JCL Blog

Big Pain Equals Big Gain

Everyone in our solar system knows about the pain going on at HP. I would not be surprised if even a few extra terrestrials know about HP’s roller coaster ride of CEOs, acquisitions, write downs, re-orgs, lay offs, and other painful stuff.

The tendency of course is to write off a company with this much trouble. Why work for, work with, sell to, sell with, or even write blog posts about a company that seems to put its business plan in the blender before deciding what to do each morning?

Well, because with this much pain there is enormous opportunity for gain. In the fifteen years we have been helping big technology companies market through their partners we have been involved in many conversations with HP. Most of those conversations have included a significant thread about how HP does things and about how there was no chance the way HP did things was ever going to change.

Well, things are changing now!

On every measure except market capitalization, where even Facebook has a bigger valuation, HPQ is pretty big. Seventy three years of history, over one hundred billion dollars in revenue, and 350,000 employees. Add to this HP’s tens of thousands of business partners that sell their hardware, software, and services all over the world and I would not be surprised if the HP ecosystem was more than a million people strong.

No matter what experts say about the rapid pace of change inside technology companies, every company in every industry avoids change and HP and the technology industry are not immune. Right now, the move to the cloud and BYOD is moving the pieces around the technology industry chess board and presenting a once in a decade opportunity to companies willing to change big.

So all of the planets are lined up and HP is Jupiter.

If I were HP, this is what I would want to do with my influence:

Make it UNBELIEVABLY EASY to work with HP
Set a new TRANSPARENCY standard
Establish HP in the CENTER of the ecosystem
Make each change FOUNDATIONAL

Clearly these measures build on each other. Each will have an impact on its own. With a little luck the compound impact could change the whole industry.

The Cloud is Out of Our Control

Anyone familiar with network diagrams knows that the cloud symbol is used to refer to the things outside of the control of the network owner. In the old days it meant our network connects to the Internet here, or connects to the telephone network here.

Wait, that is still what it means! By this definition we have had cloud computing since the 50s. What is the big deal about all of this “Cloud Computing” then?

True to the definition, we are shifting more computing from inside our networks to the part of the diagram depicted by the cloud – the part out of our control.

Web email (gMail, Hotmail…) was the first mainstream application of this, but network administrators know that the migration to the cloud started well before that with security services, enhanced phone services, distributed computing grids. And everyone else is watching as we are now getting cool cloud apps like Dropbox, Evernote, Google Docs, and Office 365.

So are we just back to timesharing the VAX? Well, no.

Yes MS Azure, AWS, Google App Engine, OpenStack, and the dozens of other offerings do look a lot like mainframe timesharing with one big exception – the new cloud services talk to things inside your network, and talk to each other.

All of this talking is done with Application Programming Interfaces (“APIs”). These are instruction sets that enable people or computers to interact with systems, without being in the system.

We will all be hearing a lot about APIs in the weeks ahead because how they are used and who owns them is the center of the currently front page lawsuit between Google and Oracle.

Tale of Two Conferences

I was fortunate enough to attend two Cloud Computing conferences today. They were right next door to each other in Seattle, one at the Sheraton (CloudFair2012) and the other at the Convention Center (Cloud Intelligence Conference). It was an interesting study in the current state of tech marketing because the CloudFair was dominated by Google and the Could Intelligence Conference by Microsoft. While it is not really fair to make a full comparison because I could only attend part of each (the CloudFair is in the workshop day of a three day conference and the Cloud Intelligence Conference was only a one day thing), it was a great way to see the contrast between how Google and Microsoft reach out to their markets differently.

The experience reminded me of the great exchange between Bill Gates and Steve Jobs at the All Things D conference in 2007 where Walt Mossberg asked them what they appreciated most about each other and Steve said that he admired Bills ability to partner, and Bill said he wished he had Steve’s sense of style. Two great companies, two completely different approaches. The same can be said for Google and Microsoft. Microsoft still knows partners and Google’s “style” is to turn as many of its engineers into marketers as possible.

