Software for rent

Marc Benioff has never been modest in his dreams for Salesforce.com, the business software company he founded in 1999.

Benioff, whose appetite for brash publicity and business growth matches his bulk, declared several years ago that Salesforce would be "the Microsoft of the 21st century." Never mind that his company brought in over a year what Microsoft garners in a few days. Or that another company, Google, seems more likely to wear that label.

Salesforce promised to revolutionize the way businesses buy software, and to a large extent it has accomplished that in one market niche: customer tracking. Its innovation was in turning software into a service that is leased over the Internet, instead of something bought and installed on company computers.

And yet for Benioff, the company's chief executive, that is not enough. He wants to turn Salesforce into a platform like Microsoft's Windows operating system, a product so popular that it is the foundation for a veritable ecosystem of software developers.

"In our industry," he said, "the only companies that really make it big move from being a killer app to being a platform."

But whether he can pull off that strategic leap is unclear. Salesforce has started to look less revolutionary as larger, more established companies have adopted its leasing model. And as Benioff himself notes, few software companies successfully make the move to platform status.

Yet that jump is critical to Salesforce's long-term success. Its share price has tripled in three years, showing that investors are counting on success beyond the market for customer-tracking software.

"It's been very impressive what Salesforce has pulled off," said J. Bruce Daley, editor of The Enterprise Software Observer, an industry newsletter. "But I think this is a company about to hit a wall."

Like others, Daley declared it "logical" that Benioff would try to use its beachhead in managing customer information to establish itself as a platform, a kind of holy grail of the software world. The plan is to persuade outside programmers to do what Salesforce cannot afford to do on its own: round out the company's offering of products so that customers can lease a greater range of business tools, like payroll and accounting software.

"But the jury is still out on whether ultimately it will be successful," Daley said.

It does not help Benioff's cause that the subscription model's success has inspired software firms, including Microsoft and SAP, the German business software giant, to offer subscription-based versions of their own products for customer relations management, known as CRM. That means Salesforce faces increased competition in its core market at a time when it is focusing on selling itself as a platform.

And then there is the competition from smaller companies like NetSuite, which uses the same leasing model to offer a full suite of applications it has built, including billing, accounting and other critical business tools.

Peter Goldmacher, an investment analyst for Cowen & Company, is among those arguing that Benioff should--at least for the time being--throttle back his wider ambitions and stick to his primary business. Goldmacher was once among Salesforce's most prominent Wall Street boosters, but he has tempered that enthusiasm.

"My concern is that this is a company letting itself get distracted," Goldmacher said.

In the late 1990s, Salesforce was one of a group of start-ups exploring ways to capture a share of the lucrative business software market using the leasing model, also called "software as a service" and "on-demand computing."

The leasing model, its supporters say, permits companies to avoid the expense and headache of installing complex software packages that typically require huge outlays of cash for hardware and software upgrades.

"It's all about letting our customers pay attention to innovation and not infrastructure," Benioff said. "Software as a service is about freeing them from having to hook up another computer in another data center to another database to another application server to another security server."

In the battle for a share of business software dollars, Benioff chose to focus on customer relationship management tools, a relatively small corner of the market. Such software would help sales representatives track customers and potential customers.

"CRM seemed a perfect place to start and prove our concept," he said.

By contrast, NetSuite focused on creating an on-demand financial product that handles tasks like billing and accounting precisely because they are so central to a business.

"Our strategy has always been to be the application you run your business on," said Zachary A. Nelson, chief executive of NetSuite. "Salesforce chose an easier route."

Though the two companies were started within weeks of each other, Salesforce has 35,000 customers, compared with NetSuite's 5,300. But Nelson said he sees a strength in those numbers. "The same reason companies are slow to come makes them slower to leave," Nelson said.

In response, Benioff described NetSuite as "not worth talking about," given its relatively small size. Instead, he was eager to discuss larger companies like Microsoft and SAP, and he said their moves to on-demand software are a testament to Salesforce's success.

In September, Microsoft started selling Dynamics CRM Live, an on-demand version of Dynamics CRM, the shrink-wrapped software package the company has been selling for four years. At around the same time, SAP unveiled Business ByDesign, an online version of the company's array of business software, aimed at medium-size businesses.

At a news conference to promote that product, Henning Kagermann, SAP's chief executive, declared ByDesign "the most important announcement I've made in my career." But those who follow the business software market are generally skeptical that SAP, a company whose sales staff has thrived on selling multimillion-dollar software packages, will be as aggressive offering a cheaper version of its own product line.

These same analysts, though, tend to be more bullish about Microsoft's chances against Salesforce.

Benioff dismissed Microsoft's offering as "an inferior product," but analysts said that Microsoft needed only a strong offering, not a superior one.

"If you know how to use any of Microsoft's desktop tools, you know how to use Microsoft's CRM product," said Bruce Richardson, the vice president for research at AMR Research, a technology consulting firm. Microsoft is a minor player in the CRM market, but its Office software suite is installed on hundreds of millions of computers. And the company has priced the on-demand version of its CRM software to be significantly cheaper than Salesforce's offering.

"That's classic Microsoft: to aggressively attack from a position of weakness to gain market share," said Goldmacher of Cowen & Company.

Goldmacher had high hopes for Salesforce when the company went public in 2004. But he has cooled on the company since then; he said that over the last 18 months, Salesforce has lost its focus.

"More and more, I see them chasing bigger opportunities that won't necessarily pay off," said Goldmacher, who now has a neutral rating on Salesforce's stock.

"What they're telling the Street is, ?We don't care about profitability,'" Goldmacher said. "Their story now is that CRM is just the bait, and the platform the real hook."

Despite $497 million in sales, Salesforce posted a loss of $3.6 million last year.

Benioff counters critics by noting that although the platform project is less than two years old, the company is selling more than 700 add-ons, most of them written by third parties. Salesforce, working with a pair of venture firms in Silicon Valley, has created a $25 million fund that will provide seed money to companies seeking to build applications for the Salesforce platform.

Salesforce has also entered into a series of partnerships with Google, hoping to ride whatever success that company has in social networking and office applications, a field now dominated by Microsoft.

Many of the add-ons require customers to download additional software, which waters down Benioff's simplicity message but also could make customers more loyal.

"The more our users customize, the more they are tied to our service," said Steve Fisher, the Salesforce executive overseeing the platform project.

Another issue is that Salesforce is mainly used by sales staff needing to keep track of leads and customer lists. To AMR's Bruce Richardson, that is not a very large step toward empire building.

"Marc wants to be the Facebook of the enterprise, but he's missing a key piece," Richardson said--a core product so popular that it naturally grows into an environment that attracts hundreds of third-party software vendors.

That is where the company's partnerships with Google might prove critical.

"Marc is waiting for Google applications to mature," said one former Salesforce executive, who asked not to be identified. "If it can link with Google applications, then maybe Salesforce can develop into a platform."