Salesforce wants to be the dominant cloud platform for business. Their view is that computing has seen two waves: the first was the mainframe, and then the PC client server, and now the third is cloud computing. They have been consistent about this since their inception in March 1999, so this is no recent bandwagon hopping.

2. They Have a Good Shot at Meeting This Ambition

They have a powerful mix of capability and relentless focus. They have the resources -- cash, cash flow, clients, track record, management team, and so on -- needed to execute on this vision. Their competitors are bigger, but Salesforce has the advantage of focus. They are pure play, and they have no legacy to protect.

3. They Are a Marketing Machine with Flair

Having attended a few big rah-rah events, such as Java One, I see that Dreamforce compares well on scale, details, and flair. Its messaging and visuals were consistent and powerful, and everything just worked well. This all costs a lot of money (which relates to the next point), but that money has to be well spent, and they seem to be doing that. The presentations had real flair and humor. Benioff knows how to be controversial to get press. They are a billion-dollar business that still acts like a start-up. Even the music was good.

4. Their Biggest Issue Is Maybe Price

There are many lower-cost competitors to their base CRM application. Now that SaaS is increasingly accepted, due in part to Salesforce's evangelical marketing, smaller competitors spending a tiny fraction of what they spend on marketing can undercut them. Their most visible competitor is Zoho, and it does not look like Zoho is going to shy away from this battle, and they have staying power. So Salesforce is fighting on two fronts. On the one hand they are competing with Oracle and SAP for big enterprise accounts. On the other hand they are fighting low-cost competitors, such as Zoho. This will require all their marketing and management skills.

5. They See Today's Troubled Economy as Their Moment to Win Big

They got their early big traction in the last downturn around 2001 and 2002 and have never looked back. They are greedy while others are fearful. They spend more, grow, and hire, while other firms lay off people. The basic economic advantages of cloud computing, such as lower capital expenditures and a faster time to market, resonate in a downturn to the point that they overcome the resistance of conservative buyers to cloud computing.

6. Their Vendor Eco-System Is Making Money and Acting Bullish

Salesforce knows that this matters. This is the lesson they learned from Microsoft. Will they move into the spaces currently occupied by vendors? Of course they will. Vendors will have to be agile; that is just how the game works. But today, in these tough markets, we see vendors that are profitable, growing, hiring, and raising money. The winners in many segments are being defined now. It is a great time to be an entrepreneur in this space. Salesforce knows how to leverage all its capability to make a few winners do very well and then promote that success big time, thus inspiring others to come on board.

7. They Believe That Good Software Design Matters to the Core Economics of Cloud Computing

They refer constantly to their "multi-tenant kernel," which sounds very techie for a such a marketing-driven company. It does appear that they are not suffering from the scaling and reliability problems that we have seen affecting consumer Web 2.0 ventures such as Twitter and Facebook.

8. They Also Know How to Partner with Big Companies to Make Themselves Look Bigger

They wheeled out large companies, such as Google, Facebook, and Amazon, as partners. The message was, "We are at the center of an eco-system with big partners." This makes large conservative enterprise buyers feel comfortable.

9. Focused Research and Development

They have a predictable and focused R&D plan, with a major theme each year. This again makes large conservative buyers feel comfortable: they know what to expect.

10. They Will Need to be Careful About Usability Issues

They are adding so much functionality and so many partners that they face the danger of users getting confused and going to simpler point solutions. That "hairball-of-complexity" problem bedeviled Microsoft as it grew fast, but Microsoft enjoyed a lock-in that Salesforce cannot count on. The SaaS world is naturally lock-in resistant, with low switching costs. There is no sign of this being an immediate problem for the company, but it is something they will have to look out for.

See also our most recent story about Salesforce: Salesforce.com Says Hello World.

For many years, Salesforce.com has had the policy of announcing their next big move on the eve of their annual Dreamforce event (aka, where Salesforce partners get to pitch their stuff). In past years they announced internal facing applications, used by employees. Even if the employees were talking to customers, it was still an internal app. The news was simply that it was SaaS.

Today Salesforce.com Says Hello World

They are announcing a way to build apps that connect the internal facing processes that drive and account for transactions with the external public web based apps. This is a big move. The two examples they showed were travel and recruitment, but it does not take too much imagination to think of more. Given the size of the Dreamforce ecosystem on display in the convention center, one assumes that there is a big pipeline of apps under development.

