Software as a Service Archive
I've been quite the juggler so far this week, so I thought I'd link to some of the stuff I've been up to.
Here's my latest BusinessWeek column. It talks about the erosion of local advertising amid newspapers and why we don't care enough that they're going away to, oh, say, subscribe. Further, I throw doubt on this whole idea that these local ads will flood online creating the next great market. Needless to say, it's created some controversy and push back. A dozen or so companies have written me to tell me they're indeed selling ads to local companies. I don't doubt it. My point is it's near impossible to build one huge-billion dollar business selling ads in local markets throughout the country. It's a bit like the push back I got on my software as a service column. Yeah, customers love it and you can get to $10 million-$50 million in revenues pretty easily. If that's the new end goal for venture backed startups the Valley is in trouble.
Meanwhile, I've also been busy deriding Sirius and actually defending Google over at TechCrunch. And below is the first installment of a four part series of interviews with the controversial Jimmy Wales, founder of Wikipedia. It's a longer clip than we usually run, but I found the stuff at the end about why Wikipedia doesn't put ads on its site particularly interesting. Enjoy!
Earlier this month I made my feelings about OpenTable abundantly clear, and as I said then, the reason the company is most likely anxious to get all those unused dining checks off its books is because it's gussying up its financials to go public. Of course, I thought the company would wait until the market recovered. Nope, they filed today, which means OpenTable is either very optimistic about a turnaround in 2009 or really needs some cash.
Since flaming the company, I've had a few conversations with people who really do love it, find it useful and have not had my issues. (Although most everyone I've talked to agrees the dining rewards program is lame, at best.) Still, should OpenTable price, I don't think this is a stock you want to own for the following five reasons:
1. Did I mention it's 2009? Have you seen the markets?
2. OpenTable is essentially a local business. They have to conquer territory market-by-market, restaurant-by-restaurant. Local is one of the hardest and most expensive things to do well. It's also one of the only things that the Internet doesn't particularly make easier. Just look at Craigslist: The gods of local. The site's traffic is still dominated by a few big cities. Local hits tipping points and network effects but only in each city. There is traditionally no national tipping point for locally-oriented businesses. In other words, a restaurant in Memphis isn't going to do something because a restaurant in New York finds it valuable.
3. Margins. Imagine that! OpenTable isn't very profitable selling software-as-a-service. That's because it's a very expensive business model to scale, as I've detailed at length here. In short: The software doesn't sell itself, subscription revenues are monthly and steady, but lower in dollar amount and customers can cancel at any time. Such is the pay-as-you-go business model. You can build a huge business here as Salesforce.com has proven. Unfortunately, it's really the only one who has proven that. Even Netsuite, who I'm very bullish on, has struggled with profitability.
4. Restaurants are going to be closing and cutting corners as the recession wears on-- that can't be good for revenue growth. When fewer people are coming in your doors, do you need to pay for a reservation service?
5. The online travel agency effect. I could be way off here, but a lot of San Francisco restaurants just take reservations on their own sites, eschewing OpenTable. They don't want to pay the fees, and why should they when building and maintaining a Web site isn't exactly hard in this day and age? OpenTable may have brought restaurants into the online age, the way sites like Expedia and Travelocity did for the airlines, but increasingly vendors hate middlemen. Especially middlemen who control the customer relationship and take a cut of the proceeds. A lot of restaurants will still want to outsource, of course, but I think it's a risk when it comes to growth.
To OpenTable's credit, they reached out to me after that nasty early January post, and I was supposed to have a sit down with CEO Jeff Jordan. That's not happening now thanks to the quiet period! But I look forward to talking to him when he can talk again. OpenTable has always been ostrich-like when it comes to media so maybe there's something I'm missing here. I'm always open to someone changing my mind, as Tony Hsieh knows!
I have written a few times about my total dislike of OpenTable.com-- a site I adored when it first came out. Please. Someone take them down with a better product that caters to its users and not just the restaurants that buy its software. I will personally invest in the idea. OK, that's not true, because my freezing 100-year-old Victorian house takes all my money. But I'll throw you a launch party or a parade or something.
My problem in short:
OpenTable was founded amid the dot com bust and survived. Good for them. But it was infected with a lot of the worst of Web 1.0 thinking, particularly the belief that biz dev deals and partnerships with other businesses were more important than users. Back in the late 1990s, with a few exceptions like eBay and Craigslist the idea of a "community" mattering wasn't really a necessity of building a consumer Web business. It was enough that users could communicate, find things and buy things in the comfort of their living rooms using the brand new Web. Combine that with the crash and you had an environment that required any surviving company to find a way to make money quick and focus on users and features later. That's the story of OpenTable: A company that is ostensibly a consumer business, but actually makes its money from selling software and hardware reservation engines to restaurants.
Make no mistake, users: The company knows who signs the checks.
When I took the job at TechTicker, I had no idea a massive credit and banking crisis would become the dominant story of the markets. As I wrote before, it makes me feel a tad irrelevant as someone who focuses on tech companies and startup culture. But the plus is it's forced me to stay very engaged in the news flow of this crisis, and re-engage with my finance reporter roots.
Fun fact: I actually started my career covering finance. The reason I don't have a Southern accent? I used to get mocked when I called Wall Street and said things like, "What do y'all think about this market?" Good times.
Anyway, during the last downturn I talked to experts over and over again who talked about a flight to quality-- ie focusing tech holdings on the big, safe tech names-- as the way to survive the turbulence. Similarly, I have CNBC on in the green room all day and all I hear is that same advice. OK, so let's see how you did if you took it: According to this chart you would have lost money on nearly every name.
