The popular technical press is all agog with news of Salesforce’s recent acquisitions including Heroku for $212M and Radian6 for $326M. Some of the comments question such expensive purchases but these are very astute moves and it’s worth exploring why.
Salesforce’s core business is in volume operations provision of CRM and equivalent software as a service. Whether by accident or more likely by design, it is playing an aggressive ecosystem game.
Around its core services, it has built a large ecosystem of companies consuming its APIs to develop new activities. AppExchange acts as a marketplace for this and Salesforce would appear to be:
- Encouraging innovation in its ecosystem (through provision of an API & tools such as Salesforce ideas)
- Leveraging the ecosystem to identify the new future successes
- Acquiring and commoditising new activities to core services (i.e. acquisition of Sendia to become Force.com Mobile.)
In an ecosystem game, the tactical plays are fairly straightforward :
- Grow a wide and active ecosystem to reduce cost of innovation, accelerate rate of innovation, provide a means of spotting the next trend and act as a defensive barrier against competitors.
- Be mindful of barriers to entry and where those barriers are being eroded create new ones.
- Create a moat devoid of value around the core revenue streams to limit competitor actions and eliminate any differential value competitors may have.
One of the early barriers to entry into Salesforce’s business was the need for large scale computing resources. With the growth of computer utilities such as Amazon’s EC2 this has been eroded. To respond Salesforce needed to up the game and create a new barrier. The purchase of Heroku should not only help achieve this by forcing competitors to now provide a platform as a base minimum but it will also help grow the ecosystem further, hence satisfying two goals.
Competitors to Salesforce who have mainly concentrated in the product space have recently been introducing social CRM features to differentiate themselves. By acquiring Radian6 and providing it as a core service, Saleforce should in effect eliminate any differential value SCRM provides and push it towards a commodity. The acquisition of Radian6 should be viewed as both encouraging ecosystem growth and further extending a moat devoid of value around Salesforce’s core services, hence satisfying two goals.
The purchase prices also sends a signal to the market that Salesforce is in the acquisition game and companies building around or close to Salesforce services may well be purchased. This is in effect “buying attention”, something which Google appeared to do by creating an environment where it seemed that every start-up had ambitions of being “bought by Google”. Salesforce has been carefully growing its acquisitions over the last few years and sending this signal.
With a market cap of $17+ billion, Salesforce is playing a powerful game and growing rapidly. The purchases of Radian6, Heroku, DimDim and others will only help its cause and undermine the position of its competitors.
Smart move, smart play, smart people.