Microsoft Knows Partners

At the Cloud Intelligence Conference, the speakers were mostly talking about Microsoft Azure and Office 365, and most of the speakers were not from Microsoft, but partners of Microsoft that help Microsoft customers run their Microsoft products. These partners are formidable companies in themselves, and some have products that integrate closely with Microsoft’s offerings. The speakers were talented, had a great deal to contribute and were not just pitching their own services. Since just about every company has Microsoft in its IT infrastructure somewhere, it is a given that the audience were already Microsoft customers. The presenters took advantage of this fact and were helping Microsoft customers see what was on the way to them from the mothership. The negative of this approach was that the audience did not feel that they were getting the inside view into Microsoft, and there was a bit of a theme of ‘yes we are keeping up with the cool kids’. Neither of these is going to push customers off of a platform already through their organizations.

Google Is Not Evil and Engineers are Not Marketers

Google as a company defines itself by declaring what it is not (evil) and continues that method with Google engineers declaring they are engineers and not marketers. These guys were great speakers, very knowledgeable, easy to listen to, and clearly passionate about Google products. In addition, and in contrast to Microsoft, they did a good job of letting the audience get a sense for the inside Google perspective. Developers do like that kind of thing a lot. The talks were clearly aimed right at the users with no reference to partners or how a partner could use this technology to take better care of its clients. It is very possible that there were partners in the audience that were going to do just that. It was interesting that the Google guys were both published authors and took the opportunity to plug their books. I suppose this could be a result of Google’s culture of academia (where college professors are always writing and plugging their books). It was a bit ironic however, because they did say they were not going to try to sell the audience anything, well except their books.

Great change only happens when innovation makes things 10 times better. Clearly the tools available to businesses through the cloud are at least 10 times better, so this is going to be a time of great change and it is hard not to be excited about it. It will be interesting to continue to observe these two great companies build their tools and their markets. Along the way Microsoft will surprise everyone and innovate, and Google may even surprise themselves and do some marketing.

The Third Wave of Partnering

Thirty years ago the PC revolution spawned a significant number of companies that today we call “the channel”. These companies resold computers, parts and pieces, software, and expertise. Since no company could reach the entire market with an internal sales staff, the millions of people in the channel built the big technology companies like Microsoft, Intel, HP, and Cisco. These companies have experienced extraordinary change as the decades have passed.

The first wave of the channel was driven by the mark up associated with selling retail, and it ended about fifteen years ago. It was replaced by the opportunity to sell services. This second wave started with simple network administration services and grew to the full complement of services we have today. The big vendors then got into the game. Lead by IBM as it recreated itself as a services company in the ‘90s and now generates over half of its revenue from services. In the last few years, HP bought EDS for $14 billion in 2008, Dell bought Perot Systems for $4 billion in 2009, and Xerox bought ACS for $6 billion in 2010 making the services business – very big business indeed.

The service offerings of these large firms include everything imaginable and are sometimes easy to visualize: Xerox for example sells document management services instead of copy machines. And other times incredibly complex: like EMC’s high availability enterprise network attached storage in the cloud. We are watching big iron make its comeback as each of these big companies builds monstrous data centers and offers a cloud solution for everything. Wasted processor cycles and storage capacity are being wrung out of these systems and IT labor is being used more efficiently driving down the incremental cost of computing quite rapidly. Enterprise computing budget line items that used to be over $1 million now seem to cost $50,000 and those that used to cost $10,000 now start at $15 per month per user. All of this disruption will present many opportunities for add on services – which is the hallmark of the second wave – so the companies in the channel will thrive in the cloud.

If that is not enough excitement for you, the third wave is forming. At the risk of using another already overused word, let’s call this the platform wave. There may or may not be a better word, but at least we are not calling it the “Cloud Wave”. To review, in the first wave channel partners marked up hardware or software products, in the second wave channel partners charged for their time/expertise (still a big business), and in the third wave channel partners are part of a platform ecosystem. Sure, this has been part of the Microsoft strategy for 30 years. Microsoft pioneered the transition from big proprietary platform systems offered by IBM, HP, and DEC in mainframes, to their own small proprietary platform system: Windows. Along the way, Microsoft has grown its partner ecosystem to over 600,000 partner companies that have millions of employees worldwide implementing, customizing and maintaining solutions built on the Microsoft platform. So it is tempting to say that there is nothing new here. However, one dominant platform is one thing, a dozen is something different all together.

