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.