Grid 2.0

The hype cycle for grid computing started many years ago, and today it is mostly relegated to uses in bioinformatics, financial services, and 3d modeling (think crash testing, oil discovery, etc.).  With yesterday’s announcement, Sun is making this grid infrastructure available to anyone, anytime, and on demand at Network.com.  As Jonathan Schwartz points out, consumer plays have been driving the surge behind massively scalable web services.  Think Google, Yahoo, eBay.  On the enterprise side think about any dozen of SaaS vendors like Salesforce, LivePerson and Rightnow.  Rather than building your own infrastructure, imagine being able to create your app or service and deploy it with no wires to pull, no datacenter or storage infrastructure to manage, and all with the frictionless use of a credit card or PayPal?  Pretty interesting thought?  I haven’t done the ROI analysis of $1 per CPU/hr (would love to see someone’s rough cut at this including operating overhead) but this certainly levels the playing field for scalable backends.  Imagine if you are a startup and can’t get VC funding but have a killer app to deploy.  Without any upfront capital expenditure, why not throw your service on the grid, pay per use, and build from there.  That is a big concept, if it works. I believe this is the beginning, the very early beginning, of on-demand utility computing.  With Microsoft moving behind software as a service, I see them deploying their own grid on their own stack on a rent per use basis.  IBM will too.  Competition will breed even better pricing and more opportunities for startups to focus on their apps and product and less about the back-end. I don’t see startups rushing to deploy their whole infrastructure on the Sun grid right away, but it certainly is worth looking at and monitoring over time.  What has changed from 10 years ago is that the focus is not on corporate computing (those guys still want their own grids) but as Jonathan so aptly points out, the long tail-the renegade departments who don’t want to wait, the many startups that have new web services, etc.  Ironically it was Sun that printed money from the VCs and startup community during the bubble-our checks went to a startup and they bought a Sun, Oracle, EMC backend.  Well today the open source wave has killed that business and maybe this is another take for Sun to get at this capital.  So how about that ROI analysis? 

Web as platform-don’t forget the enterprise

As I have written before, most of the talk about this next generation web has focused around consumer applications.  I, however, have always believed that we should not forget the enterprise.  This resurgence of web-based and loosely coupled applications has been driven by consumer-based innovation but there are many pockets of opportunities for the enterprise to take the best of the open web.  As you look at the adoption of technologies in the enterprise much of it has been driven by a push-pull mentality where a vendor tries to sell enterprises something they don’t necessarily need.  On the other hand, with the growth of the web and broadband over the last five years, it has made it easier for vendors to leverage the pull-push mentality where a single user begins using a service or downloads some code, hacks away on it, and then pulls it into the enterprise.   All of this make sense-consumers are web-savvy, broadband is everywhere making it an enjoyable experience, web-based services vs. client applications are driving growth in communications, sharing, storing, and collaboration—these same consumers also work at enterprises and "pull" some of their best practices and learning from the consumer world into their everyday working world. Let me give you an example.

A friend of mine heads up IT architecture at a large health care organization.  One of the big initiatives is to reorient the company to focus on the consumer (sounds like they hired too many consultants).  What that means for IT is how to do they integrate thousands of different databases to figure out all of the information about a particular doctor?  Sure, some of this is an exercise in enterprise data integration but you have to remember that probably 75% of the real information is in the form of unstructured notes about the particular doctor.  Think about how much data gets put into CRM systems which is not structured.  So naturally he asked me about what was happening in the consumer blogosphere, about tagging technologies, about RSS and turning every application into a publishing system, and how he could potentially integrate this into his enterprise.  The pain was large enough that he was looking for new and better ways, think loosely coupled ways to solve his problem.

