Marc Knows Marketing

In a recent interview with Victoria Murphy Barret of Forbes, salesforce.com CEO Marc Benioff elaborated on his marketing prowess. And indeed Marc has done a great job selling the vision of salesforce.com. His company's stock carries the highest multiple on revenue and earnings of any comparable company in its category. Possibly in any category. But despite all of this success (and I am a big fan of salesforce.com), in the final analysis, it remains to be seen whether or not Marc knows economics.

I heartily agree with Marc that the application software business is broken. I disagree, however, that on-demand applications are necessarily the best way to cure what ails the industry. I believe that software appliances may prove to be more economical than Software as a Service (SaaS).

Just 2 weeks ago, I was in the office of a very successful senior executive of an application software company. He was very bullish on their use of salesforce.com, and he was going to give me a demonstration of the application. Well, the pages were too slow to load for the demonstration to be effective, so we skipped it. In all likelihood, it was not a salesforce.com server problem, but instead some latency problem on the Internet at that moment in time. It got me thinking that high speed LAN technology is much cheaper and much more reliable than the comparable Internet connection.

Consider that you can deliver 100Mbits wireless connectivity to an entire office with a couple of Linksys routers that will run you a grand total of about $100. These are solid state devices that never break. What would 100Mbits dedicated connection to your SaaS provider cost you? Thousands per month, or more.

"No matter," you say, "A little latency is a small price to pay to be shed of all of the misery of integrating applications with infrastructure and managing the resulting snarl of code and maintenance from multiple vendors that don't seem to communicate with one another." Indeed, the legacy approach of integrating and maintaining an application atop a general purpose operating system lacks the elegance of an engineered solution. But what if an application was as easy to use as a song downloaded from iTunes onto your iPod? That day may be coming sooner than you think.

With a software appliance, the software vendor integrates the application with just enough operating system to support the application. A browser interface is provided to configure the application, just like with SaaS. Installation of the application is as simple as downloading a file onto a server, because server virtualization technology from a vendor such as VMware turns the server into a "player" like an iPod. Have you ever had one song "crash" another song on your iPod? Of course not. When you load your servers with virtualization as the base layer, you get the reliability of the iPod player for applications that are delivered to the server in much the same manner as songs are delivered to the iPod.

The result? An application with zero integration and maintenance hassles (the application vendor does all that work for you), with a browser interface, running on a server that costs less than $2000, delivering high bandwidth output to everyone in the office (and equivalent bandwidth to everyone outside the office as any other SaaS application).

I think I'll take Marc's lesson in marketing, and stick with the economics of the software appliance approach to build my business.

Virtualization is a Poor Man's Multi-Tenancy

A few years back I recall reading several analyst comments about how Siebel was going to eat salesforce.com's lunch just as soon as they could get that sucker online. I just laughed. I laughed because I had some experience with both salesforce.com and with another application provider who "put their app online," and I understood thoroughly the difference between an application that is architected for the Internet and multi-tenancy, and one that is not.

My experience with salesforce.com was both as a user (Red Hat was a very early customer in 2001)and as a supplier (my team called on salesforce.com as part of our Linux sales effort). I knew that salesforce.com had a pretty lean infrastructure due to multi-tenancy (serving lots of customers with just a small number of Linux servers). I also knew that they designed the application and the interface to tolerate the uncertainties of the Internet. By contrast, I had witnessed several cases where the ERP/CRM vendor simply put up a couple of machines dedicated to serving customers from their data-center. It was rarely successful, and the applications typically came back in house quickly. These legacy applications simply were not designed for the uncertainties of the Internet. Nor did they have a multi-tenant design to serve many customers from a set of shared systems (efficiency being the key to the SaaS model).

Well, part of that problem may be going away soon. High performing virtualization coupled with virtual appliances that are tuned to be efficient (i.e. no overhead from a bloated, general purpose OS) may provide the first hope of multi-tenancy for legacy applications. Add the soon-to-be-introduced quad-core processors from AMD and Intel, and you may just have a recipe for efficiently serving lots of customers from a common infrastructure. Add Amazon's EC2 and S3 services, and you may not have to endure fixed costs at all to effectively serve your customers with an on-demand version of your application.

None of these developments solve the latency problem of the Internet, but they do promise to make the costs of entering the SaaS space much lower for software application companies. Separating the infrastructure from the application architecture will be a very good thing for application companies that are looking for ways to better serve their customers and grow license revenue.

The Traditional OS Goes Away

I have said it before, but someone else said it this time. Tony Iams, senior analyst with research firm Ideas International Inc., said it in an interview with Patricia Pickett of eChannelLine. Here is the money quote:

"The traditional OS that we know no one loves basically goes away and becomes part of the application itself. The application and OS code are combined and wrapped up in a virtual machine and shipped."

Looks like Tony is now a student of the virtual appliance university. Welcome to the club, Tony. I'll send you the "No OS" pin you see at the top of my blog site.

IDC Predicts Software Appliances

In mid-December, IDC released its 2007 predictions for infrastructure software. The number 2 prediction on the list is:

"Software appliances will become a household word in 2007. The convergence of virtual machine technology and a new initiative by several tool vendors is giving birth to this new form of software packaging."

Just 12 months ago, the concept of a software appliance was a very nascent trend when Steven Hamm wrote an article in BusinessWeek describing the concept. VMware had just decided to give the player away for free, and they were offering 3 software appliances from their site as demos. The WikiPedia definition for Software Appliance was created in December of 2005.

Now, in January of 2007, IDC has predicted household familiarity is coming soon. VMware offers more than 350 virtual appliances from VMTN. rBuilder Online now has over 2400 software appliance projects, with over 1000 software appliances available as downloads. And Gartner has predicted that Windows Vista will be the last of the monolithic operating system releases because the software appliance approach will make the general purpose OS obsolete. What a difference a year makes.

Why should all the folks in the server application business care about this trend? Because software is too complex, the ratio of services to license sales (6:1) is ridiculous, and license sales have become stagnant due to the excessive cost of deploying and maintaining software solutions. Software appliances coupled with virtualization offers the possibility of market expansion and license sales growth through dramatic simplification of deployment and maintenance. Yes, SaaS is also a fine answer, but it requires a total architecture overhaul and operational expertise that most software companies do not possess. Software appliances are a better answer for most server application vendors.

Want more proof? Read Digium's latest press release about their software appliance, AsteriskNOW. Simplification, market expansion, a better solution for customers. We should all be experiencing the bliss that Digium feels at this moment.