Edited transcript of periodic BriefingsDirect Analyst Insights Edition podcast, recorded May 9, 2008.
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Dana Gardner: Hello, and welcome to the latest BriefingsDirect Analyst Insights Edition, Volume 29, a periodic discussion and dissection of software, services, cloud computing, and related news and events with a panel of industry analysts and guests.
I'm your host and moderator Dana Gardner, principal analyst at Interarbor Solutions. Our distinguished panel this week, and this is the week of
Joe McKendrick: Thanks, Dana, good to be here.
Tony Baer: Hey, Dana, top of the morning.
Gardner: And, last on our panel this week, Phil Wainewright, an independent analyst, director of Procullux Ventures, and also a prolific software-as-a-service (SaaS) blogger. Welcome back, Phil. [Update: See Phil's blog on this topic.]
Phil Wainewright: Great to be back, Dana.
But, before we get into a discussion on cloud computing's economic future, let's go around the table. I was at JavaOne in San Fransisco this week, and I understand that, Phil, you were attending a Salesforce.com event in
Wainewright: Yes, indeed, their first full Dreamforce event in
Wainewright: It was a great to actually have the Salesforce crew in my own timezone, so that I could take all of that on board. We had the usual two-and-a-half-hour Marc Benioff Dreamforce keynotes, and he was the one that got ragged this time, instead of me, so that was nice.
Wainewright: Well, that's right, although to be honest, it was my first Dreamforce, because I had never made it to San Fransisco for the Dreamforce events in the fall, and that's something that Marc has often complained to me about. So, it was good of him to bring the show over to me. I appreciate that, Marc, thanks.
Wainewright: Oh, yes, it is. There were 2,500 people there. So, it was a big show. Some of the independent software vendors (ISVs) who have been putting software on the force.com platform are actually from
Unit 4 Agresso recently bought CODA, which was an independent company listed on the
Wainewright: Well, I think it's an incoming tide. Whether it's got the speed and force of a tidal wave is another matter.
McKendrick: Can't you call it one of the "Four Horsemen of the SaaS Apocalypse" or something like that?
Wainewright: People started talking to me earlier this week about these four vendors, all listed vendors on the stock market, that have got a certain size. Taleo just did an acquisition this week that brings them out to the 200 million-a-year run rate, close to the run rate that Concur has. Taleo is talent management, and Concur is travel and expense management. Then, you have Omniture, which is Web analytics. They expect to do around about 300 million this year. Then, the big Daddy of them all, force.com, is looking to do $1 billion this year.
You are starting to see the leaders emerge now. Thank goodness it's not just Salesforce, but kind of gang of four, to use another foursome analogy, and they are riding the wave. I'm not quite sure what apocalypse it is yet. We might argue that it's an apocalypse for the conventional software vendors. Certainly,
Gardner: And, this event came right on the heels of the news last weekend that Microsoft, at least for the time being, is walking away from its bid for Yahoo! And, from comments from Bill Gates and others, it seems that Microsoft might be fully done with that merger or proposition. Was there any talk of that or did any Benioff mention it?
Wainewright: No, he was strangely silent, actually. The president of Google EMEA, was one of the people who came on stage during the Benioff keynotes. So, there was a talk about Salesforce and Google teaming up and working together, but very little about Microsoft.
The thing that interested me about Benioff's presentation, and this is something that I blogged about, was that he is really positioning force.com not as the platform of the future, but as one of the platforms of the Web, and the one that he believes will be the leading platform for enterprise applications. But, he is now starting to talk about a whole forest of different platform-as-a-service (PaaS) vendors and acknowledging other platforms -- like Google App Engine, Amazon Web Services, and even Facebook -- as platforms people use to build functionality in the sky.
That's an interesting change of emphasis. In the past, it was always about. "Salesforce is a platform of the future. Microsoft Windows is the platform of the past. And, we are going to replace Microsoft as everyone's favorite platform."
It's good that he's now talking about the context of the Web being everyone's favorite platform and Salesforce's force.com being just one of the platforms that you can choose to put functionality on the Web.
Wainewright: That's right, and perhaps that change of emphasis is something that Microsoft has not quite taken on board yet, and that's one of the reasons they thought buying Yahoo might be the way to go. Perhaps that's a topic we will get into later in the podcast.
