Marketing Memos

We may be in a recession, but SalesForce.com has decided not to participate.

Last week SalesForce submitted financial reports covering the three deepest months of the current downturn. From February through April, SalesForce saw their revenues rise 23% and their net income nearly double, climbing 92%. They also announced that SalesForce is the U.S. economy and that Marc Benioff would ascend to the papal throne.

Defying economic gravity is considered a miracle on Sandhill Road.

We should not be surprised by this quarter’s occurrence. When in recession, companies and consumers alike reduce risk while attempting to expand opportunity. SaaS offers a reduction in risk for implementing a CRM system. Since SalesForce is currently absconding with nearly 10% of all CRM revenues and is thus the undisputed heavyweight of the SaaS CRM industry, 3,900 new customers instinctively turned to them in early 2009.

Another angle is that in tough economic eras companies look for ways to increase their own sales. Coordinating sales efforts and keeping proper tabs on your pipeline is part of hitting pay dirt. When times are good, you can be a little lax about managing your sales efforts. When you start raiding the kid’s college fund, you instill discipline on your sales force.

This brings an interesting revelation about SaaS. As a delivery system, SaaS reduces risk to the consumer (and to the vendor as well). During times of profit peril, low risk alternatives beat those with large commitments. Thus SaaS has the ability to grow during down business cycles when packaged software does not. SalesForce has shown that it grows during up cycles too. We might assume that Marc’s Marauders merely are great at what they do (and they are). But a more fundamental shift in the software market is in play.

SaaS’ ability to attract business during downturns is compelling. Not every product category is as fundamental and as organizationally flexible as CRM, so SalesForce’s success is not directly transferable to other software solutions. Yet the principle of engineering risk reduction while offering economic adoption of business-improving solutions alters market fundamentals. It reduces and perhaps eliminates the drastic dips that hit enterprise software companies as industries that consume software suffer. Sure, revenues may lower during recession, but negative growth appears unlikely and thus most of the misery associated with recession may be avoidable. Since SaaS is delivered globally and since other markets suffer recessions less (my New Year investments Brazil are doing quite well, thank you), economic undulations are less serious for SaaS.

Aside from the well discussed issues of integration, I fail to see why a software vendor selling database-centered solutions would not opt to offer a SaaS alternative. Proffering one does not preclude a packaged product, and may well attract customers reluctant to risk the ‘big investment’ during periods of low lucre. SalesForce shows that you can produce double digit growth numbers in a downturn.

There is risk however. Benioff will look bizarre wearing his miter.

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Once in a great while you see a company doing what would be sane in other markets, but might be a Herculean improbability in their own.

Yes, this has to do with the Linux market.

Specifically this has to do with the embedded Linux market, a realm so fragmented that ‘chaos’ is too polite a description. It is also one of Linux’s silent success stories. Odds are that you are within five feet of one or more devices that have embedded Linux inside. Glancing about my office I count three (a printer, a router, and a cell phone, though I suspect the hub and print server at Linux-based as well).

The embedded Linux market is fragmented along several vectors. The primary vector of discord is the application. Router makers and printer makers and cell phone makers have different interest and needs with embedded Linux. A while back my neighbors at Wind River were toying with the notion of creating an online community where users in the different markets could share innovations in a non-competitive environment, but that initiative seems to have fallen in the gutter.

Now MontaVista wants to do the opposite.

Ignoring for a moment the unfortunate aspect of having the word ‘vista’ in their corporate name, the folks at MontaVista have decided that the proper approach to the market is to offer embedded Linux packages tailored to different market segments. They are not tackling the relative industries (routers, printers, cell phones, etc.). MontaVista is segmenting their embedded Linux offering by CPU/platform – Atom, PowerQUICC II Pro, PowerQUICC III, TI OMAP35x, etc.

Unlike the x86 server market, where use variations between box vendors are relatively limited, the chip market for embedded Linux is highly fractured. The differences are allegedly significant enough that loading a Linux distro down with cross platform packages is a burden to the buyers. MontaVista claims that many in the market buy an embedded Linux package and then customize it to their platform before using in production.

Which seems very odd given that the use of Linux Inside is typically for the more primitive functions.

MontaVista is segmenting their product to match the chip-based segment of the market. Now segmentation is a Good Thing^TM for marketers to do. What I find curious is that the assembly of a Linux package by CPU is a significant segmentation vector and that it has taken this long for a vendor to segment accordingly.

Which means it may not be a prime vector for segmenting.

Over at Wind River, they segment based the category of final product in which their Linux will be embedded. There are Wind River Linux distros for automotive devices, networking gear, consumer products as well as several medical and military specs. Instinctively this seems to be the more rational segmentation model. Consumer devices need user interface packages (image a G-Phone without the G-UI). Networking gear doesn’t need fancy UIs, but it does need routing and network security functions that a consumer device might not.

The method to MontaVista’s madness may be in their new Integration Platform (sigh, another use for the acronym IP). Akin to SuSE’s openBuild system, the goal is to provide customers with ways of safely and sanely customizing MontaVista’s core distro. This saves buyers the pain of finding, including and removing parts of a Linux distro to make it work for the intended application.

