IBM's Path to the Future

Yesterday I proposed that IBM leads the world in delivering technology related services to businesses and therefore we may be able to get a sense for future winners by looking at what IBM is doing. 

Here are a few clues from IBM’s 2009 Annual Report:  

From: Samuel J. Palmisano, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER

1. Building Analytics Capability:  “… the knowledge of the world, the flow of markets, the pulse of societies — can now be turned into insight through sophisticated mathematical models, also known as analytics. Where once we inferred, now we know. Where once we interpolated and extrapolated, now we can determine. The historical is giving way to the real-time, and even the predictive.  IBM is moving quickly to capitalize on this promise. We have built the industry’s premier analytics practice, with 4,000 consultants, mathematicians and researchers, as well as leading-edge software capabilities — bolstered by key acquisitions such as Cognos and SPSS. Our new Business Analytics and Optimization service line targets the highest-growth opportunities by delivering integrated analytics solutions based on the needs of specific industries.”
2. Changes in the Cloud:  “Thus, the data center is shifting from being a single physical place to something more like the Internet, a diverse set of services fueled by IT.”
3. Customers Want:  “So the questions we are hearing are no longer about whether a smarter planet is a real possibility. Now, there is an enormous hunger to learn how. CEOs, CIOs, governors and mayors are asking questions like: How do I infuse intelligence into a system for which no one enterprise or agency is responsible?”

From the Financials: 2009 total revenue: 

$95 Billion Global Technology Services Group: $37 Billion 

• Strategic Outsourcing Services
• Business Transformation Outsourcing
• Integrated Technology Services
• Maintenance
• Integrated Technology Delivery
• Business Process Delivery   

 Global Business Services Group: $17 Billion

• Consulting and Systems Integration
• Application Management Services

 As I read through the report some recurring themes indicated what IBM thinks will be big in the future: 

1. Cross Platform: No one vendor can solve all problems so there is significant value in being able to work across platoforms
2. New Ideas: Clients will pay for ideas they cannot think of themselves (new processes, new technologies, ideas that span systems or departments)
3. Outside the Company:  Security, compliance, and standards are among the functions that can be done better by outsiders

 So if you want to pick the winners of the future, pick companies that deliver technology related services that tie together different technology manufacturers and add some intelligence along the way.

Later:  IBM beats Wall Street expectations for Q1 performance.

Picking the Winners

I am not smart enough to pick the big winners in advance.  So I don't play the stock market, and at CSG we sell shovels to the gold miners instead of prospecting for gold ourselves.  Sure striking it rich would be a thrill, but the world is littered with hundreds or even thousands of would be Googles.  I was going to say would be Twitters, but they have not made any money yet!

This strategy has provided us with a very interesting vantage point from which to watch the show.  And it is quite a show these days.  I sure am glad I am not a telecom equipment vendor or a distributor -- it is easy to see what is going to happen to them.  It is much easier to pick the descending parts of our industry than the ascending.  Who in tech is going to do well?  

There has been so much talk about services over the past ten years that we have both lost interest, and lost track of the definition of services.  There are hosting services, IT services, software as a services, software + services -- and each time the word services means a different thing.  IBM, Dell, HP, Microsoft, and Oracle all have significant services organizations.  IBM generates more revenues from services than all of Microsoft's revenue.  What is IBM doing when they deliver services to their clients?

Business pay IBM 50 billion dollars a year for services.  And everyone in tech wants to get into services.  I propose that we could learn a bunch about the future winners by digging into the question -- what are people paying IBM 50 billion dollars a year for?

Stay tuned, in tomorrow's post I will dig through IBM's annual reports.

Death by Home Video

The iPad has been praised for its handling of video including comparisons of the iPad screen at arms length to a giant TV across the room.  I agree Netflix does look great and you can watch YouTube and TV on the iPad.  

However, like everyone else with an iPad, I had created use cases in my mind prior to purchase that were just fantasies.  The one I was really hoping for was the ability to watch home videos easily.  I am not sure why I was thinking this because the rockiest parts of my relationship with Apple have been over video.  I have never really understood Quicktime, and the codecs are a mystery to me.  In fact, after a full switch over to Apple at home a few years ago, it was video that sent me back to the Windows platform.  The final straw was the leap to iMovie 08 from iMovie 6 where Apple just said -- we are starting over and so are you.  I said forget it.

