January 30, 2013
Look, we know the old truism that if you don’t have customers and profits you don’t have a business, you have a hobby. But could we please get a little balance on the profit idea?
Emerging companies typically don’t declare profits because they use excess cash to fuel growth. Anything left over is plowed back into the business. If the company is public, its stock price rises not because of some magical ratio of earnings or dividends to share price, but because the money the company invests in its people, processes, technologies, research and development and products make it a more valuable entity to anyone looking at its future. The mini-computer makers were famous for this. I recall Digital rising to $199.50 per share with never a dividend. It’s a good model.
This is the basis for my argument that subscription companies are being given short shrift by Wall Street analysts because they apply metrics more in tune with the manufacturing era than the information age. You might disagree because companies like Salesforce, NetSuite and many others not yet public get plenty of attention. But that misses the mark.
Because the analysts don’t track things like unbilled deferred revenue, a measure of how much money is under contract but not yet on the books, they don’t get a realistic view of a subscription company’s health. And since the analysts influence who buys what stocks and at what price, the market pricing mechanism in the stock markets may not be giving subscription companies — or investors —a fair shake.
I caught up with Tien Tzuo last week to discuss this. Tzuo, you may recall was CMO and chief strategy officer at Salesforce before co-founding Zuora, the subscription billing and finance company. Say what you want about Tzuo but he isn’t shy when it comes to expressing his ideas about subscriptions. Last week he was seen speaking on CNBC and wrote an article for All Things D on subscriptions with NetFlix’s recent stunning 40% appreciation in the background. He believes some companies’ meteoric growth spurts are directly attributable to eschewing conventional Wall Street wisdom regarding profits and earnings. The examples he gave me say a lot.
“Salesforce vs. WebEx. For years, WebEx was on a growth path that was 6 months ahead of Salesforce’s. Then they went public, and listened to Wall Street’s insistence on earnings. Wrong move. Salesforce ignored it, overtook WebEx within 6 months after WebEx went public, and went on to soar to much greater heights.
“Successfactors vs. Taleo. Same thing, Taleo cared about earnings, SFSF went contrarian and said, ‘Hey not only are we not going to show earnings, we’re going to spend all our IPO money on growth, and show losses for years.’ SFSF started off a fraction of Taleo’s size, overtook them, and wound up with a $3.4 billion exit [SAP bought SFSF in 2012] which was almost two times greater than Taleo’s [Oracle bought Taleo for $1.9 billion in 2012].
“And finally, to bring it back to current events, Netflix. They didn’t listen to Wall Street (they never have); they knew their strategy was focusing on customers, and customers more and more want movies anywhere, on any devices, not just on DVDs, and they followed their customers’ lead. This week when the stock soared 40% higher was a big vindication for them.
Tzuo has a point and essays like his and speaking out are ways that the establishment eventually changes. Of course this isn’t a statistically valid study though I am sure such things exist but it does raise some important questions. If Wall Street is not valuing subscription companies correctly it is causing a lot of money to be left on the table.
Traditionally, it takes the establishment some time to come around on a shift this fundamental. After all, we wouldn’t want standards and controls to change so frequently that they failed in their primary mission. But at the same time, as a wise man once told me, no one should have to be hit over the head with an old tire tool to see what’s so plainly obvious.
All this affects CRM because the financial analysts have a great deal of influence. But too much influence can inhibit companies developing the next great application by preventing capital formation where it’s needed. Given how much of CRM and social are delivered as subscription applications by emerging companies today, it’s a concern. So Wall Street really does need to kick it up a notch or two.
We have too many social platforms according to Dorie Clark in a Harvard Business School Blog posting and I am speechless. Good thing I can still write. One passage in Clark’s piece is amazingly illustrative:
“During a panel I moderated with well-known blogger and tech expert Robert Scoble, he said there was no alternative to constant, ubiquitous engagement and held up a spare battery he carried for his smartphone, so he’d never run out of juice. No time to respond to tweets? Do it while you’re walking down the hallway, he said. Plenty of people agree with him.
Ok? But at some point there are only so many minutes in a day, so many hallways to walk down and so many more social platforms.
Please allow me to offer a modest alternative. Why not stop and listen and analyze what’s coming in over the transom rather than constantly bailing. You are, after all, in no real danger of sinking your little social boat.
This posting is largely good news because it indicates we might be nearing the end of the social hype curve. This could be the year of focusing on all the other things that social is really good at like listening and through analytics, helping us to synthesize novel responses.
If we get away from pure broadcast mode and apply some analytics we might discover things like sentiment, emotion, intent, demographics, likes, interests, influence and who knows what else.
Of course, back in the day all we had was broadcast, which might mean that social really is maturing. That always happens at the end of the hype curve and miraculously we start getting some of the productivity that was promised way back at the beginning.
This is an unabashed plug for my next webinar which will be at 1 PM in the East Next Tuesday January 29. Details are here. I will be speaking about some recent social media research I did with the estimable Esteban Kolsky and how our results connect with the economic times we all try to do business in. In other words, I am trying to connect a ‘Why’ to the social stampede. I won’t miss it and hope you will not either. So click on that link and go register.
