SmoothSpan Blog

For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

Archive for July, 2008

American Express takes 13% Position in Concur: Cash for Expansion

Posted by Bob Warfield on July 29, 2008

American Express has taken a 13% position in SaaS Travel & Expense provider Concur in exchange for a $251 million cash investment and a seat on the board.

Concur has been on an acquisition spree, but cash had fallen to about $17M.  This new infusion should open up all sorts of additional possibilities given the place they occupy in the ecosystem.  Concur has already been a very partner centric business. 

I’ve chatted with Concur CEO Steve Singh from time and time and always come away impressed with the company.

While they have not yet reached the scale of Salesforce.com ($172M annual revenue versus $800+M), other key statistics such as their price to sales ratio (they trade at 9x revenue as I write this) and cash (nearly identical cash post this transaction) are suddenly the same. 

This may give Concur the fuel they need to close in to a solid #2 SaaS player position behind Salesforce.com.

Posted in saas | 2 Comments »

Visualize Success. Better: Get Your Customers to Visualize Success

Posted by Bob Warfield on July 28, 2008

Guy Kawasaki (world’s most famous tech evangelist) posts this morning about some fascinating studies involving perception.  Seems that softball players and golfers who imagine softballs and golf holes to be larger than they really are have better days than those who don’t.  Sounds like they visualized their success.

Kawasaki goes on to suggest that perhaps if entrepreneurs imagine their market sector is larger than what it is, they’ll do better.  But while softball is a team sport, batting is pretty solitary–you’re alone up there facing the entire opposing team.  You just need to hit that ball and hit it well and they respond.  Markets are the other way around. 

I’ve often said that startups don’t create demand, they discover it.  But, perhaps they can help it along.  At least a little.  The secret I’m suggesting is to convince as much of you audience as you can reach to think that you market is very large.  That starts from investors, but customers are equally important.  Who doesn’t want to be a part of something new that will grow to something very large and successful?

Isn’t that the entrepreneurial equivalent of visualizing a hole so large you can’t help but hole in one?

Posted in Marketing, strategy | 3 Comments »

Fred: Comments Aren’t As Important as Blog Posts on Techmeme

Posted by Bob Warfield on July 28, 2008

VC Fred Wilson frets that Techmeme is a conversation that’s one sided because it doesn’t treat comments as highly as blog posts.  He is unhappy that Scoble’s post decrying Silicon Valley VC disease got onto to Techmeme but David Hornik’s reply did not.

Even if Hornik’s reply was as good or better than Scoble’s post (it wasn’t), I have a couple of problems with this.  First, its a reply.  Whatever interest or excitement it has fundamentally comes from responding to the blog post in the first place.  Techmeme and others are justified in focusing on the start of the conversation.  The blog post stands without the comments, but 90% of the comments cannot stand on their own without the blog post. 

Second, the purpose of Techmeme et al is to identify interesting conversations, not to microanalyze them down to which comment was the best.  What possible basis can they have for determining which comment is best at present anyway?  Are we going to measure impressions?  Do we care that the comments at top will automatically get more impressions than the ones at the bottom?  Are we going to vote?  At Helpstream, we let people indicate which response to a community question is the “best answer”, but no such facility exists in the blog comments I’m familiar with.

Fred’s been at this business of comments being more important or as important as the blog post for a while.  I read the comments.  There are often good ones.  Most of the time they are not as good as the blog post itself though, and this is not unexpected.

Posted in Marketing, Web 2.0 | 2 Comments »

Fixing the Root Cause of Amazon’s S3 Outage

Posted by Bob Warfield on July 27, 2008

Details are here on how Amazon is fixing the root cause of the recent multi-hour S3 outage.  The long and short of it is that single bit corruption of the messages that describe the health of a server spread widely and forced a restart of the whole system.  Diagnosing the problem slowed them down and the restart itself was fairly slow.  Amazon is attacking all these angles by repairing the source of the corruption both for this particular issue and for other areas vulnerable to the same problem, as well as taking steps to make diagnosis and restart faster.

These are all good moves that will increase the robustness of the system quite a ways beyond just fixing the original bug.  That’s the right way to think about infrastructure: you need to fix the entire class of problems and not just the specific occurrence.

Posted in saas | 1 Comment »

The Advertising-Based Web 2.0 World is Losing Its Anti-Gravity Ray Too

Posted by Bob Warfield on July 23, 2008

I wrote recently that Google is losing its Anti-Gravity Ray.  By this I don’t mean that Google is by any means over, merely that it will increasingly have to obey the ordinary laws of physics and deal with delivering real financial results that include a close focus on profitability and not just growth.  It’s not a harsh sentence at all, rather it is what the vast majority of public companies deal with every day, and Google certainly has the momentum and wherewithal to be right at the top of that heap.