This is just one example but you could easily think about that customer pain and extract it to a number of enterprises.  Data and application integration continues to rank either #1 or #2 in every CIO spending survey but going for the expensive $1mm plus point to point integration methodologies is not the way to go.  We just have to be creative and think about new ways to unleash the massive amounts of data in the enterprise to make the workers more productive.  Think of the easy-to-use technology used in search, RSS as the new publish subscribe, and loosely coupled applications as a new wave to hit the enterprise in the next few years.  Obviously all of the buzzword du jour technologies are just enabling technologies and it is incumbent upon the startup to find the problem, figure out the market potential, and understand how to sell it.  It is quite early in the process but this next-generation web will have a huge impact in the enterprise as well as in the consumer space.  It will just take some time  because while many of the startup companies I speak with understand the opportunity in the enterprise, they are rightly focusing on the market opportunity with consumers first.  Many of these entrepreneurs do not want to be seduced by the big dollar figure type deals that are out there knowing that it costs a lot of money to sell to the big boys and a whole different kind of support infrastructure.  In addition, most enterprises are not ready for it yet, but trust me, the early adopters are already out there trying to figure out how to use wikis, RSS, and other successful consumer technologies in their shops.  This means it is a good time to be looking so if you are an entrepreneur bringing some of these new technologies into the enterprise, let me know as I would like to speak with you to learn more.

Delivering software as a service

Adam Bosworth has an interesting post on the evolution of software and why software delivered as a service will be the business model of the future. As you know, I have always been interested in this trend since my first post in October 2003 and since I invested in a number of companies in 1998 and 1999 like LivePerson and Expertcity (GoToMyPC) that subscribed to the ASP business model. What I have learned and what Adam points out is that it comes down to the customer experience, making a product easier to use for a customer and evolving it as quickly as possible to meet the customer’s needs. Software delivered as a service enables that and packaged software does not. In the time it takes Microsoft to deliver an application (went from 1 year to 5 years), a company delivering software as a service can deliver 60 iterations of its product. As Adam points out, “things that breed rapidly more quickly adopt through natural selection to a changing environment.” I have never thought about software in evolutionary terms, but it certainly makes sense.

From an evolutionary perspective, the ASP business model is quite interesting to examine. While every piece of software should not and will not be delivered as a service, it is also quite clear that customers are tired of buying expensive software products with large upfront licenses, expensive hardware to purchase, manange, and maintain, followed by expensive professional services to get the product up and running. From this backdrop, it is easy to see why reducing complexity and simplifying technology for customers is a big driver to more rapid adoption of products. It is also easy to see why reducing complexity for the customer also helps reduce complexity for the vendor, lowering the friction to sell and deliver its product. This means a more capital efficient business model, one which would hopefully scale much quicker and cost less to build product, sell, and support customers. For the vendor, it makes it:

1. Easier to sell
-shorter sales cycle-do not have to test extensively in a customer’s environment
-lends itself to telesales, can demo over phone and web, do not need a huge sales infrastructure to close deals (just need quota bearing reps without a huge staff of sales engineers and professional services guys to get the job done)
-not a capital expense, usually sold as monthly or annual subscription which can many times be taken out of business budget as opposed to IT budget

2. Easier to install
-no messy installation process, long testing process, or even waiting for hardware to be delivered to customer
-can leave a customer and simply point them to a URL, train them over the phone, and get them up and running
-all of this means that the business can scale rapidly

3. Cheaper to support
-browser-based delivery and richer client interfaces like DHTML make it easy to use for the customer=less training=less customer support costs

4. Easier to integrate
-standard APIs make it easier for software delivered as a service to integrate disparate systems
-once again, reduces costs to deliver product to customers and also removes obstacles to getting customers

5. Cheaper to build
-versus a few years ago, you now have much cheaper bandwidth, storage, servers, and software
-think Linux, Intel boxes, cheap bandwidth, commodity software stacks, and smarter entrepreneurs changing the economics of building and delivering software as a service.
-the economics speak for themselves

Given this, it seems to me that the ASP business model will only get more attractive with time. The ASP model makes it easier for vendors to sell and get customers up and running, lending itself to a more scalable and profitable business model. While I am not suggesting that every product will evolve this way, it is clear that simplicity rules. The ASP model is certainly one way of accomplishing simplicity. Appliances are another way. Packaged software with huge installation costs is not.

