Another View | Why Google won't focus on business software
- By Sridhar Vembu
- Sep 24, 2008
The biggest competitor my company, AdventNet, faces as an online applications vendor is Google. Even as we compete with Google, we are also part of its ecosystem in a variety of initiatives, such as single sign-on for Google users, using Google Gears open-source technology for providing off-line access and so on. The situation is common in the industry: Companies like Google and Microsoft are both partners and competitors to a variety of other companies.
We are often asked why we compete with Google. It is better to ask why Google is interested in the business software market. Let me explain with a spreadsheet.
Focus on the revenue per employee and profit per employee. I have put the business software industry and the consumer Internet industry in separate groups. Notice how successful companies with mature business models, such as Oracle and Intuit, don't even pull down half the revenue per employee of Google, and perhaps surprisingly, they pale in comparison with the supposedly struggling Yahoo. EBay also towers over every software company except Microsoft. Finally, even Microsoft falls short of Google's revenue/profit per employee ' and Google isn't even milking a mature monopoly.
Salesforce.com's numbers are instructive. Although it likes to pass itself off as an Internet giant, the company's revenue per employee is only in the range of its business software peers and is a fraction of the Internet giants. 'I know an internet giant when I see one, and you ain't no internet giant, Salesforce!'
That revenue, I must add, is despite the company's out-of-this-world pricing for customer relationship management subscriptions. They pull in almost $1 billion in revenue on the backs ' some really overloaded backs ' of a little more than 1 million users, leading to almost $1,000 per user per year.
Now it is clear why we compete with Google. Google is perhaps the most stunning technology success story ever, but we simply don't believe it has the rational business incentive to get too deep into the business/IT software category. The lower revenue and profit-per-employee figures would be tolerable if there were huge growth opportunities there. But when successful companies like Adobe and Intuit pull in revenues well shy of Yahoo, when even the enterprise software leader SAP is smaller and slower growing than Google and when Google makes nearly as much in profit per employee as SAP or Oracle make in revenue per employee, it is fairly clear this market is not going to make a material contribution to Google's growth and profitability objectives.
So what is Google's plan? It is fairly obvious the company is in it to put Microsoft on the defensive on its home turf, to diminish that company's offensive capability in the Internet. It is also perfectly clear why Microsoft wants to be an Internet player: as Google has shown, it is a higher-margin business even than its monopoly-profit core business.
So why is business software so much less profitable than the Internet? I can think of two reasons: 1) purchasing departments that know a thing or two about supplier margins and specialize in putting the squeeze on them and 2) sales and support costs, particularly support costs. When you sell software to businesses, they have all kinds of support expectations, which add to headcount. A search engine or a news portal isn't expected to provide any customer support.
Also, within the business software industry, companies that sell to small and midsize businesses, such as Adobe and Intuit (Microsoft is also very strong in this area), have higher revenue per employee than companies that focus on large enterprises, such as Oracle or SAP. That is likely because strategies focused on those businesses lead to outsourced selling.
When push comes to shove ' and there is a lot of messy push and shove in the business software market ' Google's resources are going to flow into figuring out how to monetize the humongous traffic of YouTube or compete in online auctions rather than figure out a way to squeeze a bit more margin compared to Oracle, Adobe or Salesforce. That might explain why Google has been silent on CRM, project management, invoicing or human resources tools ' because those markets don't offer the profit potential the company already enjoys.Sridhar Vembu ([email protected]) is CEO of AdventNet/Zoho