Here is a contrast in market approaches: Wind River has both a general purpose distro and a string of special builds for different industries. MontaVista has a general distro with some reconfiguration for different CPUs and with a tool to tailor the distro to your specific needs.

Which approach is better?

I’ll have to give the short-term nod to Wind River. Business in competitive markets moves fast. Wind River provides products pre-configured for various industries, and yet which can still be tweaked by the customer (or by Wind River) if there is some exotic need. This helps customer get their products to market faster and possibly cheaper. If Wind River were to engineer an openSuse/MontaVista-IP type system for customization, then they would be hitting on all cylinders.

The marketing lesson herein is that segmentation is always driven by the customer base, not the convenience of the vendor. Segmenting by industry is a natural for many technology vendors, but it may not be the viable for your products. There are two primary goals in segmenting, which we’ll be happy to explain once we land you as a client. Your segmentation model must meet these goals. If you don’t then you will embed your company into the ground.

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IBM knows how to club competitors.

Using Open Source for the betterment of your products is well understood. Using Open Source to grind your competitors face into the dirt is more of an art. Yet when done well it accomplishes the primary objective of competitive marketing – attacking your opponent’s strengths.

For technology marketing tyros reading this, understand that attacking your competitors weaknesses is a losing game. Weaknesses are typically marginal worries to consumers. If your competitor’s weakness were serious then they would have never become a competitor. Even if the weaknesses were important, they can be corrected and thus your assaults will be short lived.

Attacking their strengths however is to eat their souls.

Your competitor’s strengths are what made them successful. Any time you can assault their strengths you attack the very foundation of their prosperity. Successfully making their strength into a weakness will do more harm than nuking their headquarters. After all, they can build new offices once the ground stops glowing.

The trick is that competitive strengths are … well … strong. You must make customers believe the opposite of the compelling reason to buy that your competitor has created. Often this is merely impossible. If one were to attack Oracle database strengths – their robustness and scalability in particular, attempting to convenience people that these were Bad Things – you would be laughed at as their slapped you into a straight jacket.

Open Source allows you to do something even more insidious. It allows you to attack a competitor’s strength by promoting the same strength. And no, I am not wearing a straight jacket at the moment. It is out at the cleaners.

IBM lost the battle for the big database market. Depending on whose numbers you like to use, DB2 is well behind Oracle, Microsoft and MySQL. With Oracle now positioned to control the fate of MySQL via the Sun Micro acquisition (assuming that antitrust lawyers don’t put Larry Ellison in a legal straight jacket), Oracle runs away with nearly all of the market. Granted, MySQL does not add much to Oracle’s top-line, but the Open Source option keeps customers in their camp by covering all bases (graphic by JoinVision.com).

Unless, of course, there is an alternative.

While Oracle is acquiring MySQL to provide product to the low and mid market, IBM is investing in EnterpriseDB to reduce Oracle’s high-end revenue stream. EnterpriseDB offers the Open Source Postgress database with an added layer than makes it look like an Oracle instance. Users have Oracle’s PL/SQL interfaces atop a database that costs about 90% less than what Larry wants. Granted EnterpriseDB and Oracle databases are an apples and kumquat comparison. Oracle offers a lot of features that EnterpriseDB will not provide.

By and large that doesn’t matter.

IBM’s move to include EnterpriseDB with DB2 licenses attacks Oracles strength on two fronts. First, it gives customers a reason not to buy Oracle instances for non-critical applications. Customers need to have the number of database technologies kept to a minimum so developers and support staffs have less technology to master. If customers do not need the esoteric aspects of an Oracle database, having EnterpriseDB and IBM support are good options.

The juicy bit though is that IBM is using Oracle’s PL/SQL interface to bleed off enterprise adoption of MySQL. Since cost savings are the primary attraction to Open Source databases, EnterpriseDB offers Oracle shops a means for achieving a unified set of interfaces to databases while not enriching Larry, who according to recent news stories is the highest paid CEO in the United States, making north of half a billion bucks in 2008.

IBMs move then is removing the advantage of Oracle’s MySQL acquisition and simultaneously attacking Ellison’s high end revenue stream. Poor Larry will likely only make $400M this year.

Expect more of the same from other vendors. Open Source creates products that offer real value and real competitive threats. These products can be leveraged to hobble competitors. Large vendors will continue hunting for Open Source upstarts that can cause competitor convulsions.

In this instance though, I wonder if there is another feature afoot. IBM previously participated in a $10M round funding for EntepriseDB. They have more than a passing interest in EnterpriseDB. In theory EnterpriseDB’s PL/SQL layer is portable. Since IBM is bundling EnterpriseDB with DB2, there is a chance that the EnterpriseDB application interface could be ported to DB2, which offers some of the esoteric database features required by large enterprises. This may be the beginning of a concerted program by IBM to not only block new Oracle sales, but to migrate existing accounts.

You gotta love technology marketing. It’s like warfare but we use bucks instead of body counts to keep score.

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