The late 1980s ushered in a massive fight for software dominance, with Lotus, Borland (Nasdaq: BORL), and Microsoft (Nasdaq: MSFT) all vying to control the business-software industry. We're seeing a similar shakeup today as enterprise software goes from pricey discs to speedy programs delivered via the Web. Will Salesforce.com (NYSE: CRM) be the big daddy of this new environment, or is it destined to become a has-been like Lotus?
Microsoft won the original battle because it understood the importance of creating both must-have applications and a platform on which to run them. Its resulting one-two punch of Windows and Office helped the company become a software goliath.
To keep its valuation climbing, Salesforce.com must do likewise in the on-demand world. I think its CRM system is a killer application, but it's also built a tremendous on-demand platform for other such software.
As my Foolish rival Rick Munarriz points out, Salesforce.com's revenue growth is slowing down -- it'll likely be only 45% or so for the year. Then again, for a company that's expected to generate $722 million-$728 million in revenue in the same period, that's still impressive. Many software CEOs would sacrifice a limb for this kind of organic growth.
It's also true that many big-name software companies are moving toward on-demand offering. I'd argue that this fact validates the entire sector. Back in the 1980s, when IBM (NYSE: IBM) espoused the virtues of relational databases, it turned out to be boon for upstart Oracle (Nasdaq: ORCL), which had a much more compelling offering.
I actually think Oracle is Salesforce.com's most serious threat. In addition to his deep understanding of business software, Oracle CEO Larry Ellison is an investor in NetSuite, a top on-demand player that recently filed to go public. I find it interesting that Ellison decided to start a whole new company solely to pursue on-demand applications.
Oracle has succeed in providing on-demand solutions for ADP (NYSE: ADP), but that's still only one case. Will a mammoth firm like Oracle be nimble enough to scale its applications for small-business customers, like Salesforce.com can?
Salesforce.com has a strong brand, a killer application, a robust platform, and a customer breadth that sets it apart from its rivals. In the topsy-turvy tech world, things can change fast, and it's always possible that Salesforce.com will stumble. But based on what the company has already built, it has the ingredients for being a great software company. I'm betting it will keep on proving the skeptics wrong.
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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 3,231 out of more than 50,000 participants in CAPS.
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