Gardner: Okay. Let's go over to Tony in
Baer: I have been observing from afar. I have been remote, as they say, but have been devoting most of my attention to JavaOne. I do want to add a thought there about Microsoft or Microhoo and also about Marc Benioff's thoughts on an emerging SaaS ecosystem.
One thing I want to make clear is that when you just have one company in the market, essentially it's one-trick pony. When you have competitors, that validates the market. What Benioff was indirectly saying there is that if SaaS is no longer synonymous with Salesforce, that now validates the SaaS platform. It vindicates his contention that SaaS is a platform, and that the future is "no software."
That's one thought. The other thought, before going on JavaOne, regards Microsoft walking away from Yahoo. My sense is that Yahoo is not going to get any better price for their shares than what Microsoft was going to offer. But, I think it is a blessing in disguise, at least for Microsoft, if not for Yahoo shareholders.
This would have been a horrendous deal for Microsoft. This is not the type of deal that they do best. They do very well in making small, very strategic technology acquisitions. What's gotten lost in the noise here is that Microsoft does have this stake in Facebook, which only happens to be "The most Popular," software development platform in the social computing space.
And, I've got to believe that maybe they are facing a war in ads, but why not work around this, instead of co-opting this, to become or federate with the social application development platform of choice.
Gardner: I think that there are some indications that the bloom is off the rose of social networking, both as a significant revenue generator, as well as an application development platform, at least for one of the social networks to become a development platform. That's from some recent revenue indicators from Google that its relationship with MySpace has not proven to be as monitizable as they expected.
Also, some recent statistic show that the types of applications that have been generated on Facebook are very tenuous, very one-off or fun things that would appeal to teenagers, but not with any significant depth or business value. The amount of activity from developers on Facebook has been slacking off, or at least plateauing, which is not a good indicator.
So I take your point that Microsoft is in the game of social networking, but I am not sure if that's enough to do much for them in terms of overall online activity.
Baer: I'll put this way. For social networks, we are getting into kind of a Gartner-style "trough of disillusionment" there. But, I see this thing fitting more into the mold of the strategic technology buys or technology acquisitions that Microsoft does, because, if you think about it, this has not been tapped.
I totally agree with you. I'm very turned off by the types of applications and sort of frat-partying environment that you have on Facebook. But, I think there's a lot of untapped potential in terms of turning some of these techniques and using them to extend enterprise applications, whether they be on premises, in the cloud, or what have you. So, I could see this as being potentially an extension of the Visual Studio Platform in the .
Wainewright: I'm just thinking about advertising and Facebook. People are surprised that for these social networking sites the ads don't work. I remember back in the Web 1.0 boom and the dot-com boom, one of the things that was interesting was the discussion sites were very bad at generating ad revenue, because people didn't click on the ads.
The cost per thousand (CPM) for discussion sites, or for the discussion area of a site, was always a lot lower than other types of sites that were more information heavy. So it's old news about kind of sites where people follow what other people are saying. It's a bad site for advertising, because you are interested in the conversation. You don't go there to click away on something else.
Baer: That's right, and it's not necessarily the metadata of the discussion content that creates some affinity-based relationship between buyer and seller as a result, and, therefore, you get a higher value CPM advertising revenue benefit. It does seem to push it down to a lower common denominator of just page views for the sake of page views.
Wainewright: Yeah, that's right. People start chasing page views without remembering the reason that they are chasing is to generate value for advertises. They think, "We've got lots of page views," but they don't think back to whether those page views are going to deliver value.
Our topic is what are going to be the revenue models now that we have a fairly good expectations of SaaS, Web services, publicly available APIs, mashups, and increasingly robust cloud community of not only host and providers and infrastructure providers, but ecologies.
I emphasize the plural of development activities that create business value in some form over the wire. This is all well and good for the end user, but in order to support such an ecology, there needs to be revenue commensurate with the cost, perhaps even leaving some margin on the table.
Let's go to you, Joe McKendrick. You've been studying SOA for some time. You've been familiar with data for some time, technologically and functionally, but let's look at the economics of this as we move more toward an online world. Microsoft has indicated this through its Yahoo purchase attempt, desperate as it may have been and now perhaps squashed as it may be.
If you see the future as an online world, do you have any sense of how the money is going to be made, now that we are segueing into this new era?
