Beagle Research Group

The Longest Tail

I spoke with a group of investors last week about the importance of the emerging field of platform technology.  They were interested in investing in a company that was looking for additional late round funding and they wanted to know a few things.  What is the market for this new technology?  Who will buy it?  Isn’t the market already saturated with applications and application technology?

Those were fair questions, especially coming from people who managed other people’s money.  One of the most difficult things to do in a situation like this is to make an estimate of the future because to do the job right you must ignore what’s out there already and imagine new markets, new niches, and new opportunities.

It reminded me of the introduction of low calorie beer in the 1970’s.  There is a school of thought that says there is no market for a new product until the product exists, until someone declares its existence.  I am told that market studies in that era indicated that about one in ten people would be interested in a beer that tasted about the same but delivered fewer empty calories to the mid-section. 

One in ten is not a big number despite the size of the beer market, because you have to find that ten percent and make product available to them at the point of purchase.   It was a classic long tail dilemma — a big-ish market underserved because it might be too costly to go after.  Fortunately, for the beer market, low calorie beer got launched and it was a big success, more people wanted the new beer than the market estimates forecast. 

Nevertheless, rather than growing the beer market in absolute terms, the introduction merely fragmented it — where a beer maker once sold one kind of beer, it now had to make, package and market two.  If you were a brewer you were faced with a Hobson’s choice of doing nothing and losing market share or introducing a new product through product line extension pretty much to tread water.  It would be decades before the gourmet beer craze rejuvenated the beer industry.

I thought I could detect some of that thinking behind the questions the VCs were asking me.  Is platform technology going to bring more customers into the market or will it simply compete with the established producers?  I think the case is with the former argument though there will, inevitably, be competition with existing products.  The market for enterprise software is driven by economics and it is more driven by economics today than ever before — and at least part of the drive is simply the result of the success of on demand solutions.

On demand software showed business enterprises that their critical systems could be delivered at prices that are orders of magnitude lower than conventional solutions.  Some of that is simply a reflection of a flat earth, globalized landscape but it’s mostly about economies of scale.  The secret to the success of on demand platform technology will be in opening up new software categories to commercial exploitation.  Those categories involve many of the smaller applications that companies routinely build for themselves because, like the ten percent of the beer drinking population, the market is too fragmented — that’s a classic long tail situation.

However, if those long tail applications were all that awaited exploitation by platforms, investors might justifiably be apprehensive about investing.  Fortunately for investors and platform providers, there are many more niches that have historically been underserved or completely unserved where economics can drive major adoption — a classic opportunity for disruptive innovation.  Three areas to consider are education, law, and healthcare.

The thing that unites these three areas is paper.  Far too many of the business processes in these segments are still paper based because there has never been a critical mass of money to drive development of applications for these fragmented markets.  Legal filings, medical records, and student activities of many types are paper bound because there is no economically feasible software based solution to support their business processes. 

In my experience, when counties need to expand storage for legal filings even as basic as a property deed, they build a building; ditto for hospitals and medical records.  The cost, overhead, and delay involved in real estate transactions or healthcare can be directly traced (in part) to human labor and records management and, more importantly, to moving paper based information into electronic systems for wide-scale use.

There are about 5,000 hospitals in the United States each of which uses all sorts of software from operating room scheduling to clinical laboratory systems to systems that manage patients on a ward.  You might think that’s a pretty big market but you also need to consider the number of software companies trying to make a living there. 

SAP has a bit less than 20,000 customers and I don’t know how many seats deployed; before Siebel was bought by Oracle they said they had about 4,000 customers and four million seats deployed; Salesforce.com has more than 350,000 seats and 18,000 companies as customers.  Still think healthcare software is a big market?  Healthcare is a balkanized mess of competing vendors whose products must integrate across numerous departmental and technical boundaries.  If this isn’t a long tail market, I don’t know what is.

At the end of the day doctors and nurses are still saddled with seemingly endless reams of paper based charts and reports; their time is unnecessarily taken up with managing paper, and the computerized, globally accessible electronic medical record is a pipe dream.  The cost of managing paper based medical processes is knowable and can’t be small.  If I was an investor wondering where platform technology was going, I wouldn’t worry about finding a market.  There are still a lot of business processes that need disruption.