Moving towards an on-demand world

I have always been a big believer of the hosted software or ASP (application service provider) model since we made our first investment in LivePerson in January 1999. One of our main competitors of that era was Kana, which at that time, did way better than LivePerson in terms of customers, revenue, and market capitalization. I wrote a post months ago showing how far Kana had fallen, and how LivePerson stuck with its hosted software model and finally hit profitability. Back in those days, the sales people at LivePerson and Kana were not only fighting a product battle but also a religious war of enterprise licenses versus the hosted model. And back then, many large enterprise customers were not willing to have their data hosted with an early stage, private company. The world is changing. Recently Kana announced its new “on-demand” model jumping on the hosted software bandwagon. Comments from the Kana release sound familiar-Siebel and others are increasingly talking about an “on-demand” model and customer flexibility. RightNow Technologies is another company in the CRM space that is delivering an “on-demand” solution, filing for an IPO last month. So why is the hosted or ASP model coming back strong from its near death experience during the Internet boom?

First and foremost, without customers there is no business. Today’s customers are increasingly getting over data hosting concerns and are warming to the pricing and flexibility of subscription pricing and “on-demand” software. They are tired of the traditional enterprise license model, the lengthy implementation costs, paying for site licenses instead of on usage, and failed projects. Secondly, the cost side of the equation has changed dramatically. Hosted software vendors have learned from their erroneous ways and no longer need to build a data center for unlimited demand. Additionally, the pure costs of building a data center and using bandwidth have decreased significantly. Finally, the “on-demand” model is proven as a number of companies are already profitable-look at Salesforce.com, RightNow, and a couple from my portfolio, LivePerson and Expertcity (GoToMyPC).

Given these trends and the success of some of the companies above, it is clear that the new “on-demand” wave is just starting, and we will continue to see enterprise software companies like Kana move in this direction.

VOIP/Messaging in 2004

So I was at a New Year’s party recently and overheard a great grandmother and grandmother waxing poetically about the wonders of Net2phone and VOIP. Both of them happened to also have children/grandchildren living abroad and the cost savings from using VOIP is tremendous. While the penetration of VOIP is still quite modest compared to the traditional phone system, it really got me thinking that 2004 could be the breakout year for the technology. As the New Year brings about predictions, I have included some from Voxilla regarding VOIP.

I am also currently researching the use of VOIP for my office. My team is in the processs of moving from Greenwich, CT and back to NYC, and I have unfortunately been designated CTO for the transition. My first goal was to outsource as much as possible, particularly our phone service and email requirements. For a small office, it really makes no sense to build and maintain Microsoft Exchange onsite or to buy a huge PBX. Regarding VOIP, I found a number of interesting companies that only serve businesses and host the VOIP infrastructure in their own data center where all of the phone equipment, gateways, and interconnects would be located. VOIP equipment is more expensive than PBX so this way we could reduce the upfront capital cost of equipment by sharing it with a number of other customers. All we would have to do is get a direct T1 connection to their data center and buy some VOIP-enabled phones. On the messaging side, I came across a handful (not alot) of companies that offer hosted Microsoft Exchange for monthly service fees.

In general, most of the VOIP business service providers and the hosted Microsoft Exchange companies seemed to be pretty small players. What I did look for and did not find was a company that offered small and medium sized businesses an outsourced messaging platform for both VOIP and email (sounds like a big opportunity for me having just researched the build/buy decision for my office). It would be great to get all of my messaging handled through one vendor where all I really had to do was plug and play to get my office up and running. AT&T recently announced that they will offer VOIP, and rumors are that they will soon introduce a hosted Microsoft Exchange play. Trust me, I am not going to be running to AT&T any time soon for my business needs. If any of you know of reliable companies that offer both of the above services, please do let me know. Until then, my office will be one of many that take the plunge into the world of VOIP in 2004.

Citrix buys GoToMyPc maker, Expertcity-great day for ASPs

Congratulations to Expertcity and Andreas, John, and Klaus. It has been great to work with you from a board level over the last 4 1/2 years. When the transaction closes, I look forward to writing a little more about how you were able to persevere through some tough times, launch new product, stay focused on leveraging the core screen sharing technology, and build a high growth business in a completely new market. Not only were you an early player in remote access, but you also were one of the first ASPs out there.

