An eBay for Business Software

On first glance, Marc Benioff doesn't seem like a man in a hurry. The

bearlike 40-year-old chief executive of software pioneer Salesforce.com favors

Hawaiian shirts and rarely shows up in the office before noon. He eases into the

day with yoga workouts and barefoot walks on the beach. Yet, since he co-founded

San Francisco-based Salesforce.com six years ago, he has been dreaming up big

ideas at a dizzying clip.

The most recent one came in June. That's when Benioff introduced a

technology, named Multiforce, that he calls an operating system for the

Internet. Customers and software makers can create applications for Multiforce

that can be used over the Web like Salesforce's own software. In essence, he

turned Salesforce.com into a platform for others to build upon-much like

Microsoft's Windows.

Now, Benioff is planning an even more sweeping initiative. On Sept 12, he's

scheduled to unveil something called AppExchange, which he envisions as nothing

less than the eBay of corporate software. It's an online marketplace where

software makers and customers can swap and sell applications they develop.

Companies interested in new software capabilities can search through a menu of

applications. When they find something they're interested in, they can read

reviews by others, try it out for free, and buy it with a few clicks.

Salesforce.com's products fall into a broad category of software called

customer relationship management, or CRM in industry-speak. The applications on

AppExchange, however, can be any kind of business software. And just like

Salesforce's products, they'll be accessible to any subscriber with a Web

browser and Internet access.

Benioff contends that this approach will eventually change the entire

structure of his industry. Software over the Web-commonly called on-demand-accounted

for less than 10% of the $46 bn in corporate software sold last year. But he

says creating an open marketplace for on-demand software will help cause the

decline of the big, complex, and expensive corporate applications sold by the

likes of SAP and Oracle. "It's a big leap for us," Benioff says.

Salesforce.com is under pressure to take the next step because the market it

pioneered is getting mighty crowded. Siebel, the longtime leader in selling

traditional CRM software packages, sells an on-demand version, as do a handful

of startups. Microsoft, which offers customers its CRM software online, is about

to issue a major upgrade. Most worrisome, giant SAP is expected to offer an

on-demand version by yearend.

Loyalty Gambit



AppExchange strengthens Benioff's hand. The marketplace makes it possible for
the company to offer a large array of software that it could never afford to

build by itself. At the same time, if customers adopt other applications running

on its computers, they will be less likely to leave it for a competitor. While

Salesforce.com won't receive any fees when companies buy applications on

AppExchange, it expects the marketplace to help expand its customer roster and

revenues.

The risk for Benioff is that he might be trying to do too much, too fast. Can

he keep all of these balls in the air at once? While more than 80% of

Salesforce.com's customers are small and medium-size businesses, the company

has recently been trying hard to attract larger enterprises lately. It's not

clear if Salesforce will be able to serve both masters. At the same time, to

seed AppExchange, the company is writing more than two dozen applications

itself, potentially putting a strain on its staff. "They're trying to be

both an applications company and a platform company," says analyst Rebecca

Wettemann of researcher Nucleus Research.

Salesforce.com is showing signs of strain. The company delivered strong

quarterly results on Aug 17, reporting revenues up 77%, to $71.9 mn, and net

income up 331%, to $5 mn. It landed a handful of major contracts, including a

5,000-person deal with Merrill Lynch. Still, the company forecast revenues of

$78 mn to $80 mn for the next quarter, while analysts had been looking for as

much as $84 mn. Its stock slid 8.5% the next day, to $20.32.

AppExchange could help spark a rebound. Benioff did not pre-brief Wall Street

on his plans, but industry analysts who got briefings are intrigued. "I

think a lot of small software companies will sign up. They'll want to be on

the magic bus with Marc," says Bruce M. Richardson of market researcher AMR

Research.

Benioff had software's small-fry in mind when he dreamed up AppExchange. He

saw that Multiforce would make it possible for software developers to market

their programs to all comers via a vast directory. Already, 35 software makers

have 70 applications under construction.

But the appeal of AppExchange isn't limited to the tech industry's

pint-sized players. Consulting giant Accenture, which just started building a

systems integration practice around Salesforce's offerings, is considering

writing programs to run on AppExchange. "I was a skeptic two years ago that

Salesforce.com would make its way in the enterprise, but we're now seeing our

customers deploy it," says Woodruff Driggs, head of Accenture's CRM

system-integration business.

Merrill Lynch, for one, is avidly interested in Benioff's marketplace. It's

thinking about asking some of its own tech suppliers to sign up for AppExchange.

That way, their applications will run more dependably and will be better

integrated with other programs running on the Multiforce platform, says Andy

Brown, Merrill Lynch's chief technology architect.

For Salesforce.com's smaller customers, AppExchange holds some of the

attraction of Linux and other open-source software. Once they write a

Salesforce.com add-on for their own use, they can simply press a button to make

it available to others-with their data removed.

Benioff's competitors make light of his grand vision. "It looks great

on PowerPoint, but on planet Earth, it won't fly," predicts Zachary A

Nelson, CEO of NetSuite, a small software-on-demand specialist. Nelson and other

rivals claim that Salesforce.com's own applications don't meld well with

traditional corporate software. Shai Agassi, a member of SAP's executive

board, says there's no way an aggregation of small applications like

AppExchange could replace SAP's packages, which he says provide about 80% of

what's needed to run a company. "Salesforce.com is a CRM company. Marc is

trying to make noise and buzz about something bigger, but that's all it

is," he says.

Analysts agree that AppExchange won't replace SAP's armada of programs-at

least, not anytime soon. But they see it as a smart idea that would play very

well in small and medium-size businesses. "I think this ecosystem will

grow, and it will grow fast," says analyst Robert P. Desisto of market

researcher Gartner.

By Steve Hamn in New York in BusinessWeek. Copyright 2005 by The McGraw-Hill

Companies, Inc

An Online Applications Mart

Salesforce.com started out selling software for salespeople, delivered via

the Internet. Now, with the new AppExchange, it's attempting to become a

marketplace for a wide variety of corporate applications.

Customer Contributions After they create customized programs to run on

top of Salesforce.com, customers can post them on AppExchange, either to sell or

share. For example, a company that develops a program for calculating its

salespeople's compensation could sell that program.

Software Sales Software makers can create versions designed to run on

top of Salesforce.com's service and post them for sale on AppExchange.

Sales Force's Stake The company won't take a cut of each sale the

way eBay does. Still, it expects the marketplace to boost demand for its own

software.