Sridhar Vembu
(Credit: Zoho)
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.
(Credit:
Zoho)
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.
This weekend I attended a book party in San Francisco for Jonathan Zittrain. His book, The Future of the Internet--And How to Stop It, was recently published and received good reviews. I will be interviewing him at the Berkman Center for Internet & Society 10th anniversary conference on the future of the Internet this week.
At the party, I talked for a few minutes with Oracle Chairman and CEO Larry Ellison. The book party was hosted by Ellison's novelist wife, Melanie, and HuffPo's Arianna Huffington. It turns out that Zittrain and Melanie Ellison met in junior high school.
I asked Ellison about the growing market for on-demand software and about SAP's problems getting its on-demand enterprise application suite, Business ByDesign, to market. Ellison said that SAP's problems indicate how difficult it is to develop on-demand software.
Oracle CEO Larry Ellison
(Credit: Dan Farber)Ellison invested early on in two of the current on-demand software leaders, NetSuite and Salesforce.com. He is the majority stakeholder in NetSuite and owns a few percent of salesforce.com, both of which are public companies.
Ellison doesn't appear to be in a hurry to cash out or bring them into Oracle's orbit. It's been 10 years since NetSuite and Salesforce.com were founded, and there isn't a standalone billion-dollar on-demand software company, he told me. He noted that Oracle revenues are around $26 billion and said that Oracle has built the biggest on-demand software business.
The Oracle Web site claims 3.6 million users of hosted applications, middleware and database. However, if on-demand is more narrowly defined as multitenant, shared environments, Salesforce.com takes the enterprise software crown.
While the two companies are growing, and taking advantage of the heightened interest in on-demand software, neither company is the kind of profit engine that excites Ellison.
NetSuite lost $23.9 million on $108.5 million for 2007 (revenue did climb 62 percent), and Salesforce.com reported $748.7 million (a 51 percent increase from the previous year) in revenue and $18 million in net income for fiscal year 2008, which ended January 31. Salesforce.com is projecting that it will break the $1 billion revenue barrier for its current fiscal year.
Despite the large year-over-year revenue growth of his two investments, Ellison said that on-demand enterprise software is growing slowly, comparing it to how open-source software has evolved. It all depends on your point of view. Most people would agree that on-demand and open-source are gaining market share at the expense of the incumbents, especially among smaller businesses.
But Ellison is playing in a different league. He looks at MySQL, which Sun acquired, and doesn't see it eating his lunch. He looks at Salesforce.com and NetSuite with his parental, velociraptor eyes and doesn't see them as worth pursuing at this time. That may change down the road. Oracle has consumed most of its worthy competition from the old world, and it will get hungry again, especially if it wants to expand its market downstream from the large enterprises.
In this week's EIC Squared podcast, ZDNet's Larry Dignan and I discuss the latest news from SAP, Sun Microsystems, Advanced Micro Devices, and Microhoo. At SAP's Sapphire conference this week, company executives explained the delayed rollout of the new on-demand enterprise suite, Business ByDesign. SAP CEO Henning Kagermann said that the total cost of ownership (TCO) equation on Business ByDesign and the upgrade procedures weren't good enough:
"We know we can have TCO, but need NetWeaver enhancements. There's a very close link between the TCO of Business ByDesign and NetWeaver. The TCO is not so much hardware; There are too many processing steps in our hosting. We can continue to do manual steps when first upgrade Business ByDesign from 1.0 to 1.1, but it's not predictable in way where every client got it at once and in the same way."
Larry remarks on AMD's lack of transparency about its chip fabrication plans and product roadmap, and I recap my visit to JavaOne, where I met rocker Neil Young and interviewed Sun CEO Jonathan Schwartz about his plans for JavaFX and cloud computing. Schwartz has a good plan, but getting developers on board will take some heavy lifting.
We also debate whether Microsoft is open to a union with Yahoo after the parting of ways.
SAP CEO Henning Kagermann has some advice for how Microsoft CEO Steve Ballmer should spend $45 to $50 billion.