Living by the sword

In its short life, Salesforce.com has garnered more than its fair share of publicity thanks in no small measure to the activities of its founder, CEO, and chairman, Marc Benioff. Benioff may be the 21st century high technology answer to P.T. Barnum, a colorful figure in an industry that has more shades of grey personalities than Micky-D's has ways of stacking burgers, buns, and lettuce.

Who can forget Benioff's marketing genius starting with innovations like the "no software" logo modeled on that of the movie "Ghost Busters"? And who can forget the direct challenge to Siebel Systems and the rest of the conventional software establishment with ads featuring a 9-year old writing at the blackboard a hundred times, "I will not let Siebel take my lunch money." At the time, taking on the market leader was a breathtaking David and Goliath clash.

Each challenge was backed up with product and rode a wave of discontent that fueled belief in the core message. Now Siebel is part of Oracle along with Peoplesoft and the establishment is regrouping. Salesforce.com is now challenging Microsoft, Oracle, and even IBM with its AppExchange which promises to radically alter the way people make enterprise software just as on demand computing first altered the way people use and pay for it.

Drafting behind the leader

For years the rest of the on demand market has been drafting behind Salesforce.com and Benioff's marketing brilliance and Salesforce.com is now seen in some quarters as less David and more Goliath. The drafting is even taking a nasty turn. Salesnet, an on demand SFA company located in Boston, has been running a marketing campaign for several months that takes a page out of the Benioff play book. Using the same international symbol of a red circle with a slash through it to indicate "no" Salesnet started the "No Bull" campaign to position itself as the alternative to Salesforce.com.

Prior to the campaign Salesnet had been in the doldrums along with anyone else who tried to gain market share against the Salesforce.com marketing machine, but the company now says it has traction. We don't have to take Salesnet's word for it, though, because it appears that Salesforce.com is getting aroused by the negative publicity that "No Bull" is causing.

A few weeks ago, Salesnet CEO, Jonathan Tang, tells me the company received a phone call from Salesforce.com's legal eagles informing them that the campaign was inaccurate and asking that they stop it. The campaign was based on separate data published in 2005 by Nucleus Research and Deutsche Bank, neither of which sang all the praises of Salesforce.com.

In the best tradition of American business, Tang consulted his attorneys who basically told him he was simply publicizing published material from third parties and that if it was inaccurate those parties were the true objects of Salesforce.com's objections.

Lawyer up

There are two things in life that I will never quite understand. I am cool with nuclear physics and pride myself that I can name all six quarks, I can converse about the particle and wave duality of light, and I can hold my own in literature, but I will always be stymied by the maneuverings of attorneys and people engaged in high finance.

The parties have now entered what I call a "light" litigation phase in which each has filed declarations and motions in separate suits in their local jurisdictions designed to draw first blood and to cause opposing counsel to schlep across the continent to argue about the merits of "No Bull". To the best of my understanding no one has been formally served yet, hence the "light" designation. I wonder if the Salesforce.com matter is about the facts of "No Bull" or simply a case alleging plagiarism.

I suppose there was no possibility of ignoring the challenge for Salesforce.com. The company is intimately aware of what happened to Siebel when that company decided to treat its challenger with contempt by ignoring it. Still, according a challenger the status and respect implied by a law suit carries its own risks.

Most competitors in the on demand SFA space take Salesforce.com to task in one way or another, usually over pricing or features - two useless undertakings. Salesforce.com has about half the market share of the on demand market. What will happen when the minions dividing up the other half of the pie discover that the way to fame and possible riches (or at least free publicity) lays in getting the big guy to mix it up with them?

We looked on in wonder as Salesforce.com attacked Siebel and the latter company did not respond. Siebel was ultimately a victim of a poor economy and impatient investors, the Salesforce.com ads couldn't have been a lot of fun to look at but in perspective they were only tangential to the company's stagnation. I think Tom Siebel must have known that and factored it into his strategy to ignore the upstart.