Do I have a synapse missing that makes it impossible for me to decipher home video in the land of Steve?  Does everyone else do this easily and I just don't get it?  

If I am not alone  -- then home video could be the thing that breaks down a wall of Steve's garden.  It does seem like video is getting bigger and soon may be too big for Apple to force into their little box.

Social Media: a How or a What?

Yesterday I referenced Ric Merrifield's new book Re-Think where he helps companies see the difference between how things are done and what is being done.  Here is one of his early blog posts that will give you an idea for the concept.

Ric uses an example of someone sending a fax.  "What are you doing?" ... "Sending a Fax." (almost sounds like the "Making Copies" SNL bit.  He goes on to explain that people have a natural tendency to think that sending a fax (the how) is the actual value adding work -- when in fact it is just how the work is being done.

The fax is clearly old school now and that makes it a perfect illustration.  In fact, the fax is often used as an example of the value of the network effect -- the first owner of a fax machine could legitimately ask "Now what does this thing do?".

Social media is clearly a network, and it is clearly used for creating, organizing and tracking relationships and communicating broadly or directly with the people in those relationships.  Do these activities qualify as what we are trying to accomplish, or just how we are accomplishing something else?

Separating the How from the What

I heard Ric Merrifield speak today as he is promoting his new book:  Re-Think.  There is no question he is doing relevant work and I have already ordered a copy of the book.

I am most interested in the way he articulates the importance of separating the How from the What.  I see this problem often with clients that get caught up in doing the same old stuff bigger, faster, or cheaper -- all without asking "What are we doing?".

It is an easy trap to fall into and we all have to get better at raising the red flag when we see it happening. 

I am also interested in the heat maps -- more on that later (after I read the book).

Lessons from IBM

I pointed out the other day that IBM's stock outperformed Google's over the past 4 year period.  There are many things we can learn from the granddaddy of all technology companies.  In its 130 year history, IBM has had more "eras" than most tech companies have had years.  In fact, IBM tangled with the Justice Department before Bill Gates was even born.

The one thing that has always impressed me about IBM is how they seem to be playing on an entirely different level than anyone else.  Real companies count on IBM to give them real solutions to real business problems.  Every time I find myself in a conversation with a senior exec at IBM I am reminded that they have managed to continue to operate at this level regardless of the headlines of the day.  

Somehow I just don't see IBM burning R and D budget on a Twitter clone.

Curiously, IBM also does a great job with its ads.  They come up with fun and memorable ways to make the point that they are serious about business.  Here is my favorite one: which is probably 10 years old now but it still resonates.

Couldn't Resist

Well I held out for four days, but yesterday the hype won out and I got my iPad.  Maybe it was the combination of being in New York, and going past the amazing 5th Avenue store, or the endless articles and coverage.  That store is open 24 hours a day and is swarming with knowledgeable and efficient staff -- I was in and out in 10 minutes despite the fact that the store was packed.

Daniel Lyons summed it up well in his piece in Newsweek:  "Buy into the World According to Steve, and you're making a Faustian bargain -- you sacrifice freedom for the sake of a lovely device that (mostly) works just the way it's supposed to, eliminating the headaches and confusion that most tech products bring with them."  He goes on to list all of the things the iPad will not do (like flash).

Steve Jobs has done it again and he should get most of the credit -- but the conditions that serve as the backdrop for his success were not created by Steve, but by the rest of the industry.

The Microsoft Brand Promise

I found myself in a conversation the other day about the Microsoft Brand and was stunned to realize that I could not articulate Microsoft's Brand Promise. Understanding that a brand promise is different than a tag line, I still thought I should be able to articulate it. FedEx's tag line might say: Absolutely positively overnight. But their brand promise is really: "you can trust us with your package". Volvo's tag line might be "There is more to life than a Volvo." but the brand promise is: "you and your family will be safe." I don't know what Apple's tag line is but I think their brand promise is "we know cool better than anyone (including you)".  See my post the other day on the Apple brand promise.

Microsoft used to say "A PC on every desk and in every home" but that was more fortune telling than either a tag line or a brand promise. Here is an article from 2002 where Mich Mathews the Corporate VP of Marketing explains the campaign that intended to "help people realize their potential".  The new Microsoft ads say "Windows 7 was my idea" but I have a hard time getting any promise out of that.  Here is a recent article from the Seattle Times  where David Webster, Chief Strategy Officer in the Microsoft Central Marketing group, explains the campaign but not a brand promise.

