the revenue spigot is fully turned on at some undetermined point.

While Zoho behaves like a scrappy start-up, it is well-funded by India-based parent company AdventNet, which develops enterprise IT management software. AdventNet has 900 employees and is profitable, according to Vembu. "One of the privileges we enjoy as a private company is to not disclose revenue/profit numbers, which lets us do the kind of analysis on competitors they can't do on us," he joked.

The problem with Vembu's logic is that Google has an enormous pool of cash to invest in improving the economics of business and consumer productivity software suites. And, part of being a software company is having multiple and adjacent revenue and user data streams. Microsoft is a highly profitable software company with many adjacent divisions. Google Apps won't be as profitable as search, but it will be profitable and ties users into the Google platform and monetization engine.

If Google can attract consumers with its apps, gaining entry into small- and medium-size business won't be a huge profit-sucking sinkhole of sales and marketing. The search giant claims that more than 500,000 businesses and schools have signed up for the free and $50 per-user-per-year Google Apps. According to Dave Girouard, head of Google's enterprise division, the Google suite has about 10 million active users. Google can afford to invest in building the the market for Google Apps, and Microsoft will be forced to alter the economics of its Office business as cheap and capable cloud-based suites, with offline capabilities, gain traction.

What does that mean for Zoho? Run faster and hope that Google and Microsoft move slowly.

SAN FRANCISCO--During a panel discussion at the Structure conference here Wednesday, various representatives from the cloud-computing world offered their views. Panelists included:

• Christophe Bisciglia, senior software engineer, Google
• Jason Hoffman, founder and chief technology officer, Joyent
• Tony Lucas, CEO, XCalibre Communications
• Lew Moorman, senior vice president of strategy and corporate development, Rackspace
• Geva Perry, chief marketing officer, GigaSpaces
• Joe Weinman, VP of Strategic Solutions at AT&T

The panelists agreed that there will be open and proprietary, as well as specialized, cloud platforms. The discussion got a little heated between Google's Bisciglia and Joyent's Hoffman on the subject of open platforms and Google's BigTable software for distributed data storage.

"The question is, is it about selling your soul? You can't leave," Hoffman said during the panel, referring to Google's App Engine and cloud-computing platform. "There's been a lot published on what an open, loving cloud should do. We should give people real assurances that the cloud is a good place to be."

During the panel, Bisciglia said people can build a better mouse trap and compete with what Google offers. "When we publish something on BigTable, it is not to say that it is a lock-in, but it's our attempt to say that this is something that worked for us," he said.

"If your data is in Google's BigTable, you can't pull it out. You can't install it on your own hardware or leave. You have big brother telling you everything will be OK," Hoffman told me after the panel concluded. "One solution is that Google should provide nice export tools, but that doesn't solve the problem of where you run it. If I were a big enterprise company, I might want to run BigTable on my own hardware. If Oracle had the equivalent of a Google App Engine, a customer could run it on their own or someone else's hardware. What if Facebook started on Google App Engine? They would be stuck on Google."

Joyent is a David facing at least one Goliath, and its livelihood depends on an open-infrastructure approach. It doesn't have the market power to create its own standards. The company is doing 5 billion page views on month, which includes about 25 percent of third-party Facebook application pages, according to CEO David Young.

Joyent is working on a cloud-computing standards initiative called Cloud 9.

"We want to make it easy for people to leave," Hoffman said, adding that application programming interfaces should not hard-code server provider names into APIs.

"We need to interoperate just like the electrical grid," Young said. Google's BigTable and Amazon's SimpleDB are not pushing standards, which are needed to move things forward."

See GigaOM for more coverage.

Click here to see more of CNET's stories from the Structure 08 conference and on cloud computing generally.

Vint Cerf, one of the fathers of the Internet and Google's chief Internet evangelist, talked with Beet.tv's Andy Plesser about the future of video and broadband at the Personal Democracy Forum in New York.

Cerf expects that video will be downloaded rather than streamed over time. With gigabit for second speed, users could download an hour of video in 16 seconds. "It's like the iPod--you can download music faster than you can listen to it," he said. Cerf also said that broadcasting, rather than downloading a separate copy to every user, is a good delivery model, and that users will have more control over which ads to watch.

However, obtaining the bandwidth to download a movie in seconds is a problem. Cerf said that the U.S needs policies that will cause more broadband to be rolled out everywhere in country. "We need to have as many broadband solutions as possible to evaluate for cost and deploy in the places where they are most effective," he said.

He added that incentives are needed for investments in infrastructure, and it could entail regulation of some aspects of the Internet in order to assure that there is either competition or fair access to the underlying broadband resources. The U.S. is far behind other countries in its regulatory posture and still very hands off, Cerf said. "As a nostrum, it hasn't worked out very well," he said.

Watch the video

Steve Gillmor and Nik Cubrilovic, the hosts of the new TechCrunchIT site, snagged an interview with salesforce.com CEO Marc Benioff after the announcement of Force.com Toolkit for Google Data APIs. Benioff gives a lengthy commercial for his platforms-as-a-service strategy to remake the software industry and create a multi-billion dollar software company.