Which Way Do You Face?

As with any new tool or API, there are other ways to achieve the same end. The question is simply which way is more efficient. It is really a question of which way you face. Do you look from the web into back end enterprise systems? That is the traditional way it is done today. The web developer asks the back end system how they want their data and how it will get data back. The Salesforce.com way looks the other way, from the back end systems out to the world.

Timing Is Good To Get Developers

They are likely to get a lot of traction with developers for three reasons:

1. Enterprise SaaS is going mainstream, it is a big market to get into right now.

2. Consumer services are facing a downturn, developers need something new.

3. Getting into back end processes is a better way to build long term client engagements.

Platforms Here, Platforms There

Platforms are everywhere. Developers love Amazon Web Services and Google App Engine looks so cool. There will be a bit of tug within the developers between what looks most technically elegant with least lock-in, versus what will make money quickly and reliably. It is possible that Salesforce will appeal to these more pragmatic types, the ones who have been the mainstay of the Microsoft ecosystem in the past.

In this era everything is different - the stack, the players and the potential for value creation. Let's outline the basic shape of this emerging era, in particular defining what makes up the new stack.

At the Top - SaaS: these are the end user services that we actually interact with, such as Basecamp. This is the "final mile". This is what we used to call application software, vertical systems or value added systems. Although SaaS is sometimes also used to describe the layer below, we prefer to label the top as SaaS and the middle as Cloud Computing. Typically this layer has had thousands of companies. These are our bootstrapped Gritty Entrepreneurs.

In the Middle - Cloud Computing: this is the Cloud where we witness the "sound and fury" of BigCos battling it out - Amazon, Google, Microsoft, IBM and others. This layer is the most fluid and where all the deals are. This layer can be seen as two layers, but the difference is very blurry. Some SaaS companies create some "middleware" that they position in this layer. Some start-ups create middleware as their primary focus, with an end game of getting acquired by one of the Cloud BigCos. Over time, these will tend to get rolled up into a few big platforms that compete by providing higher levels of abstraction for developers.

At the Bottom - Core Technology: this is what we might call "traditional Silicon Valley", hard core patent-protected technology sold to big companies that use it as part of their stack. Arista, the latest venture from Andreas Bechtolsheim falls into this category.

Spectators And Players

Most of us are spectators in the Cloud Computing game. It is fun to watch the big guys duke it out and ReadWriteWeb will continue to report on that. Entrepreneurs need to understand the strategies of the big players who will be their "platform partner". But we all have lots of opportunities to be players at the top of the stack, in the SaaS layer. This is where there are low barriers to entry, massively reduced R&D costs and incumbents who will be slow to embrace SaaS for fear of cannibalizing their core business.

Has The Stack Value Inverted?

Traditionally, value was at the bottom of the stack, which is why Microsoft and Intel were so dominant in the past. With a few notable exceptions like SAP, the top of the stack tended to be smaller companies.

It is possible that this has inverted, that the real value is now at the top of the stack and not at the bottom. For example, Arista will probably be very successful, but their market will be limited to the few companies who build huge data centers. Those clients will place huge orders but will also have a lot of negotiating clout.

Lock-In And Network Effects?

So maybe the value is all in the middle now? This is certainly where all the action is today. The two big questions at this layer are:

1. Lock-in? How easy will it be to move your SaaS service between Amazon AWS, Google App Engine, Microsoft Azure and other contenders? Today there is quite a lot of technical lock-in, you cannot move from one to another without some re-coding. But is that a big deal? No, because a) any Platform that jacks up prices will get hammered by their competitors and b) when you do need to move, it may require some coding changes but the move is transparent to end users. So, very little lock-in.

2. Viral Network Effects? Market leaders will get a lower cost of sale, but there is no social media viral effect at the Cloud Computing Platform layer.

Without Lock-In or Viral Network Effects, this layer will be commoditized. It will be very, very big but it will be a thin margin commodity business that is all about scale.

So The SaaS Cream Floats To The Top?

This is our theory. The value is with the small SaaS companies in the "final mile" interacting with end users. This is what we are seeing with our bootstrapped Gritty Entrepreneurs.

What About Players Across Layers?

Next week I will be at Dreamforce, the Salesforce.com annual event in San Francisco. Salesforce.com is the SaaS pioneer that defined the market. At some stage they decided that being on the top layer only was not enough and they created their Force.com "platform" on which others could create applications.