The new platform builders look different because their consumer focus can obscure the view. Is Google search or a platform, is Facebook social or a platform, is Apple a shiny device maker or a platform, is Amazon a giant online department store or a platform? They are all of the above, and even if there is a small chance search, social, devices, and shopping could coexist; there is no chance all of these platforms can. Both Facebook and Amazon made significant announcements last week with the Open Compute Project and Amazon Cloud Drive respectively. Google, with Docs and Gmail have been in this space for a while, as has Apple with Mobile me, and Microsoft with their rebranded Office Live services and Azure. Salesforce.com, Oracle, SAP, HP, and Dell are also developing cloud solutions.

As stated above, the second wave (services) is likely to get bigger as these platforms deploy because companies are going to need more help than ever to take advantage of all of the new offerings. So what exactly is the third "platform" wave?

Wikipedia defines a computing platform as: some sort of hardware architecture and software framework (including application frameworks) that allows software to run.

The third wave is the new products built on top of the platforms. There have always been products built on platforms (think MS Office on Windows, or Garage Band on OS X), but this era is different because the platforms are not machine dependent (i.e. are accessed by devices ranging from smart phones to set top boxes), and there are so many products. If you still think this is the same old thing, consider Dropbox, Evernote, Zotero, or SpotCloud, or even a Wordpress server running on Amazon’s EC2. These new applications run on the platforms, and also enable other new applications – Zotero can be made more portable by storing files in Dropbox.

At present there are over 380,000 active apps in the Apple App Store and over 250,000 in the Android Market. Amazon does not publish numbers, but the growth of its EC2 and other cloud offerings is pervasive. The opportunity to carve off a small specialized piece of this new marketplace is attracting many new entrants to the channel – and converting a sizable number of existing channel partners.

In the months ahead, channel partners will be spending considerable energy evaluating the merits of the platforms offered by these and other companies and success or failure will ride where they choose to make their investments.

Part Time Computer Operator

For the past 25 years every knowledge worker has needed a certain amount of technical skill in order to work. Knowledge of operating systems, general business applications, and job specific tools have been required in order for a knowledge worker to add value and justify getting paid. So work has been a combination of operating the computer and doing the actual work.

Initially, the increases in productivity were astounding. Moving from a hand written ledger to a spreadsheet application was at least a 10x increase in worker productivity. I am no productivity expert, but my own personal experience would lead me to conclude that over the past 10 years this trend has flattened. Once computers got sufficiently powerful to do the work normal knowledge workers needed done, the tool makers just added complexity -- which may have even reversed some of the productivity gains.

The last big improvement in knowledge worker productivity was probably the widespread adoption of email with attachments. this would have been in the mid to late 90's. Since then computers have gotten smaller, faster, and cheaper -- but they have not given us a 10x improvement in productivity. We can stay in touch with our friends using social media, and watch movies anywhere anytime, but these have not been leaps forward in worker productivity. We are overdue for the next big step forward.

I bet there was a time when drivers of automobiles could drive without having know anything mechanical. They just got in and turned the key. Soon the knowledge worker will not have to know anything about computers in order to add value and justify getting paid. Computers will just work and knowledge workers will be able to spend 100% of their energy on their jobs.

One could argue that the time spent now on keeping a laptop running is less than 10% of a knowledge worker's effort. So removing this would not produce a 10x productivity improvement. I propose that many workers confuse the time they spend serving as computer operators as a value added activity. Building spreadsheets is work -- right? Once a knowledge worker can dedicate all effort towards the actual job -- big gains in productivity will occur.

I can give my daughter an iPad and she just knows what to do. No time spent being a computer operator. Soon we will be able to do the same thing at work. A new person to the team could contribute value on day 1 -- 100% of the time.

Intuit and the Tyranny of the Uptime Clock

Those of you following my Twittering and blog posts must think I have become obsessed with the Intuit outage. At CSG we operate a hosted enterprise software service and face the tyranny of the uptime clock -- just like Intuit. As the technology industry moves to adopt cloud computing, we all suffer a credibility loss when a major player like Intuit has a long term outage like this one. The lack of an explanation, and generally poor levels of communication by Intuit during this episode does not help. Sure they could not post on their own websites while down, but they have official blogs outside of their control that were up and so they did have the ability to communicate. Here is a short list of the communications:

Intuit on Twitter @Intuit: First post was 11.5 hours into the outage, at this writing 8 posts, including a gap of 16 hours before the latest post saying they are now on the way back up. The posts pointed to their community page with 4 undated or time stamped updates, and 2 references to the small business blog, where they posted an update 12 hours into the outage.