Today I read a post by New York VC and famous blogger Fred Wilson, which directed me to a post by his VC partner Brad Burnham.  Fred describes Burnham as, “the big thinker at our firm.”  In addition to talking about a new investment in startup Meetup, Brad lays out some very significant changes in the firm’s thinking about where to invest.  In essence, he is signalling that the Anti-Gravity Ray for Web 2.0 startups may be weakening.  It will no longer be sufficient to drive traffic at any cost and hope to monetize that traffic at a later date using advertising.  There is concern in the VC circles that the pure Web 2.0 game may be about over:

Something is changing on the web. We have lost some of the giddy enthusiasm that has surrounded the web since 2004. It was then that Tim O’Reilly defined Web 2.0 as a platform that leveraged collective intelligence. There is still a ton of interest this idea, but many of the recent conversations we have had about the web are colored by concern.

We’re at that “What comes next?” stage of consolidation.  “What comes next?” will be the next period of punctuated equilibrium as the innovation world oscillates from innovation to consolidation and back again. 

Meanwhile it may not be a good idea to be too focused on more of the same.  As Brad puts it:

Two things will need to happen if the recent pace of innovation on the web is going to be sustained over the next few years. The next generation of services will need to have an impact on the real world and the real economy, not just an attention economy driven by self expression and discovery online. These new services will also need to reach real people, many of who use few if any web services today.

Burnham clearly wants to see the Web 2.0 world much more firmly engage with the real world by producing real revenues driven by a willingness by customers to pay real cash presumably because a real problem is being solved for them.

I wrote recently about this with respect to Communities on the Web for Business.  A recent study commissioned by Deloitte has shown a tendency for these communities to fail to reach anything like critical mass.  The reason, I believe, is that they aren’t grounded in solving a real problem for people.  Rather, they attempt to solve a problem for the business.  At my company, Helpstream, we are focused on solving real problems for real people with Web 2.0 and Communities.  That’s the biggest reason why I joined, together with the awesome team and the product that team has put together.

The web brings us two things:  lots of choices and a short attention span.  Those two things and the musings of these VC’s, when tTaken together, this means that if you don’t solve a real problem with your Web 2.0 technology, you probably won’t succeed.  Businesses, in particular, need to focus on solving real problems for their customers with these technologies because they typically need to show results much faster than startups, particularly in this economy.

Posted in saas, strategy, Web 2.0 | 3 Comments »

Posting for Traffic Loic?

Posted by Bob Warfield on July 22, 2008

I noticed a sudden flurry of posts from Loic Le Meur of Seesmic this morning in Google and wondered what was up with that.  I didn’t actually check on it, but it seemed like a lot of posts for Loic, at least relative to other times.  In addition, he invoked the sacred god of blog traffic by link baiting Robert Scoble.  Seeing the Scoble post, the first thought to go through my head was to wonder whether he was having a traffic problem.

So I brought up the curve for Seesmic on Compete.com:

Seesmic Traffic

Seesmic Traffic

 

I’ve no idea whether this is the source of the flurry of posts, but there is a bit of a downtrend from the peak.  It bears watching…

Posted in Marketing, Web 2.0 | Leave a Comment »

Do You Read the SaaS Curmudgeons? Do You Enjoy SaaS Schadenfreude?

Posted by Bob Warfield on July 21, 2008

Do you read the curmudgeons?  I’m not exactly sure what else to call them, but these are the posts that tell you the new new thing is actually not very good at all.  There is always a willing audience for these sorts of things that are the large audience feeling threatened by the new new thing who would like it to just go away.  There is little downside risk of being found out wrong because they typically write about the new new thing early enough that there is still time for that new thing to screw itself up.  Very often they do too.  Every shiny new thing does not take over the world.  But even if one does, by the time the new new thing is the established way of life, the curmudgeon’s post has faded from memory.

Playing the curmudgeon is a time-honored way to get traffic.  It’s a link-baiting tactic that existed before there were links to bait.  I bring this up having just read Sarah Lacy’s  and Nick Carr’s posts about how terrible the on-demand business is.  Yeah, that Sarah Lacy that didn’t do so well playing the curmudgeon face to face with Facebook’s Mark Zuckerberg.  When you want to play the curmudgeon its usually important not to have too many representatives from the new new thing present, it’s best if they can’t take part in the dialog, and they certainly shouldn’t be as smart as the Zuck is. 

Nick Carr has a long history of curmudgeoning too, although he swings his bat both ways and frequently attacks the status quo as well.  He’s very comfortable attacking the on-premises world with an entire book (“The Big Switch”) and then writing a post like this one that proclaims, “Anyone who thinks the software-as-a-service business is a gold mine is wrong. The economics are fundamentally different from those of the traditional software business – and not in a good way.”  Darn!  Whichever way you want to deliver software isn’t going to work according to these conflicting views.

