How is AppExchange really doing?

After last month's AppExchange announcements, I thought it might be a good moment to try and take stock of Salesforce.com's application platform and how well or otherwise it's been doing [UPDATED May 11th: Salesforce.com has challenged several key assertions in this article. I've added amendments below, based on their comments].

Some observers, such as ZDNet blogger Joshua Greenbaum, suspect that AppExchange is all hype and no revenue. At the opposite end of the credulity scale, the recent announcement of AppExchange Platform Edition had Red Herring's Tom Taulli drawing comparisons to Microsoft's Windows. [Disclosure: WebEx, whose Connect platform aims to compete with AppExchange, is a paying client (see disclosure page). And Salesforce.com never sends me any chocolate].

There's no doubt that Platform Edition marks a new departure for AppExchange.Trouble is, Salesforce has played fast and loose with the numbers It breaks the link to Salesforce.com's core CRM application, making it possible for the first time to sign up as a customer for AppExchange applications without the extra cost of licensing the CRM component. An interesting and no doubt deliberate side-effect of the way this is priced is that it creates an economic incentive to license multiple AppExchange applications, because you pay the same $50 fee whether you run one or ten applications; or $100 if you want to run any number from eleven upwards.

This has lowered the bar for customers to sign up. But price is just one among many factors in achieving market success, especially when it comes to establishing a platform that an ecosystem of third parties can rally around. Partners will only come on board if they see a lot of customer traction on the platform. But customers will only buy into the platform if it offers them a significantly better value proposition than they can find elsewhere — which means they want to see lots of strong partners on board before they'll buy into it. Catch-22 for the vendor.

Salesforce.com's strategy for getting past this conundrum has been to get partners excited about the opportunity to market their wares to its customer base. This has certainly succeeded in getting partners to sign up in droves, which then creates an apparently rich and varied ecosystem that Salesforce.com can then market to its customers. But if customers don't sign up, partners will start to drift off and it'll be back to Catch-22 again. Keeping the momentum going at this point is critical to the long-term success of Salesforce.com's platform ambitions.

Trouble is, Salesforce has played somewhat fast-and-loose with the numbers it has used to tempt partners to sign up for AppExchange. It always quotes the headline figure of its 30,000-strong business customer base when it talks about the market AppExchange partners can address. That's true if you think of AppExchange simply as an online directory where Salesforce.com customers are encouraged to browse for products that they can use alongside the core application. But a directory is just an online catalog. It's not a platform.

The majority of Salesforce.com's paying customers are on the basic Team or Professional Editions, which crucially don't include the Apex web services API — an essential ingredient for really deep integration (Salesforce.com makes great play of the fact that more than half the transactions processed in its data centers are API calls, but most of those come from Outlook and Office integration running on user machines, which is available to all users — even non-paying users — rather than from server-side integrations with third-party or legacy applications). [Correction: Client calls as a proportion of API calls have shrunk to less than 10% of the total; in April the figure was 8%. Not exactly 'most'. I got that dead wrong.]

The Team and Professional Editions support simple mashups at the user interface layer, but not the deep API-driven integration* — along with shared custom data objects and other advanced development features — that leads analysts to hail AppExchange as a sophisticated platform for building advanced composite applications. Only* the more expensive Enterprise and Unlimited Editions support this level of integration. *[Correction: Certified AppExchange partners that build applications using the API can sell them to Professional and Team Edition customers. Other more advanced features aren't available to users of those editions.]

Salesforce.com doesn't break out customer or user numbers by editions, but as one partner put it to me privately, "The deeper we went in the integration, the more we realized we were talking to a smaller and smaller audience."

Happily, there are AppExchange success stories out there:

• VerticalResponse, an email marketing vendor, has recruited 1400 Salesforce.com customers, amounting to one-tenth of its entire customer base. Unsurprisingly, Salesforce.com is holding the company as a shining example and one of its most successful AppExchange partners.
• Clicktools, a customer feedback management vendor based in Bournemouth, UK, has used AppExchange to help raise its profile and expand into the US and Asia Pacific markets.
• A small US demand generation vendor has privately reported that "the vast majority of its business" comes via AppExchange.

But one thing these three success stories have in common is that none of them depend on they're doing very limited API integration to link their functionality into AppExchange. They're just mostly doing a simple mashup at the user interface level. The main more significant role AppExchange fulfils for them is as a showcase for what they offer. Most Salesforce.com users will find a use for add-ons like these that extend the core prospect management capabilities of its sales automation software.

Talk to partners who've invested in building more sophisticated integrations and you'll often hear much darker murmurings of discontent. The customer base they can market to is much narrower and the sales cycle to this more demanding enterprise class of customer is more extended. What's more, they don't see any evidence that Salesforce.com's own salesforce has any idea how to market and sell AppExchange-based solutions to those customers.

Their mood has not been helped by the proposal to charge a 10% commission for referrals under its AppStore program, slated to go live later this year. These vendors have paid to get certified for AppExchange, they've plowed investment into API-level integration, they're getting next-to-no help from the vendor's internal sales and marketing teams, they feel obliged and leant on to exhibit at Dreamforce (another big cost) and now they'll have to pay a 10% referral fee for anyone who signs up via AppStore — even if the customer is a prospect they've gone out and found for themselves and worked hard to close the sale. [Salesforce.com disputes this too; I'm waiting on details and will post again when I've heard back]. 

None of this bodes well for Salesforce.com's platform ambitions. These are the partners who will help it penetrate the serious enterprise marketplace. However much AppExchange proves its worth as an online shopping mall for on-demand applications, it won't prove its platform credentials unless it can build similar momentum amongst partners that are integrating at an API level. Currently, I'm hearing far more in the way of disgruntlement than enthusiasm from those partners.