Even before Salesforce.com Inc. (CRM:US) went public in 2004, Chief Executive Officer Marc Benioff wasted few opportunities to poke fun at bigger, more established software companies, calling their products “landfill.”
In his management book “Behind the Cloud,” Benioff advised upstarts to “box above your weight.”
Now, Oracle Corp. (ORCL:US), SAP AG (SAP:US) and Microsoft Corp. (MSFT:US) are punching back, buying companies that offer business-management tools over the Internet, gaining traction in an area pioneered by Salesforce. That’s stepping up pressure on Benioff to move beyond his core -- programs that manage sales -- and accelerate a push into software-development and social-media marketing, part of a bigger market valued by UBS AG at more than $100 billion.
“They need to stay ahead of the curve or else they’re going to get clobbered,” said Josh Greenbaum, an analyst at Enterprise Applications Consulting in Berkeley, California.
When he started Salesforce, Benioff bet that wider use of the Internet would help enterprises stop buying servers and software and installing them in-house. The bet paid off, as companies look to use online services -- now called cloud computing -- to cut costs and streamline operations.
“There are more competitors entering a market pioneered by Salesforce,” said Rick Sherlund, an analyst at Nomura Holdings Inc. in New York, who recommends buying (CRM:US) the shares. “We’re starting to see a lot of consolidation activity as Microsoft, Oracle and SAP want to be more broadly competitive against Salesforce.”
Concern over accelerating competition has diminished Salesforce’s value. The company’s enterprise value (CRM:US) -- which accounts for its debt and market capitalization -- will fall to 5.85 times sales in the current fiscal year, versus its yearly average of 7.72 since 2005, data compiled by Bloomberg show. On the same basis, Oracle’s value (ORCL:US) has held up better amid an acquisition spree (ORCL:US), with a ratio of 3.56 for its current year, compared with an average of 4.64.
Salesforce’s revenue growth may taper (CRM:US) this year and next, from the 37 percent rate in the fiscal year that ended Jan. 31. The rally that lifted (CRM:US) Salesforce’s stock 64 percent through April 19 from a low on Jan. 4 has since fizzled. The shares have declined (CRM:US) 15 percent since that peak.
Benioff for years has beaten the drum for corporate software delivered as an online service as a more efficient way for companies to run sales, marketing and customer support. Instead of paying multimillion-dollar licensing fees up front, customers rent its applications by the month via a Web browser, with Salesforce handling updates.
“The moves that Oracle, SAP and Microsoft have made validate what Salesforce.com has been saying for over a decade,” Benioff, 47, said in an interview from his vacation home in Hawaii. “When you’re one person with a flag like we were for many years, it’s much harder.”
Benioff, who recently joined the board of Cisco Systems Inc. (CSCO:US), spent 13 years at Oracle before starting Salesforce in 1999 with the blessing of Oracle CEO Larry Ellison, who also invested $2 million in the venture.
A decade later, Ellison, speaking at a posh Silicon Valley hotel three summers ago, lambasted Salesforce, accusing the software maker of repackaging decades-old technology. Cloud computing, Ellison ranted, was “nonsense.”
“All it is, is a computer attached to a network.” Of Salesforce, Ellison added, “They change a term and they think they’ve invented technology.”
These days, Ellison has embraced cloud computing, buying companies and starting his own online computing service to deliver Oracle’s business applications and database software.
Oracle, based in Redwood City, California, says it’s already booked (ORCL:US) $1 billion from cloud computing, as well as online human resources and customer support companies it acquired in the past year. Customers include Yahoo! Inc. (YHOO:US), Starbucks Corp. (SBUX:US) and Hyatt Hotels Corp. (H:US)
Beyond the $13 billion customer relationship management software segment, UBS analyst Brent Thill estimates the broader platform software market, which includes databases and development tools, to be worth $101 billion.
“We’re the second biggest software-as-a-service provider today and to be honest with you, we just got started,” Oracle co-President Mark Hurd said in a recent interview.
Oracle also plans to add accounting, supply chain management, and manufacturing planning to its online offerings.
SAP, the world’s largest maker of business management applications, reported better-than-estimated earnings (SAP:US) thanks to its SuccessFactors online HR software. Redmond, Washington-based Microsoft, a perennial Benioff target, last month bought Yammer Inc., a Facebook-like corporate networking tool that competes with Salesforce’s Chatter.
To contend with the newfound competition, Salesforce is expanding into human resources and tools for marketing on Facebook and Twitter. At its annual Dreamforce conference on Sept. 18 in San Francisco, where Salesforce is based, the company plans to detail its new human resources offering. Benioff will unveil Work.com, which will let managers set organizational goals and recognize employees.
“They’ve been making a lot of acquisitions that give them new capabilities,” said DuPont Co. (DD:US) Chief Information Officer Phuong Tram. DuPont has standardized on three vendors -- SAP, Salesforce and Microsoft -- and expects each to deliver technology it can rent on a monthly basis, he said.
Salesforce can hit $10 billion in sales given its pace of growth, Benioff said, though he hasn’t set a target date. Analysts expect it to reach $10.8 billion in annual sales by 2020, according to estimates compiled by Bloomberg.
Benioff is drawing on the expertise of John Wookey, a Silicon Valley engineering executive who joined Salesforce last year after spending 12 years at Oracle and almost three at SAP.
“The challenge here is it’s a company that grew out of selling primarily to small and medium-sized businesses, to selling to large enterprises,” Wookey said.
Wookey needs to prove his mettle at Salesforce after presiding over the years-late Fusion suite at Oracle, then departing SAP after less than three years.
“John Wookey needs to establish some credibility as a guy who can deliver,” said Greenbaum. “He’s had very high profile roles, and in each case left before the job was done.”
Salesforce and Oracle are also dueling to take advantage of growing corporate demand for marketers to create campaigns and garner product feedback from Facebook and Twitter users’ streams of posts.
Oracle bought closely held Involver Inc. following deals for Vitrue Inc. and Collective Intellect Inc. in the past three months. Google Inc. (GOOG:US) on July 31 said it would buy Wildfire Interactive Inc. for about $250 million to let ad clients design social media marketing campaigns.
The acquisitions echo Salesforce’s $745 million deal for social marketing company Buddy Media Inc. on June 4.
“The reason Oracle and Salesforce are buying companies in my space is they see there’s a lot of activity, and the growth rates are much higher than their growth rates,” said Rob Tarkoff, CEO of Lithium Technologies Inc., which helps companies, including McDonald’s Corp. (MCD:US) and Sephora USA Inc., create social media campaigns. Tarkoff said he’s fielding calls about a potential acquisition on a weekly basis.
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