Salesforce Missing Mobile Target

Salesforce.com is trying to goose margins by introducing new ways for customers to use its cloud-based development platform, but it's still missing in action where mobility, perhaps the fastest-growing tech segment, is concerned.

The company said customers can now build applications and Web sites using the Salesforce development language and infrastructure. Furthermore, in order to encourage customers to develop even more, Salesforce won't charge for the first site or application they create. Ariel Kelman, senior director of its platform business, explained over the phone last week that the company believes that "the best way to accelerate growth is to [allow customers to] have a trial."

Unlike SAP, Oracle and Microsoft, Salesforce doesn't earn huge up-front license fees or ongoing maintenance fees many customers consider akin to extortion. While that explains its popularity with customers, it also explains investor uncertainty about the viability of the business model, which sometimes seems more like a hamster wheel than a strategy.

Indeed, Salesforce doesn't make money on new customers for at least three years because it invests time and effort up-front, while the customer pays over time. One way to make customers profitable to Salesforce more quickly is to get customers to pay for more services. Bruce Francis, Salesforce vice president of corporate strategy, told me over drinks a couple of weeks ago that more than half of Salesforce customers use at least one application available on AppExchange, the vendor's virtual mall of third-party business applications. (Salesforce earns commissions from sales of third-party applications on AppExchange, but doesn't divulge specifics, rolling those earnings into the "Subscription and Support" line item on its income statement).

That's one way of upselling. The other is to get customers to pay for the privilege of building their own Web site and applications, which is precisely what Salesforce is doing now. Kelman admitted that this initiative is geared at "customers expanding their use of Salesforce."

Salesforce needs to keep upselling because the price of success (it's the first SaaS company to generate $1 billion or more in annual revenues) is that, rather than being compared to other SaaS vendors like NetSuite and Successfactors, it is peered with more established application vendors. But while Oracle and Microsoft earn $1.11 and $1.74 per share, respectively, and SAP paid a dividend of $0.63, Salesforce's EPS stands at a paltry $0.15 (up from $0.08 in the year-ago quarter).

Moreover, SAP, Microsoft and Oracle are each planning to add the predictable subscription-style SaaS revenue stream to their traditional business mix. Salesforce will thus have to double down on margin growth, and that's where its development platform plays a crucial role. Revenue earned from sales of partner applications are less expensive than revenue from new customers; revenue from applications and sites that customers build themselves are even cheaper and more margin-friendly.

But given the shifts in the way people work, mobility has got to be the next item on the vendor's to-do list. SFA, its bread and butter application used to manage customer accounts, is still in the dark ages in terms of presentation and usability on a smartphone. Salesforce could rekindle start-up-like revenue growth and cut Microsoft and Oracle off at the pass by adapting its application to the small screen. I'm relatively certain that SAP is working along the same lines, but is focused on its installed base for the time being. This leaves the rest of this segment to Salesforce if it can only seize the moving part.