So what is the Microsoft brand promise?

4 Years, 4 Stocks, 1 Surprise

Take a look at this chart showing percentage increase in stock price over the last four years for Microsoft, Apple, Google, and IBM.  These are the top four companies in terms of market cap in the technology sector.  Apple is blowing it out -- which is no surprise -- at 275% over four years.  Microsoft is in the back of the bus -- also no surprise.  Google and IBM are in the middle and IBM has performed better that Google over the past 4 years -- that was a surprise to me.

So the question is:  Which stock would you buy right now?

A League All His Own

The iPad mania is accelerating to a level that will make the Hollywood PR industry envious.  Steve Jobs has left the rest of the tech industry in the dust and is playing on a stage others don't even know how to get to.  Show biz was at this game 100 years before the PC was created so tech has got some catching up to do.

I have already said I am waiting until later to get the iPad.  My definition of later is getting modified every day.  This Elements ap is not only enough to get me to eat my words, but now I want to go back and take 9th grade chemistry again!

 Any remaining space in the hype-o-sphere that could have been left for the rest of the industry was mopped up by Jobs with his masterful Apple vs Google fight.  

I suppose the rest of us should just take the month off.

Cool vs. Fool: The Apple Brand Promise

Steve Jobs does bring a great deal of value to Apple.  He sees into the future with binoculars while we have a hand over one eye.  He sticks to his plan while others cast about.  He has no problem implementing unbelievable measures to keep things secret.  He is an inspiration to his employees and no doubt his enemies.

I submit that above all of these things his greatest value is delivered as the keeper of the Apple Brand Promise.  

As the importance of the salesperson is displaced by a customer's interaction with the social graph, the Brand Promise is more important than ever.  The Brand Promise is the context within which the community talks about a product.  A well established Brand Promise erects boundaries beyond which even detractors cannot go.

What do you think the Apple Brand Promise is?  For a long time it was that Apple products were easy to use.  I do not think that is it anymore.  

I propose this:  You will always be cool with an Apple product in your hand, in your bag, or on your desk.  Steve Jobs upholds his promise that you will not feel a fool for buying his creations.

How else could he convince everyone to pre-order iPads -- a first generation product that no one has even seen!

Love him or otherwise, that Steve Jobs is doing it again.

The Timid Need Not Apply

On the morning of August 7, 1974, the Frenchman Philippe Petit walked across a steel cable he had strung between the twin towers of the World Trade Center.  He not only made it to the other side, but spent 45 minutes going back and forth eight times and even jumping up and down and lying down on the cable.  When asked why he did it he said: “When I see three oranges, I juggle; when I see two towers, I walk.”  Philippe Petit is the perfect profile for someone running a marketing department.  We just do this stuff despite the risks.

Marketing is Not Safe

The volatility in the job markets has caused people to be much more interested in job security.  Gallup just did a poll and 70% of working Americans said that their current job is the ‘ideal job’ for them.  The people in the Gallup poll must not be in marketing.  CMO tenure has been getting better over the past couple of years – but it is still very short at 28.4 months.  How anyone can focus on the big picture with a two year horizon is beyond me.  So it is clear that anyone looking for a safe and secure job need not apply.  Marketing is definitely a fun and vibrant industry but by all measures it is definitely not safe. 

Here are five reasons that Marketing is Not a Safe job:

The Environment is Always Changing: The competition is doing things, other industries are doing things, the tools are changing, customers expectations are changing, and the economy is changing.  There are so many things changing all of the time that it is impossible for anyone to sit still.  To make matters worse, the rate of change is increasing.  So if you thought last year was wild – get ready for next year because it is going to be wilder.

No Clear Measurements: Despite tremendous advances in the tools and tactics for measuring marketing performance, there are no agreed upon standards.  The sales department has revenue and marketing has a mixed bag. And just when it seems like a standard is going to emerge the environment changes.

Exposed to the Blame Game: When things go bad people go looking for someone to blame, with no clear measurements and a constantly changing environment, the marketing department can be as exposed as a Frenchman on a wire.

Public: Scientists can do their experiments in a lab, marketing people do not have that luxury.  By definition marketing activities are public and therefore the wins are exposed to be copied and the losses are spectacular crashes in plain view.