When asked about the challenges for older enterprises, Benioff said, "I don't have time or patience for the status quo...for people who are trying to control innovation or stop the future." He included Microsoft, as well as unnamed vendors, partners, journalists and other parties on his list of those who are holding onto the past and getting in the way of innovation.

"Thank god for Google," he added, citing his ally in the battle against Microsoft and the cloud-forsaken Luddites. It's shaping up to be an interesting battle. Salesforce.com could also find itself as an acquisition target.

I covered the announcement today in my post "Marc Benioff's mantra: Anything but Microsoft".

Today Salesforce.com announced a "global strategic alliance" (also known as a partnership) with Google, introducing a new integration point, Force.com Toolkit for Google Data APIs. The alliance allows developers using Salesforce.com's cloud-based development platform to integrate with data from Google services via Google Data APIs. This integration service is in addition to Salesforce for Google Apps, which integrates Google's suite of applications with Salesforce.

CODA, which is developing a financial suite of applications on the Salesforce platform (Force.com), has developed a prototype that takes data from Google Spreadsheets and brings it into an Order-to-Cash module.

This latest coupling with Google is part of Salesforce.com CEO Marc Benioff's quest to remake the software world and replace Microsoft as a leading business software platform for building any kind of application. Remaking the software world means moving from client/server solutions to multitenant, cloud-based, on-demand, software-as-a-service, utility computing, platform-as-a-service applications or whatever assemblage of words describes Web-centric computing. They could also be called "server/client" systems, since Salesforce.com, Google, and others offer offline access to the applications.

Part of Benioff's strategy over the years has been to draw attention to his company by picking on his biggest potential competitor--Microsoft. His mantra is "the end of software," referring to the kind of client/server applications embodied by Microsoft Office. In a March interview with CNET News.com, Benioff said:

I think Microsoft is still a dinosaur. More than ever, it tries to hold onto its monopolistic position around technology that they hold, whether it's SQL Server, whether it's NT, whether it's Windows, whether it's Office--these are their cash cows they don't want slaughtered.

The other part of Benioff's strategy is to align with Google against Microsoft. "The enemy of my enemy is my friend, so that makes Google my best friend," Benioff has said.

But the reality is that Microsoft Office is an essential part of the Salesforce ecosystem. Benioff told me that a very large percentage of our customers do integrate with Microsoft's desktop apps. But he seems to be encouraging customers to abandon Microsoft Office and adopt Google's applications.

Benioff touts that the most downloaded applications in the Force.com AppExchange are related to Google, such as Appirio Calendar Sync for Salesforce and Google Apps and Gmail to Salesforce Browser Button for Firefox. But Microsoft's popular Word and Excel integration for Salesforce.com is not available via the AppExchange, so it's unclear as to how it compares in terms of usage to the Google-related products in AppExchange.

Benioff has been visionary in pushing a new model for business applications and adept at generating headlines. But it is way too early to count Microsoft out. This is just the beginning of a new software era, and Microsoft hasn't yet decided to make it more interesting, but it will.

The meaning of openness in the realm of social networks continues to be difficult to pin down. At a panel discussion Tuesday at Supernova 2008 in San Francisco, representatives from Facebook, Google, and Plaxo discussed their various interpretations of openness and got into the ongoing controversy between Google and Facebook over their friend-connecting APIs.

"The point is that the individuals have shared custodianship of it because they have overlapping knowledge of each other's connections," said Kevin Marks of Google regarding who owns the social graph data. Users understand that if they violate the implicit social contract, it will upset fellow users. "The goal of OpenSocial (Google's set of application programming interfaces for allowing applications to access a social graph) is to have an abstraction so the social contract can be enforced by the containers," Marks said.

"Open is when users are mashing up things and in control. It's driven by what is valuable to the user," said Plaxo's Joseph Smarr.

Facebook's Dave Morin defined openness as giving people control over the information they share and providing developers with the capability to build on top of the Facebook platform. Social data breaks down into three categories, Morin said: identity data, social graph data, and feeds and social actions. With 80 million users, Facebook has a responsibility to make sure that users understand what and how they are sharing information, he added.

"You should be able to take your identity wherever you go and keep social graph in sync," Morin said. The notion of "dynamic privacy" is at the core of Facebook's openness efforts. Users set up privacy controls inside Facebook to share more information and to be more open, and have it always in sync, Morin explained.

It's on the point of being able to take your identity across social networks that has put Google and Facebook at odds.

Last month Facebook blocked Google's Friend Connect service, claiming that it violated its terms of service. According to Facebook, Google Friend Connect's violation was redistributing user information from Facebook to other developers without the users' knowledge.

"When Facebook Connect initially launched and Google Friend Connect launched, both implemented different technology. We found Google to be in violation of our terms of service, so we asked to talk about it with them," Morin said. "We are in direct contact with Google representatives to find ways to work together. It's important that on this panel we are talking about this...It's important that we figure out how to make it work together.