IBM also operates at many layers of the stack. But they do so with separate divisions that would be large companies in their own right.

It will be interesting to see how this stack evolves and specifically how well Salesforce.com succeeds with their mission to operate at both the top and the middle layer.

If you run a traditional enterprise software company, you have plenty of reasons to feel warm and comfortable:

1. Your conservative customers agree with you that change is bad and new technology is a terrible risk. (The people among your clients who don't agree with this won't be talking to you, they will be busy innovating - so you won't hear an opposing view).

2. Your Annual Maintenance Revenues continue to grow, as clients cannot risk a problem with software that is mission critical and complex. As your product is now quite stable, the profit margin is wonderful. (You don't notice that the SaaS barbarians are scaling your castle walls using these fat margins as ladders, saying: "Our SaaS monthly cost is less than your current AMC".)

3. Your Professional Services business continues to grow. Conservative clients prefer to go to the company that built the software, rather than a third party, so you can eat into your ecosystem whenever you have a revenue short-fall. (The fact that the software needs this much implementation hasn't gone unnoticed by the SaaS proponents).

In this benign financial environment, you look at a downturn as a good time to emphasize words like "tried and tested, stable, enterprise, integrated, customized, safety" and so on. You can assume that any drop in License Fee revenue is simply a cyclical problem, that good times will return automatically.

The frog in the slowly boiling water also feels warm and comfortable for a while...

It Is Hard For Old Timers To Get SaaSy

Repeating old mantras in the face of fundamental change is natural, because making that change is really, really hard:

1. Putting SaaS financing on an old product is simply the ASP model and that is terrible economics. You will report horrible results to investors for a long time before it turns positive.

2. However carefully you position your SaaS offering versus your traditional product, you will legitimize SaaS to your conservative clients and hasten the decline of your traditional business.

3. Your current client base is not much help. You need to position the new SaaS offering for a new market, where you will be competing on a level playing field with the start-ups.

Lou Gerstner observed in his famous book on IBM's turnaround in the early 1990s, "Teaching The Elephant To Dance", that culture is everything. Big companies need to learn to act like start-ups again.

IBM: Still Dancing

Lou Gerstner's culture shake-up must have been more than temporary, for once again we see IBM, as big and as old as it gets in IT, leading from the front. Just like they embraced the PC as it threatened the Mainframe and then embraced Linux and open source, so now they are embracing SaaS. This is despite facing all the risks described above.

IBM can be bold primarily because the most critical culture that Gerstner brought back was talking to the client to find out what they want. You can always find some people in a big client who support the old way. But if you have a conversation at senior management levels and contrast SaaS with the old model, you will find tremendous enthusiasm for SaaS.

IBM's move into SaaS is complex, as they are a big company with many moving parts. They are also experts at extending the life of really, really old technology with a tweak here, an image make-over there. AS/400 anyone? IBM is also very good at packaging up all the pieces in a way that clients find attractive, with a few little bits of high value "special sauce" added to all the free and commodity bits in the package. In other words, IBM knows how to make money whichever way the wind blows.

Vignette: Rejuvenating Their Enterprise CMS Brand

Anybody remember when CMS (Content Management System) was the hot technology? If so, maybe you bought stock in Vignette when they did their IPO in February 1999. If you sold before March 2000 you did pretty well. Since then of course, the VIGN stock price has suffered the Dot Com bubble burst and nuclear winter.

For a while Vignette used their IPO cash hoard to buy up smaller cash-strapped enterprise vendors for bargain prices. That seemed like a street smart thing to do, but then SaaS came along to take away some of the fun. Then in April 2008, Vignette changed tack and acquired Vidavee, a SaaS player in video content.

Vignette is well-placed to do more. They have cash in the bank, positive cash flow, they have always understood what enterprises want from the Net and now they can make more aggressive moves in SaaS.

How Is The SaaS Pioneer Doing?

Next week I am at the Salesforce.com Dreamforce 2008 event in San Francisco. Salesforce.com has done more to build the SaaS market than anybody. They are in an interesting position. If we view this as a battle of Romans (big, established enterprise vendors) versus Barbarians (pure play SaaS start-ups), Salesforce.com has the scale of the Romans and the positioning of the Barbarians. It should be an interesting week.