Outside the Lines

SAN FRANCISCO--After a decade as the chief evangelist in the wilderness of software as a service, which has morphed into cloud computing, Salesforce.com founder and CEO Marc Benioff is having a more challenging time coming up with groundbreaking industry disruptions. But that isn't stopping him from enthusiastically preaching the cloud computing gospel.

Benioff and company have built a $1 billion business and gradually expanded a CRM application, run like Google runs search in the cloud, into a platform that greatly reduces the friction involved in business software development and delivery. With Microsoft recently entering the cloud-computing platform arena with Azure and practically every vendor staking a claim to the cloud, Benioff's vision has been legitimized and turned into the next big thing. But that just makes Benioff try harder. Salesforce.com is no longer the underdog, but Benioff is relentlessly touting his "no software" theme and irreverently characterizing Microsoft, SAP, and Oracle as dinosaurs.

At the Dreamforce annual customer conference here Monday morning, before a crowd of 10,000 adherents, a supercharged Benioff came out on stage, seeking to maintain his crown as the Pied Piper of cloud-based business software. "There has never been a better time for cloud computing and for Salesforce.com," he said. He was likely referring to the troubled economy, which makes cloud-based software services an attractive alternative to traditional software business models.

The news of the day is an evolution of the Force.com, the company's development platform for building and running business applications in the cloud. Force.com sites will allow customers to run their Web applications on Force.com, and takes care of the domain, URL, and RSS management. In effect, the new service further consolidates Salesforce.com's hold on a company's data and public Web presence. The company also announced Force.com for Amazon Web Services, which allows applications to be built between the Amazon and Force.com clouds.

In addition, the company announced Force.com for Facebook, which allows developers to use the Facebook APIs within Force.com applications and tap into Facebook social graph data via the Facebook Platform and Facebook Connect. The combination will lead to social CRM and social sales, Benioff said. "Facebook has over 300,000 pages run by businesses," said Facebook COO Sheryl Sandberg during the Dreamforce keynote. "By coming together with Force.com we are about to unleash enterprise apps on our network," she said.

Steve Fisher, senior vice president of the Salesforce.com platform, showed a Force.com recruiting application running within Facebook. The connection with Salesforce.com could also be another source of revenue for Facebook, beyond advertising.

Cloud computing is becoming mainstream and Benioff is trying to ensure that he is upstream from the competition. He may not remain in that position, but he will continue to push the industry a whole deeper into the cloud.

On this week's EIC Squared podcast ZDNet's Larry Dignan and I discuss Google's latest disruption in the Web 2.0 field, the Chrome browser, as well as Apple's product launch event on September 9. In addition, Larry explains his idea that Dell and Salesforce.com could merge. Dell is trying to be more of a software company and is using the Force.com platform, and Salesforce.com is a major Dell customer. But, it's unclear how Salesforce.com, its shareholders and customers, would hugely benefit from a union.

SAN FRANCISCO--Standing 52 stories in the air at the upscale Carnelian Room in the Bank of America building here, executives from Dell, Facebook, and Salesforce.com discussed the meaning and use of the latest technology buzzword, cloud computing.

The sky was blue and cloudless, but it didn't adversely impact the atmosphere of what turned out to be a Dell marketing event. It was pitched as an announcement about a partnership that involves "the next generation of cloud computing."

You might recall that Dell is the company that owns the URL Cloudcomputing.com, and made a failed attempt to trademark the phrase. Earlier this month, the United States Patent and Trademark Office rejected the company's application. Dell marketing head Andy Rhodes wasn't willing to comment on whether Dell would appeal the USPTO decision.

Despite the cloudless sky, the speakers offered genuine insights into cloud computing, an umbrella term for "hyperscale" computing that covers everything from delivering compute services like a power utility delivers electricity, to simply hosting applications off-premises (see also software-as-a-service and on-demand computing).

Event host Forrest Norrod, vice president and general manager of data center solutions at Dell, defined cloud computing as an economic enabler for applications, not just for single applications but for platforms-as-a-service, such as Salesforce.com. He emphasized the economies of scale advantage that cloud computing has over client/server and previous generations of infrastructure deployment.

Dell is currently a cloud computing arms supplier to companies such as Facebook and Salesforce.com. "Dell is focused on early adopters and large customers, about 50 worldwide, to provide optimized servers, storage, and data center infrastructure," he said. "Cloud computing is still an emerging market, with standards across the framework and software stack still emerging. We are trying to promote an ecosystem to build the software stack on top of the infrastructure. You will gradually and judiciously see us add capabilities up and down the stack.

Norrod pointed to recent Dell acquisitions--Message One, Silverback Technologies, and Everdream--as examples of Dell's focus on software, not just the hardware piece. Increasingly, both Dell and HP are building out their software stacks to compete with Sun and IBM for providing highly automated data centers running commodity hardware optimized for cloud computing.

Jonathan Heiliger, Facebook's vice president of technical operations, had some praise for Dell. "Dell is doing the most aggressive things possible to optimize for cloud computing," he said. "We think Dell is perhaps the furthest along and we see them as a thought leader." Facebook has more than 10,000 servers, Heiliger said, and it's safe to assume any of them come from Dell.