Now, I KNOW, people will say ten years isn't long-term enough. Tell that to someone who was ten years away from retirement in 1999, first of all. Also, that should be considered long-term in technology, shouldn't it? It reminds me of something Peter Thiel once told me that flicks to the cultural difference between Silicon Valley and Wall Street: A bet on, say, Microsoft isn't actually a technology play. Because Microsoft wants things to stay the same. It's actually a vote against innovation.
What if instead of keeping the bet on Yahoo ten years ago as the experts told you to, you bought Google at the IPO? Or instead of SAP, you went with Salesforce? Young risky companies, yes. But, per Peter's point, it seems that's a wiser bet if you're a believer in the fundamentals of tech, because the fundamentals of tech involve change and disruption. Very few companies can stay on top of multiple market and technological shifts. Investors should think long and hard about that conventional wisdom this time around.
Last month I wrote a column for BusinessWeek about the hidden-- and substantial-- marketing costs of software as a service and it created a bit of a stir. The theme of the piece was that the Internet had killed what was once the greatest tech business model: shipping a CD of software that was too brutal to rip out and charging millions for upgrades not to mention ongoing maintenance fees. The business model that built Microsoft and Oracle and SAP, and the business model that injected profitability and growth into maturing hardware names like Hewlett-Packard and EMC.
Of course, the SaaS model-- while bad for investors and would-be tycoons eying all of Larry's yachts-- is great for customers and for those entrepreneurs who were nimble enough to "get it" ten-plus years ago. As much as I firmly as I believe the myth of the magic SaaS business model needs to be busted, I never once disputed that SaaS wasn't the future of software. Think of it like the record industry: Is an Internet world better for label tycoons? No. But it's better for customers and, well, it's a reality.
Recently, we've seen a few signs of old software grappling with this reality. One is trying to figure it out. Another is just pretending the big, loud, SaaS elephant trumpeting in its ear isn't in the room.
Ok, that headline was a little mean. But I wanted to call attention to the fact that the last great 1990s stand alone application company has fallen: JDA Software Group (who?) has bought the once-great supply chain management company i2. i2 was purchased for $346 million, despite $300 million of annual subscription and maintenance fees. Sounds about right.
i2 has been one of those walking dead software companies-- like Siebel, BEA and others Oracle has sucked up like a Hoover Vacuum in recent years-- and its ignominious purchase at a time only software-geeks like me remember its relevance is a testament to how much the "best of breed" approach has failed in enterprise software. I think the same thing is in store for on demand software, which has already been a tougher business model than people thought a few years back, with specialty vendors making less money, with lower market caps. Bring on the acquisitions!
Since this BusinessWeek column about the hidden costs and brutal slog of building on demand software companies ran, I've gotten a load of emails from people telling me how wrong I am -- mostly from companies with sub-$1 billion market caps and languishing stocks. Somehow, I think these people missed the point of the column. It's not that you can't build a "nice" business in on demand. It's not that it's not the future of software. And it's not that it's not what customers want. It's just that the next generation of multi-billion software names are looking pretty MIA.
Still, congrats to i2 on finally finding what appears to be a good home with JDA, another best-of-breed supply chain company. A lot of people have worked hard to clean up a lot of bubble-inflicted messes at the company and it must be nice to have some finality on some level. Here's a story I did a while back for BusinessWeek that chronicled part of it.
This is yet another guest post by my super popular contributor and Twitter friend, Paisano. This time I asked him to do a think piece on that over-used buzz word of tech buzzwords, THE CLOUD! Enjoy!
The rumblings you hear overhead isn't thunder but everyone scrambling to setup shop in the cloud these days. The consensus is that we want to run and store all of our stuff in one centralized location online, not in several different local destinations which is a headache and time consuming. Let's focus on the cloud computing strategies for three of the biggest angels on the web these days: Yahoo, Microsoft and Google.
I never thought I'd see the day Marc Benioff was a hard interview to get. In the earlier part of this decade, he helped make enterprise software sexy through his stunts and very quotable bon-mots anytime a reporter would ask.
But most of this year he was so busy jet-setting around the world on his customer tour to evangelize his force.com platform, he had no time for little old Sarah Lacy. Well, until this column. For the record, I wasn't so much trying to be snarky as I was legitimately curious why he was suddenly so MIA-- particularly given widespread rumors he wants to sell. That same press-accommodating Benioff clearly still existed though, because as soon as he saw it, he reached out to me. Within days I was flying back from my first UGBT stop, showering, and racing to Half Moon Bay to interview Marc at Fortune's Brainstorm conference. Huge thanks to my crew for jumping through hoops to make it happen on short notice and produce four lovely clips.
I used to cover software for BusinessWeek, so it was hardly the first time we've met, but I hadn't seen Benioff in a while and I was struck by how mellow he came across. I thought it was one of the best interviews I've ever done with him. Rather than Twittering all four links, I decided to just collect them here. (TT really needs a better system to link similar pieces together) I hope you enjoy! (We were all pretty amused by the Segway parade going on behind me. It was all my graphics editor could do not to edit in more ridiculousness just to see if we'd notice.) Clips on the jump!
An unforgettable portrait of the emerging world's entrepreneurial dynamos Brilliant, Crazy, Cocky is the story about that top 1% of people who do more to change their worlds through greed and ambition than politicians, NGOs and nonprofits ever can. This new breed of self-starter is taking local turmoil and turning it into opportunities, making millions, creating thousands of jobs and changing the face of modern entrepreneurship at the same time. To tell this story, Lacy spent forty weeks traveling through Asia, South America and Africa hunting down the most impressive up-and-comers the developed world has never heard of....yet.
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