McKendrick: Good question, Dana. And, in fact, Microsoft has given us another clue. Another memo from Ray Ozzie surfaced a couple of weeks back. You may recall the memo back in 2005, the famous "turn the world upside down" memo that talked about the advertising support of the online model for software. He kind of reinforced that with his latest memo.
It wasn't saying, "We must offer software advertising to support software," but it was more of a discussion about the social mesh, the community, the social networking, a paradigm that's emerging. It's way too early in the game, but I think it's inevitable. We are really seeing it on the consumer side. It's going to be interesting, but I think it's going to leach into the enterprise over the next couple of decades as well. I'm talking years from now, but it's definitely a model that will be sustaining consumer computing. We are seeing that emerging on the social computing side.
Look at what Google has done with just a small slice of the advertising market -- text ads associated with search and search criteria that they are going to start automating through a similar auction bid process, advertising that goes on banners ads across the Web, beyond just the text ads.
Then, they've got their designs on radio, magazine, and newspaper advertisements, particularity done at the local level. They've got designs on television advertising across both cable and broadcast, but certainly with the television that goes out over the Web. So, Google is looking at a potential of hundreds of billions of dollars of market, where Microsoft's annual revenues are what -- between $40 and $50 billion I believe? We're talking about several significant multiples of potential revenue here when advertising is factored as a full business.
So, just using as the factoid, Phil Wainewright, what do you think about the opportunity for software companies to take more and more of this advertising pie?
Wainewright: Well, we touched on this in our discussion last week, and I really think people have got this completely the wrong way around. To focus on advertising is just so "0.0," to coin a phrase. Advertising exists only because we don't have the Web. Advertising is something the B2B market has to use through magazines, TV shows, or whatever, because they couldn't reach the consumer directly.
Now, the Web enables people to reach potential consumers and business prospects directly, rather than having to go through this advertising. So, the idea that the software industry is going to get funded by advertising has got it completely the wrong way around. Actually, what is going to happen is that business is increasingly going to use software in order to get closer to its consumers and its prospects. It can actually skip having to spend the money on advertising in order to make that connection.
Let me explain how that might work, instead of running adverts on sites that host discussions about bookkeeping services for small companies, for example, or instead of paying for search ads that pop up when people are searching on the Internet for bookkeeping services for small companies. As a small company, if you are using a financial application to run your company and you want some bookkeeping services, a bookkeeping service might pop up as a menu option in the software. You can sign up for and use an outsourced service over the Internet.
Instead of the bookkeeping service actually having to advertise on the search engines, in the publications, the discussion forums, and the social networking sites, they just pay to have their service made available within a software package that relates directly to the service that they are offering.
Therefore, it's not really advertising any more. It's just product placement at a point where the consumer or the business, in this case, actually needs that service.
McKendrick: Phil's got it exactly right. Another good example is mortgage calculator, something that popped up about 10 years ago on the Web. Mortgage calculator is software, and probably before 1998, if you wanted such software you had to go out and buy a package at Staples or Office Depot. Now, you can go to a mortgage company site, for those who are still looking for mortgages, and check out a calculator on site. The software is made available as a value-add. Phil has got it right in terms of their reverse. We have to look at this in a reverse sense.
Baer Joe you are so 2006, I have to say.
So we are moving from an advertising to a placement or even visibility value, and it becomes rent to those who can draw the people in. Does that sound reasonable?
Baer: I'd say so. Look at the Amazon model which isn't necessarily overt advertising, but its affinity. You just bought a book, say, on accounting and they'll say, "By the way, based on your pattern of orders, would you also like to get a book about taxes or something like that?" So, it's basically keeping it in context.
Just a couple of days ago I was reading an interview in one of the business journals with someone who was critiquing TV ads and saying, "You know something? These are so obsolete. I really hate watching this because, basically, when you're watching a program, statistically very small minority of the audience is interested in that particular product at that particular time."
You start looking at migration to digital broadcasting. At some point -- I don't know the exact technology mix involved -- combining that with the Internet, there will be some way of micro casting. There may be a large population segment watching a specific program, but you maybe identified in terms of which demographic you specifically are. It's almost sounding 1984-ish.
McKendrick: Tony, you are so 1984.
Wainewright: Tony, that's right. I think Google actually realizes that and understands that. Therefore what they are aiming to do is get into TV advertising and all these other sectors. These are vendors that enable this kind of personalization of the message, being a conduit between the prospects and the business that's trying to sell to that prospect, and using software automation to enable that.
