11:00AM Siebel Systems (SEBL) $9.06 -0.08 (-0.9%) Siebel Systems put out a press release this morning trumpeting their success in displacing salesforce.com (CRM) at a customer site. The point of the press release is obviously to brag about the fact that at least one customer thinks that Siebel's OnDemand product is not only better than salesforce.com - but good enough to actually displace salesforce.com in an existing installation. While the press release is supposed to put Siebel's OnDemand product in the spotlight and highlight its positive values, what it really does is highlight the fact that the battleground for applications is the subscription business model. That model was introduced by salesforce.com and Siebel's OnDemand product is Siebel's response. The real question is who will convert Siebel's existing customer base to a subscription model: Siebel? or someone else?
The emergence of salesforce.com is not about product features. The outsourced application model represents a dramatic change in the business model for the entire software industry. The traditional software business model is one of a large initial license fee followed by an ongoing maintenance fee, ostensibly for maintenance and service and upgrades. That model built the software industry, but it requires a capital expense by the client and is depreciated. The subscription model simply charges a client on a monthly per-user basis. The vendor knows how many users there are because the entire application is hosted outside the client's IT system and accessed over the internet. The vendor maintains and upgrades the system continually. In the subscription model, the payment is an operational expense to the client and is deducted immediately. The subscription model is far more attractive to almost all clients. In addition, it eliminates the operational expense of having to run the application at the client site (which means eliminating an internal administrative "techy" position.)
The onslaught of the subscription business model, with a hosted application, is inevitable. The rise of salesforce.com, which reached $100 million in annual sales in just 4 years and is now closing in on a $200 million annual run rate. While the functionality is clearly a driver of the success, the appeal of the subscription model deserves equal billing for salesforce.com's success.
Siebel is still the giant of the customer relationship management (CRM) industry, but its claim to the "giant" mantle is based primarily on its huge installed customer base. That customer base, however, is still using the legacy Siebel product, which is still paid for with the traditional software business model. It seems logical to presume that Siebel itself is in the position to convert their existing base to the new OnDemand product, but our prior analysis of Siebel has shown that they already have a customer defection problem (see the Ahead of the Curve column of 25-Oct-04 "Siebel Systems Earnings Review" for more details). In addition, large companies often have great difficulties canabalizing the "good thing" they have going with an installed customer base in order to hold on to it.
Eventually the subscription business model will probably displace all of the existing enterprise level applications - not just currently installed Siebel applications, but many of the enterprise level applications. The subscription model simply makes far more sense for most businesses, since it can be scaled more easily to the revenue level at the client. If you accept this idea, it puts the installed base of all enterprise applications up for grabs. Whoever captures them - by converting existing clients to hosted subscription models - will be the next dominant enterprise software vendor. It will take several years for such a conversion to happen, but figuring out who will execute this strategy most effectively will probably result in a great investment opportunity. Robert V. Green, Briefing.com |
