Bonus Coverage: Q&A with Marc Benioff

OK, I realize that CEO Marc Benioff isn’t starved for publicity; he does just fine in his efforts to use the press to get his message across. But as I was reporting for this week’s magazine story on the few bright spots remaining in this trouble economy, he was kind enough to answer some of my questions in short order. I thought I’d post this email interview. Here goes:

Q: Salesforce is doing very well, and investors are noticing. The stock has risen in recent months, even as other companies are getting hammered. I know you can’t make forward-looking statements about Salesforce, but this must be emblematic of something. What is it?

A: I leave explaining the stock market up to the experts at BusinessWeek. As you can see from our results, we are very optimistic about the business we are in and the industry that we are leading. A few years ago, we would have great conversations with customers about salesforce automation on demand. Now we are talking to customers about wide range of applications, and our platform as a service. They want to build and run custom apps as a service on our platform. This wasn't possible before. So when I see customers changing the range and tone of their conversations, and often even initiating these broad discussions with us, that indicates to me that a big shift is underway. And-- I can't resist-- it all has a name: The End of Software. Q: How big will the software-as-a-service trend be? Is it of similar scope as the move from mainframe to client-server? Do you think we’ll see lots of companies outperforming the market in the quarters and years ahead by using this model? Can you point to examples?

A: I think you have hit on it. The switch is probably bigger than the sunset of the mainframe era. I think we are at the end of the beginning of the shift and heading into prime time. The client-server industry has been consolidating, and Oracle has clearly emerged as the scavenger of record. I think you see a new generation of leaders rising:, Google, eBay, of us are building platforms for cloud computing. They are enabling a new class of entrepreneur that can use, for example our platform to build and run their applications. They don't need to build offices, distribution centers, data centers or really infrastructure of any kind. This will unlock huge pools of innovation around the world, since the cost of developing, distributing and supporting apps has dropped dramatically. I look at a company like Appirio, which is building apps on our platform. They need relatively little capital to grow and can tap into vast IT expertise in India. Appirio is one of a new generation of companies that will be very very nimble and innovative. Q: Many tech companies like to claim that their products are as valuable during down economies as during the good times, since they result in lower IT operating costs. But for Salesforce, this really seems to be true. Are you hearing this from customers, and why do they feel this way?

A: First of all, I don’t want to make any predictions about how any company, including ours, will behave in a changing economy. It's just not my area of expertise. But our value proposition to customers has been the same for nine years now: no big upfront costs like hardware or software to buy. That was the hallmark of client-server: the customer took all the risk, and the vendor made money no matter whether the customer succeeded or failed (which they usually did). Our subscription-based business model keeps us aligned with customer success. I have to prove my value to customers like Cisco, Dell, Merrill Lynch and Citi every month. So if you are trying to figure out what the current environment will do to software companies, the basic question you have to ask is: will customers be able to tolerate their traditional risk/reward proposition? The more than 40-thousand customers who have signed on with us have said that the they are done with the hassles of client server, and I think that will continue.

Q: Do you think a recession might actually drive more customers to the software-as-a-service model?

A: I can't really say what will happen to the model if we enter a recession. It's clear that after years of poor returns with client-server software, customers are ready for a change. That trend is massive and, I believe, inexorable. I feel that the shift to software as a service and platform as a service will continue, no matter what happens over a few quarters. Q: Conventional wisdom is that during past tech downturns, software doesn’t get hit as hard as hardware. But some people (for example, Nick Carr) think that may reverse this time. With no blockbuster new application out there at the moment, companies can put off software upgrades—but they’ll still buy the hardware they need to create more virtualized, power efficient data centers. What do you think of this idea?

A: I think Nick is a very perceptive guy, and I think The Big Switch is an important book. I think the role of the corporate data center is going to change, and I think everyone who depends on it is in for some shifts. Building and maintaining data centers is difficult and time consuming. It was worth it when there was not a viable alternative. But now there is, and you can build any application to run as a service. When you think of it, money has become a service. We can pay bill and move money on line, and most people don’t keep their money in on-premise safes anymore. Who would want that responsibility when a bank is so much more secure and the funds are so much more accessible? Q: There’s been lots of M&A in software in the past year. Will it continue in the next year? A: The consolidation has been vigorous at the top, and that often forces other deals at the lower tiers. I would not want to be a mid-sized client-server vendor right now. This trend will keep the investment bankers busy and keep the customers up at night. and it will keep us standing by-- with a better alternative.

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