Wall St. Leaves Money on Table for Subscription Companies
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.
SuccessFactors and Jambok Collaborate
On Monday, SuccessFactors, Inc. announced a definitive agreement to acquire Jambok, a social learning company. You could bypass this announcement as just more dealing by software companies (which it is) but it also suggests an interesting combination that will prove to be in synch with the times.
As a social learning company, Jambok leverages social media like YouTube and Facebook and its own technologies that enable users to create mobile video and to share it along with other file types across the enterprise. Jambok is an internal collaboration tool and the combination of Jambok with SuccessFactors’ business execution cloud solution should be attractive. It will enable users to capture ideas on video and share them with peers throughout an organization.
The result will be a social learning environment that will help break down silos and make an organization more nimble at information sharing. We live in an information age and this is important though it’s easy to overlook because so many stories are about information sharing.
Lately we’ve heard this sort of thing on a regular basis, especially from collaboration vendors eager to build and tap into the enterprise collaboration market but we are still early in the effort to capture internal information and share it organizationally.
Now, collaboration using Facebook or an alternative will only take you so far. Although collaboration tools and Facebook also offer the ability to share files, the SuccessFactors and Jambok mashup suggests something bigger — the ability to not only distribute but to capture video.
As you know, I expect video content to become a big part of business in the next few years. But when I first started talking about video it was as a one-way tool for outputting information. This announcement suggests something more bi-directional. However, never forget that for video to be successful at communicating big ideas, it has to be done well — a nebulous concept but you know it when you see it. The same is true for collaboration tools. We’ll wait and see on those fronts.
My favorite way to look at collaboration products is as intellectual property generators. Every time an employee contributes to a stream, he or she is saying (potentially) here’s something we can use to generate revenue. Before collaboration many of the best ideas stayed in people’s minds simply because there was no other outlet. But the act of posting exposes ideas to others and makes them real and converts the potential of an idea into the kinetic of information in action.
In aggregate, social IP generated this way is as important as the designs, patents, knowhow, trade secrets etc. that companies already define as their IP. It’s simply another source. But now with the addition of video capture and sharing we have the potential for something bigger. A video is not simply a way to convey what something is, but how to do something and communicating the how of an idea through a company’s social channel is the potentially big idea.
We should also note that the almost casual IP capture is nearly frictionless, there is just about no cost associated with either capture or dissemination. SuccessFactors thinks that this kind of sharing will likely be a form of training for many companies going forward and the combined company is betting on it. In the press release for this announcement, SuccessFactors noted that the market for employee training is worth $100 billion annually in the U.S. alone. This could result in some amount of disintermediation for trainers and training software but not in a direct sense; I doubt that short employee videos will rival professional training directly — at least immediately.
What’s more likely to me is that this kind of guerilla idea sharing might provide a more reliable stream of information that, over time, may make some forms of training less necessary. I guess you could look at this as drip learning. Rather than a single big training session employees would learn directly from each other in smaller and more digestible increments.
Also, in an organization with multiple locations officially sanctioned guerilla information sharing may make travel a bit less necessary as internal groups find creative ways to share what they know. Less travel with fuel prices rising is a very good thing for the budget.
What’s next? Well, what about involving the customer? If making simple video is easy it would behoove vendors to find ways to enable customers to make videos of their questions, problems, needs and concerns and then share them — internally. Customers already do this and YouTube is full of clips like the regrettable (for United Airlines) “United Breaks Guitars”. Bringing some of this creative energy in house might be a good thing for helping lower your public negatives, if nothing else.
In customers’ hands this kind of technology could add significantly to a customer service knowledgebase and the output might find its way to YouTube, Vimeo or one of the other video sharing hubs. Did you know that YouTube is the second biggest search engine these days? When people want to know something they increasingly turn to YouTube to find a video. I think that’s where all this is going.
