Salesforce’s triangulation strategy
Announcements may be playing the role usually reserved for M&A activity in the CRM world right now. Generally a company purchases another when it wants to capture the benefits of another business’ R&D or established market base. But at the moment it appears that the desirable partners are too big to swallow and the result is more partnering between the big guys and the really big guys. Salesforce has been pursuing this strategy for most of the last year with Amazon, Google, and IBM. This says a lot about the state of the marketplace on several fronts.
First Salesforce and Amazon announced a partnership in which Amazon and its AWS infrastructure service would become Salesforce’s strategic infrastructure partner when Salesforce absolutely had to deploy a data center in a foreign land.
This makes perfect sense. As I have often said, it makes no business sense to build (in this case a datacenter) when you can purchase the solution at a reasonable price on the open market. As a competitive issue, Salesforce’s choice of Amazon is a direct challenge to Oracle because it offers a safe haven enabling Salesforce to diversify its partner portfolio while keeping Oracle and Microsoft at arms length. Given the rumors of salesforce being acquired by a big tech firm over the last few years, this seems a good way to help preserve its independence.
Much the same can be said of the alliance with Google. This is primarily a play for more SMB business and it’s a good one. Salesforce and Google announced their partnership around G Suite, Google’s free office apps. A while ago Salesforce and Microsoft created an integration with Outlook effectively making Outlook another UI for Salesforce. This parallels Microsoft’s own integration with its CRM and Outlook. So this partly neutralizes Outlook as a differentiator in any CRM decision.
Google integration gives Salesforce access to all those G Suite users who need CRM, especially in the SMB space. It also gives Salesforce another way to compete against Microsoft CRM. But, of course, they didn’t stop there. Salesforce also now has an integration with Google Hangouts too, an effective counter to Skype which is now owned by Microsoft.
Away from the SMB space in the Enterprise market Salesforce also forged a relationship with Google Analytics. Not that they need more analytics but the two partners have developed plausible processes that use Google Analytics to surface macro trends and Salesforce Einstein to go the last mile, a model that works with IBM too.
Last week Salesforce and IBM got closer with Salesforce naming IBM a preferred cloud services provider and IBM calling Salesforce its preferred customer engagement platform for sales and service. The agreement leverages IBM’s Watson analytics and its cloud as well as Salesforce Quip (more office software) and Service Cloud Einstein.
In all of this we can see that Salesforce is working to maintain its independence by linking with anything that can enhance its CRM and make it less desirable as an acquisition target. But of greater importance, it’s these relationships and others like them that will help Salesforce reach its goal of $20 billion in revenues in a few years. When your revenue needs are this big, you need to leverage the market penetration of similar companies. And while all of the companies named are bigger than Salesforce, they each need the bragging rights of working with the most popular CRM in the world.
Another question in all this is what’s happening with M&A activity, which seems to lull while partnerships blossom. The merger market is notorious for running hot and cold and right now it seems tepid, like there’s more opportunity for large companies like Salesforce crafting relationships with bigger partners. It’s not clear if this means there are few attractive acquisitions out there or simply that the times require different approaches to the market.
More than once in talks since Dreamforce in November Marc Benioff has used the logic, my enemy’s enemy is my friend. This logic is being played out in the partnerships his company is spawning. On one level it’s just smart business but in the back of my mind, I see the information utility of the 21st century forming. It will resemble the current electric utility in that no single provider will dominate and a high degree of interoperability will be needed. Standards like 120 volt and 60 Hertz electricity are what give us the impression of a continental electric utility grid but in reality, the grid is made up of smaller vendors adhering to the standards.
Likewise there’s no single vendor capable of dominating the information utility market and standards will be vital. That’s why it’s so important when a company like Salesforce announces partnerships. These incremental agreements have more significance that the press releases might allude to. They are steps on the road to something bigger.
Infrastructure as an anchor
Oracle’s race to the cloud has offered multiple successes to its investors and some disappointment as well. No transition of this magnitude can be expected to run like clockwork but the difference between revenues for Oracle’s SaaS apps for last quarter, $1.1 billion, and those for its cloud infrastructure, IaaS, at $396 million, should at least get you thinking.
There’s a good explanation for this and it’s surprising that the company hasn’t done more to provide guidance to its financial analysts but then again, the purpose of reporting your finances is just that. There’s no room for anything that can look like an excuse. That’s too bad because it can lead people to wrong conclusions.
