Get a Horse
I was literally gobsmacked and I had to re-read the post several times. Gartner analyst Robert Desisto—who I don’t know at all—wrote a short post last week saying that today’s SaaS vendors, “will resist the move to ‘pay as you go’ because it will have a very big impact on their business model predictability” and become “legacy dinosaurs” as his headline said.
But, but, but! I stammered to myself. How can that be? I have been researching and writing about this space for fourteen years. I was the first analyst to cover Salesforce and a bunch of other early entrants, and one of the first people to have a practice dedicated to SaaS. They all had pay as you go models, at least back then. Did I miss something?
One of the real challenges of running a subscription business, and this includes SaaS companies as well as the Dollar Shave Club, ZipCar, and all the other companies that jumped on the bandwagon, is that you have very different revenue flows that must be accounted for. Companies like Zuora have built big businesses and attracted hundreds of millions of dollars in venture funding to build billing, payment, finance and accounting systems that cater to this massive industry. Now along comes Gartner with the clear implication that the pay as you go model is not in fact alive and well? I didn’t get it. Still don’t.
As a sanity check I contacted Tien Tzuo, CEO of Zuora, a subscription billing, payments and finance provider. In his previous life Tzuo was CMO of Salesforce and at one point had the job of inventing a billing system for Salesforce that operated the way subscriptions run. Here are some points from Tien.
- Just because some SaaS companies do three-year contracts that doesn’t make them enterprise software dinosaurs. Every successful SaaS company realizes that keeping churn low is a core part of the model, and every successful SaaS company realizes that long term contracts do not equate to low churn—the only thing that truly reduces churn is to have strong adoption and customer success. That’s why SaaS vendors invest in customer success while on premise software companies do not
- Many SaaS companies actually don’t offer three-year contracts. At Zuora, we see lots of companies with month-to-month models. CDNs, cloud companies, API companies, point-of-sale systems—these industries all skew towards month-to-month. Radian6 also had a month-to-month model. The post also says doing three-year contracts makes SaaS companies vulnerable to other startups who choose to offer month-to-month … but there’s nothing to stop the SaaS vendor from changing their billing policy whenever they want. (my note: provided they have a product like Zuora that makes this easy to do the billing and accounting).
- Customers don’t have to accept three-year contracts. It’s naive to say that it’s the SaaS vendor that forces it on them—many companies actually prefer long term contracts once they are committed to the SaaS vendor, as this gets them the best price as well as longer-term price protection. This can be a win-win scenario.
- This does create havoc on revenue recognition. Monthly billing makes billing messy but revenue recognition easier. Annual or multi-year billing makes billing easy but revenue recognition very hard. There’s no free lunch.
It was such an odd thing to read. It reminds me of some other chestnuts like, “If god wanted man to fly he would have given us wings,” or “We will never need telephones in England because we have such an abundant supply of messenger boys,” or “Someday every town will have a computer,” or my favorite, “640 KB is all the memory your computer will ever need.” These are all such Luddite comments you just knew upon hearing them that they won’t stand the test of time. Heck, this one didn’t survive a day before people started scratching their heads.
Perhaps the last word on this comes from the most authoritative source—the marketplace. On December 10, BrainSell, a Boston-based technology company announced it would offer an integrated solution of Intuit’s QuickBooks with bi-directional synch to Salesforce. According to the press release, “What’s really great is that customers can get a Salesforce subscription from BrainSell with no contract, and the ability to pay month to month!”
End of the Beginning
In “IT’s Ethical Dilemma” I wrote about the challenge of having a new product and selling the old one. If the new product offers benefits of better, faster, and cheaper — and what new product doesn’t? — then how is it ethical to sell the older, less performant, and probably more expensive one?
Well, the answer is easy in a free market. First you cut the price, which is natural given the creative destruction that’s taking place thanks to your new widget. Then there’s the customer’s preference for the older, more trusted product. The older product is safe, it’s had the bugs knocked out of it and the customer perceives it as less risky. So selling the older product is actually pretty easy, in fact the customer buys it more than the vendor actually sells it. Sales people like that.
But there’s huge peril in that approach. I was reading “The Rise and Fall of Infrastructures — Dynamics of Evolution and Technological Change in Transport” by Arnulf Griibler on the plane the other day making my way to San Jose and SuiteWorld, and it made me think about our market.
Now, Griibler is not a household name and the book dates back to 1990 so there’s that to consider. But he writes about something that just melts me — the interface between innovation, entrepreneurship, and massive societal change. Call me what you want, it’s fun. Anyhow, Griibler’s book is about change in the transportation industry over centuries starting with canals and progressing to railroads, roads and things driven by internal combustion engines, and air transport.