Quicken on Twitter @Quicken: First post was 13 hours into the outage, at this writing only 4 posts -- saying they are working on it.

Official Quicken Blog: No posts, last post was April 26th.

Quickbooks on Twitter @Quickbooks: No posts, last post was May 21st.

The main site just now came back online -- making the outage approximately 34 hours in duration. Current explanation:

Our preliminary investigation indicates the outage occurred during a routine maintenance procedure Tuesday night. An accidental power failure during that procedure affected both our primary and backup systems, taking a number of Intuit websites and services offline. While power was quickly restored, we're working diligently to validate our systems and bring them back into full operation.

Intuit reported 300,000 online customers in May of this year -- many of whom use accounting and merchant services applications that require near universal uptime. In the industry this is often referred to and "four nines" or "five nines" uptime for 99.99% and 99.999% uptime.

A few basics about uptime: Scheduled outages are usually not included in the calculation, so the .001% downtime permitted in five nines uptime buys only 5.26 minutes of unscheduled downtime in a year. Three nines gets you almost an hour, and two nines gets you almost a day. Fortunately nobody died in this outage, so even a 34 hour outage is not a catastrophe on the BP scale. But it will take 388 years of perfect uptime before Intiut can claim five nines of uptime.

All of us are relieved that they are back online. This event will undoubtedly slow migrations to the cloud, and should give all of us reason to check and recheck our redundancy and uptime plans. In addition, we should be checking and rechecking our communication plans associated with any downtime. We are certainly capable of turning a bad situation worse by failing to communicate well with customers.

Intuit's Cloud Outage

When I saw some traffic in Twitter last night about Intuit's web site going down I first thought it would be back up in a minute and would be no big deal. An hour later I checked back -- still down. I checked @intuit, @quicken, and @quickbooks on Twitter thinking they would post an update -- none. I searched for Intuit related blogs -- no posts in over a month!

Knowing that millions of people use intuit's accounting, payroll, tax preparation, and merchant services, and thinking that these activities are almost always time sensitive, I naturally thought that this was going to be a big story. Next I thought that since small businesses are a big deal for technology companies, and technology companies want small businesses to adopt cloud computing, this would be a big deal in the technology industry. A major vendor like Intuit going down for hours without any communication to its users is enough to set back cloud adoption a few years -- right?

So I searched the news on Google about a story. Top search result: Intuit press release about low cost Payment Solutions, next was CEO Brad Smith being profiled by "Inspiring West Virginians", and the next four were all about stock performance upgrades due to good recent financial results. No stories about the outage.

Back to Twitter, a real time search for Intuit Down: just a few tweets. Nothing like I expected.

When a $3 Billion company with millions of customers goes down for over 12 hours without a mention in the press, without an update to its customers, and without any public outcry to speak of I can only conclude one of three things:

I fell down the Alice in Wonderland rabbit hole and never came back, or
Not communicating during a crisis works -- no communication = no crisis, or
Not that many people are using Intuit's Cloud Services.

I did watch the movie and even with the 3D I don't think I am chasing the Jabberwoky -- so #1 is out, BP and others will tell you that #2 is not true, so logic tells us that #3 could be the most rational conclusion.

Intuit's recent acquisition, Mint, has stayed up the whole time. No mention on any of Mint's blogs either.

HP Announces Printing in the Cloud

HP rolled out its web printing capability, ePrintCenter, at Internet Week NY yesterday. Here is a pretty good article in PC Mag about it.

I don't ordinarily write about individual technology announcements, so why would I write about this?

Well, yesterday I wrote about two things that could really change the way small businesses buy technology: Google's Cloud Printing and Tungle.me's web based scheduling service. Google's thing is still just a plan and HP has promised to deliver cloud printing this summer.

Here is how it will work (from the PC Mag article):

The print-through-the Internet feature (which won't work with the older generation printers, unfortunately) lets you simply e-mail a file to the ePrintCenter's email address, which rasterizes the image and sends the print job to the printer. According to HP, the ePrintCenter can handle files in most common formats, including PDF, JPG, and Microsoft Office 2003 and 2007 versions of Word and Excel. Each printer gets a unique e-mail address.