I spent a day at Oracle last week receiving a briefing on the company’s roadmap for the year ahead. While some of the information was presented under nondisclosure, I can say that the briefing ran the gamut and went into areas that I am not expert at such as serverless apps, bare metal servers, and the new autonomous database. But I am coming up to speed as fast as I can.
The company’s cloud architecture and IaaS offering gave me one surprise. Oracle intends to roll out 13 distinct regions for IaaS connected by a very high-speed backbone. Each region is highly modularized with triple redundancy and can easily scale as demand increases. All of this is very important because, I believe, this is not simply about cloud computing but about another disruptive innovation we will all face in the next few years.
The disruption is the formation of an information utility and it’s all but certain that no single corporate entity will own all of it. As big as Oracle’s plans are, Salesforce has similar ideas and while we’re at it so do Microsoft, IBM, SAP, Amazon, and a number of hosting services too numerous to mention. Yes, there will be consolidation and those too numerous vendors will likely be scooped up first.
But back to Oracle—$396 million is a lot of money but small change compared to its SaaS number and small compared with the company’s aspirations. The logical conclusion that many finance people drew from that number is that Oracle has a “problem” or that it’s not executing well in PaaS and IaaS, but really? Not exactly.
According to Oracle President of Product Development, Thomas Kurian, who led off the analyst briefing, only 3 of the 13 regions have been deployed so far. More will hit their markets this year but the rollout takes time and we’ll still be talking about it next year.
Not having the regions up and running means that in some strategic places, the company doesn’t have IaaS to sell. So the $396 million is a look into a still very much expanding world. Just for fun you could say that 3 of 13 is just under a quarter of the deployment. If the other regions were running as well as the three in place the IaaS and PaaS numbers might easily be four times the reported revenue number. It’s unclear if that’s good or not since we don’t know a lot such as capacity and utilization of the existing regions, but still…
So for now, the revenue picture remains lumpy but now we have more explanation and color for the results. Hopefully this also gives financial analysts something to consider as they try to figure out what the numbers mean to investors. The rest of the market seems to expect a bright future for Oracle as its stock continues to do well despite the lumpy earnings.
There’s also discussion about renewed competition in the database market circulating after a story in The Information suggested that companies like Amazon and Salesforce were building competitive database products and would depart Oracle in the near future. I don’t agree. If for nothing else, building a database is a big effort and one that detracts mightily from a company’s primary business interests. It is dilutive of effort and cannibalistic of resources. For these reasons it should only be taken on as a last resort. That’s the way any business should look at any effort to self-source rather than go to the marketplace for needed resources.
On top of that I spoke with Parker Harris CTO and co-founder of Salesforce recently and when asked about the story he said, “We have a good relationship with Oracle and we use a ton of it. We are not getting rid of the Oracle database. We are working on technologies that add capabilities around the edges, like sandboxes. We will have SQL Server and Oracle for a long time.”
No surprises there. It’s been true for a long time that in these big markets sometimes we compete and sometimes we cooperate. In the era of the Information Utility I expect a lot more co-opetition.
A Salesforce Bid Is Possible (but smart?)
The latest Bloomberg reporting on the possible acquisition of Salesforce has more meat on the bones but still no evidence beyond reports of conversations. But it is completely within the realm of possibility that Salesforce could be bought. The meat on the bones comes from some anonymous sources with first hand knowledge of discussions that Salesforce might have had over the last month or two with a variety of mostly unnamed suitors.
Microsoft has emerged as the possible suitor and the story seems credible. But keep in mind there does not appear to be an offer on the table. Add to this the inevitable logic that markets consolidate and a mature market has room for two contenders. If Microsoft were to buy Salesforce it would set up the dichotomy or duopoly of Oracle vs. Microsoft/Salesforce in the CRM market.
It wouldn’t happen immediately but other full suite CRM vendors like Sugar CRM and SAP could possibly wither on the vine. IBM might buy Sugar to make a go at competing with the duopoly and SAP would still be a formidable ERP player though it has been late to the cloud and one wonders if it could keep up.
At the same time, ancillary vendors like Marketo would either have to evaluate being acquired or being frozen out since both Oracle and Salesforce have their own marketing capabilities. That’s just the beginning. In a two-brand market—think Coke and Pepsi, or think about DB2 and Oracle—the customer relationship becomes more retail oriented.