He’s not always right. From today’s vantage point he got air transport only partly right as the next thing in transportation. He didn’t foresee the spike in energy prices and the funk that air travel has gotten itself into. He also didn’t see that the Internet would become the disruptor of air travel. You would have needed a pretty good crystal ball in 1990 to foresee that the ‘Net would spawn social media and that people would conduct meetings on it reducing the demand for air travel. But that’s the procrastination business, warts and all.
One of the very, very interesting findings that Griibler discusses is what happens to the standard S-curve near the end of a typical market trend. We are used to thinking of the S-curve of most trends as symmetrical around the inflection point (see picture). But in his research Griibler found that wasn’t the case. The waning side of the curve, the top half, is only about half as long (in duration) as the top. The later adopters accelerate adoption and cause the completion of the wave very quickly. He uses the term “seasons of saturations” to describe what Joseph Schumpeter observed decades earlier. According to Griibler: “Schumpeterian ‘gales of creative destruction’ (i.e., organizational readjustment processes like bankruptcies or intensive mergers), a lack of productive investments as a result of the saturation of traditional markets and uncertainty about the characteristics and investment opportunities of the new emerging paradigm prevail (Page 274).” Feels like today in many respects.
So, what does this have to say about the software industry and selling the old product or IT’s ethical dilemma? Simply put it says that we always have less time to convert from the old paradigm to the new one once we get to the second half of the curve. Part of the reason that things accelerate is that at mid-point we are in a transition state and markets hate indecision so they move quickly once the new pattern seems inevitable.
I wrote “IT’s Ethical Dilemma” because I could see this coming intuitively but Griibler gives us the empirical understanding. To net it out I think you can expect cloud computing to accelerate from here, even in markets that might not be prone to adopting it, like ERP.
Consider this press release headline that crossed my desk this morning from NetSuite as it gears up for SuiteWorld. “GARTNER NAMES NETSUITE THE FASTEST GROWING FINANCIAL MANAGEMENT SOFTWARE VENDOR GLOBALLY, Market Shift to Cloud ERP Fuels NetSuite’s Rapid Growth in the UK, APAC and the Rest of the World.”
So think about this: Cloud computing got started as SaaS and Salesforce and NetSuite are among the leaders of the rebellion still standing. For a decade no body took them very seriously. The other vendors did very little to move their applications to SaaS beyond employing browser front ends. Finally, they got some of the religion and today most are offering a hybrid solution that will run in the cloud or in the data center. There is also a thriving new industry emerging for infrastructure services that will run standard single tenant applications elsewhere to provide the illusion of a cloud.
If Griibler is right then the ten or so years that were the first part of the S-curve for cloud computing will be followed by a period that’s about 5 years long in which the late adopters consolidate their seasons of saturations. I figure the five year clock has been ticking for two years that have been recession tinged and so the five year play-out might be a bit longer.
My conclusion though is that one of the riskiest things you can do right now is to ignore cloud computing and by extension the social, mobile, and analytics waves that come with it. Once you’ve fully amortized those servers, things are going to change rapidly.
Rank
The CRM world has been atwitter, to borrow a phrase, ever since Gartner released its CRM market size report on April18. Since I am not rich, I do not own a copy of the document but the table of contents provides some very interesting fodder. The top five, in order, are Salesforce, SAP, Oracle, Microsoft and IBM.
My world is buzzing with reporters’ calls seeking comment and colleagues at the Enterprise Irregulars offering up opinions. Here are a few things to think about that I have ruminated on.
- For some companies figuring out CRM revenue is easy. Just ask Salesforce about their revenue or read their SEC documents and Voila! But it’s not so easy to tease apart CRM from other revenue if a multi-product vendor like SAP or Oracle decides that apples is apples and doesn’t split out the different revenue streams — effectively asking the analysts, “How do you like them apples?”
- I can understand a financial analyst firm doing this kind of work but less so a technology or industry analyst firm. Sure, these reports make for fun reading but they are backward looking. Financial guys look backward all the time. Heck, I know some that haven’t seen the recession yet. But my peers ought to be looking forward. Imagine if ten years ago we were all saying SaaS and Cloud are the future instead of: On-prem forever! But I digress.
- When you don’t have hard numbers to deal with, and I strongly suspect that some of these vendors undoubtedly did not give the analysts dollars and cents results, you start having to triangulate. The vendor might say that their revenues were in the x to y range and a competitor or two might say they’re in the low end of the range or whatever. The result is that the analysts have to read tealeaves and do some math that is based on assumptions. When that happens, all bets ought to be off. Averaging everyone’s estimates just gives an error prone result if you can call it that.