He noted the price of hardware is not the biggest issue. Vendors can even sell hardware at a loss or at a fixed margin cost to get the initial business. "What we have seen in the landscape is that most server providers are trying to provide Lexus quality products at a Toyota price. We are looking for Scion products at a Scion price," Heiliger explained. "(Vendors) have to be creative around power and airflow optimization. The cost of operating the hardware is key; you have to take down the operating cost, not just the server cost."

For Heiliger that means bare-bones servers. "We don't need fancy graphics chips and PCI cards," he said. We need one USB port and optimized power and airflow. Give me one CPU, a little memory and one power supply. If it fails, I don't care. We are solving the redundancy problem in software." Blade servers are not ideal, he said, because of the higher cost and proprietary lock-in that come with the lack of a standard chassis.

Check out the video interview I conducted with Heiliger about managing infrastructure hypergrowth as Facebook adds 250,000 users per day.

Claus Moldt, vice president of technical operations at Salesforce.com, offered similar comments to the previous speakers. The company is phasing out Sun equipment and standardizing on Dell servers (Dell is a customer of Salesforce.com). Salesforce.com has two data centers in the U.S. and one due to go online in Singapore later this year. Moldt said his biggest challenge is capacity planning, making sure that as customer usage patterns change, the Salesforce infrastructure can adapt instantly.

Dell is betting big on cloud computing to boost its enterprise footprint. At this point, Dell doesn't have plans to build its own cloud to provide hosting for external applications, Norrod said. But, there may come a time when being an arms supplier won't be enough for Dell to be competitive. In addition, selling bare-bones servers can't be much of a high margin business, which is why Dell is moving more into software and services. Norrod said Dell's cloud computing efforts have been a large component of Dell's recent market share growth. Dell's second quarter earnings due tomorrow should give a more precise indication of the impact of the cloud on company's business.

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.

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.

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.

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.

Salesforce.com is finally getting beyond its CRM roots. At Dreamforce Europe in London on May 7th, CODA is launching CODA 2go, an enterprise accounting system built on the Force.com platform and integrated with the Salesforce CRM application. CODA 2go will handle revenue and financial management and procurement.

CODA is claiming that 2go will be the "most functionally advanced on-demand accounting application available." At this point there aren't many comparables. Workday has entered the ring. NetSuite offers financials as part of its on-demand suite, and recently added real-time management and consolidation capabilities for companies that are multinational or have multiple subsidiaries.

The enterprise giants SAP and Oracle have not yet launched multi-tenant, on demand solutions for financials. SAP's Business ByDesign, an on-demand suite for the mid-market in private beta, will cover financials and multiple industries.

CODA 2go will be a real test of Salesforce.com's notion of a platform-as-a-service (Force.com). It's a large-scale, transaction-oriented application, which is a step beyond the forms-oriented roots of Salesforce.

On the heels of Salesforce.com integrating with Google Apps, Zoho on Wednesday announced enhancements to its Zoho CRM Enterprise Edition, adding role-based security administration, SSL support, integration with Zoho's spreadsheet, custom fields, and other features.

The cost of the Zoho CRM Enterprise Edition is $25 per user per month, with the first three users free of charge. The Zoho CRM Professional Edition is $12 per user per month.

In a blog post this week, Sridhar Vembu, CEO of Zoho parent company AdventNet, took issue with Salesforce's business model, noting that his competitor spends nearly eight times as much on sales and marketing as it does on research and development.

"Sounds to me (like) a textbook definition of 'business model bloat.' If you are a customer of Salesforce, it makes you feel really happy that the company spends (eight times as much) on selling to you as (it does on) writing the code, right?," he wrote. He added that the Salesforce business model is "an evolutionary dead end" and cited the "silent popularity of Zoho CRM."

At this point, the Salesforce business model has generated nearly $1 billion in annual revenue and 41,000 customers. The operating margin isn't great, but the company has established itself as an industry force with a generous stock price.

At some point, Salesforce's cost of sale should decrease, and the Google alliance will legitimize the on-demand services of both companies. Zoho's development prowess and low cost, and the "silent popularity" of Zoho CRM, has not resulted in a business model breakthrough so far.

At one point, Salesforce was in talks to acquire Zoho, which Vembu recounted in his blog post. He said the two cultures would not mesh and claimed that Salesforce CEO Marc Benioff said Zoho could be part of his company's AppExchange, if it didn't pull the plug on Zoho CRM altogether.

Zoho has built an impressive set of cloud-based applications at a rapid pace. Following the enhancements to Zoho CRM, Zoho Sheet is slated to gain support for macros and pivot tables.

Word-of-mouth marketing isn't enough when you are competing with giant and innovative companies such as Google and Salesforce. But Zoho's small team is not lacking in focus, talent or desire.

Webware's Rafe Needleman and I interviewed Vembu in this video about how Zoho plans to compete against Microsoft and Google in the office suite space.

Following is a Zoho video about the new enterprise CRM functionality: