I was on vacation when the news hit that Keith Block would become co-CEO of Salesforce with Marc Benioff and that Parker Harris would join the board of directors. I’ve already written about Block and for some reason always assumed that Harris was already a board member so the news came as a surprise and a gratifying one at that.
Parker Harris is a real Renaissance man with a background in the humanities (BA, English Literature, Middlebury College) as well as the chops needed to develop multi-tenant computing way back when Salesforce was emerging. That’s an important distinction and you could dwell on it for a bit.
It’s my observation that at the beginning of a disruptive innovation there are no experts in a field just talented “amateurs” to fill the need. Go as far back as you like and you see a stable pattern. Bill Gates dropped out of Harvard as did Mark Zuckerberg. Steve Jobs did just a year at Reed College. Wilbur and Orville were bicycle mechanics and spent a whopping $2k from their business on their experiments to invent heavier than air flying machines. Henry Ford? He was largely self-taught learning about steam engines on the job while taking a few bookkeeping courses. Finally, there’s Edison. This self-educated inventor and business man might be the greatest of all time with 1093 patents to his name. He took a few courses.
If you’re interested in learning more about how invention and discovery favor the talented amateurs, I suggest “The Structure of Scientific Revolutions” by Thomas Kuhn. He’ll take you even further back throughout history to see even more of the pattern.
But for now, congrats to Parker Harris, one of the great ones.
So far, the trade war is limited to actions and reactions related to durable things that trade throughout the global economy—cars, steel, and aluminum for instance. Add bourbon and Harleys for good measure. But will that remain the battleground or should we expect greater contentiousness around services, specifically software as a service and CRM in particular?
America does hefty business with the rest of the world in services which can span things like banking and finance, insurance. Right now the retaliation seems to be against areas that went for Trump in the last election but there’s nothing that says the pain can’t be spread around to services.
Current target industries and their workers might not provide sufficient leverage that other nations need to put the genie back in the bottle. Some of the people who make bourbon and motorcycles or who grow soybeans are vocal about their politics and form part of the Trump base. But their actions seem mostly limited to reactions not initiative. They’ll support a Trump policy but they haven’t been out front advocating.
On the other side of the coin—and I accept that this is a simplification—the tech sector is, by definition, entrepreneurial and able and willing to initiate action. So attacking subscription providers by foreign nations could, in theory, motivate more reaction designed to stop the trade war. There’s a lot of potential leverage there because the US has a dominant share of the software as a service economy and the subscription economy generally. While US companies have been stepping up efforts to locate cloud data centers in many countries to support data residency requirements, their services could still look like imported services and thus be subject to tariffing.
You might buy a used Harley rather than a new one or switch from bourbon to rye temporarily but how do you go without data? Not very well. That’s why I think the services industry could be a big loser in any trade war. Data and information make the world run and many companies are only at the start of their cloud translations so retaliation against subscription vendors could cause real damage.
The tech sector is also vociferous, both pro and con on numerous political issues. For every Marc Benioff advocating for progressive ideas there’s a Peter Thiel supporting the administration. But the progressives might have the numbers if only because so much of the industry is based in California. So there’s all the more reason for foreign governments looking for leverage against American tariffs to target the tech sector and especially software.
So, US dominance in SaaS and the cloud generally is a dual edge sword. US companies have dominant positions but for this reason it would be easy to target the industry with, say, 50 percent tariffs. As with other industries, tariffs could be expected to slow growth and adoption and possibly cause some vendors to set up production in other countries as Harley-Davidson is.
Once a path is set and investments are made the shape of any industry could be permanently altered. It will be hard for any business to abandon sunk costs in other lands once a trade truce is agreed to. So we’re possibly looking at a generational or even secular shift in the shape of the cloud and its industries should a trade war infect tech.
A trade war could be a driving force that sends clouds scattering to the corners of the earth. That could be good for some businesses but bad for individuals whose jobs would be put in jeopardy. It would be an acceleration of the natural commoditization cycle with one key difference. There won’t be many new job openings for displaced American tech workers whose jobs depart for parts unknown.
When the idea of a trade war first surfaced about a year ago, some prescient commentators suggested that there would likely be unforeseen consequences. No one has perfect visibility into the heart or actions of an adversary regardless of the analytics used. But retaliating against what an adversary does well is an old story and it wouldn’t surprise me to see tariffs on cloud computing services should cooler heads not prevail. Those tariffs will have follow-on effects that we can only guess at right now but it’s doubtful that those actions will improve US’s standing in tech.
There’s a confusing dynamic happening in the software industry caused by the inexorable shift to the cloud. Even before you can get into the analysis you need to identify which cloud(s) you’re thinking about (infrastructure, apps, platform). Also, once you’ve done that you need to decide if you’re partial to technology or financial analysis. It should be no surprise that either approach alone gives only half the picture, so you really need to engage on both fronts.
A big topic right now centers on whether vendors are growing their revenues fast enough to claim leadership positions in the cloud. If not, what happens to those not growing fast enough to satisfy the finance guys. Oracle is a case in point and the company has been subject to a lot of financial analysis that finds the company lacking. How you evaluate revenues, especially in comparison to peers helps you figure out the price of a share of stock. But it’s very hard to get to an apples-to-apples comparison.
As one recent post on Seeking Alpha declared, “Oracle’s ability to adapt to the decline of the on-premises software business and the rise of cloud/SaaS remains in question.” To which I say maybe because the analysis is only partly revenue related. Of equal importance is the changing revenue model—taking in incremental revenue rather than a big license fee.
Moving to the cloud changes the business model, not just the product and too often I see financial analysts applying old financial models to new technology and business models and it doesn’t work well.
For most companies the easiest customer to re-sell or up sell is one you’ve sold to before but migrating your installed base to the cloud is anything but easy if you sold them legacy solutions. The effort is more akin to selling for the first time. No decision which can be frustrating in any sales situation is just as prevalent in an installed base as it is in the general market even for an incumbent vendor.
So in the horserace that some financial analysts insist on handicapping, a pure cloud vendor will usually look better than a legacy vendor moving there. But on top of all that, when your analysis is based on revenue growth you can get spurious results. Even if a legacy vendor induces an existing customer or a group of them to convert, the revenue impact is likely to be a short-term reduction because we recognize cloud revenue over time, not all at once.
We are unarguably in a transition-state so we see a mixed industry. But if you go down the road a few years to a time when the major conversion from legacy to cloud is over, the whole industry will look more uniform and comparisons will be easier.
But it will also be a more fragmented market than we have now. Software vendors will have many complex relationships between themselves and infrastructure vendors and it will be far from unusual for Brand A software to be running on Brand B infrastructure even though both brands might offer both software and infrastructure.
All of this suggests to me that the real plain of competition will have to change. It will change because the vendor communities want to avoid the zero-sum rut that markets invariably head towards in a commoditization push that leaves the survivors competing for pennies when they once competed for millions.
That’s why I see the industry morphing into a utility where a small oligopoly controls most aspects of the market, usually under some form of regulation. A utility won’t care much about infrastructure, for instance, because it will all be the same from the perspective that it adheres to standards.
The electric utility industry is a fitting example. Electric devices are agnostic over how power is generated or whether it comes from next door or a thousand miles away though some customers might prefer greener or cheaper solutions. But vendors in the supply chain take responsibility for adhering to and maintaining standards so that the product is uniform.
It’s doubtful at this stage if any of the enterprise software vendors will stub a toe getting to the cloud. Each has a unique path to travel that’s based on history and legacy constraints. At this point, rather than comparing vendors in what is a very disparate market, it might be wise to look more at year-over-year comparisons and similar measures that track a vendor’s progress against the goal. Revenues and revenue growth will, of course, always be important but the handwringing that goes into quarterly analysis and that emanates primarily from looking at a still emerging market and seeing a long established one, obscures reality and benefits no one.
The end of the second quarter ended the first wave of vendor customer events. Still to come are Salesforce Dreamforce and Oracle OpenWorld—and others—in the fall but mercifully, we have the summer to digest all the information absorbed this spring and re-synch with our native time zones. Here are some things I learned during show season but as you read this know that no person goes to all the events and other people like Paul Greenberg, Esteban Kolsky, and Brent Leary are well worth reading on the subject. So are Jon Reed and Phil Wainwright.
CRM is big, big, big. Still.
CRM doesn’t appear to be slowing down. As an industry it’s rated at about $35 billion in revenues up three-fold over where it was at the beginning of the century when I was a tenderfoot. One reason for the growth is the constant diversification led in no small part by Salesforce’s innovative culture. Big vendors like SAP have rededicated to CRM and I wish them well though I have a nagging feeling that’s an uphill path. Still many enterprise vendors seem to have entered CRM as a defensive move to secure their legacy customers. That’s not a recipe for sustained excellence. But what do I know? I’m just an analyst.
Salesforce isn’t going to bail out your business plan
Some vendors got into the market on Salesforce’s coattails without realizing they still have to perform. You can be in the AppExchange and flounder if you’re waiting for a Salesforce sales rep to call you up with a deal. Also, Salesforce isn’t likely to buy your business. They might buy a lot of companies but there are even more to choose from.
The next wave might involve formation of an Information utility
I’d say we’re in the latter half of this wave, a time of automation, consolidation, efficiency, and effectiveness, in other words commoditization is happening. That’s what the digital disruption is about in my humble opinion. Right around the corner is formation of an information utility which is already ongoing and gaining altitude. No one calls it that but major vendors are building cloud data centers galore—Microsoft even sank one off the coast of Denmark as an experiment in cooling to save money. At any rate the big guys need to get together to set utility standards for APIs, metadata, and interoperability in much the same fashion others did about 50 years ago to breathe life into the relational database and SQL. This will necessarily add to commoditization but it will also open new areas for competition.
