Thursday, October 06, 2011

Larry offers Hotel California ...

According to CW, Larry recently raged over Salesforce describing it as a roach motel and pleading the case for interoperability. He's just given a gift horse to some fairly smart operators and this time Larry's forgotten to fill it with any of his own soldiers.

First, some background which everyone knows already, so I'll keep it short :-

  • Activities evolve and our industry has been shifting from a product to a utility service world. This has been clear for the last 6+ years, Salesforce knows this and they've been positioning themselves in that future space.

  • Past success always acts as an inhibitor to future survival, it creates an inertia barrier to change. This is why Amazon and not some hosting company encumbered by an existing business model made the break into IaaS. This has been crystal clear for 4+ years. Salesforce knows this, it's why Oracle has been slow to react to the change.

  • In this future world, competitive markets will become key to solving those outsourcing risks such as pricing competition, second sourcing options and loss of strategic control. Such markets will require multiple providers, access to code and data (i.e. standard data formats and APIs) and semantic interoperability. The latter point is only solvable with complex systems through running code and unless the market intends to be a captured markets (i.e. dependent upon one vendor) then that code will have to be open source. This has been clear for the last 5+ years. Everyone knows this just a lot of people refuse to believe it usually because of inertia barriers which have become institutionalised.

  • Critical in this new world is the development of ecosystems as these enable a company to solve the innovation paradox and simultaneously appear more innovative and highly efficient. This has been blindingly obvious for 3+ years. More details on common models such as ILC can be found here. Salesforce knows this, they've been playing an acquisition game around their own ecosystem and sending market signals because of this.
  • With a large enough ecosystem, you can create network effects through aggregated data e.g. market reports. This can be used as a soft form of lock-in i.e. even if you open source an entire system, your service still maintains an advantage simply because of the number of people using it. In other words, you can be entirely open but in effect create lock-in (i.e. gravity) for your service because of the benefits that being within that ecosystem brings. This has been painfully obvious for the last 3+ years.
  • Salesforce has also been playing a tower and moat ploy, building a tower of core revenue surrounded by a moat of high barriers to entry and devoid of differential value. Attacking Salesforce is a tough call for anyone, hence I suspect Larry's aim to make interoperability his calling card.
Salesforce has the ecosystem to play an aggregated data game i.e. free market reports for an industry based upon aggregated data or free comparison KPIs to your sales team effectiveness etc. Given the smart plays Salesforce has been making, you can bet your bottom dollar they've got lots of this in the pipeline.

Salesforce could also use open source as a tactical weapon in this space. They could open source the entire system and say "come and compete", "run it yourself" with full knowledge that those who build it for themselves and take the private road will eventually switch to public, whilst those setting up as public providers will lack the ecosystem and hence any aggregated data benefits. Salesforce is also smart enough to know that this game could be played against them, so they'll have to go down that route at some point. Hence you can pretty much bet your bottom dollar they've been working on this.

Larry has walked into a huge trap. He's just called out interoperability as the key differentiator for his service but as we all know the real issue is portability which requires semantic interoperability and running code. All Salesforce has to do is start launching more aggregated data services and open source the entire system under a banners of "Freedom in the cloud", "Run it yourself for Free" and Larry is left standing with the high cost proprietary service with no real portability (except between one licensed version of Oracle and another).

It's difficult to see how Oracle's strategists could have been more tweedledum or tweedledee as currently they are primed to become the industry's example of Hotel California (you can go anywhere you like as long as you're paying fees to Oracle?).

Now, open sourcing won't be easy for SFDC because they have an existing service, security professionals will be concerned over exposing security weaknesses, lawyers will have their usual collywobbles over IP and financial controllers will gasp at writing down a technology asset.

However Benioff like Maritz (you don't think CloudFoundry doesn't have a grand strategic purpose do you?) is generally a shrewd player. It all boils down to a question of timing and willingness to play the end game but we could be expecting checkmate to Salesforce in the near future.

Bad move Larry ... really bad. Oracle will be lucky to make it out of 2020 with this standard of play.