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Salesforce.com Loses Money, but Masters the Art of Distraction

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In the latest earnings season, enterprise cloud firms concealed their losses with a smokescreen of buzzwords.

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Enterprise software is not a sexy business. They say you can put lipstick on a pig, but good luck gussying up terms like "customer relationship management" (CRM) and "enterprise resource planning" (ERP). The digestive functions of large corporations are important, and everyone benefits when they go smoothly; but usually, the less said about them the better.

So it's odd that Salesforce.com's (NYSE:CRM) annual conference has grown into such a big deal; the most recent one attracted more than 130,000 visitors. It's even stranger that Dreamforce has become so hip. This year it featured Alec Baldwin and Green Day – bad-boy actors and bad-boy bands. There were supermodels and prime ministers. There was a dress code.

Chalk it up to salesmanship. Last year's theme was "the Social Enterprise," a concept that appealed to everyone but Salesforce's clients. This year's campaign slogan was "the Internet of Customers." Subject matter included mobile devices, Big Data, gender bias in the workplace – anything but customer relationship management.

Which is to say that Dreamforce was all lipstick, no pig.

In that respect it was similar to a 3Q earnings season in which enterprise cloud firms concealed their losses with a smokescreen of buzzwords. During Salesforce's quarterly conference call, CEO Marc Benioff couldn't stop talking about his company's new mobile platform. He told analysts that he runs the entire company from his iPhone 5, and he informed them that "the world has changed. It's gone cloud, it's gone social, it's gone mobile and it's gone connected." When a representative from Goldman Sachs (NYSE:GS) asked him when we might expect profits from this brave new world, Benioff spoke vaguely of a "balance" between profits and growth -- an either/or proposition peculiar to cloud companies.

For its part, Netsuite (NYSE:N) focused on its acquisition of TribeHR -- for an undisclosed sum -- and something it calls "social HR." Workday (NYSE:WDAY) talked about its new Big Data Analytics product, and recruiting software built "from a mobile perspective." Neither wanted to discuss net losses of $17 and $48 million, respectively, any more than Salesforce wanted to address a $124 million deficit. Netsuite and Salesforce both saw operating margins deteriorate year-over-year. Workday enjoyed some improvement, but remains the worst performer of the three.

These companies are adamant that the cloud is the future of enterprise software. Benioff compared legacy competitors like Oracle (NYSE:ORCL) and SAP (NYSE:SAP) to Microsoft's (NYSE:MSFT) Steve Ballmer, calling them "representative of the past." Netsuite's CEO argued that "the enterprise on-premise product is sort of like the flip phone of software." Both examples were colorful, and neither had anything to do with enterprise software. If a Web-based approach is better for corporate IT -- and in many cases it probably is -- then we should be able to discuss it without diversionary references to buzzy consumer technologies like mobile and social. If enterprise cloud companies have a clear advantage, then their first priority should be to explain to investors why a superior product requires inferior margins. The flip phone might be dying, but it's not because Apple (NASDAQ:AAPL) took a loss on the iPhone.

If they were discussing their core products, these companies might tell us -- and every so often, they do tell us -- that the cloud's advantage lies in commoditization and integration. At one time, Salesforce offered a commodity CRM product that played nicely with other cloud software. Workday did something similar with HCM (human capital management). Instead of buying a farm, you could rent a cow from here, a chicken from there -- whatever you wanted, from whomever you preferred. As Netsuite's CFO put it during his company's conference call, "Cloud vendors all are looking to interoperate to make customers' lives easier, and that really is the key message."

Except it's not. The key message is revenue growth, and integration has been sacrificed in order to achieve it. Cloud vendors have expanded and acquired their way into new markets in an attempt to get their hands in as many cookie jars as possible. For Workday, this meant introducing a financial services product that competes directly with Netsuite. For Netsuite, it meant an acquisition of TribeHR that butts up against Workday's business. Netsuite has pursued Salesforce into social, and in an attempt to offer a "suite" of its own, Salesforce has partnered with Workday for HCM -- even as it builds an HR product of its own called Work.com.

Choose-want-you-want has deteriorated into pick-your-side, and cloud vendors are abandoning the openness that made them so attractive in the first place. The rise of proprietary app stores like Force.com only highlights the Napoleonic ambitions at play as firms compete to become platforms rather than equal citizens in the world of corporate IT.

Of course, this makes them pretty similar to traditional enterprise software companies like Oracle and SAP, which in turn have embraced a cloud distribution model. Despite all rhetoric to the contrary, the big difference between these groups is now something we're not talking about – the fact that Oracle makes money and Salesforce does not.

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