Expertcity is not the only ASP making headlines today. Salesforce.com filed to go public and raise $115mm. As I mention in an earlier posting about Google and IPOs, pre-bubble, it took companies 4-6 years from their first round of funding to IPO/acquisition. During the bubble it took 1-2 years. While I am excited about today’s announcements and other recent deals like VMWare (bought by EMC) and Zonelabs (bought by Checkpoint), it is obvious that we have returned to a pre-bubble mentality and the companies that will be significantly rewarded are the ones that embody the philosophy of building real businesses with real revenue and cash flow. Well, isn’t that just business 101? Yes, and this is great news as it is something we can all understand.

ASP Part II-Siebel buys Upshot, Motiva

Siebel Buys UpShot, Motiva

If you can’t beat ’em, join ’em. On an earlier post, I commented on the return of the ASP model. It looks like Siebel is jumpstarting its efforts on the ASP side with its purchase of Upshot for $50mm + $20mm of earnout for 2003 and 2004. For an industry-changing hosted CRM play, that does not seem to be a hefty price. Let’s see what happens with Salesforce.com when and if it goes public next year. Word has it that Salesforce.com is expecting to do $100mm of revenue in 2003 while being profitable for the last 2 quarters.

Speaking of CRM, it is interesting to look at 2 other eCRM players, Kana, an enterprise vendor, and LivePerson, an ASP. At one point in time, Kana was worth $5b to LivePerson’s $300mm market cap. Today Kana is worth $105mm and LivePerson is at $135mm. The consensus analyst estimates have Kana losing ($0.54) this year and ($0.01) next year while LivePerson is forecasted to have EPS of $0.01 this year and $0.10 next year. It looks like profitability and operating leverage finally count. The luster of the ASP model seems to have returned to the public markets.

A big week for VOIP

I have been helping a friend of mine who is moving into town get access to local resources such as carpenters, painters, and restaurants. An email I received from him today had the standard list of questions on utilities but the one that surprised me most was, “Who is your cable provider and do they offer VOIP?” This was a surprise since he is not the most bleeding-edge technical guy. In my mind VOIP really hit the mainstream this week with this email, Thursday’s Wall Street Journal (unfortunately subscription required) article about VOIP’s threat to the Bell companies, and today’s New York Times front page coverage in the Money and Business section.

While programs like Skype offer free P2P telephony over computers, services like Optimum voice offered through Cablevision and Vonage are the true groundbreakers that are bringing VOIP to the mainstream. Mainstream users do not want to be tied to their desks with computer headsets. With these services, customers can simply plug their phone into an adapter which converts analog signals to digital. There is no need to buy new equipment or even change how you use the telephone. Vonage claims to already have 55,000 lines. Since there is no competitive advantage technically in the VOIP service business, it will be interesting to see how cable companies, startups, and Bells compete with each other on marketing services and pricing. The great news is that consumers will only reap more benefits as VOIP continues to gain market share.

Is the ASP Model Back

Siebel and IBM team on hosted CRM service

It feels like 1999 again when the ASP (application service provider) business model was all the rage. Why is Siebel trying this again when their most recent foray was a complete disaster? Bottom line: Salesforce.com is eating their lunch. Siebel’s enterprise license revenue model is coming under real pressure as large enterprises are getting tired of spending millions of dollars upfront with no real ROI.

Could this be the return of the ASP model? In the old days, the promise and hype of many ASPs were as high as their burn rates. A number of these companies poured tens of millions of dollars into infrastructures that only had a handful of customers. The end result for most was disastrous. Despite the many failures, I am conjecturing that the ASP will be back in a BIG WAY for the following reasons: tight budgets, increased comfort level of customers to have data offsite, broadband connections allow for always-on access, and vendors with right-sized business models designed to make a profit. When and if the capital markets return, let’s see how these companies perform.