They are thinking beyond the old model of advertising, and I think that's Microsoft's problem. Microsoft hasn't really understood this, is still thinking about online advertising as a segment, and is not looking beyond the wider opportunity to use the automation on the Web as a way of just bringing buyers and sellers close together.
This requires a tremendous amount of cloud compute, to the same levels we have seen in matching search criteria to results and then matching that to advertising. That advertising is then bought through an auction-bid process among those seeking the highest placement.
So if we take that same model and apply it to all sorts of different needs and wants of business, personal, entertainment, and luxury across the board, what do we call it? It's not really advertising.
Here is our chance at the BriefingsDirect Analyst Insights podcast to come up with a name for this thing. Any takers?
Wainewright: I've struggled with it actually, Dana. I have been planning a blogpost about this for probably a year. I saw someone really calling it "featuretisment," which I am not advocating, but it's a possibility. Maybe it's "online merchandising," maybe it is "placement," maybe it is just "promotion," rather than advertising. But, I think we do need a different word, because, if we use the word "advertising," we approach it too much from the old mindsets.
Baer: Here is one that I hopefully don't use, which is "lifestyle enhancement" or "lifestyle augmentation." I hope we don't use that.
Baer: I want to just shoot that one down immediately.
McKendrick: I want to throw another note in here. When we talk about social computing, the whole Web 2.0 paradigm world, we are talking about the incoming generation. You have the 20-something is coming in, and even younger than that.
These folks are well accustomed to SaaS, online/on-demand software and are accustomed to seeing advertising online. I have a nine year old daughter and her favorite sites are Webkinz in which you buy stuffed animal, get a special password code log in and you can virtually manage your Webkinz online. She loves that and --.
McKendrick: Yeah, Club Penguin is another one, Disney took that.
McKendrick: What's interesting is, 10 years ago, our kids would have had to go out and buy a CD and install a CD locally in the computer. These things are all delivered online to kids. Kids don't want this. My nine-year-old probably doesn't know how to install something from a CD.
McKendrick: Exactly. Everything is through the browser now. That's what they are expecting. That's what expected now. College students as well.
This statement came out loud and clear. Sam Palmisano says he is never going to put advertisements in anything
They need to consider some of these other more interesting business models, particularly in the context of business. We're not talking about a $15 music download or an $8 movie download. We're talking about anywhere from $50,000 to hundreds of thousands of dollars of purchasing that happens very rapidly across the entire B2B economy.
Any thoughts about how
Baer: Actually, take a look at the emerging model for downloading films or TV shows, that's probably is a better example. For a certain price you can get it without ads. For free, you get it with ads. I don't know if that directly applies, there maybe some sort of variation of that, which can keep Sam Palmisano's feeling that he can go to sleep at night.
Wainewright: I think they do. The subscription model does take, but I think you will still have indirectly funded applications, particularly for volume markets like the business markets, the small business market, and obviously the consumer market, which is indirectly funded.
The consumer doesn't pay, but it is supported by some kind of either advertising, commissions on product placement, or just the expectation that a certain percentage of free users will upgrade to a paid version, and, therefore, the free-user population is a marketing expense.
We see all of those models already in the SaaS segment. The thing that is going to make this a slow transition is having a set of subscription services, where there are lots of different providers being aggregated, and they're getting some cut off the subscription. These are big billing and settlement challenges.
Actually, the software, the infrastructure software, that can support doing all of that measurement and doing it accurately and dealing with all of the questions: "I want my money back -- how do I get my money back?" These are questions that come up when money changes hands. This is something that still hasn't been worked out properly.
I was interested to see that Salesforce is still at the first stages of working at providing billing and settlement for force.com. In a sense, they are probably behind other players in that space, in terms of having an infrastructure for doing that. I think that could be a brake on this kind of thing taking hold very quickly, simply because the technology doesn't exist yet.
Baer: Just to underscore your point, it's not only that they perfected it for their core business, they now are handling increasing portions. A lot of their business is business process outsourcing. So, they're saying, "We don't only deliver the product to your customer, but we will take on large chunks of the fulfillment process or the warranties service repair process." And, they've have got the billing mechanisms down for that.
Gardner: So, the intellectual value of understanding how to manage that process is what ultimately buoys them and makes them now part of a potentially larger virtual ecology, rather than physical.
