How Google Is Going To Put The Squeeze On Salesforce.com

Associated Press

Salesforce.com has a real problem and it's not one of the usual suspects (Oracle, SAP or Microsoft).

Google's Marketplace announcement a few weeks back just confirmed if there is one company that is likely to be giving CEO Marc Benioff a really bad toothache, it's Google, and unfortunately dentures might be the only longer term solution.

While the Apps Marketplace poses the biggest threat yet to Salesforce.com's Force.com development platform and the AppExchange store, it's only the latest indication of a collision course that Google and Salesforce.com have been on for a number of years. It's not likely to be a head-on collision -- more like a grinding side-by-side collision -- but the outcome is what you would expect when a Hummer and a Mini are vying for the right of way. The Google Marketplace is likely to be a huge blow to both Force.com and AppExchange, but Google Apps is also going to undermine Salesforce.com's CRM app by changing pricing expectations for online apps.

Email and CRM are Different, but Pricing Disparities Shouldn't Span Galaxies

In a nutshell, the big problem that Salesforce.com faces is pricing. Some may think that comparing CRM and email pricing is like comparing rice to risotto. They are different applications. But they are delivered through the same model (SaaS) and they are both core enterprise apps, so there should be at least some semblance of pricing parity. And for those wondering why email is the point of comparison with CRM, it's because it's the anchoring app (along with Calendar) of Google Apps.

Since CRM is relatively more specialized than email, it would seem reasonable that it should be somewhat more expensive. On the other hand email, is significantly more computing-, storage-, and and bandwidth-intensive than CRM, and it's the workhorse app for virtually all enterprises. It's more than 40 years old and the original killer app of the Internet. In contrast, CRM software just started to get going about 10 years ago and it addresses functionally specific needs in marketing, sales and customer support. Everyone working at a company has an email address; only some use CRM apps.

But even if CRM should be somewhat more expensive, it shouldn't be dramatically more expensive. Yet it is.

Google Apps Premier Edition (GAPE for short) costs $50 per user per year. If you add on the related Google Postini Antivirus, Anti-spam, message archiving, and other features, you increase the cost by another $50, to $100 in total. By comparison, Salesforce.com's most popular version, the Enterprise Edition, has a list price of $1,500 per user per year. The cheaper professional edition runs for $780 per user per year. Even if a negotiated price is lower, we are speaking about significant pricing differences; between 8 and 15 times the Google Apps price.

It just seems inevitable that at some point an enterprise CIO is going to wake up and wonder: why am I paying between 8 and 15 times more for my Salesforce.com CRM application than I am paying for my GAPE email (Gmail), calendar (Google Calendar), messaging (Google Talk), video (Google Video for enterprises), intranet content management app (Google Sites), and online spreadsheet, word processing and presentations (Google Docs) solution? Some of the stuff like Google Docs is half-baked, but the core parts, such as Email and Calendar, are fully baked. The half-baked stuff will finish baking, but at worst, it's an ignorable freebie.

Exactly when this happens is unclear -- and Salesforce.com is doing just fine at the moment, aside from a nose-bleed valuation multiple of 40x trailing free cash flow. But given the growth rate of Google Apps, it might become an issue sooner than most think. And while Salesforce.com and Google Apps have been flying the SaaS flag together, until recently, Google's Marketplace is now competing directly with Salesforce.com's AppExchange. It's a battle of CRM vs. email as the anchor app of a new platform, and it's no secret that the broader reaching and more generic email application is the better candidate here.

Why Pick on Salesforce.com?

A few quick thoughts on why Salesforce.com is a good point of reference for Google Apps. Without a doubt, Salesforce.com has been the most successful independent SaaS company, by far. It has succeeded, largely because it's cheaper than the shrink wrapped solutions it has replaced. Being the most successful SaaS company, it offers the best relative comparison to Google Apps, when viewed at similar points in their lifecycle. And, of course, it also shares the same pricing model as Google Apps, which offers an easy pricing comparison.

But Salesforce is just likely to be the first among the many enterprise software/IT casualties that lie ahead. And it's not that Google is going to steal the revenue of others, it's more like it is just going to suck out all the waste in the industry, which means that the trillion dollar enterprise IT sector is facing a shrinking future. When companies adopt Google Apps, there is dis-intermediation at the software, hardware, services, networking and data center level. Some aspects, such as services, are not entirely eliminated, but significant portions maybe.

One last thing, before we get going. The Marketplace announcement is very significant. It could be the equivalent of the iPhone App Store for the enterprise cloud market -- despite Salesforce.com's much older AppExchange. But this discussion shouldn't overshadow the bigger problem caused by the new economics -- think Wal-Mart style pricing -- that Google Apps Premier Edition introduced in 2007.

Comparing Growth Rates

Before Google Apps, Salesforce.com was the king of the SaaS heap, but after more than 10 years, it's still a very pitiful heap. And it's not that the concept of SaaS (or now cloud computing) didn't make sense, it was just that all the contenders never had heft to begin with and in the enterprise space that is what you need to move the elephants out of the way. Salesforce.com is the only independent SaaS company with more than $1 billion in revenue and most others are well below half a billion in revenue, despite many having been around for 10 years (or almost 10 years). Aside from CRM software, all the other SaaS companies have only found success in niche offerings. In many cases they were not displacing incumbents so much as creating new applications. This is just a testament to how difficult it is to displace anyone within the enterprise IT space.