FYI, this all came about because I really like GetSatisfaction for what they are doing and because I offered a free webinar as a prize in last year’s CRM Idol contest. You might recall that Get Satisfaction won that competition and I am flattered to be giving this little talk.
Sickweather is a beta service worth checking out. Like other crowdsourced tools like Google Flu Trends, Heath Map or Global Public Health Intelligence Network, Sickweather uses crowdsourcing and mapping to identify areas of flu and possibly other contagious disease outbreaks.
It’s flu season and if you haven’t gotten a shot, it’s still a timely thing to do. Meanwhile it doesn’t hurt to avail yourself of the benefits of some very cool technology to keep safe.
I was doing some research in the Time Magazine archives (the best ones I have seen, by the way) the other day and came across this nugget from 1962:
“Despite the discouraging results so far, many scientists argue that military-space research will ultimately produce an overflowing cornucopia of marketable consumer products, from supersonic planes to small nuclear reactors for home power.”
State of Business: Where Are the Tinkerers? September 21, 1962
Take note of the date. Supersonic planes for commercial travel became a reality with the Concord, an Anglo-French construction that operated between New York or Washington and Paris or London for many years until airframes started to fatigue and the small fleet was retired. Supersonic travel never really caught on. Airlines have gone in the other direction since then electing to buy big cattle cars for the masses rather than supersonic hotrods for the elite.
It makes perfect sense too given the rise of civilian aviation and private planes over the years and people’s refusal to hear sonic booms whenever a plane flew over. But in ’62, who knew? And that’s the point about prognostication, especially when you don’t rely on research to provide an inkling of what’s even possible or what other factors might have an impact. That’s best seen in “small nuclear reactors for home power.” In a society where people can’t be depended on to do the right thing when disposing of an old TV or refrigerator, small nukes simply offer the real possibility of a million Chernobyls.
What the Time article didn’t even hint at was the possibility of having small computers for home and personal use or what that might mean. They couldn’t even imagine that but they are not to be blamed. It’s human nature to think that tomorrow will be just like today in all its particulars and that’s one reason why we are so bad at making predictions.
With that in mind we turn to the new year and prognostications about what might happen in our tiny corner of reality, CRM. Here are my thoughts.
- Gamification will continue to gain interest as some people figure out how to avoid the crash that Gartner predicted when it said that 80 percent of gamification projects would fail by 2014. The key will be understanding the difference between gamified tasks at work and work as a game. See?
- Cloud computing will continue being adopted by enterprises. The version of cloud that will be popular will involve moving the data center off site, not in fundamentally reorienting enterprise apps to face modern customers and users. We are still in the early phases of adoption of this kind of cloud, which is best thought of as Infrastructure as a Service (IaaS). Disenchantment is still a year or two off but it will happen.
- Back office applications will accelerate their migration to the front office. We’ve seen billing and payments move much closer to the front office with products like Zuora making them part and parcel of the subscription economy. But also, human resources applications like Work.com from Salesforce are also moving historically back office HR functions to the front office. This will continue as other companies get into the act. Eventually I expect to see many more customers interacting with raw material suppliers through vendor sites.
- Robotics invade the front office. Companies like VirtuOz produce Intelligent Virtual Agents (IVA’s) that replace people in many routine customer service functions like triage or even whole transactions. IVA’s aren’t perfect but they can speed up the customer service process and they can be deployed 24/7 for consistent service. Sometimes all you need is a robot to get something done and IVA’s will help segment the market and preserve human agents for more complex situations.
- Analytics will continue its land-and-expand mission. It started with sentiment analysis, which has proven to be useful but there is so much more to be done. Applying analytics to segmentation, influence and other more fine grained listening is not that hard. Once you have an analytics engine the next piece is scoring and submitting the scores for analysis. Scoring algorithms will therefore proliferate and the roll out of additional analytics ought to accelerate, bringing more refined ways of filtering big data.
- There is a hardware revolution going on that almost no one is attending to, partly because gear has become so commoditized at the personal end that we think of it as another appliance but also, so geeky at the main server end that few of us comprehend it. But make no mistake about it gear is where innovation is at a fever pitch. No gear, no social, no analytics, no cloud. No kidding. Devices that speed up data handling through in-memory (SAP and Oracle come to mind) databases, massive storage arrays with solid state drives, and sophisticated analytics to take advantage of all this, are in market. This is another land and expand situation where landing has been ongoing so look for the expansion to get into high gear next year.
- CRM continues to melt like a jellybean on a summer sidewalk. Everything continues to come together and the appeal of silo-ed sales and marketing applications continues to wane along with interest in desktop PC’s. What replaces them is the holistic CRM database shot through with social and analytics for anytime decision-making and continuous buying. CRM is not going away and neither is the jellybean, we’re just making soup.
- The cost of energy is beginning to affect front office business and we can see it in several ways. Transportation is becoming costly for manufacturers who are beginning to move production closer to customers (think HP and Apple for starters). Transport costs and travel in general will affect the front office too so look for credible alternatives such as video calling embedded in front office apps. This is another technology already in market and ramp up will not be difficult.
That’s enough. Hopefully none of this rises to the level of a small nuke for the home but if it does I will be back here next year to walk it all back.
