Racing for The Cliff -- Salesforce.com and The Looming Competitive Market

Salesforce.com just had a hot quarter, if you believe many analysts and at least one of my fellow bloggers. But hidden beneath the patina of biggest quarter, most customers, and largest on demand deal ever, was the one little glitch that not enough people seem to pay attention to: the cost of competition. 

Sales were up, but profits were down, and chairman Benioff acknowledged that most of that difference was due to the cost of hiring new sales staff. That's a subtle way of saying that more pressure is coming for competitive sales and competitive pricing, and Benioff, per his usual modus operandi, plans to spend his way out of the problem. 

Good luck. Multiple fronts are aligning against Salesforce.com in 2007, and, considering the, shall we say, agressive way in which Benioff has marketed his company against everyone else, it's no surprise that every conversation I have with potential competitors involves a "we're gonna get Marc" component. It's one thing if you've just pissed off a few of the multi-billion dollar behemoths in the software industry, it's another when you've basically trash-talked them all: Oracle, SAP, and Microsoft have all felt the brunt of the mighty Marc, and all three are not-very-secretly itching for a fight. 

Which they're about to engage. This will be the year of on-demand for the rest of the market, and it's going to take away the only real competitive advantages that Salesforce.com has had -- serious pioneer status and a lot of high-end, and high-priced hype. The other potential competitive advantages -- deep integration to the back office, and a sizable and legitimate ecosystem/infrastructure play -- are still too nascent to give Marc the cover he needs as the big guns start to fire. To date Salesforce.com has not established that the bulk of its customers want deep integration, too many of them are just implementing an on demand contact management system. And AppExchange just hasn't reached anything near the critical mass -- I'm not sure it's even really left the launch pad yet -- to give Salesforce the next big revenue play it needs to stay ahead of the forces arraying against it.

Perhaps most importantly, the AppExchange model has a deep, and irremedial flaw in it: Salesforce.com desperately needs to expand the core of its functionality away from CRM in order to avoid being the next Siebel -- which was ironically caught in a simliar problem of too much focus on CRM and not enough success in ecosystem and back-office integration (and on-demand -- at least Marc has gotten that part right.) The problem is that AppExchange expands the core through partners, instead of expanding the core inside Salesforce.com itself. That means that growth will have to come from a third-party network, instead of inside the company. I don't think becoming a software distributor will let Salesforce.com survive the onslaught of full-service, suite-based competitors for long.

So, as the forces of the market align over the next two quarters, watch how easy it will be for Salesforce.com to keep its customer acquisition numbers growing. Of course, don't watch too closely -- the company also announced that it will now report them only twice a year, instead of every quarter. This is supposed to stabilize the stock and keep volatility to a minimum -- if the numbers start to go south, Salesforce won't see the hit for an entire six months. Not a bad way to stem the tide before it starts out to sea. Which is what I think will be the picture as 2007 comes to a close: a receding market dominance as bigger and more able competitors start paying back Marc for his kind words of the last several years. It's never really been the end of software -- could it be, however, the beginning of the end of Salesforce.com?