"I'd encourage him to spend it on Yahoo. For Microsoft, the challenges are more on the side of the consumer space, not the enterprise space," said Kagermann.
While Ballmer walked away from Yahoo over the asking price and other issues, he might be back if Yahoo fails to show that it can gain momentum.
Kagermann was speaking at SAP's Sapphire conference in Orlando, Fla. ZDNet's Larry Dignan captured the action. Kagermann speculated that Microsoft wouldn't have made the offer if it didn't have a good handle on how to integrate the two companies.
In 2004, Microsoft and SAP were in talks to merge but nothing came of it. It could be that Kagermann hopes that Microsoft acquires Yahoo so it will be distracted with the merger and not get any ideas about trespassing on SAP's enterprise software territory.
At SAP's Sapphire conference this week in Orlando, Fla., a question posed by one of my colleagues concerns the status of Business ByDesign, an on-demand suite of applications that has been in development for about five years.
SAP co-CEO Leo Apotheker
(Credit: Dan Farber/CNET News.com)Last week, it was announced that the product would take 12 to 18 months longer than the original target of 2010 to reach $1 billion in revenue and touch 10,000 customers in the mid-market globally.
ZDNet's Larry Dignan reports on a conversation with SAP co-CEO Leo Apotheker, who explained that Business ByDesign was delayed because the company wasn't able to achieve the planned 10-times reduction in total cost of ownership.
Larry wrote:
That's a fancy way of saying SAP hasn't figured out how to make money at its $149-per-user, per-month price point. SAP confirmed that it was delaying Business ByDesign when it reported its first-quarter earnings. "We've announced a price point, and now we're working backwards," says Apotheker.
Apotheker is looking to "labor arbitrage" (cheaper programmers offshore) and the next release of SAP's NetWeaver middleware to help bring the costs in line. He contends that the delay won't give an advantage to competitors: "No one will be able to offer an end-to-end, comprehensive business suite."
Being bigger and more comprehensive may prove to lead to unwieldy, more costly, and less agile software development. Perhaps SAP will offer some demonstrations of Business ByDesign at this week's conference to prove that it will be worth waiting for the product to get into fiscal alignment.
This week on the EIC Squared podcast, ZDNet's Larry Dignan and I discuss the latest reports surrounding the Microsoft-Yahoo mating dance. We expect some news later Friday or early next week as to which way Microsoft is leaning--fight or flight.
I visited with IBM executives this week, and share with Larry my thoughts on IBM's focus on the mainframe and its budding relationship with Google. In addition, we discuss Sun's challenges in turning free, open-source software into profits for the company. And we talk about the upcoming JavaOne and SAP Sapphire conferences.
SAP announced that its on demand enterprise suite Business ByDesign roll out is moving slower than previously expected.
The company said that it would take 12 to 18 months longer than the original target of 2010 to reach $1 billion in revenue and touch 10,000 customers in the mid-market globally. For 2008, SAP expects to have less than 1,000 customers across six countries.
SAP wants to make sure it doesn't flub Business ByDesign, which represents the future of the company. The company pioneered client/server ERP software, but has been slow to enter the rapidly growing on demand arena. SAP has said that it has deployed 2,500 engineers over the last four or five years to create Business ByDesign, which the company touts as the most complete on-demand suite across applications and industries.
(Credit:
SAP)
SAP's plan is to provide 2,100 service interfaces in Business ByDesign, which will mesh with each other but will not be customizable, according SAP founder Hasso Plattner.
NetSuite has been working on its on-demand suite for ten years, coming out with new versions yearly. And, salesforce.com is expanding its platform to include ERP capabilities, such as CODA's financial applications built on the Force.com platform.
Plattner differentiates Business ByDesign from salesforce.com by virtue of the completeness of the SAP suite. For SAP, software is about serving larger businesses with a complete, integrated suite of applications with "wall-to-wall functionality," Plattner said.
At a recent debate, salesforce.com CEO Marc Benioff challenged SAP founder Hasso Plattner.