The Germans have a word for this curious phenomenon of enjoying the pain of others.  They call it “schadenfreude”. 

Let’s put the schadenfreude aside and ask, what would a Marc Benioff or Steve Singh be telling Ms Lacy if she was unlucky enough to be plying this “SaaS is a brutal slog” trade while personally interviewing one of them in front of a large audience as she did Zuckerberg?  Let’s review the major points Lacy is making about SaaS along the way.

Software sold “as a service” over the Web doesn’t sell itself, even when it’s cheaper and actually works.

AMR is quoted as saying “The challenge is you have to spend 50% to 100% plus of revenue in sales and marketing cost,” he says. “You need this [limitless] amount of cash to forever feed the growth machine.”

There’s just one problem with this statement, and the argument that somehow the marketing and sales costs of SaaS make it “a brutal slog.”  The problem is that on-premises software is an even worse slog, except for the very largest brands like Oracle, SAP, and Microsoft.

Think about it.  Every quarter is a scramble to make the number for on-premises vendors.  And when that number is made, the entire license is recognized and the next quarter the company starts over.  At best, there is recurring revenue from maintenance that is perhaps 20% of the original license price. 

SaaS, by contrast, has recurring revenue.  If you didn’t sell a single additional license in a quarter, so long as your customers are happy, you’ll still get the recurring revenue coming in.  Which one sounds like a worse slog to you?  I can tell you from having talked to a number of on-premises companies wondering if they should endure the horrors of a switch (ask Steve Singh of Concur what that’s like) that they’d prefer to deal with the SaaS slog.

Don’t take my word for it, or even theirs.  Take a look at what it costs public companies in terms of Sales and Marketing dollars to sell an incremental dollar of revenue:

Isn’t it interesting that the red squares, representing perpetual companies, are almost all to the right of the other symbols representing SaaS companies?  And isn’t it interesting that the reds wind up even past the point where AMR said the costs were so prohibitive?  It’s actually cheaper for SaaS companies to acquire revenue than similarly sized perpetual companies, and I’m surprised that Lacy and AMR didn’t do their research better to find that out.  The data has been here in this blog for some time for anyone that wanted to look.

And vendors are continually tweaking their software, fixing bugs, and pushing out incremental improvements.

Lacy says, “Great news for the user, but the software makers miss out on the once-lucrative massive upgrade every few years and seemingly endless maintenance fees for supporting old versions of the software.” 

Hold on just a minute there, Sarah!  First of all, the upgrades are almost always included for free in exchange for paying maintenance.  That massive upgrade revenue blip almost never hits, and when it does (for example with Peoplesoft 8), customers are so unhappy that the vendor dare not ever do it again.

As for all th e tweeking and bug fixing, let me tell you something about that.  There is a huge overhead associated with on-premises.  Engineering management colleagues whom I’ve hashed this over with estimate that overhead at about 40% of development cycles.  Yes, Sarah, it will cost you 40% more in ongoing R&D to do on-premises than SaaS. 

Why?

Building the first version may very well be harder for SaaS, but after that, you’re only paying the cost of bug fixing and innovation.  Meanwhile, on-premises has those same costs, but it’s much worse.  The reason?  They have to support multiple platforms and versions in the field.  Let me tell you, supporting Oracle, SQL Server, and DB2 simultaneously, a typical Enterprise makeup, is a lot of work.  Add to that multiple app servers, web servers, and whatever else factors into your platform stack.  With SaaS, it’s one platform all the time.

What about those bugs?  It so happens I’ve surveyed a number of On-premises technical support organizations and asked a simple question:

How many of the bugs reported are already fixed in the latest version of your product when they are reported?

The number was staggering, and ranged from 40-70%.  Imagine that your customers just never encountered 40-70% of the problems.  That’s very good for customer sat.  Even better, imagine you didn’t have to hot fix and patch any of those problems because customers were transparently upgraded in your data center.  Further, imagine no problems due to new untrained IT trying to run the app.  You run the app according to the best practices you’ve established.  I can’t imagine a happier place to be from an Engineering cost standpoint.

Meanwhile Dare Obasanjo chimes in that Partners can’t take a SaaS switch

Dare comes closest to the real problem for on-premises vendors with this.  Sarah Lacy appears to buy Larry Ellison’s claim that SaaS just isn’t profitable enough.  That’s actually far from clear because no SaaS vendors have reached remotely the size of Oracle.  We don’t know what effect total brand domination can have on their sales and marketing costs.  We know there is a pronounced knee in the curve for on-premises vendors that starts at over a billion dollars.  Those companies can sell more cheaply.  We don’t know the effect when you’ve taken so much market share as the big guys have that you no longer are struggling to hit the kinds of growth numbers we see with Salesforce and other SaaS vendors.  Most importantly, we don’t know the impact after 10 years of recurring revenues keep coming in.

