Here’s an interesting story about how Salesforce, on center stage this week because of its gigantic Dreamforce conference, is at risk because it relies on technology it did not build and does not own.
The piece argues that Salesforce (CRM), which leads the market in the subscription software that sales people use to track and manage customer accounts, builds largely on other companies’ core technology.
Most notably it relies heavily on Oracle’s database. Oracle (ORCL), by the way, is also a major competitor to Salesforce in this customer relationship management category and other business applications. It’s coopetition at its best.
The author’s argument is that this heavy dependency on third-party players differentiates it from Oracle and Microsoft (MSFT) and SAP (SAP), which all build their own databases and other foundational technology. And all of those companies, unlike Salesforce itself, have very profitable track records.
Now, Salesforce chief executive Marc Benioff’s dream of taking on not just Oracle but SAP in other enterprise software categories puts it at risk, according to the story. That may be why Salesforce is building up its skills in PostgreSQL, an open-source database favored by many companies that are increasingly wary of relying on pricey databases from Oracle, SAP, and even Microsoft.
To step back for a second: Open-source code is built by a worldwide community of developers that span vendors. The resulting code is typically free as long as key alterations are funneled back to the source code.
The beauty of this model is that thousands of programmers write and maintain the software, so theoretically the code will be better and more secure than proprietary code that belongs to a single company. (Although there have been some glitches there.)
Increasingly, commercial software companies, which are used to charging (big) for their software, plus support and service as well, are turning to open-source software. Case in point: IBM (IBM) has backed big open-source projects from the Eclipse development environment for Java applications and the dominance of the Linux operating system. But those companies have other stuff to sell. In IBM’s case, makes money from mainframes and IT services.
For those companies, releasing technology to open source projects—like the Kubernetes for managing computing containers or the Open Compute Project, which takes the open-source model into the data center hardware realm—is no biggie. For commercial software companies, on the other hand, contending with this raft of free, and highly capable software is an existential threat.
As one data point, note that Red Hat (RHT), which sells support and service for Linux, is arguably the most successful company built on open-source. It became the first $1 billion open source company three years ago and closed its last fiscal year in February at almost $1.8 billion in revenue. That is not chump change, but it’s a far cry from the run rates proprietary software companies tout.
Here’s guessing that the new normal for software companies in the open-source era will look a lot more like Red Hat and a lot less like Oracle, SAP, and Microsoft. And that has to be a sobering thought.
The CTO of one software vendor, who requested anonymity because his company is caught up in this painful transition, recently summed it up: “It’s time to realize that the benefit of open-source software accrues to the users, not to vendors.”
That means profound changes will continue to shake companies working under the old, profitable proprietary software vendors to their very roots.
Companies like, um, Oracle, SAP, and yes, Salesforce.
For more on Salesforce strategy, see the video below.
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