Marks asked Morin what Google would need to change in Friend Connect to make it work for Facebook.

Morin answered, "We would like to work together on how to make dynamic privacy happen for everyone, so every privacy setting on our site works on other sites."

Marks was unclear as to what Google was copying from Facebook in its Friend Connect implementation, using OpenID, OAuth and OpenSocial, that would cause a violation in Facebook's terms of service.

Morin said he preferred not to talk about legal matters. "Our representatives are talking so a fight on the panel doesn't need to happen."

It wasn't a fight but Morin's answer that representatives are talking makes it seem that lawyers instead of engineers, who are at the core of the two companies, are running the show.

Smarr chimed in, "We see each other all the time, and we are all in Silicon Valley, so there are overlapping back channels."

"What Facebook is doing (with dynamic privacy) is very laudable--if you choose to share something in one place, it should appear in another. It's just not clear on how this dynamic privacy will work. If Facebook tries to do it by themselves and not with other people, it will be hard to make it really scale," said David Recordon of Six Apart, who has been involved in data portability efforts.

See also: Social Stand-Off: Google And Facebook Not

Joe Kraus, Google director of product management, gave a brief talk about the social Web at the Supernova 2008 conference without a single mention of Google's own social-networking service, Orkut. However, he did focus on Google's Friend Connect service, which lets Web developers add social features to their sites. Webware chief Rafe Needleman did a thorough job of covering Kraus' remarks, and below is a video of his presentation.

With the Microsoft/Yahoo/Google triangle taking a new shape as Microsoft exited and Yahoo and Google connected, the analysts covering tech industry sports are weighing in with their opinions.

Some Wall Street analysts believe Microsoft will take another run at Yahoo if the company can't get back on track or Carl Icahn wins his proxy fight to control the Yahoo board. That may be wishful thinking. Kara Swisher reports that Microsoft is done with its courtship of Yahoo and nothing will bring them back to the negotiating table.

Mike Arrington of TechCrunch called the Yahoo-Google deal a massive destruction of shareholder value, employee morale, and the Interent balance of power:

Yahoo's hatred of Microsoft runs so deep that they were actually, in the end, willing to destroy the future of their company just to keep it independent for a short while longer. They've ignored the wishes of their shareholders, employees and many now former key employees in killing that deal. And apart from Google, CEO Jerry Yang, President Sue Decker and possibly Tim O'Reilly, I don't believe there is anyone in the world that is happy with what has happened.

In a further lambasting post, Arrington called Yahoo desperate and possibly neurotic:

Quite simply, it looks to me like Yahoo is effectively paying Google off to step in and (1) keep Jerry Yang, Sue Decker and the current board of directors in power, and (2) avoid a desperation deal with Microsoft for as long as possible, or longer. It's not even clear to me that Google wants this deal, based on the terms. It almost looks like they're just doing Yahoo a favor, and trying to keep them out of Microsoft's hands.

At the other end of the spectrum, venture capitalist Fred Wilson thinks that Yahoo did the right thing by choosing Google over Microsoft as a partner.

Yahoo! finally woke up and did what they should have done years ago, cede search monetization to Google who simply does it better and will always do this era of search better than anyone else.

Now Yahoo! will do what it needs to do. Clean house, get lean, get out of businesses it shouldn't be in. Focus on what it's good at. And start making money and growing again.

They may need new leadership to do that. But selling this asset to Microsoft just because they had the wrong leadership and probably still have the wrong leadership is a mistake.

From my reading of the events over the last five months, Yang regrets that Microsoft walked away from the acquisition talks. "We all felt and understood a combination done right has a tremendous amount of power and leverage," Yang said during an interview with Walt Mossberg at the D6 conference.

As a founder, Yang preferred that Yahoo stay independent and that he have the chance to turn the company around as CEO. Microsoft historically was not the kind of partner that Yang considered for a marriage. And his board of directors, led by non-executive Chairman Roy Bostock, seemed to go along with that line of thought.

But the entire affair turned out to be mostly about the money, as Decker admitted. "We never got through the price door," she stated during the same D6 interview. Yahoo's board believed that the company was worth more than $35 per share based on future promise, and Microsoft wasn't on the same page. In effect, Microsoft called Yahoo's bluff.

It also wasn't helpful that Yahoo was negotiating the search deal with Google at the same time Microsoft was pursuing its hostile bid. After months of rejection, Microsoft basically became less enchanted with the potential marriage, and despite the pummeling from the shareholders, Carl Icahn's camp, and the press, Yang and his advisors held out for more money.

Unable to come to terms with Microsoft on a generous deal just for the search business, Yahoo took the less complicated, non-exclusive Google deal that allowed the company to remain in the search game.

As I wrote in my post "The battle for Yahoo's soul," Jerry Yang and Sue Decker have a short runway--about six months--to prove that they can "redefine" the essence of Yahoo in a way that yields more revenue, profit, and positive buzz. With the continuing board room distractions, employee defections, and morale issues that go along with being under siege by various parties, the duo have their work cut out for them.