So now perhaps we'll see what a more activist approach produces. Marketing messages are one thing and having product is another. I understand all that, but I still don't understand lawyers and MBAs.

Rebalancing the enterprise software market

I have been wracking my brain for an adequate metaphor to describe the situation that has developed in the CRM world and in enterprise software in general.

It started about two years ago when Larry Ellison of Oracle looked at the enterprise software market and decided that SAP could conquer the world unless it was checked. At the time, enterprise software had more players and with the exception of SAP it was characterized by many medium size companies each doing its own thing with the result that building support for end-to-end business processes typically involved an integration project or two. Those projects were expensive, systems integrators thrived, and project time and cost overruns were common. It was that situation that proved to be such fertile ground for the on demand message promoted first and loudest by Salesforce.com.

Others saw what Ellison saw but Peoplesoft moved first by acquiring JD Edwards. Oracle promptly put in a hostile bid for Peoplesoft and eventually won. Meanwhile, investors impatient with Siebel's progress caused Siebel to fall into Oracle's lap in a deal that just concluded.

The result has been that Larry Ellison has achieved his goal of consolidating the industry and building a company that has the critical mass to go toe-to-toe with SAP on the applications side, once all the integration and consolidation is finished, that is. That brings us up to last week. No sooner had Oracle closed on the Siebel deal than SAP announced its on demand CRM solution.

In a rare display of symmetry, SAP brought IBM to the party. At the SAP announcement in New York, Big Blue's representative stated the obvious, that SAP runs on DB2 (take that Oracle!) and that IBM Global Services has a ton of CRM and on demand expertise just waiting to be deployed to help SAP further its CRM ambitions. What was left out was that IBM's CRM on demand expertise comes largely from IBM's experience hosting and promoting Siebel OnDemand. Also, left out of the discussion, probably due to time constraints, is the fact that IBM has the largest CRM deployment on the planet -- about 60,000 Siebel users to be precise.

Siebel and SAP have been competitors for a long time and each has fought tooth and nail for supremacy in CRM contesting each other's market share numbers and the methods of counting. It happens every spring in what I call the 'Silly Season' where each company's analyst and public relations teams pull out all the stops to convince people at Gartner, IDC, Credit Suisse First Boston, and many other firms, that they generated the most CRM revenue or deployed the most seats in the prior year. The metrics used are not really clear, which is part of the fun of watching this coronation process.

Similar things can be said of Oracle and SAP where ERP is concerned, they are tough competitors though SAP has more solid bragging rights. So it made perfect sense last week when SAP aligned itself and its friend against a now consolidated common enemy.

They say that nature abhors a vacuum and when one seems on the verge of developing, equilibrium reactions take place to resettle the balance. Large,mature markets demand balance -- a clear choice of competitors who, though they might sell very similar products and services, offer them in different ways to gain advantage in select markets -- the go to market strategy. You can't be all things to all people which leaves some bases relatively uncovered and opens niches for the competition.

Part of what happened last week was simply the rebalancing of the enterprise software industry. SAP didn't care very much about the on demand market which was evident from its lack of entry until its arch rival got one of the premier solutions in the business. At that point SAP could no longer ignore this developing market, despite the fact that it preferred selling traditional products to IT departments of major corporations.

If you look at what SAP announced -- just SFA and only focused on the 100 to 200 sales rep market in enterprise and high end mid-market companies -- and if you gave the benefit of the doubt to all the future plans to deliver marketing and service as well as hybridized solutions you can see this is not much more than an effort to checkmate Oracle in the CRM market. SAP didn't even bother to develop a multi-tenant architecture, it's simply hosting code on blade servers, an approach much like Oracle's CRM facilities management offer. SAP made some veiled comments about Salesforce.com alleging that SAP's architecture is superior for preventing down time, but i see that largely as collateral damage.

As Oracle and SAP rebalance in the front office space the real winners will be companies like Salesforce.com, NetSuite, RightNow, and a large swath of emerging companies with complementary solutions that help the market grow at the margins. Like two sumo wrestlers in the middle of the ring, the titans will occupy each other while the minions run around unchecked to develop the on demand economy that could eventually out compete and replace the titans.

