Webware

On the surface, it sounds like an odd couple: Facebook, one of the most recognizable successes in the Web 2.0 firmament, and Zuora, a start-up with a suite of subscription commerce products based on the software as a service model.

But Zuora is betting on a computing trend: that as more applications move to the cloud in coming years, the natural corollary is that developers will follow the money and necessarily move in the same direction.

Even on Facebook.

"There are 140 new applications a day on Facebook because it's so easy and so viral a platform," Zuora CEO Tien Tzuo said. "But is anyone making money on Facebook?"

Probably not many. While developers have built profitable businesses on cloud-based platforms, such as Amazon Web Services, Salesforce.com's Force.com, and Google AppEngine, the same can't be said of Facebook. That's a source of no small amount of frustration for developers hemmed in by Facebook's restrictions on placing ads on the service (not to mention the relatively low advertising rates for in-application ads on the service.)

That does not preclude the possibility that someone will find a way to unlock the potential of the so-called Facebook Economy. But so far, it's more of a scenario than a reality. Tzuo, who is about to give it a shot, argues that if each active user on the service had a $1 monthly subscription, that scenario could turn into a reality with more than $1 billion in annual subscription revenue.

So it is that on Monday, Zuora is debuting a cloud-based service at the Demo conference. The product, called Z-Commerce, consists of different modules that a developer can use to set up and manage a subscription service on Facebook. Z-Commerce also comes with pre-built widgets that can get plugged into existing Facebook apps without the need for additional code work.

For its part, Zuora assumes responsibility for the back-end arrangements, including billing and payments. The ambition is large: to attract enough Facebook developers to the idea and transform their applications into subscription services. If enough of them conclude that this is an idea whose time has come, Tzuo believes that Facebook can actually evolve into an enterprise cloud computing platform.

A tall order, to be sure. Still, I'm sure Mark Zuckerberg wouldn't have any issues if that came even halfway true.

Zuora, a company that offers an on-demand subscription billing and payment service, announced Tuesday that it has secured $15 million in Series B funding. According to the company, the round was led by Shasta Ventures and Lehman Brothers Venture Partners. Benchmark Capital and Marc Benioff, chairman and CEO of Salesforce.com, also participated.

Zuora's funding round comes amid concerns that venture capitalists aren't as willing to invest cash in start-ups as they were just a few months ago. But as Jason Pressman, managing director at Shasta Ventures points out, maybe that fear is unwarranted.

"Now is the time for investors to act, not sit on the sidelines and watch what happens. The venture community needs to continue to support the innovation and immense potential in Silicon Valley and elsewhere," Pressman said.

Zuora is competing in a crowded market. Companies like Aria Systems and eVapt are trying to corner the sector and each have been able to raise funding to do it. Regardless, Zuora has high hopes for what it can do with its business model and believes it can solidify itself as the leader in the market.

"Our vision is to build the PayPal for the subscription world, so that our customers can focus on their core business, not on their infrastructure," said Tien Tzuo, CEO, Zuora. "The Series B round ensures that we can maintain our rate of growth and momentum and continue our quest to be the gold standard in this market."

Zuora hopes to become the "gold standard" with the help of its two main products: Z-Billing and Z-Payments. Z-Billing is designed specifically for subscription-based companies that need help managing and growing their business, while Z-Payments aims at becoming a complete payment solution that manages all elements of the payment process. With the help of the funding, Zuora claims it will release more products to supplement its current stable of solutions.

Chalk it up to happenstance, but Zuora founder Tien Tzuo couldn't have timed it any better.

The company on Tuesday morning announced Z-Payments, an online payment service for subscription-based businesses. Interestingly, the product will also accept payments from PayPal.

Along with the announcement, PayPal's president, Scott Thompson, has joined Zuora's board of directors.

What with the stock market in a funk and companies acutely concerned about the impact of a slowing economy on their bottom lines, the pitch Tzuo plans to make is that Z-Payments can handle the job of collecting recurring payments more efficiently and at a lower cost than doing it themselves--especially compared with paper-based payment processes. So the question becomes: If the economy tanks, will subscription services like Zuora's benefit?

In an interview, Tzuo made the case for the subscription model. In a post he wrote a few days ago, he laid out the same argument:

For one, the cost to subscribe is much more affordable than it is to buy. Look at Zipcar, for instance. It's far less expensive to subscribe to an entire fleet of cars vs. purchasing your own. Not to mention, many can't get the credit they need to buy a car or other goods right now, making subscriptions the only option. Likewise, it's more cost effective for businesses to use SaaS applications. Companies operating under this model have an advantage to win more business for that reason alone. Salesforce.com, as an example, thrived during the recession from 2001 to 2002.

Also on the subject of cost savings, it's less expensive for companies to offer their apps as a subscription. Building a Web app can be very inexpensive compared to a desktop app or one that you buy off the shelf. Paying for server space vs. manufacturing and shipping is also a consideration that many businesses are taking into account as they build out their products.

This marks the company's second product in the online subscription segment. In the spring, Zuora introduced Z-Billing.

I kidded Tzuo about the PayPal arrangement, suggesting it may be the prelude to a marriage between the companies. But it's not so far-fetched. PayPal doesn't do billing, and in an interview with ZDNet's Phil Wainewright, Thompson gushed about the extension of Zuora's pay-as-you-go model.

"All these enterprise software vendors sell you a chunk of stuff, most of which you don't want," he said--and it becomes a burden, he added. "Your business is slowed down because you're dragging along this big anchor."

The number of Web 2.0 start-ups I see with undeveloped business models is frightening. "We'll figure it out later" might work if you're talking about a product line expansion strategy, but revenue? I maintain that if you're truly innovating in technology and have a product in beta, you might want to apply the same discipline to your revenue model and start beta testing it as well. Once you have a million users, it's a bit late to start thinking about your business plan.

So Zuora, with its new Z-Billing offering, is at once exactly the right product for the times, and a big risk in terms of customer acquisition, since many companies that should use it won't start thinking about it until it's too late.

Z-Billing is a service that handles subscription billing for Web 2.0 companies. Many Web companies, once they do turn on their for-pay services, set up a "good-better-best" system, where, in addition to a limited free option, they offer customers different tiers of services, with overage charges should they use the service more than they are contracted to.

Z-Billing lets you maintain different grades of service for an online property.

In other words, they treat you just like your mobile phone company.

The Z-Billing platform exists so these companies don't have to write the billing procedures themselves. The platform can handle the complexities of penalty billing, "rollover" credits for unused monthly services, and pro-rating customers' fees when they change plans mid-cycle. The service can also tie into the authorization or provisioning systems a company might have to manage who has access to what.

Zuora starts off by charging its customers 2 percent of bills collected, with the fee going down as collections go up. Presumably the billing is handled by the Z-Billing product itself. Its first customer is Core Metrics, an analytics and digital marketing company.

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. And the Zuora business model has analogs in the telecom world, in particular in Portal Software, a telecom billing company that was founded in 1985 and acquired by Oracle in 2006. The downside to the model, as I said, 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.

See previous coverage: Benchmark, Benioff invest $6.5 million in Zuora.