I stopped buying HP printers for home a couple of years ago because they break so much and the software on the PC was gigantic. Why printing would require software in the hundreds of MBs just never made any sense to me. Add to that the fact that the software was telling me to download updates every other day -- and I was reminded early and often that HP was not the printer to buy. All I wanted to do was print!

Anyone who has ever done tech support will tell you that printing is still a giant pain in the neck. If HP does this right -- it could be a game changer.

This may not seem like a big deal -- but I bet the Microsoft Small Business Server team is thinking about the implications.

Clouds on the Horizon

Today I am in Los Angeles attending Mark Anderson's Future in Review conference - aka "FiRe". I have attended this conference several times and it is always my favorite conference of the year. Like many conferences is it a great way to meet new and interesting people. This conference is different however because the subject of the future is quite broad and Mark does an amazing job of packing the agenda with a wide variety of subjects -- and all expertly presented in a No PowerPoint zone.

We are half way through the event and I have a good ten pages of notes. It will take a while for me to distill all of this thinking into blog posts, but until then here are some initial thoughts:

There has been a good deal of discussion about how Cloud Computing will impact the world and how cloudy our future looks when considering the dislocating effects of energy and climate issues.

Energy: Half the world does not have electricity. Right now the worldwide production of electricity is 13 trillion watts -- most electricity is created from coal, and we have 2,000 years of coal reserves on hand. Do we make electricity more expensive (to discourage use and reduce carbon footprint) and in the process deny even more of the world population the benefits of electrification, or do we reduce the cost of electricity, deliver it to more people, but figure out how to produce it without such a large impact on the environment. We need 28 trillion watts of innovation by 2050.

Ray Ozzie: It was around the tech world in 45 minutes in a conversation between Mark Anderson and Ray Ozzie that hit at least 20 topics. Some of the points were:

On creative destruction: The amount of money in the system may just drop in the near term. The consumer will pay less, new revenues will be created (later).

On the shift to consumer (from enterprise): The more there is a consumer buyer of technology the more costly it will be for the enterprise. This is both in terms of exception management and security. Any CIO should have a very clear view of threat model. The insider threat included.
On the Cloud: The cloud = developer sit down, worry about coding - that is it!
On Privacy and Facebook: Facebook has a lot of momentum. We as a society have never had to deal with privacy issues on the scale that we have. We have business models that are fundamentally attached to intent and matching that with advertising. It is very difficult to cope with. Facebook is doing us a great service by pushing the envelope so much.

People, Learning and the Role of the Institution: The core of most organizations is failing and the value is at the edge. Return on Assets is trending to zero (because we do not know how to value the right things). The cloud provides power tools for the edge. The edges collide and become centers with power tools and social tools. The edge pulls the core to the edge. There is deep thought going into how these networks are put together. The greatest innovation into how these communities are structured is happening in India and China. How can it be governed? It is not always about technology.

I will be sending out updates on Twitter @jcleon. Or follow the tag: #Fire2010.

Fifteen Ideas from Baptie Channel Focus

Yesterday I wrote about some themes that emerged at Channel Focus, and I promised to share some of my other notes. Like most everyone I make lists of notes while at conferences -- always intending of course to pay some attention to them later in my life. The act of writing this blog is great encouragement for me to put a little more thought into these notes, so here is my list of fifteen things I want to remember from the conference. Whenever possible I give credit to the people that either directly proposed the idea, or said something that sparked the thought in my brain. These are not direct quotes but attribution none the less.

Sandy Carter (IBM): Know the customers problems better than they do.
David Green (Motrola): 1% of the cloud is for the enterprise right now.
Sandy Carter (IBM): We see far less than the Gartner 20% at the enterprise. The private cloud is the way to go. Good stepping stone to the public cloud.
Oli Thordarson (Alvaka Networks) Everyone overestimates change in the short term and underestimates the impact in the long run (Geoffrey Moore). And Solution Providers are the most adaptable creature on earth.
Gartner Study Cited: Was 20%, now 50 % of purchasing decisions influenced by the Business Decision Maker (BDM) and going to 70%.
Sandy Carter (IBM): Social Media is 50 % for listening.
Tarkam Maner (Wyse): 300 to 3 watts of power required per device makes wireless power possible.
Tim FitzGerald (Avnet): We are 3 years into a quest to deliver solution and the partners in our program are experiencing growth at 3X the industry.
Ross Brown (Microsoft): Three screens include the TV; Younger gen drives the adoption; 90% of all MS developers will be on cloud projects by FY11; Script is fast and flexible compiled is not; cloud computing will take the most complicated licensing (MS) and double it.
Ross Brown (Microsoft): ISVs are partners now but many want to be customers instead.
Ross Brown (Microsoft): You really don't have to find new partners but broadcast your intentions and let them come to you.
Ross Brown (Microsoft): Who is building the Government Cloud?
Julie Parish (NetApp): Only 15 % going to the cloud – so do what you do best even if it is not cloud oriented.
Rod Baptie (Baptie): 20 percent fewer SPs now than 2 years ago.
Rod Baptie (Baptie): Channel thinks the cloud will happen much faster than the vendors do.