What we do know, is that it is extremely painful to switch.  There is huge channel conflict, both internally and externally.  Businesses that want to switch have to endure a couple of years of brutal slog, to use Lacy’s words, to get there.  But once they are there, they never look back.

I’ve seen a number of on-premises companies trying to get to SaaS.  Have you seen any SaaS companies trying to convert to on-premises lately?

Related Articles

It’s becoming obvious that BusinessWeek just doesn’t get SaaS.  Here is another blogger’s take on BW’s foolishness.

Posted in saas | 14 Comments »

Web 2.0 News Flash: Most Customer Community Projects Fail

Posted by Bob Warfield on July 18, 2008

There’s a whole series of blog posts out on a Deloitte study that shows the vast majority of customer community sites fail.  The reasons are interesting.  Part of it has to do with the question of whether the business understands that some community uses are “destination” uses and others are “casual uses”.

For more on this, see my post over on the Helpstream Corporate Blog.

Posted in saas | Leave a Comment »

Google Anti-Gravity Ray is Fading

Posted by Bob Warfield on July 18, 2008

When a company has a monopoly on an extremely valuable franchise that is growing rocket fast, all sorts of unreasonable things happen.  That company levitates.  Almost no amount of spending can bring it down to Earth.  Until, that is, the growth begins to slow.  At that point the anti-gravity ray starts to fade.  What usually happens first is a profitability crisis.  Often the company’s revenues are still growing impressively, but they’re not blowing away analyst’s estimates.  When that happens, attention focuses on profitabililty instead of unbridled growth.

So it was with Google today.

They hit the revenue growth number but missed the profitability number by quite a bit.  The market will punish them severely for it.  Google, for it’s part, will now have to live in a world without anti-gravity.  It wil have to manage itself more efficiently by the numbers, in other words.

The company is legendary for continuous hiring, giving people 20% of their time to work on projects of their choosing, and projects that get built at considerable cost but do not see the light of day or produce meaningful revenue.  All courtesy of the anti-gravity ray.  Unless they can restore its effectiveness, all of that largesse must inevitably slow to a halt.  After all, when a company makes its revenue numbers, but misses its profit numbers, its because expenses are too high.  Fiscal conservatism will have to be put in place.

It will be interesting to see how the innovator’s culture deals with this new challenge.  A crack down on expenses usually doesn’t happen all at once.  Google strikes me as a place that will consider its options carefully before doing anything precipitous.

Om Malik says its a sign Silicon Valley should be worried.  Indeed, an awful lot of the Valley’s economy is associated with ad revenue in some form or fashion.  But there are vital other areas.  SaaS businesses, for example, seem to be doing pretty well from what I gather asking around.  They’re raising money quite successfully and the smaller SaaS players are growing like weeds.

Overseas spending is also an important area that is bucking the trend.  In this day and age, having an effective global strategy is crucial.

If you don’t have an anti-gravity ray, try selling service (Software as a Service or the old fashioned kind–IBM did well on services this quarter) and make sure you’ve got overseas exposure.

Posted in business, Web 2.0 | 8 Comments »

Big Screen Kindle for College Kids is Brilliant

Posted by Bob Warfield on July 18, 2008

Remember how much college textbooks costs?  Maybe you’ve bought some recently.  It’s horrendous!  And the reason is not that many are printed.  These tomes are not best sellers in most cases.  They’re thick, they have illustrations, and they are expensive to print.  Double expensive because the printing runs are not for very many copies.

Enter Amazon’s plans to introduce a new Kindle with an 8 1/2 x 11″ screen.  Perfect!  Kindling (sorry Fahrenheit 451 fans) textbooks is brilliant.  Radically lower the cost of delivery by eliminating printing and going digital and you can sell them cheaper and still raise eveyrone’s margins.  Plus the kids were raised in a digital world, so they’re ready for it.  On top of all that, those old textbooks are heavy!  I would so like to carry a Kindle instead. 

And why aren’t University libraries being set up around Kindle technology?  Why keep all those crazy books?  Set up a server in a basement somewhere, create some sort of library checkout licensing scheme (Amazon would administer this), and voila! Everything is computerized.  Books are still checked out, so only 1 (or however many the license allows) can have a book at a time, the computer can force the return of the book when it is due. 

Huge potential for digital books going forward.  I’m going to watch Amazon closely.

Posted in business, Web 2.0 | 4 Comments »

 
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