AppExchange Is Here – What’s Next?

I was the guy standing on the sidewalk the other day outside the hotel in San Francisco where Salesforce.com was announcing the birth of AppExchange. You couldn’t miss me — I was the analyst with an empty Starbucks cup panhandling for new ideas.

For the last two years I had been talking and writing about the importance of a new kind ofon-demand application platform that would enable users to have instant access to best-of-breed software that would integrate with whatever else they were using. Essentially, I had been talking about what AppExchange is — and now that it had arrived, I might have felt a little insecure about my future. Hence the cup.

Maybe that was just a bit overdone. After all, a product announcement is really just the end of the beginning — not the beginning of the end. If AppExchange is another disruptive innovation from Salesforce.com, and I firmly believe it is, then there is a lot to look forward to. Consider these potential milestones.

More Platforms

We saw the beginning of the platform wars the week before Salesforce.com’s announcement when NetSuite announced the availability of NetFlex. I have belabored the point elsewhere, so I will only say that you can’t have a market with only one vendor unless that market is sunsetting. So, having two vendors in the space marks an official beginning in my mind.

Other companies are gearing up to enter the space too; Rearden Commerce is a great example. Though Rearden is gaining lots of traction right now with its employee spending management application, the solution is really just the first application for its platform. To offer an analogy, it’s like saying CRM is Salesforce.com’s first application on AppExchange.

Other vendors are champing at the bit, and some will announce this quarter — though I am not free to identify them yet. In addition to general-purpose platforms, I am also seeing evidence of specialty platforms surfacing in areas likeon-demand call center and on-demand analytics.

So, shortly we should see a proliferation of platforms and developers, and users will weigh the pros and cons of each. Platforms will replace conventional operating systems as the deployment and integration foundation, and savvy developers will keep their applications vanilla to make them easier to deploy among platforms.

Generating Revenue

At the same time, more work will need to be done by the platform vendors to make it easier for their partners to transact with customers. Currently, Salesforce.com stands back from the transaction between its ecosystem partners and the end users. The company takes no percentage of the sale, and its revenue comes from selling another hosting seat. In this, there is a strong analogy with the Windows operating system. Every PC user buys a Windows license, but Microsoft makes nothing on the applications that run on Windows, and Microsoft stays out of the transaction.

There’s nothing wrong with that model, but I wouldn’t bet it represents a high watermark. Here’s why: Microsoft doesn’t produce a catalog of Windows applications or assist in the sale, but Salesforce.com does produce a catalog of AppExchange compatible applications. More than that, Salesforce.com also provides the forum and virtually brings the customer to the vendor by placing AppExchange on its site.

There’s no doubt that it is good business for Salesforce.com to forego any immediate revenue for the sake of bringing people into the exchange and making it successful. Don’t expect this to remain standard procedure. At some point, the partners will encourage Salesforce.com to take a more active role in selling and take a percentage.

The reason is pretty simple. AppExchange will make traditional software sales and marketing somewhat obsolete. There will still be a need for sales and marketing — but not to the degree we currently see it, for the simple reason that vendors will decide they don’t need to pay as many sales people if customers do their own demos and call up with purchase orders.

In such a case, it will be less expensive for a vendor to pay a percentage of a deal to Salesforce.com — or whoever is the platform vendor — than it will be to pay a dedicated sales force. That’s why the partners will encourage Salesforce.com to take a percentage.

Strength in Numbers

On a related point, the danger for any software vendor is having to settle for whatever terms the platform vendor dictates or risk being shut out of the market. That’s why there will be a market for multiple platforms and why software developers will support them. I think there will be compatibility issues between platforms — just as there are now between operating system and database versions.

Other Issues

There are more issues to consider, but let me leave you with just one more: application style. What I mean is that most of what we’re seeing in AppExchange so far are traditional database applications — data is input and viewed through a user interface, and reports are generated.

Marc Benioff made a big deal about “mashups” applications that are constructed at the intersection of data from Salesforce.com and Google Maps, for instance. However, mashups are simply an elaboration of the basic database application. There are other styles of application that the AppExchange is a good home for. Some are horizontal — like Skype, which demonstrated its ability to phone-enable any AppExchange application — but some will be more vertical.

More important, I believe there are additional applications that bring together more than two parties in collaborative business processes that probably have not been thought of yet. I think the real power of AppExchange will be in its ability to promote their development. That should keep us all pretty busy.