Requires New Ideas: The half life of a successful marketing idea is even shorter than the tenure for CMOs so a constant stream of new ideas are required.

So, if you want to exist in a world where there is no job security, no agreed upon measures of success, where you can get blamed for other people’s screw ups, where you regularly fail and sometimes succeed in public, and you have to come up with new ideas all of the time – marketing is the job for you!

Wait! There is More

If you can bear to read on you already know you are well suited for the marketing business.  Here are three things successful marketing people do to not only survive, but thrive in this environment.

Set Expectations Properly: We have all been in countless meetings where the expectations ascend into the rafters – you know, go viral, a Cadbury moment.  There is no question it would be awesome, but it does not happen very often.  So any plan has to be built around a realistic expectations.  If the plan does not make sense with a the laws of gravity applied then come up with a new plan.  There is a big difference between leaving an opening for serendipity and counting on it. Pros don’t get caught up in the hype and set unattainable expectations.

Talk About One Measurement: Measure everything, but only talk about one measurement.  In the end there should only be one measurement that counts and talking about all of the other (contributing) measurements just sounds like excuse making.  You and your team can use all of those other measurements to learn fast and learn a lot, but in the end the one key measurement is the only thing that matters.  Remember, this one key thing should be the thing that your marketing department’s client (the sales department) is expecting to get.

Fail All of the Time: So much has been written about failing and failing fast that it seems we sometimes forget to do it.  Even previously successful campaigns can fail as the environment changes.  Make sure you know what failure looks like and don’t talk yourself into re-casting a failing campaign as a winning campaign by picking out one good looking number and putting all of your weight on it.  Make sure to set expectations properly and that means describing in advance what a failing campaign looks like and agreeing what will be done.

So Marketing is Awesome

Anyone still reading is already converted.  We should remind ourselves more often that marketing is an awesome business and we are all lucky to be in it.  Philippe Petit truly enjoyed his high wire act.  He was in his element, he had done his homework (he had been planning since 1968), he was a professional, and it was obvious to everyone who witnessed the event.    

Lipstick on an Excel Pig

A really smart MBA with a spreadsheet and proper motivation can make just about any idea look good and we have all seen campaigns, ideas, and even entire companies get funded in this way.

One of the things that often impresses me about the people I meet at Microsoft is their ability to be self critical.  Some would argue that at times it goes too far.  I think it is a characteristic other companies should try to emulate.  

Last year at the Monaco Media Forum, Darren Huston, Microsoft's VP in charge of Consumer and Online, gave a great presentation and one of the things he said was: "average creative gets way over measured to try to prove it was great creative.  Great creative -- we don't spend weeks measuring."  The "we" at the end gives away that in addition to making this great observation, he was showing how Microsoft can be its own greatest critic.  I believe this one corporate personality trait is Microsoft's biggest asset.

Whether or not the criticism is self directed, he was making a very good point, and we see it played out often in the technology marketing industry.  Marketers get so attached to their ideas that they lose the ability to call a pig a pig.  

This disability is self inflicted.  By recognizing in advance that many ideas will not produce the desired results.  And that no matter how experienced your team is, marketing is dominated by experimentation.  You can in effect leave the door open to honest self criticism and ensure that there is a safe way to kill ideas that fail.

The Most Expensive Marketing Program Ever

As an outsourced provider of marketing services to technology companies we find ourselves in conversations about how much marketing programs cost just about every day.  These are very important discussions that have a wide ranging and long term impact on a company.  Every company should do everything it can to execute its marketing plans for as little money as possible.  Value achieved is the result of two factors:  the outcome, and the cost.  Driving down the cost is an effective way to improve the value achieved.  The strange thing to me however is the reluctance to drive the cost all of the way to zero.  

That is right, we are the outsourced provider, making us the company that gets the money associated with the cost in the Value = Outcome / Cost formula, and I just said our clients are often reluctant to reduce the cost of their marketing programs to zero.  I am not saying however that we are willing to work for free -- I am saying that the most expensive marketing programs are the ones that should not happen in the first place.  The only way to have an infinitely expensive marketing program is to have zero outcome.  Bad ideas cannot be changed into good ideas by doing them for less money.  Bad ideas should be killed off and replaced with other better ideas.

So the next time you find yourself talking about how you want to do the same thing you did last year, but for less money:  make sure you are also asking if the program is worth doing at all.