Here is a quick list for reference. Note: Oracle and SAP have sizeable SaaS businesses, but the bulk of their business is still shrink-wrapped software. I added them to provide some humbling context of the state of the enterprise cloud industry. The primary reason is simple: you can't disrupt the shrink-wrapped industry by occupying niche application markets.

Google launched the ad-supported Google Apps for your Domain (ads are only shown only in the email app) in August 2006, and the paid version, GAPE, roughly half a year later, in February 2007.

To compare the relative growth of Google Apps and Salesforce.com in their first few years of growth, just imagine the latter growth on steroids. Within roughly 3 1/2 years, Google Apps has amassed 25 million users and more than 2 million businesses. In contrast, it took Salesforce.com 10 years to reach 2 million users and 72,000 businesses. At the current run-rate of new businesses added, Google Apps grows its customer base by 3,000 per day, or more than half of the amount that Salesforce.com added in their most recent quarter. In case that 3,000 per day number doesn't really resonate, that is a run-rate of 1 million businesses per year. Salesforce.com's Investor Deck claims that the US business opportunity is: 6 million small businesses (with payroll), 100,000 medium sized businesses and 9,000 enterprises; it looks like the reference data comes from here). Not all of Google Apps customers are based in the US but the majority most likely are.

This is not a totally apples-to-apples comparison because the majority of Google Apps users are using the ad supported versions and are not paying a subscription fee. Even so, I estimate that GAPE accounted for roughly $204 million revenue in 2009, 264,000 businesses and 2.7 million paying subscribers (see my estimate assumptions at the end of the article). The estimate is not scientific but it doesn't matter too much because there is an order of magnitude difference in growth rates even with conservative estimates.

The main point is that it took Salesforce.com roughly 6 years to reach $250 million in annual revenue, while it took Google about 3 years, or half the time, to reach about $300 million in revenue (roughly $200 from GAPE and $100 from the ad supported version).

Here is the story in a few charts. The first one simply shows total customers as reported by both companies. You can't see much of a bar for Salesforce in 2002, but it's useful to have it in there since that was Salesforce.com's 3rd year.

  
This is the chart showing estimated GAPE (paying) customers.  Even if only 11% of Google Apps customers are using GAPE it still amounts to more than 3x the number of Salesforce.com's customers.  I assume the ratio of GAPE to total Google Apps users has been consistent historically.

Here is the chart for users.

And here is the one for paying users (estimated) only.  The difference here is less dramatic, with GAPE having less than 2x the number of Salesforce.com paying users (subscribers).  This is not so suprising since Google has much greater penetration in smaller businesses, which have fewer subscribers.

Android + Chrome and Google Apps

It's worth pointing out some of the other key stuff that is likely to further the Google Apps case.  Many companies are locked into the BlackBerry platform for mobile email and Google Apps provides integration for this now.  But for companies that do use Google Apps, Android devices start to become another no-brainer.  Google has indicated that enterprise will get more attention for Android in the future.  For companies that are considering moving to Google Apps, they can now contemplate ditching BlackBerry solution costs (its expensive) along with all the other server hardware, networking, data center, and shrink-wrapped related goodies (licensing + maintenance, IT admins etc.).

The other obvious point is that the browser as an application delivery platform is going to advance at a much quicker rate for the next 5 years than it did for the last 5 years. IE6 was the dominant browser in 2005 and Microsoft's browser share has dropped at an increasing rate from 89% to 61% since then. The reinvigoration of browser technology ensures that all the obstacles to web-based apps will just melt away at an increasing rate. Some people will simply never be convinced of this trend, but it's a one-way trend, regardless. 

Where does this leave Salesforce.com?

It's kind of sad that in a way Benioff paved the way for Google Apps, only to have it come back repave the road in way way that favors them. Salesforce.com is not showing any ill-effects yet from the Google Apps tsunami -- and likely won't for some time -- but it's hard to imagine how declining prices in the IT world will allow them to maintain such a big price premium for CRM when compared with Google Apps. 

Already we are seeing that Microsoft is engaging in some panic-stricken discounting to protect its email franchise -- and more importantly keep Google out of the enterprise -- and this is likely to continue. Microsoft has the same channel conflict issues that Barnes & Noble had when it tried to fight Amazon.com. It realized it needed to compete by offering an online store, but at the same time it didn't want to undermine its physical store channel.  We know how this played out; it lost because ultimately the online channel was the most efficient one.

Microsoft has the same issue. It is offering online alternatives but it has huge investments in its existing shrink-wrapped model.  These compete with each other and you can bet that internal factions are rife at Microsoft.  Microsoft also has to consider its VARs which get little upside from selling online versions of Exchange vs. the shrink-wrapped solution.  It's simple to understand they make more money from the latter. But Microsoft will grudgingly keep fighting, and more discounts (or bundling things such as their Dynamics CRM!) is certain.

The bottom line is that pricing is going to keep going down for corporate email and it's not going to stop there. There is no reason not to anticipate that the enterprise IT sector is in a mature phase that might be on its way to ultimate decline (at least in revenue terms). The only solace IT fans should take is that mainframes are still alive and well; enterprise dinosaurs are not really susceptible to rapid extinction.

How much revenue does Google Apps Make?

Google doesn't breakout the numbers GAPE revenue. It's lumped into the "licensing and other" revenue category which accounted for $762 million in 2009.  Here is my rough stab at Google Apps revenue (explanation following the table).