The danger I see, and I have written about this before, is that in a two horse race, innovation takes a back seat. Each vendor can figure out its unique differentiators and tend to its own flock, staying away from expensive competitive wars. This is the dangerous part of the scenario since Salesforce, far more than any other vendor in the market has been the innovative engine of the industry. In recent years, Salesforce has kept up a regular cadence of innovating a disruption and the market has taken the next two years playing catch up only to find that Salesforce’s cadence has disrupted things again. There is no telling if this cadence could be kept up if Salesforce became part of Microsoft or any other vendor for that matter.
You can heap all the accolades you want on Satya Nadella, CEO of Microsoft, and he deserves some for his insistence on making Microsoft more relevant across a broad swath of his company’s product lines. But making Salesforce a part of Microsoft—or any other large vendor—would insert Salesforce into a competitive landscape for resources already carved out by innovative projects inside Microsoft. Also, the Senior team at Salesforce including co-founders Marc Benioff (CEO) and Parker Harris (CTO) could not be expected to stay on for very long and it is their innovative genius that has produced today’s Salesforce, a company full of Blue Ocean thinking and projects reminiscent of Microsoft in the 1990’s.
For that reason, I think Salesforce, a roughly $5 billion company, barely able to register for the Fortune 500, is too big to be acquired. Taking Salesforce out would have a deleterious effect on innovation, and thus competition, in the industry. It risks creating a duopoly. Perhaps one of the reasons for the rumors of Salesforce retaining bankers for advice about its future is for the specialized legal expertise that might be needed if the Department of Justice or even the European Union decided to weigh in on anti-trust grounds.
There is a lot to consider in all this. It’s not just about two companies considering a merger and trying to set a price or raise the cash. It’s about the future of the whole industry.
After about 1930 the only cars imported to the U.S. were luxury models and sports cars, the country’s manufacturing prowess along with the devastation of the Second World War provided a more or less protected market in North America. During that time automotive innovation barely budged. Many of the innovations we think of as commonplace today came from outside vendors trying to innovate around U.S. patents. Things like the dual overhead cam engine, disk brakes, and front wheel drive were forced on the Big Three automakers from Japanese manufacturers in the 1980’s.
Consolidating the CRM market into a duopoly now would have a similar effect that could stifle innovation and launch a status quo era in software. But we’re just getting started here and that’s why a deal to acquire Salesforce doesn’t make sense to me.
Duped By Linear Thinking
I feel like such a dope.
About once a year some rumor circulates about Salesforce being bought and speculation runs rampant for a few days about who the suitor is and what the likely scenario will be in the march to the altar. This week saw the annual festival. I never thought it was a great idea but there seemed to be a lot of smoking guns.
Bloomberg thought that the company was retaining bankers and all of a sudden we all just knew it could mean only one thing. But there are lots of reasons that a public company would do something like this and dealing with a potential takeover attempt is only one of them. A few weeks from now we might all be exposed for the linear thinking chumps that we’ve demonstrated we are. I have very little data (just my old friend logic) for what follows so it might even be true.
Another possible reason to retain bankers could be if a company is making an acquisition, which would be news of a different sort and still worth pursuing. But what would prompt this? After all, don’t companies buy each other all the time without engaging high priced bankers? Sure they do and Salesforce, by virtue of its high-flying stock could easily do deals for little more than a swap. So why engage the masters of the universe?
Well, how about an international deal, one in which a foreign company is bought in part or completely by Salesforce? In such a situation you’d want to ensure you crossed all the T’s and dotted the I’s in the proper format following all relevant laws and customs. We’re now getting warm.
Over the winter Salesforce and Sage made a joint announcement that Sage would begin migrating some of its accounting software to the Salesforce1 Platform. There was a news item but it didn’t get much play. Later, during Vice Chairman, Keith Block’s Boston Salesforce World Tour Event, he mentioned it casually and I wrote about it wondering how I could have missed it. But it wasn’t big news.
Then yesterday, after the markets closed by the way, I received a save the date email from Sage announcing a fireside chat press conference between Sage CEO Stephen Kelly and Salesforce’s Marc Benioff. It reads in part:
The world’s #1 small business accounting solutions company and the world’s #1 CRM solution and cloud platform for business are coming together for a fireside chat.