Resisting Overproduction

Everyone with a DVR knows that there are only 40 minutes of content in every hour of TV.   When you hear the host say "Stay with us" or "We will be right back" or "We are taking a break" what comes to mind? These and other conventions from radio and TV, fade in and fade out music for example, are often viewed as signs of professionalism.  I propose they are overproduction and reduce the value of the experience.  Begging the viewer/listener to endure a commercial is a dead giveaway to old media does not seem fit our new media reality.

Here are three podcasts that I listen to that range from new media to old media.  How much content do you think there is in each one of these podcasts?  

The Advertising Show

Cranky Geeks

Rebooting the News

I admit, this is not really fair because Rebooting the News does not have any advertising at all -- so it is 100% content (and an amazing podcast).  Cranky Geeks would be next -- 3 short breaks for ads at one minute each -- but they are not that intrusive and I don't even hit the 2X button on my iPod.  27 minutes of content out of 30.  I am a big fan of John Dvorak.  I was following him before there even was a world wide web and I am still not tired of him.  I suspect that all of us are more than happy to sit through the adds -- just for John.  The advertising on Cranky Geeks works -- I use both Go Daddy, and SquareSpace because I want to do my part to keep Cranky Geeks going.  On The Advertising Show -- well you make your own determination, but I leave my iPod on 2x for as long as I can last -- and even then I rarely make it through the whole thing.  It has to be at least half filler and advertisements.

So if you are going to put ads in your podcast -- pick advertisers that will resonate with your audience -- and resist the pull of overproduction.

PS:  Ira Glass says "Stay with us" on This American Life -- and I just don't get that.  His content and production quality are legendary and he holds my attention the whole way through -- not sure why he says it.

Respecting Followers

True leaders respect their followers. I have always been struck by celebrities that disdain their audience members.  "Followers" has an updated meaning now that we call the people that follow us on Twitter followers.  

Maybe David Letterman started it, but the number of celebrities that are plainly complaining about their fans really makes me scratch my head.  If fans or followers make the celebrity, wouldn't the celebrities customer be the fan?  Without customers...

Politicians are really the neediest of celebrities when it comes to followers because they need their followers to vote. Another thing that struck me about Game Change (see my review yesterday) was the way some of the candidates do not respect their constituents at all.  At times they plainly showed how little respect they had for them.  John Edwards really took the cake in the book when we went from saying "They love me!" to his staff after a good speech to "They looooove me!" with an eye roll.  

The idea with a brand is to build a relationship with a customer that is larger than a single transaction.  Brands have followers just like celebrities and politicians and just as strangely, some customers continue to buy from brands even when they are showed no respect at all.

Yesterday I was listening the Advertising Show podcast where Rose Cameron, Euro RSCG Strategy Chief, was asked about the difference between the US and British advertising markets.  Her answer?  In Great Britain advertisers have a "real respect for the intellect of their audience".  In America we continue to buy from companies that have little or no respect for us or our intelligence.  

When it comes to politicians, celebrities or brands there are plenty of strange things to marvel at, but for me the strangest is how people continue to follow those that clearly have no respect for them.

A Helping Hand for the Search Engines

I sometimes get so caught up in the wealth of information available on the web that I lose sight of how far we still have to go in search.  The other day I was helping someone unfamiliar with the web use a search engine to perform what should have been a simple task and it was a significant reminder of how undeveloped the search industry really is.  Having been in the technology industry for some time now, I have a natural tendency to defend our machines.  People new to using these tools have pretty lofty expectations -- "the computer can just do that, right?"  Invariably my role goes from apologist to apologizer as I find myself saying: "well it is really a very complicated thing we are asking the computer to do..."

The Task:  Use a Search Engine to Find a Restaurant

Not just any restaurant though, we wanted a place nearby, that served Latin American cuisine from a Spanish speaking country, from South (not Central) America.  So sure, since our quest was a school project, our restaurant search was a little different than most - but not that different.  And explaining to the uninitiated why any combination of: Seattle, Restaurant, Latin America, Spanish, Central America did not produce the desired results in any of the search engines was humbling.  Defending the most used command line interface of our day by saying: "when I was a kid we didn't even have the web." didn't add much to the conversation either.

Our Solution:  This is a "Short" cut?

