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Can Stamp Out Software?

The past couple of years have been rough in the formerly white-hot market for customer relationship management (CRM) software. After growing nearly 80% in 2000, to $10.6 billion, the market expanded just 6% in 2001 and stalled completely last year, according to tech researcher AMR Research. A notable exception to the gloom is, which, despite its small size, has become a pain for the industry's giants.

San Francisco-based grew more than 100%, to $52 million, in its fiscal year ended Jan. 31, and broke even in February. Effusive Chief Executive Officer Marc Benioff marked the occasion by inviting 200 customers and friends to a Feb. 28 concert featuring rocker David Bowie at New York's Carnegie Hall.

Benioff has plenty of reasons to celebrate. In the three years since launched its service, the privately held company has amassed more than 6,000 customers with 80,000 individual users in 110 countries -- including the likes of General Electric (GE), Honeywell (HON), AOL Time Warner (AOL), Cigna (CI), Avis, and Cable & Wireless (CWP).

QUICK STARTER. A number of the large customers, including Cigna and AOL, bought's service even though they had previously paid big bucks for software from market leader Siebel Systems (SEBL). "We're the fastest-growing CRM company," crows Benioff. He hopes take go public this year if the climate for IPOs improves. Beyond that, he has an audacious goal: $1 billion in annual revenues within four years.

While that may prove hard to reach, there's no question that is already a bona fide success, thanks to its unusual sales model. Rather than selling expensive software that customers take months to install on their own computers, it offers them a practically instant-on service that they pay for monthly -- typically an affordable $65 to $125 per user.

To do their jobs, the customers' sales, marketing, and customer-service staffers simply log onto a Web site from their desktop or portable computers. Even though is still small, the fact that it's out in the market offering an inexpensive and simple-to-use alternative to traditional software puts pressure on Siebel and other CRM bigs.

"LOOKING IN THE MIRROR." Yet in spite of's winning ways, it faces greater challenges this year than ever before. That's because mighty Microsoft (MSFT) is gunning for its business. The software giant in January delivered a long-awaited CRM package tailored for small and midsize businesses. Those two segments combined account for about two-thirds of's customers.

Microsoft has already lined up 900 companies worldwide to help sell its product and aims ultimately to for more than 5,000. By comparison, has fewer than 50 resellers and only about 100 salespeople. While Microsoft downplays the competition, CEO Thomas Siebel of Siebel Systems is gleeful when he envisions Microsoft's effect on his pesky rival. "Microsoft will roll them over. They get Zambonied," he says.

Benioff's response: "He's looking in the mirror. It's psychological projection. He's seeing himself in others." Indeed, many observers believe that once Microsoft establishes a foothold in the low end of the CRM market, it will set its sights on Siebel and the high end. Benioff dismisses Microsoft's threat to his business. He calls Redmond's product offering a "software lover's paradise," since customers not only buy the company's CRM application but need to buy a stack of so-called middleware products to make it usable.

JUST SAY NO. Besides, Benioff isn't afraid to stick his finger in the eyes of the giants. He taunts traditional software makers with the company's motto, "The end of software," and its logo, which shows the word "software" with the universal "no" symbol stamped over it. He even has hired out-of-work actors to picket outside Siebel marketing events. "We're in a karmic bind," explains the practicing Buddhist and devotee of Tibet's Dalai Lama. Lacking size and traditional marketing clout, he feels no compunction in resorting to gimmicks to generate buzz and get companies to try out his service.

Benioff knows his enemies. He worked for software powerhouse Oracle (ORCL) for a dozen years, where he met Tom Siebel, a former Oracle sales chief. In 1999, he started, joining a growing band of entrepreneurs who believed that services delivered over the Net would rapidly replace traditional software.

The revolution didn't arrive on schedule, though, and most of the so-called application service providers (ASPs) are out of business. Benioff insists that the transition will come eventually, once customers get comfortable with the idea that software can be delivered to them like electricity. "Like all new models, it has to have slow incremental gains," he says. "Things don't happen overnight."

SLOW DRIVE? has gradually built up its services to the point where it offers most small and midsize business all they need to automate their sales and marketing operations. After launching a basic sales-force management service in February, 2000, it added customer-support and marketing editions in 2001, and a large-business edition one year ago. Right now, one-third of its customers are small businesses, one-third are midsize, and one-third are large enterprises.

With that kind of breadth, faces competition on all sides. In addition to Siebel and Microsoft, it runs into Oracle, SAP (SAP), and PeopleSoft (PSFT) in enterprises, smaller-fry such as SalesLogix in the mid-market, and fellow ASP UpShot in all three segments.

Technology analysts typically recommend for small businesses and as an experiment or stop-gap solution for large enterprises. But they predict that eventually, when the economy improves, many of its large customers will graduate to more function-packed traditional software products. "If budgets free up, sales managers will again focus on the broader tools that aren't available from Not everyone needs a Mercedes Maybach, but most at least want a Camry, and they don't get that from," says analyst Michael Maoz of Gartner.

"ANALYSTS ARE WHORES." Analysts think the Microsoft threat is this upstart's major hurdle, however. Rod Johnson of AMR Research points out that over the past three years,'s prices have crept up. Small companies can buy Microsoft's software for about $400 per user -- and that's a one-time expense. He says most companies still prefer to own their software. "I see a lot of risk for them from Microsoft," he says.

Is Benioff worried? Hardly. He argues that his offerings have a lot more capabilities and advantages for customers than the analysts give credit for. He says that since the tech market researchers get most of their revenues from large tech companies, their analysts are captive to the status quo and conventional thinking. "The analysts are whores to the established software vendors," he says defiantly, abandoning his normally affable style.

Customers are pleased with's service. Frank Mallozzi, vice-president for sales at printing technology specialist Electronics For Imaging, says he bought for his 200 salespeople last year because it was affordable, it could be integrated with the company's run-the-business applications from SAP, and it has all the bells and whistles he requires. "Even as we grow, we believe this will give us all we need. We don't have to switch to an enterprise software package," says Mallozzi.

GROWING LEGITIMACY. Now, Benioff is beefing up's offerings. This year, he'll add document- and contracts-management features, and expand the billing and invoicing capabilities. He's also creating what he calls a "shell" that allows customers to get at capabilities and data in their SAP and Oracle financial and order systems via -- rather than having to use the more complex software.

As a sign of's growing legitimacy in the enterprise market, on Feb. 28 it announced a strategic alliance with PricewaterhouseCoopers, its first such alignment with a major tech-consulting firm. PwC will train a team of experts.

If continues to gain ground in corporations and hits its financial performance targets, it will prove that the utility-computing model can work. And that would clear the way for other startups and even established companies to make a go of it, too. Don't count this revolution out just yet. By Steve Hamm in New York

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