Salesforce CEO Benioff's big bet? He can sell more CRM subscriptions by connecting functions to his platform.

Aaron Ricadela, Contributor

May 19, 2006

4 Min Read

In Search Of Smart Partners
AppExchange has had a few modest successes. Morgan Stanley bought 400 new seats of Salesforce in February because it wanted to run recruiting software from AppExchange.

But Salesforce has larger ambitions for AppExchange, where it offers software layers for data storage, analysis, security, presentation on the Web, and PDA delivery, all exposed through APIs and development tools that partners say Salesforce has finally gotten right, after a few false starts. All that plumbing can be exploited by other companies' software. Over time, Salesforce wants AppExchange to become a platform for other Internet software to run on.

Getting big consultants on board is also part of Benioff's growth plan. Accenture is developing customized versions of Salesforce for oil and gas, insurance, and pharmaceuticals, specialized markets Salesforce doesn't have the resources to tackle. Benioff says Salesforce won deals at Aon, Chevron, and Kaiser Permanente because of its Accenture partnership. Now he's trying to get Indian outsourcers Tata Consultancy Services and Wipro Technologies to customize Salesforce's apps.

The next step may be for Salesforce to license generic versions of its code, so companies can use it to create Web services for resale. Salesforce is trying out the concept with a small company called Remend, which makes real estate software. Remend licenses Salesforce seats at a reduced rate, then resells them with its customization to real estate brokers. "Marc gives up a little of his brand but is still able to control ongoing development of the platform," says Gordon Ritter, a general partner at Emergence Capital Partners, a VC investor in Salesforce before it went public. "He's meandering through that carefully now." Ritter also holds a large personal stake in Salesforce.

Benioff is coy about quantifying how much money AppExchange is bringing in. Will Salesforce turn technology licensing into a new revenue stream? "That could be, but I'm not making a bet there," he says. How many Salesforce seats are being sold as a result of AppExchange? "It's too new." What percentage of customers have bought Salesforce's pricier unlimited edition? "Almost zero." Will AppExchange lead to acquisitions? "I don't know," he says.

That last question raises Benioff's hackles. And it speaks directly to the larger question of who's going to lead the software-as-service movement in the future. Investors have suggested Salesforce must acquire more companies to expand faster and head off competitors that offer online software beyond CRM. NetSuite is preparing for an initial public offering early next year, says CEO Nelson, and some investors and analysts suggest that Salesforce buy AppExchange partner Intacct, which makes accounting and HR apps, to counter the move.

Acquisitions Required?
Acquisitions could give Salesforce more influence. AppExchange puts new functions a couple of clicks away from Salesforce.com, but it's "still two separate apps with a sheen of integration," says VC Ritter. It's unproven whether that will be enough to help Salesforce crack departments such as accounting and HR without software it owns, develops, and supports.

AppExchange skeptics abound. "Benioff has just admitted there are 130 things this software can't do," says Joshua Greenbaum, principal at Enterprise Applications Consulting. "In the world of CRM, that's a liability, not an asset."

But Benioff nixes the notion that Salesforce must buy new capabilities. "People say to me, 'You're so stupid. You only make a CRM app. You should make Widgetforce, you moron.'" His rendition of the follow-up conversation: "How big is the market for Widgetforce? Well, I don't know, but I bet it's bigger than CRM!"

His strategy centers on more CRM seats. But to get them, Benioff is betting big on customers' desire to hot-rod his product to suit their needs or gain more features. Seen to its conclusion, the plan requires Salesforce to get into the business of development tools and middleware, areas dominated by Microsoft and IBM, two vendors Benioff has managed to avoid while duking it out with SAP and Oracle. Can Salesforce survive having the whole software industry on its tail?

Benioff dismisses Microsoft as "just more software"--full of interdependent products, hidden costs, and IT complications. Whether Salesforce can move into the $1 billion club while holding those demons at bay may be the ultimate test for how much of the market for business technology can move to the Web.

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