After several attempts with results of either restaurants from other cities (in one case the third entry in the search results was for an establishment in New York) or an overwhelming list of Mexican eateries, or news about the earthquake in Chile, I developed a new strategy.  We would search for recipes for dishes from Argentina, find one with a really distinct name, and search for that!  Argentina because it had not just had a natural disaster, and distinct name so the search engines would not get too mixed up with unrelated results.  Presto!  Not really presto actually because this meandering route through 15 or 20 search queries took much longer than either of us wanted to spend.  First to cooking sites, then to ethnic cooking sights, then to Argentinian cooking sights, then look through the recipes before deciding that "empanada" was just the right mix of common and unique for the search engines, then enter "Seattle Restaurant Empanada" and what do you know -- half way down the second page of results we found one that was only 10 miles away!  At one point I had to wonder if there isn't a Latin American Restaurant section right in the Yellow Pages!  I would never know of course because for the last ten years I have taken the phone books straight from my front porch to the recycle bin.

So all of this is to say that as enamored as we are with the tools we have today -- the truth is that their capabilities are severely limited.  We are just getting started in search and someone could invent the next Google tomorrow. 

Same Words Different Meaning

One of the best parts of my job is meeting new people and throwing around ideas. Ideas are a big part of marketing and everyone has some they are working on.  During these situations, particularly with someone I have just met, it is not uncommon for me to get well into the conversation and wonder -- are we really talking about the same thing?  It is amazing.  Two people in the same industry with the same native language with the proactive intent to effectively communicate -- well into a conversation and possibly not actually communicating at all.

Use The Simplest Word Available (and get the job done)

My most often cited example of this comes from about ten years ago.  We were pitching a senior member of a medium sized technology firm on some ideas we had for making their channel partner program more effective.  These were not exotic ideas and were based on our core inside sales services.  In a nutshell we were proposing to use our call center capacity for hire to help them sell more stuff.  After 45 minutes of lively dialog about our ideas, processes, reporting, success measures, and all the rest our prospect stopped us and said:  "Thanks and I am sure you have a great system but we just spent a bunch of money on a new CRM system and we are not going to rip it out, so we are not interested."  POW.  We had not set the thing up right, he thought we were a software company, and all of our service speak just got translated in his head into that framework.  Oh was that humbling and I can think of at least a dozen things we learned the hard way that day -- like the dangers of describing simple things with big complex words.

Here is a quote from Hemingway on the subject:  "...He thinks I don't know the ten-dollar words. I know them all right. But there are older and simpler and better words, and those are the ones I use."  We should always use the simplest words available. 

Since then we have actually added software to our call center services -- so the job of describing what we do has gotten even harder.  Like everyone in our business we need to work hard to speak plainly and directly.  I struggle to find a good reason to  talk about the Pareto Principal instead of the 80/20 rule.  Sure you sound fancier, but isn't the goal to make your point?  If the other person can't remember the difference between that and Parkinson's Law you may have lost them from the conversation for good.

One Example of Irrational Exuberance Meets the Cloud

Disclosure:  My company competes with Salesforce.com from time to time, but our product is a niche extension of what SFDC does and we have never claimed to be a replacement for their product.  I doubt Mark Benioff has ever even heard of our 150 person company.  This post can be read as negative on Salesforce.com -- buy my point is on the irrationality of the stock market more than on the performance of the company.  Salesforce.com has done a great job blazing a trail in our industry.  

Salesforce.com recently released their earnings and the trends I pointed out in my posting: Sales vs Engineering continue.  In short it is another impressive performance.  Growth, profits, and one amazing P/E!  At Friday's close the stock was trading at a price earnings ratio of 114.5!  Yow!  The industry is listed at 21.8 and the S&P 500 at 20.5.  I know there are some irrational investors out there but I just don't get this -- Salesforce.com trades at five times the P/E of the rest of the industry.  No less than 14 analysis have the stock at a strong buy, 4 at moderate, and 14 at hold.  Not a single analyst in the sell column.  