- Ditto for the size of the whole market. About ten years ago I saw some work that looked like it took a long time to compile that said the CRM market had an absolute size of about $46 billion. We left that number in the dust a while ago and we still forecast $20+ billion in products and services per year and growing. Go figure, if you can.
- Then there is the matter of how you measure. Fiscal years differ, measurements differ — Seats? Dollars? Currency Conversions? Canasta? — the analysts have to rationalize it all so that we’re all talking apples. That’s hard to do.
A few years ago SAP was battling Siebel for the #1 ranking and according to financial analyst reports at the time, they were booking any revenue that was not nailed down as CRM. I still have the reports. I think SAP won the derby that year but the next year the analysts started counting the shelfware in major IT departments and guess what they found? Only about half of SAP CRM had been installed or was likely to be while Siebel, Oracle and some others consistently had about 25% shelfware.
Market dominance became important when Geoffrey Moore published Crossing the Chasm because his data showed that most markets consolidate into a three horse race with numero uno taking most of the business, due hanging on to keep uno honest and tre looking for a buyer. But each of the CRM vendors in the top five is a complex, multi-product company. Each sells CRM for its own reasons and one of them is surely to offer a complete product line that keeps competitors at arms length. The number one spot is still coveted for bragging rights but trust me, if the ranking disappeared tomorrow, very few CIOs would have trouble rounding up the usual suspects for an RFP.
So to net it out, take this all with a pound of salt. It’s a beauty contest at best and in my humble opinion not a representation of the best work that analysts — either of financial or industry variety — can do.
Dell in Deal to Go Private
Just last week I was writing about the importance of sometimes ignoring Wall Street analysts whose focus on quarterly earnings can force a company into neglecting its best interests. Bowing to the demands of quarterly reporting (and profits) reflects short-term thinking that might prevent long-term success. Today Dell decided to go private in a $24 billion dollar deal that involved about $15 billion in debt, private equity and an assist from Microsoft and I think it reflects Dell’s need to step away from that thinking.
It’s a gutsy move but one that I think will benefit Dell. It is also somewhat like a restructuring under court supervision during a bankruptcy but this has none of the stigma of a bankruptcy nor does it have the outsiders looking over your shoulder that can make such a restructuring so difficult.
Dell will be free to chart its course though it must be said that its partners in this endeavor can’t be expected to be silent. But neither can they be expected to be naïve about what’s ahead, they presumably are smart people who went into this with open eyes.
So, what are they doing and why? Well, PC and laptop sales have peaked. The industry will sell a lot of boxes this year, but the growth is out of the market and it is becoming a zero-sum situation of replacements and takeaways. In Q4 2012 the majors, including Dell, shipped a combined 90,372,942 units — 4.9% less than in 2011’s Q4 according to Gartner. At the same time, smaller devices are ramping like crazy — headline: “Gartner: PC sales continue to slide as tablets eat their lunch” and as the PC makers sneeze, Intel, the maker of the CPU chip, catches cold — headline — “Intel profit sinks 27% on dreadful PC sales”. So the play now is to compete in tablets and smart phones and try to make it up on volume and software. But the prices are lower for smaller devices and so are the profits.
When Dell was a public entity, no Wall Streeters wanted to know about declining sales of big boxes or rising sales, but lower margins, of devices. But that’s the reality. As a private company Dell will be freer to attack the device market and to more aggressively go after the market for cloud computing where it can remake itself into a twenty-first century tech company.
Dell already has substantial assets in non-hardware related areas. For example, it owns Boomi, a cloud integration product that enables Dell’s service group to bring together multiple cloud systems into a single solution for its mid-range customers. It partners with Salesforce.com in delivering Sales Cloud and Service Cloud solutions using Boomi and third party apps. It ties the deals together with financing from Dell Finance. So the company has some significant assets it can use to innovate new products and I expect we will see a lot of that.
Lastly, as I look at this I see a similar story in Sun Microsystems which Oracle bought a couple of years ago when the once high-flying computer maker began to stumble. In concert with Oracle’s database gurus, the hardware division has rolled out some impressive next generation devices that will certainly drive cloud computing to new heights. But there’s no reason to concede that market to Oracle/Sun and Dell might have something to say about high performance cloud computing infrastructure as it begins to innovate anew as a private company.
Dell’s announcement this morning is studded with opportunity and peril. But the fact that it has taken control of its destiny and that founder Michael Dell is still at the helm means that the company should now attempt to kick its innovation into high gear. The outcome is uncertain but if successful it may present a new model for what aging and once successful companies can do when the market shifts beneath their feet. This will be fun to watch.