Plattner was asked by Benioff if he would consider buying Salesforce.com. "It always makes sense to look into something. If the Apex platform (the Salesforce.com platform) is really as good a he thinks it is, we should look even more," he said.
Plattner also had some advice for Benioff. "We have many things in common. Let me give you some advice, but you might not take it because you are younger: don't overestimate your platform."
Perhaps SAP has been overestimating its ability to deliver an on-demand solution. JMP Securities analyst Patrick Walravens contends that Business ByDesign doesn't have a single data model, but instead different workstations in silos, and is now working to rectify that situation. So far, SAP isn't talking.
SAP has stumbled in earlier attempts to move its business applications online. The company's initial foray into hosted applications was marked by shifting product plans and murky delivery schedules. SAP eventually launched a hybrid approach with CRM, with a product designed to work the same, whether used on-demand or on-premise.
In the meantime, Microsoft, Salesforce.com and others have evolved their on demand applications. Salesforce, in particular, is moving ahead aggressively in the market with plans for an on demand platform service, in addition to expanding its business applications lineup.
See also:
Larry Dignan's coverage of SAP's quarterly results.
At a Churchill Club event at the Computer History Museum in San Jose on April 3, Hasso Plattner, co-founder and chairman of SAP, and Marc Benioff, co-founder and CEO of Salesforce.com, debated the future of enterprise software. The debate was moderated by Quentin Hardy of Forbes.
I covered the debate here. Benioff challenged Plattner to run SAP's software on the salesforce.com platform. Plattner gave Benioff some counsel: "We have many things in common. Let me give you some advice, but you might not take it because you are younger: don't overestimate your platform."
Following is a video clip from the event. Benioff describes the new era of enterprise software, which "look to the functionality of the past but to values of the consumer companies like Google, eBay, Amazon and Yahoo, who have become massive companies serving millions of users with tremendous complexity but through a new technology model."
Plattner talked about the need for immutable Web service interfaces. "The most important thing to learn when using services is that we cannot really modify them." The future is building on top of services and meshing services with each other. He also noted that the new software paradigm will allow developers to monitor and see what users are doing.Listen to the entire debate here.
In this week's EIC Squared podcast, ZDNet's Larry Dignan and I discuss the latest news, including SAP's management changes, Dell's woes, Intel's new mobile chip, life extension for Windows XP, and Google's lottery winners.
MOUNTAIN VIEW, Calif.--Two titans in the enterprise software business faced off Thursday at a Churchill Club event at the Computer History Museum here, and a bit of history was made.
The sage, 64-year-old Hasso Plattner, co-founder and Chairman of SAP, and the upstart, 43-year-old Marc Benioff, co-founder and Chairman of salesforce.com, debated the future of enterprise software, fielding questions from Quentin Hardy of Forbes and the audience.
The history footnote of the evening came from Benioff, who challenged Plattner to build SAP applications on the Salesforce.com platform. "I want to figure out how to get SAP to build on our platform," Benioff said. "SAP needs to write its new apps on our platform, and I need to help him do that because there is no way he can figure that out...we will be in a war to get more developers on our platform."
Debate partners: Marc Benioff and Hasso Plattner
(Credit: Dan Farber)Plattner, who was writing software when Benioff was in grade school, wasn't biting, and became a bit exercised. He questioned whether Salesforce.com could keep thousands of on-demand service interfaces consistent as its platform grows and as customers write code to integrate with the platform.
"All 41,000 Salesforce customers are on the same version. When we release the new version in June, we don't break the links. In some cases they have to re-implement, but you still have a managed environment," Benioff countered.
"I would be scared at what you just said. If you extend that to whole enterprise system, I would be scared to death," Plattner responded.
Benioff, who I declare the debate winner by nontechnical knockout (no references to in-memory database systems), stuck to his vision of the future. "You have to buy into the fundamental premise that the world has to change, and because we have a global network and a new architecture with massively parallel servers, we can build technology with a level of automation previously unimaginable.