Business models proliferate and get complex. Being SaaS is now table stakes.
We’ve begun winding down the on-premise business model, though it will likely be with us on the edges for most of the next century. But for practical, enterprise computing the cloud and subscriptions have come into their own. The folks at Zuora are still evaluating the subscription side of the model and its offshoots and will likely have interesting things to tell us down the road. Clearly, subscriptions haven’t taken over the world yet but we’re all trained subscribers at this point and that fact drives CRM. I look for more ideas surfacing to articulate a new model of labor as a service. Whatever we call it the more we engage in the gig economy the more we find we need an organizing principle and I think it will borrow heavily from XaaS.
Social media has jumped the shark
The Facebook revelations of the last quarter from Cambridge Analytica to feeding data to hardware makers put Facebook under a cloud and cause some people to re-evaluate their allegiances. Can social survive or has it been exposed as a show, like “Seinfeld,” about nothing? My instinct is that social has to morph into a data utility sitting on top of the information utility and it has to become regulated to prevent the worst abuses else it falls into irrelevance. Translation: billions of users is not enough, they have to be the right users.
There’s a new book by Jaron Lanier, “Ten Arguments for Deleting Your Social Media Accounts Right Now.” It’s an industry insider calling in an airstrike on his own position. We have to destroy this village in order to save it. But it softens mid-way into something more like we can’t use social until it gets fixed. Fair enough. But most of the social concepts complained about in the book are not typically what CRM vendors engage in. So there’s hope. But we still need to fix social. Pronto.
CRM is maturing
This means there are few, if any, niches left for upstarts with a better mousetrap in any of the traditional stovepipes. Those bases are covered. Nevertheless, new opportunities open all the time. Some are crazy and scary amalgams of AI, machine learning, selling and marketing with a little Tai Chi added for good measure. They won’t all survive but that’s not news. The big players are only getting bigger. Salesforce is well beyond the $10 billion mark and Oracle grows its cloud presence every quarter. The majors have so much money to direct at R&D and marketing that a new company can’t expect to go head to head.
The middle office might be a thing
I learned this at Apttus’ event. Though I think the name needs work the idea is sound. It lines up with the coming information utility. More importantly it acknowledges the reality that back office data drives some front office processes and vice versa, too. The middle office comes on strong in the IoT and semi-automated world of eCommerce which is only growing.
Chicago is a thing
Chicago used to be the city tech users flocked to for conferences but then San Francisco cornered the market. The tide is turning though. Chicago has a few months of spectacular weather, but year-round it has great food, friendly people, a can-do spirit, and art and architectural gems. I went to two conferences at the McCormick Center this quarter. They were well attended and the McCormick is plush and spacious. Give it to Chicago, they know how to do architecture. So I look for more conferences to migrate to the middle of the country, to places like Chicago, Dallas, and New Orleans. It’s a shorter flight and these cities have more real-life amenities than say, Las Vegas. Don’t look for Dreamforce or OpenWorld to move but each company is now using Chicago for smaller events.
Despite the money spent on shows, some CRM vendors seem to be pulling back on marketing, which is a mistake. The vendors I see who are doing well have a balance of shows, automated outreach, and in your face marketing for good reason. Others rely too much on top of funnel marketing and don’t get the conversions they want. People buy from people and there are too many warm leads for salespeople to chase right now. They can’t spend their time upgrading the leads because their primary job is closing deals. So more live marketing might be in order; chatbots are fine but talking to real marketing people, doing webinars etc. haven’t gone out of fashion.
Salesforce’s just announced Q1 FY 2019 results beating analyst estimates and causing the stock to rise 3.9 percent. The company had been advising investors that it expected to grow to $12 billion and in the fiscal year and the Q1 results of $3.01 billion keep it on track. That’s a 25 percent increase year-over-year with first quarter operating cashflow of $1.47 billion up 19 percent.
The company adopted an alphabet soup of new regulations in the quarter including ASC 606 which deals with how subscription companies recognize revenue. From the press release:
Unearned revenue, representing ASC 606 deferred revenue less the cumulative timing differences of recognized revenue from ASC 606 adoption, on the balance sheet as of April 30, 2018 was $6.20 billion, an increase of 25% year-over-year, and 23% in constant currency.
That’s an important measure, before ASC 606 subscription companies had various approaches to recognizing booked revenues that had been held in reserve to pay future subscription fees. This points out the power of the subscription model. In contrast to conventional revenues that start at zero each fiscal year, subscription customers commit to purchases well into the future making it easier for a company to hit its growth targets.
The rise of subscriptions had caused some inconsistencies in revenue booking across the industry and ASC 606 and other regulations will help regularize that process. Look for other companies like Oracle to go through a similar adjustment as their cloud strategy takes hold.