Please mark your calendar for May 13 at 12 p.m. PDT to listen in on a conversation between Sage CEO Stephen Kelly and Salesforce CEO and Chairman Marc Benioff.
Audiocast details to follow soon.
Just a conversation between two CEOs of different companies happening in plain sight, nothing special going on there! I bet they’ll have trouble getting an audience!
So, the logical deduction I am now making about Salesforce is not that they will buy Sage, frankly I don’t think it would be such a great idea. But I do believe that Salesforce will likely take a minority position in the company via some form of preferred stock that Sage would issue for the occasion. The purchase would give Sage some incentive (and cash) to continue porting its accounting products to the Salesforce1 Platform and it would give Salesforce greater access to some very specialized markets in construction and real estate for openers.
Is this the answer to all the speculation from earlier this week? I don’t know. But it seems more logical than the annual frenzy of buying Salesforce, which I wrote yesterday is far from likely.
When I queried Salesforce representatives about the possible takeover they had no comment as you’d expect of a well-managed public company. But I imagine the C-suite at One Market Street in San Francisco had few laughs at our expense this week.
To know for sure we’ll have to wait till May 13 and the fireside chat when all will be revealed. Or not.
See you there.
Why No One Is Going to Buy Salesforce
After a short and not terribly informative piece on Bloomberg saying that Salesforce had engaged with bankers to potentially evaluate takeover offers, the usual activities ensued. The company’s stock went for a small ride and pundits and prognosticators all began speculating about whom a logical suitor could be and even what the company would be worth on the block. This was not the first time.
I was one of the speculators placing a metaphorical bet on IBM as the suitor followed by Oracle, HP, and Microsoft in no order. They could all use the shine that acquiring this gem would provide. But let me be clear—I don’t believe Salesforce would be acquired in its current state.
The reason is simple—even if a buyer paid a premium on the company’s $50 billion market capitalization it would not be enough because Salesforce’s greatest asset is its future and you can’t put an accurate price on that. So far in its 15 plus year history the company has innovated and helped create markets in cloud computing, social media, CRM, modern platforms, wearable devices, web and mobile computing, and more. Salesforce might go by the ticker symbol CRM but its business is front office business innovation.
All of this is exactly why Salesforce is such an attractive target and precisely why no one will buy them. Large companies, which are the only ones that can afford to be in the bidding, are not hotbeds of innovation. They hang back waiting for markets to prove themselves before swooping in to offer products and services for new niches. Cloud computing is a great example. There’s a famous YouTube video of Larry Ellison at the Churchill Club ridiculing cloud computing as a fad and so much hot air. This was before Larry got religion (and products). Less flamboyant stories can be told of IBM, HP, Microsoft, and SAP—they all waited to enter the market watching Salesforce to ensure it was safe.
Now, of course, they all talk about cloud computing as if they invented it or at least as if they perfected it. Owning Salesforce would give one of their stories great credibility and then you could see a multiplier effect going out to the other innovative areas the company is involved in. But it could also signal the end of a good thing.
I don’t see how you can bring Salesforce into one of those shops and expect it to thrive; the cultures are too different. Salesforce is laid back and takes prudent risks entering new markets as they are forming so as to acquire a first mover advantage. The others? Not so much.
Aside from Apple, I don’t see other companies innovating the way Salesforce does to invent the future. That’s why Salesforce (and Apple) have such bright futures and why buying either company would be detrimental to the tech sector and the economy in general. It would slow or even curtail innovation.
Some might say that if Salesforce ceased to be the innovation engine that it is, that some other emerging companies would have the chance to take its place, that the free market would do its thing and all would be well. I agree with that but hasten to add that it has taken Salesforce 15 years to get to this point and other companies might be able to evolve quicker to fit into one or more of Salesforce’s niches, but it would take time and there’s no guarantee that those other companies would follow the same trajectory.
To make an analogy, if Thomas Edison got kicked in the head by a mule before he invented the incandescent lamp and the modern power grid, we’d likely still have them today along with sound recording and movies and many other things. But it’s hard to see that these inventions would have been as early and if that’s true, what would the last century have been like?
This is all speculation but so is trying to figure out who might be able to afford to buy the company. I’d be surprised if enough shareholders would be prepared to sell and keep in mind that insiders still own a big block. They’re also rich already so it’s hard to see the benefit of selling now rather than letting things evolve as Salesforce’s other endeavors begin to show profits.