Baptie Channel Focus 2010: Three Themes

Earlier this week I attended the Channel Focus conference in La Jolla, CA organized by Rod Baptie. Rod does a tremendous job putting these events together and all of us in the industry owe him a debt of gratitude. It was a pleasure to connect and reconnect with people in real time and compare ideas and experiences. Although there was not an official theme, there were some ideas that came through for me this year. Here are three that I want to remember:

Hot Trends: The Cloud and Social Media: These are big things in our business now and they would emerge as the topics in any conference. There were many good tactical ideas for dealing with each and I have some lists of thoughts I will publish later. That being said, the old saying: “the more things change the more they stay the same”, did ring in my ear. We have been talking about these and the cloud in particular for a long time and as the changes actually start happening it is almost anticlimactic. We need to remember that the hard work of building and operating channel partner programs still has to be done through these changes. In the very last session we discussed a recent survey of vendor and channel partner sentiment and found that the channel partners could be more ready for the changes than the vendors. Not surprising on one hand because channel partners are smaller companies and prone to change faster, but it is ironic because it has been the vendors that have been evangelizing the changes to the partners.
Organizing Ourselves: At lunch yesterday Rod Baptie and Scott Hammond took a few minutes to remind us that we have no industry association to advance our thinking in a more organized way and advocate for policies and practices that could benefit all of us. Rod and Scott have been working on this since the conference in 2009 and have made considerable progress. Perplexing as this reality may be, we do need to get on this. I will post a link here to the working group as soon as I get it.
The Recovery is On: Everyone I talked to seemed to agree that the recovery is on – and everyone is swamped trying to make the most of it. Hiring seems to be going on in channel marketing departments everywhere as the plans that have been cooked up during the downturn are pressed into service. As we struggle together up this steep ramp the winners will be the ones that make sure to keep things simple enough to execute well and that listen to their partners.

As always the speakers were very high quality and the agenda was just packed. Rod squeezed what any normal person would consider enough content for three or even four days into two days. Even though some people may have to add a third day just to recover, I think the format was very good. Short enough to attract the busiest people and with sufficient density to satisfy the most discriminating conference attendee.

One more thing: We all are absorbing more information than ever: The social media tools do enable vendors, channel partners and customers to process much more information – and so our capacity to absorb messaging seems to be taking some big steps forward. We have been working for several years to make the communications vendors have with channel partners more compact and efficient – in response to partner feedback of being overwhelmed. In this event I did not hear that sentiment anymore. Could it be that through these new aggregating and distillation tools that the channel partners actually want more information from the vendors?

This reminds me of something I heard Jay Rosen say not so long ago (and this is a paraphrase from memory): There has never been a time where I have been able to get enough information about a topic I was really interested in. There may be something to this.

One Example of Irrational Exuberance Meets the Cloud

Disclosure: My company competes with Salesforce.com from time to time, but our product is a niche extension of what SFDC does and we have never claimed to be a replacement for their product. I doubt Mark Benioff has ever even heard of our 150 person company. This post can be read as negative on Salesforce.com -- buy my point is on the irrationality of the stock market more than on the performance of the company. Salesforce.com has done a great job blazing a trail in our industry.

Salesforce.com recently released their earnings and the trends I pointed out in my posting: Sales vs Engineering continue. In short it is another impressive performance. Growth, profits, and one amazing P/E! At Friday's close the stock was trading at a price earnings ratio of 114.5! Yow! The industry is listed at 21.8 and the S&P 500 at 20.5. I know there are some irrational investors out there but I just don't get this -- Salesforce.com trades at five times the P/E of the rest of the industry. No less than 14 analysis have the stock at a strong buy, 4 at moderate, and 14 at hold. Not a single analyst in the sell column.