I suppose the logic must be to pay in advance for growth.  A quick look at the articles referencing Salesforce.com from this last week alone and you would think CRM was just getting started and the buy ratings are based on the incredible growth.  I just don't see that either.  It is true that salesforce.com is highly scalable because it offers hosted software and adding a new customer does not cost them much in terms of manufacturing cost.  However, the thought that this cost is lower than other software companies is not true.  Sure they don't have to ship anything -- but neither do any other software companies.  The cost in added bandwidth required for a new customer of a hosted solution like Salesforce.com probably exceeds the cost of delivering an executable over the web as typical software companies do now.  The whole industry operates on a very low marginal cost for adding another customer.  Once the software is developed all software companies (yes Salesforce.com is a software company) keep 90%+ of each additional dollar.

What matters then is the cost of selling.  When your product is nearly free to produce, the biggest expense is either R&D or Sales.  And Salesforce.com takes the cake in high sales cost.  Salesforce.com spends 50 cents of every dollar it takes in on selling costs.  This has been the case from the very beginning.  The fans must argue that awesome growth costs money and when Salesforce.com decides to slow growth, they will be able to radically reduce sales spending and the profits will skyrocket.  So let's dig into that thought a bit.  Over the past three years the company has had an impressive growth rate.  Even now, growing at over 20% per year is impressive.  But 2008 was 50% over 2007 and the deceleration is steady however you run the numbers.  All the while the sales spending is keeping pace with the growth -- last quarter it was 48%. 

Here are some other interesting ratios:

• Salesforce.com spends 5 times as much on sales as it does on research and development.
• Salesforce.com spends $2.50 on sales for every $1 increase in revenue.
• Salesforce.com spends $170,000 on sales per employee per year -- that is every single employee in the whole company.

In the last earnings release conference call Salesforce.com indicated that growth will be declining further to 17% and they are continuing to hire more salespeople.  So the cost of new business acquisition is going up even further.

So here is what I conclude.  High sales cost is heroin.  If you stop doing it there will be serious consequences.  The only logical explanation for the steady investment of 50% of revenue on sales is that no economies of scale in selling have emerged.  This company sells to the enterprise and enterprise selling is hard and expensive work.  It is not like consumer companies that go viral and all of the sudden the product starts selling itself.  They spent $600M last year to produce 20% growth and in 2008 they spent $375M to grow 50%.

So while it is possible that no new competitors will come on the market, no setbacks to cloud computing in general will occur, and Oracle and Microsoft will continue to give up marketshare, I have to think that this valuation is about as good as it is going to get for Salesforce.com. I think even Salesforce.com agrees in that last year they took advantage of their incredible market cap to raise $500M in debt and now sit on a $1.7B pile of cash.

More on Disclosure of my interests:  I do not hold and of Salesforce.com's stock nor do I hold a short position. 

The Problem with Specialty Publishers

The technology industry, like every industry, has a group of publishers serving it.  These specialty publishers are facing even more pressure than the publishing industry overall and it is showing in the quality of their reporting -- particularly when they are reporting on their advertisers.  Take this example from Channel Insider yesterday:

The Story:  

Starting with the headline: "Tech Data's Recession 2009 Strategy Pays Off" Jessica Davis quotes Tech Data's CEO Bob Dutkowsky as saying the company's fourth quarter was exceptional.  She goes on to paint a picture of Tech Data just as Tech Data presented themselves to her.  The main points:  Tech Data's revenue was up in a down market; Tech Data's profits were up; Tech Data walked away from undesirable business.  From the article you gotta think that this Bob Dutowsky is one amazing CEO.

The Rest of the Story:

So let's dig into the numbers a bit. Q4 Revenue:  As reported in Channel Insider, Tech Data's Q4 revenue was great:  $6.28B vs. $5.71 -- and increase of 10% over the previous year. The other three quarters were all down 18%, 16%, and 8% for a total of the year including the killer Q4 of DOWN 8%.  The article says revenue was UP 8.2% even when accurately stating the revenue figures.  I take this as an indication of just how far the author was swept away by the press release, and the fact that no one else read the article before it was posted.  The rest of the industry was down 1.8%.  Ingram Micro (IM) was down 14% and Synnex (SNX) was down 1%.  So Tech Data is doing better than some, worse than others, and worse than the industry.  To their credit, they did pull out some pretty good net income in a tough environment.  

It appears that the investment community looked at the data instead of taking Channel Insider's reporting at face value because the stock fell about $3 on the earnings announcement on 3/2. Eric Savitz at Barrons on 3/2/2010: "Tech Data: Q4 Beats; But Stk Slides As Q1 Outlook Disappoints"

If these publications are going to survive a good place to start would be better reporting.