Why intense competition could pressure Salesforce’s margins

Market Realist

Salesforce overview: A key enterprise cloud computing company (Part 5 of 6)

(Continued from Part 4)

Competition heats up

Salesforce (CRM) believes that as traditional enterprise software application and platform vendors shift more of their focus to cloud computing, they’ll become a greater competitive threat. According to a recent report from IHS Technology, Cisco’s (CSCO) announcement that it will construct the world’s largest network of clouds with its partners will allow the company to cash in on the global trend of rising expenditures among enterprises for cloud architecture and services.

IHS’s senior director and principal analyst for the cloud and big data, Jagdish Rebello, states that “the cloud is becoming a critical cornerstone in the strategies of those wishing to offer online storage, computing, analytics and provisioning services.” This is being driven by huge amounts of data consumption on mobile devices like smartphones, tablets, and computers that require storage that can be provided by cloud vendors, thereby encouraging multibillion-dollar investments in cloud-based architectures. IHS estimates that enterprises will spend more than $235 billion on cloud architecture and services by 2017—a 35% gain from the $174 billion projected to be spent this year, and triple the $78 billion expended in 2011. In 2014, cloud spending is expected to rise 20% from $145 billion last year.

A Gartner report, Market Share Analysis: Customer Relationship Management Software, Worldwide, 2012 published in April 2013 and cited by Forbes said Salesforce.com, led the CRM market with a 14% market share in 2012 and overtook SAP at 12.9%), Oracle (ORCL) at 11.1%, Microsoft (MSFT) at 6.3%, and IBM (IBM) at 3.6%. Gartner said the top ten vendors worldwide generated $10.9 billion in sales alone in 2012.

Synergy Research Group said in its fourth quarter 2013 research that Amazon (AMZN) leads the public infrastructure-as-a-service (IaaS) market, while IBM (IBM) clearly leads in private and hybrid cloud infrastructure services. Meanwhile, the public platform-as-a-service (PaaS) market sees heated competition, with Salesforce slightly ahead of Amazon and Microsoft (MSFT) in the fourth quarter of 2013. In aggregate, Amazon is the leader in cloud infrastructure services with a 28% share, followed by IBM, Microsoft, Salesforce, Google, and Rackspace (RAX). Synergy believes in terms of segments, IaaS is growing the strongest, followed by PaaS and then private and hybrid cloud infrastructure services. Synergy estimated that IaaS and PaaS quarterly revenue reached the $3 billion milestone, with full-year 2013 revenues falling just short of $10 billion.

IHS said companies are competing to provide enterprises and consumers with private and public cloud services. It added that Google (GOOG), Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT) are offering public cloud storage to drive adoption of the individual companies’ hardware and content. E-commerce retailer Amazon’s cloud business is called Amazon Web Services (or AWS). It provides IaaS services for cloud infrastructure and PaaS services for application platforms. IHS also named others—like Barracuda (CUDA), Dropbox, and Carbonite (CARB)—that adopt the so-called Freemium model, under which premium storage services are available on top of a fixed amount of free storage, in order to compete with the giants. IHS believes security and compliance, data loss, unauthorized access, and mining for marketing purposes are some of the challenges that cloud service providers need to tackle.

Recent news reports indicated that cloud computing majors Google, Amazon, and Microsoft are cutting prices on their cloud products, which has led to a price war in the space. Companies such as Salesforce, Netsuite, and Workday could see margins squeezed as larger and profitable competitors lower prices to gain market share.

Continue to Part 6

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