I suppose the logic must be to pay in advance for growth. A quick look at the articles referencing Salesforce.com from this last week alone and you would think CRM was just getting started and the buy ratings are based on the incredible growth. I just don't see that either. It is true that salesforce.com is highly scalable because it offers hosted software and adding a new customer does not cost them much in terms of manufacturing cost. However, the thought that this cost is lower than other software companies is not true. Sure they don't have to ship anything -- but neither do any other software companies. The cost in added bandwidth required for a new customer of a hosted solution like Salesforce.com probably exceeds the cost of delivering an executable over the web as typical software companies do now. The whole industry operates on a very low marginal cost for adding another customer. Once the software is developed all software companies (yes Salesforce.com is a software company) keep 90%+ of each additional dollar.

What matters then is the cost of selling. When your product is nearly free to produce, the biggest expense is either R&D or Sales. And Salesforce.com takes the cake in high sales cost. Salesforce.com spends 50 cents of every dollar it takes in on selling costs. This has been the case from the very beginning. The fans must argue that awesome growth costs money and when Salesforce.com decides to slow growth, they will be able to radically reduce sales spending and the profits will skyrocket. So let's dig into that thought a bit. Over the past three years the company has had an impressive growth rate. Even now, growing at over 20% per year is impressive. But 2008 was 50% over 2007 and the deceleration is steady however you run the numbers. All the while the sales spending is keeping pace with the growth -- last quarter it was 48%.

Here are some other interesting ratios:

Salesforce.com spends 5 times as much on sales as it does on research and development.
Salesforce.com spends $2.50 on sales for every $1 increase in revenue.
Salesforce.com spends $170,000 on sales per employee per year -- that is every single employee in the whole company.

In the last earnings release conference call Salesforce.com indicated that growth will be declining further to 17% and they are continuing to hire more salespeople. So the cost of new business acquisition is going up even further.

So here is what I conclude. High sales cost is heroin. If you stop doing it there will be serious consequences. The only logical explanation for the steady investment of 50% of revenue on sales is that no economies of scale in selling have emerged. This company sells to the enterprise and enterprise selling is hard and expensive work. It is not like consumer companies that go viral and all of the sudden the product starts selling itself. They spent $600M last year to produce 20% growth and in 2008 they spent $375M to grow 50%.

So while it is possible that no new competitors will come on the market, no setbacks to cloud computing in general will occur, and Oracle and Microsoft will continue to give up marketshare, I have to think that this valuation is about as good as it is going to get for Salesforce.com. I think even Salesforce.com agrees in that last year they took advantage of their incredible market cap to raise $500M in debt and now sit on a $1.7B pile of cash.

More on Disclosure of my interests: I do not hold and of Salesforce.com's stock nor do I hold a short position.

Microsoft and HP

Yesterday Microsoft and HP announced a deeper partnership through which they intend to offer solutions based on Microsoft Software and Hewlett Packard hardware with an emphasis on cloud computing. Hard to know what this really means and the reporting I have seen does not offer much in granular detail other than to recount that they intend to spend $250 million on the exercise.

Here are some thoughts on what could be significant about it:

Microsoft's strength is in the enterprise. If this deal pushes cloud solutions aimed at small business and consumers to HP it could be a good thing -- particularly since it would help Microsoft stay focussed on its strengths. Some of the reporting on the announcement mentions that there is an enterprise element to the HP partnership. I really don't get that. Microsoft and HP both have big ongoing relationships with enterprise customers and I just cannot imagine the companies throwing that business into this bucket.

HP is no Google in terms of consumer focus, but is well positioned to deliver the broader marketplace. So there is a chance HP could make it work.

Who else is impacted? As with many of these deals, the people not in the deal are as important as those named. The most significant is Dell. We do not know how this deal changes the relationship between Microsoft and Dell. We will have to keep an eye on that. Other players like VMware and Cisco will also be interesting to watch in the context of this deal.

So initially I think it is a good move by Microsoft. The downstream execution and the reaction of the other related companies will determine if is a winner of an idea. Either way, there will be more to this story.