The evening started off more calmly, with Benioff describing the new generation of enterprise software companies, which he said will look more like consumer companies, such as Google, Yahoo, and eBay on the back end, but serve up traditional business functionality.
Plattner rambled on about betting on modification-free software with SAP R/3 in 1993, only to find that customers wanted to customize it. SAP's plan today is to provide 2,100 service interfaces in Business ByDesign, its forthcoming hosted suite of applications for the mid-market. Those interfaces will mesh with each other but will not be customizable. He differentiated Business ByDesign from Salesforce.com by virtue of the completeness of the SAP suite. SAP has been working on Business ByDesign for four years with 2,500 developers on the project, and it won't be generally available until later this year or 2009.
For SAP, software is about serving larger businesses with a complete, integrated suite of applications with "wall-to-wall functionality," Plattner said.
Benioff claimed that the Salesforce.com platform could run any kind of enterprise application. He asked Plattner why Salesforce.com beat out SAP for the Dupont business. "We had a shitty CRM system," Plattner said. He then said that the new SAP CRM 7.0 is the best product in the field. "You had a good time and now we are. If you are really successful how much are you worth?" Plattner said.
Benioff said Salesforce.com is aimed at all sizes of companies and across industries. "We have been passionate about moving obstacles out of the way of the old enterprise software companies," Benioff said. "We are at the verge of a breakthrough, and it is as big as the software-as-a-service business has been. We see platforms emerging where we can accept customers and ISV code and run it natively, just as R/3 ran natively on Oracle. This means you can run the business processes of any company in the world. We are moving now to platform-as-a-service, and it's biggest the threat to SAP, MS, Oracle, and BEA architectures."
As salesforce.com evolved from CRM to application platform, Benioff has been making that claim the client/server model is doomed. Plattner touted SAP's developer community. "We have 1.2 million software developers on our platform, 2,000 partners developing addition software," he said. "We have the largest software development project in our history, with 2,500 developers developing on demand," Plattner added.
"You have 2,500 developers and 2,100 interfaces. All that and no customer success," Benioff taunted.
In a moment of calm, Plattner said, "We have many things in common. Let me give you some advice, but you might not take it because you are younger: don't overestimate your platform." Sage advice.
Plattner was asked if he would consider buying Salesforce.com. "It always makes sense to look into something. If the Apex platform (the Salesforce.com platform) is really as good a he thinks it is, we should look even more," he said. Plattner also said that he thinks Oracle, where Benioff worked for 13 years, will end up acquiring Salesforce.comTo put this debate in historical context, Benioff has been known to disparage SAP, which generated $15 billion in revenue for 2007 with a 26 percent margin, as a company that doesn't innovate. In an interview with News.com's Charlie Cooper and myself a few weeks ago, Benioff said:
With SAP, you really have not seen innovation in the last 10 years. If you think about what is the one thing that SAP has ever innovated, what have they created that's unique to the industry or value-added technology? I have a hard time thinking about what SAP is going to be known for at the end of the day.
In August 2007, Plattner's proxy, SAP CEO Henning Kagermann, characterized Salesforce.com as follows:
Salesforce is like best of breed in the old days. It's always an advantage, but you cannot be best at everything worldwide. That's our advantage--we can run an entire business.
Speaking of old, SAP was founded in 1972 and Salesforce.com in 1999. Salesforce.com is approaching $1 billion in annual revenue, and a much smaller margin than SAP, with its software-as-a-service platform and subscription business model. SAP has been slow to adopt the software-as-a-service model, but is prepping to launch Business ByDesign. It will be more directly competitive with NetSuite than Salesforce.com, which is built primarily around CRM applications.
Benioff summarized the future of enterprise software during the debate in this statement: Software-as-a-service will not happen without Microsoft, Oracle, or SAP. But they are holding on to the past. The new Internet companies--Amazon, Google and ebay--what they have done and the new young internet companies is really the next generation."
Fundamentally, companies will find it more practical and cost effective to deploy enterprise software from the cloud over the next decade. As I said earlier, Benioff won the debate, but he has a long way to go to unseat Plattner's company.
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