In thinking of all this, it finally struck me. The metaphor for the front office market today is the Mexican Standoff.

SAP On Demand Announcement -- Take 1

It was no surprise that IBM and SAP joined ranks to promote SAP's on demand CRM product a day after the Oracle-Siebel deal concluded. It's very clear that the consulting, database and applications powerhouses have a common interest in opposing the California based Axis-of-CRM represented by Oracle-Siebel, Salesforce.com, NetSuite and many others. So clearly the battle lines are being drawn in the sand and it will be interesting to see how the California crew responds.

At its announcement, which I watched on the Web, SAP representatives said two things that should resonate with everyone in the CRM and on demand industries. First, each speaker talked about listening to the customer or if that speaker was an SAP customer, being listened to. There's everything to like about that. It helps to ensure that good products are built and that service is appropriate.

Second, the company talked about CRM as a business process done with customers rather than as a thing that we do to customers. You have to like that too. Companies generally understand that we are in an era where revenue increases will be the result of better engagement with customers rather than grabbing market share. Treating CRM as a true business process will help any company to do better. 

But there were also things that made me just want to roll my eyes. Some of it sounded like the state of the union address -- there were a lot of warmed over ideas that sounded like motherhood and apple pie, but nevertheless made me wonder is that it?

For example, they trotted out ROI and TCO again. Those two financial metrics are vital to the success of almost any business endeavor, but they are by-products of success which is driven by the right product, at the right price, and right time.

More to the point, ROI and TCO were real hot button issues a few years ago when a small CRM system could cost millions of dollars including a consulting engagement that might have cost three or four times the software license. After six years of on demand and constant market pressure to drive down costs, the CRM industry already had a good grip on costs.

At a monthly entry price of $75 per user seat SAP is not even the low cost leader so it is not clear what's left for SAP to provide in that area.

The ROI and TCO pronouncements were emblematic of other market needs the company said it observed including fast implementation and ease of user adoption. Again there's no argument that these things are important, it's just that they aren't the same hot button issues they were six years ago.

Back then, sales representatives had little experience with SFA and the products were not as well thought out as they are now. At that point user adoption was a major issue and companies routinely had to choose between their CRM systems and their mutinous sales teams. Most chose the latter and complained to their CRM vendors with reason. We've been beating that horse to death ever since despite the significant advances in user interfaces, training, and continued development. Again its hard to see what a new offering offers that is different.

"Ontology recapitulates phylogeny," coined by the 19th century German philosopher Ernst Haeckel, comes to mind. The loose translation is that the development of the individual retraces the evolution of the type. If that's true, SAP is on track. It has introduced SFA and promises marketing and service modules to be delivered in upcoming waves, more or less recapitulating the evolution of the CRM suite. From that perspective it makes some sense that the company would be shooting at the CRM demons of yesteryear. But the reality is that the market and users have moved on and yesterday's issues are just that.

SAP also introduced what it alluded to as a third generation delivery model which it said would be more stable and prevent outages. Unfortunately,if the on demand model is all about syndicating access to really expensive hardware and software, the infrastructure that SAP introduced was more about corralling a lot of gear in a safe location which is very reminiscent of facilities management with some newtwists.

But perhaps the biggest question mark this announcement leaves is how it changes the company's business model. One of the hallmarks of disruptive innovation theory is that when the incumbent vendors realize their franchise is at stake they try to bring the innovation in-house; maybe they call it a hybrid solution. The results are almost universally disastrous -- the last company that tried to have it both ways is now a part of Oracle. Still that's what SAP is trying for. The alternative to the big disaster, by the way, is a smaller one, the innovation fails. Well see.

No matter what you think or say, you can't discount SAP and their entry into the on demand market. No doubt they'll win some business and no doubt other vendors will win more, for now. More competition will mean more bakeoffs and the more bakeoffs there are the more each company will learn about its competition and about demand.

Perhaps the biggest things SAP has going for it right now is its customer orientation and the belief that CRM is all about process. With those ideas and a lot of development money, we should expect very interesting times in on demand CRM.