Salesforce.com Makes Platform Play

Salesforce.com, based in San Francisco, is on the brink of that transition. In February the hosted CRM software company announced that it would stop reporting its subscriber totals at the end of each quarter, switching instead to reporting them twice a year. While Salesforce.com cast the switch as a move to smooth over "quarterly lumpiness" and focus investor attention on long-term trends, most Wall Street analysts took it as a sign of slowing new-user subscriptions.

Salesforce.com put some of those worries to rest with its mid-year update in August, which revealed that its subscriber base has climbed past 800,000, a 24 percent gain on the 646,000 subscribers it had at the end of its last fiscal year in late January and a 60 percent increase from its year-ago user total. But significant swathes of Salesforce.com's new user growth are coming from the lower-priced Platform Edition product launched in April -- a sign of the seriousness with which Salesforce.com is taking its goal of expanding beyond CRM into the broader software-as-a-service (SaaS) infrastructure market.

Salesforce.com has long wanted to be a platform player, but until recently, it didn't have the technology or product positioning to back up that ambition. CEO Marc Benioff fired off an opening shot in early 2005 by introducing "Multiforce," intended to be an on-demand development environment that customers and partners could build atop to create their own custom applications hosted on Salesforce.com's infrastructure. (Multiforce eventually evolved into AppExchange, the company's network of add-on tools.)

But Salesforce.com didn't sell its service as a platform-only offering -- customers still had to buy full CRM subscriptions, even if they didn't want to use that functionality -- and the system's customization features were limited. While Salesforce.com began speaking of itself as an on-demand platform vendor years ago, company executives couldn't point to more than a handful of customers using it for anything other than CRM services.

This year, that changed. Salesforce.com partners say the tipping point had two catalysts: Salesforce.com's introduction of Platform Edition pricing and packaging and its development of the Apex platform, a programming language and toolkit that allow outside developers much greater flexibility in extending Salesforce.com.

Now, Salesforce.com's largest customer is an organization that doesn't use the vendor's eponymous CRM service. The Japan Post, the nation's largest employer and provider of banking and postal services, worked with local solution provider HitachiSoft to create a custom, hosted customer service system used by 45,000 regional branch workers.

"The Japan Post runs on our platform in all of their retail offices -- and they're not using CRM," said Bruce Francis, Salesforce.com's vice president of corporate strategy.

Similar arrangements are popping up all through Salesforce.com's user base. Morgan Stanley has 800 users running a customized recruiting application atop Salesforce.com. Dell's IdeaStorm customer-feedback system runs on Salesforce.com. The Walt Disney Co. began using Salesforce.com as a development platform for homegrown applications after Salesforce.com won a bake-off against Microsoft's .Net development stack -- a tool for scheduling character appearances that took 3,000 hours to build with Microsoft technology took just 96 hours to create on Salesforce.com's system, according to Francis.

Salesforce.com partner Bluewolf, a New York City services firm that specializes in on-demand software deployments, went live this week with one of its first significant Salesforce.com platform engagements. The Hartford Financial Services Group, a Fortune 100-listed investment and insurance firm, chose Salesforce.com as the vendor underpinning its new workflow tracking system. Bluewolf, which previously worked with The Hartford on a departmental Salesforce.com CRM deployment, helped its client build the custom application, which uses Salesforce.com in very unorthodox ways. Atop Salesforce.com's infrastructure, Bluewolf helped build a complex engine for routing and tracking insurance policy approvals.

Done in about seven months, the project would have taken two to three years with traditional software development methodologies, Bluewolf principal and co-founder Eric Berridge estimates -- and a year ago, it might not have been possible. Apex, announced last October and made generally available in Salesforce.com's Summer '07 edition, is a sea change for developers.

"The main difference Apex has delivered is the ability to write procedural code against the platform. That allows our developers to cut a lot of corners," Berridge said. "We spend almost no time worrying about the infrastructure, performance, or the right patch set -- Salesforce takes care of all that. Now we spend our time as a consulting firm, building consensus with the client around what they're looking for."

Although it's working on Apex's bleeding edge, Bluewolf ran into no significant technical obstacles on the Hartford project, Berridge said. The main challenge was the learning curve Bluewolf's developers faced in mastering the new technology.

With Salesforce.com finally ready to serve as the platform player it has long wanted to be, its next hurdle will be convincing the market that it's more than CRM. As someone inevitably points out at every Salesforce.com analyst meeting, the company's name is Salesforce, not AppExchange or Multiforce or some other, broader branding.

"There's still a lot of evangelizing that needs to happen," Bluewofl's Berridge said. "Salesforce.com has a reputation in the marketplace as being a world-class CRM vendor; that's how they're characterized. Their biggest challenge is educating the marketplace that this is a platform play and not a CRM play."

Salesforce.com will have a big megaphone next week for its evangelizing. Its annual Dreamforce customer conference opens Sunday in San Francisco, and Benioff likes to kick off the show with headline-grabbing, splashy announcements. The Wall Street rumor mill is already churning heavily with expectations of big news: Salesforce.com's stock has risen around 15 percent over the past week in the run-up to the conference. Benioff began priming the pump on last month's earnings call. "Those of you with an appetite for news are used to us serving up industry-changing surprises like AppExchange and Apex at Dreamforce. We promise that you won't be disappointed," he told gathered analysts.

Inflection points are risky, and Salesforce.com has skeptics questioning its ability to grow beyond its CRM roots. Cowen & Co. analyst Peter Goldmacher, who has a Neutral rating on Salesforce.com's stock, doesn't see platform sales expansion stemming Salesforce.com's tide of slowing revenue and growth. With platform subscriptions priced lower than CRM subscriptions (which start at $65 per user annually, versus a $25 starting list price for the Platform Edition), Salesforce.com's profitability is likely to suffer, he warned in a recent research note.

Other analysts are more bullish on the company's prospects. "It seems increasingly clear that even as Salesforce still drives most of its revenues from its CRM products, the real focus is on the company's position as a platform vendor," Bernstein Research analyst Charles Di Bona opined in his own research report after Salesforce.com's August earnings call. "If Salesforce navigates this transition successfully, we think that the potential long-term payoff is substantial, and as one of the first movers in this market, the company has the early advantage. However, given the newness and rapid evolution of the market, success remains far from certain."

Rivals like Microsoft, SAP and Oracle are lining up to try to knock Salesforce.com off its pace, but the true threat the company faces is best symbolized by a ghost. Like Salesforce.com, Siebel Systems trailblazed its way through the software market and proudly took up the vanguard position in the CRM market it pioneered. But larger, more established vendors eventually cracked the CRM code, while nimbler upstarts like Benioff's ate away at Siebel's market opportunity. In the end, Siebel was trapped in the niche it helped invent, and became easy prey for Oracle to pick off -- which it did, ironically, the day Salesforce.com kicked off its Dreamforce 05 conference, upstaging Benioff's opening keynote.

Count analyst Josh Greenbaum of Enterprise Applications Consulting among the naysayers. In an oft-cited blog post dubbing Salesforce.com "Siebel 2.0," he forecast: "Salesforce.com is the next Siebel, the next CRM has-been, the next low-priced software buyout opportunity, unless somehow the company gets sold before its stock begins to tank or it engineers a remarkable turnaround from its current moribund strategy. It may take a couple of years, and there may be some big blockbuster announcements and a couple of good quarters in the interim, but it's gonna happen, and it's gonna be ugly."

Next week's Dreamforce, with its promised blockbusters, will be a high-profile showcase for Salesforce.com's plans for transitioning into a platform player and achieving the escape velocity needed to propel itself beyond CRM space. In the long run, the company's survival is at stake.

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