Wainewright: Hold on! They are doing that as a single company, they are not doing it with all kinds of tiers and partners, who are all contributing their own services and wanting to bill and charge back for those services. So, it's an order of magnitude larger.
Gardner: Perhaps the message to them is that they should be thinking along these lines, taking what assets they have, and extending them into partnerships, APIs, and Web services that can be plugged in through a SOA, and perhaps they get some transactional revenues as a result.
McKendrick: Which should make force.com and
Those vendors who want to be positioned well in front of an activity, the fulfillment of the actual transaction financially, would be in extremely advantageous position. Even if they take a fraction of a percent per transaction, ultimately we are talking about a massive business, one that everyone essentially would have to do some level of business with.
Any thoughts about the transactional hub, and the cloud compute power that would be required to do that?
Baer: StrikeIron kind of hits upon that model. They offer a marketplace of Web services, and part of what they do with that paradigm is that for the software developers -- someone who creates a service and offers it through the StrikeIron service -- they handle the transactions, the micro transactions. You may get a few pennies each time some uses your service. I think their model is going to take off. I think there is lot of potential for the model. We are going to see a lot of micro transactions taking place across the Web in the entire network.
Any other thought about the role of Google and what other organizations might be able to step up to the plate in this regard?
Speaker: Amazon Web Services.
Wainewright: I was just going to say that Rearden Commerce is perhaps an example of a vendor that's getting into that opportunity. Rearden this week announced a funding, a $100 million in venture funding, which mainly came from American Express and Chase.
So we see travel booking and the credit card company are teaming up with the transaction providers or the transaction handlers and getting at this nexus of bringing buyers and sellers together in the travel and employee services space. The amount of money that's being invested in Rearden says that people feel that there is quite a lot of potential in that particular vision.
Wainewright: Rearden Commerce provides software that allows you, as a business, to have your employees book their flights, their dining, and their corporate expense activity in a controlled, managed, and largely automated way. At the moment, most of their customers are relatively large customers or are customers of AMEX's travel management services. They charge a license fee at the moment, but I think in their road map, they see a potential to make money just by taking a cut out of the value of the transaction, rather than sending a traditional subscription license.
Baer: Just to go full circle here, I remember just talking to an enterprise vendor back in the 1990s. They were trying to export different mechanisms for pricing, and were talking about what they called at the time "risk sharing." Instead of charging the traditional license fee upfront, they were getting some sort of share of the benefits. Obviously, that never panned out, but today through SaaS, through micro-pricing and transactional pricing, and the acceptance of subscriptions and variable pricing, the time may have come for merging of some variance of that.
We have the "son of software" in services, also a place where Google is well-positioned. We also have the "son of financial services." That is the next era that will require the compute ability to manage on a real-time, micro level across multiple variations of transactions and very complex process and event landscapes.
And, once again, Google could rise up and be prominent in that place as well. It seems that the algorithm is what rules the future, and he with the best algorithm that can execute on that algorithm and draw in the most partners is the winner. Any thoughts?
Wainewright: And, therefore, Microsoft, as long as it talks about software, rather than focusing properly on services, is always going to be the loser.
Gardner: You need to focus on being able to develop, control and adjust the algorithms and then execute on all the variables within those algorithms at massive scale, and that becomes ultimately who's got the best compute cloud infrastructure. I'm not sure it's going to be built on Windows.
Baer: The interesting thing about Microsoft is their whole scale has been more penetration, it's never been scale in terms of that we can now conduct scalable processing.
McKendrick: It's getting to the point where the operating system is something that gets in the way. I think people will be happy with just some kind of device, such as a mobile device with a very thin layer and browser accessing everything out on the network.
Baer: And, from that standpoint, the one interesting thing that I saw from JavaOne this week, is the battle over where that rich Internet layer is going to be. Should it be within the Java virtual? Should it be in the flash runtime? You are talking about a couple battles of runtimes. You are not talking about battles of operating systems.
Wainewright: Dana, I would disagree with you about runtime on the client. I think it's going to be important, but I think it's the topic over another podcast.
Baer: Phil mentioned Rearden Commerce, and I want to add that all it's components are built on SOA-enabled services. So, there is a good lesson there. If you want to get out in the cloud, SOA paves the path.
Baer: It's the only way to go, Dana.
McKendrick: Thanks, Dana. It's great to be here.
Baer: Hey, good talking again.
Wainewright: Good to be here, Dana.
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