Why We Compete with Google

How do you plan to compete with Google or why do you compete with Google? That is a question we get asked very often. It is better to ask why Google is interested in the business software market. Let me explain with a spreadsheet.

Focus on the revenue per employee and profit per employee metrics. I have grouped together the business software industry and the consumer internet industry separately. Notice how very successful companies with mature business models like Oracle or Intuit don’t even pull down half the revenue per employee of Google, and perhaps surprisingly, they pale in comparison with the supposedly struggling Yahoo. Ebay also towers over every software company except Microsoft. Finally, even Microsoft falls short of Google’s revenue/profit per employee metrics – and Google isn’t even milking a mature monopoly.

Salesforce.com is very instructive. Though it likes to pass itself off as an internet giant, its revenue per employee is only in the range of its business software peers, and is a fraction of the real internet giants – I know an internet giant when I see one, and you ain’t no internet giant, Salesforce ! This, I must add, despite their out-of-this-world pricing for their CRM subscriptions. They pull in almost $1 billion in revenue on the backs of – those are some really overloaded backs – a little over 1 million users, leading to almost $1000/user/year.

Now it is clear why we compete with Google. Google is perhaps the most stunning technology success story ever, but we simply don’t believe Google has the rational business incentive to get too deep into the business/IT software category. The lower revenue and profit per employee figures would be tolerable if there were huge growth opportunities there, but when very successful companies like Adobe and Intuit pull in revenues well shy of a Yahoo, when even the enterprise software leader SAP is smaller, and slower growing than Google (Google makes nearly as much in profit per employee as SAP or Oracle Salesforce make in revenue per employee), it is fairly clear this market is not going to make a material contribution to Google’s growth and profitability objectives. So what is Google’s plan here? It is fairly obvious they are in it to put Microsoft on the defensive on its home turf, so that Microsoft’s offensive capability in the internet is diminished. It is also perfectly clear why Microsoft wants to be an internet player – as Google has shown, it is a higher margin business even than its monopoly-profit core business.

So why is business software so much less profitable than the internet? I can think of two reasons: a) purchasing departments that know a thing or two about supplier margins and specialize in putting the squeeze b) sales and support costs, particularly support costs. When you sell software to businesses, they have all kinds of support expectations, which adds to headcount. A search engine or a news portal isn’t expected provide any customer support.

Another conclusion that leaps out is that within business software, companies that sell to small and mid-sized businesses, such as Adobe & Intuit (Microsoft is also very strong in SMBs), have higher revenue per employee than companies that focus on large enterprises, such as Oracle or SAP. This is likely due to SMB-focused channel strategies leading to “outsourced” selling.

When push comes to shove – and there is a lot of very messy push and shove in the business software market –  Google’s resources are going to flow into figuring out how to monetize the humongous traffic of YouTube or compete in online auctions, rather than figure out a way to squeeze a bit more margin compared to Oracle or Adobe or Salesforce. That may explain why Google has been silent on CRM, Project Management, Invoicing or HR type of tools, because those markets don’t offer the profit potential they already enjoy.

(Update: Dan Farber’s take here)

28 Replies to “Why We Compete with Google”

  1. That is really I think the recent release of Google’s Chrome browser has opened a lot of eyes to Google’s ambitions to break into the enterprise software market may be.

  2. forgottee the interesting dynamics between Zoho and competitors, yet collaborators.

  3. Hi Sridhar, Thanks for the informative and interesting post. I also read the sequel. My p.o.v on why google wants to enter the the business segment is because of cloud adoption leading to consumerisation of the business software segment and delivery of software over the internet. Since google wants to retain its strong hold on the internet.-vijay

  4. I think the recent release of Google’s Chrome browser has opened a lot of eyes to Google’s ambitions to break into the enterprise software market.

  5. Zoho CEO Sridhar Vembu posted an entry yesterday entitled “Why we compete with Google,” going into some detail on the economics of the business software market in the process. It’s worth a look, if only to understand the rationale…

  6. as they create low cost solutions for businesses? Click on the spreadsheet to see a larger version. On its blog, Zoho said, “Google is perhaps the most stunning technology success story ever, but we simply

  7. announcement somewhat symbolizes the interesting dynamics between Zoho and Google: competitors, yet collaborators. ReadWriteWeb is probably

  8. I think the recent release of Google’s Chrome browser has opened a lot of eyes to Google’s ambitions to break into the enterprise software market… an ambition that has been questioned on grounds of both wisdom and probability

  9. […] as they create low cost solutions for businesses? Click on the spreadsheet to see a larger version. On its blog, Zoho said, &#8220Google is perhaps the most stunning technology success story ever, but we simply […]

  10. Google’s Enterprise ambitions… I think the recent release of Google&#39s Chrome browser has opened a lot of eyes to Google&#39s ambitions to break into the enterprise software market… an ambition that has been questioned on grounds of both wisdom and probability. A……

  11. […] In his first post, Vembu lays out his analysis of the revenue and profit per employee of the largest business software and Internet consumer companies and finds (not surprisingly) that margins are much higher for Internet consumer companies, Google and Yahoo, than business software companies, Oracle and SAP. He concludes that while Google creates Google Docs to keep Microsoft on the defensive, they won’t have the stomach to compete vigorously for the less profitable business application market. […]

  12. Sridhar,
    To start and remain ahead of competitiers requires constant innovation. If you don’t invent yourself, you will envitabley be in a perpetual catchup mode. Business softwares have already reached a level, where there is no compelling feature that distinguishes one product from another. Neverthless, MS constantly innovates in its desktop office products and stays ahead as a reault in that domain.
    Besides the change of access mechanism (desktop to web), what is the value addition that your web-based bussiness softwares provide? And Google and Salesforce for that matter.
    For Google, the bussiness is not the main focus because there is not much scope of innovation. People are comportable with the level of current bussiness products, and gap between what users want and what is available isn’t huge. Google has a plethora of online applications, office happens to just one of them.
    Google is not competing with Microsoft in office applications, and you are not competing with Google.Regards

  13. […] In his first post, Vembu lays out his analysis of the revenue and profit per employee of the largest business software and Internet consumer companies and finds (not surprisingly) that margins are much higher for Internet consumer companies, Google and Yahoo, than business software companies, Oracle and SAP. He concludes that while Google creates Google Docs to keep Microsoft on the defensive, they won&#8217t have the stomach to compete vigorously for the less profitable business application market. […]

  14. Noone can compete with Google. Google doesn’t cares who thinks that they are competing with Google. Cause internet means Google. Google is big tank of internet. Noone can beat that tank.
    So, you think that you compete with Google? Think twice.
    Regards

  15. Sridhar:Great job on the analysis there. It really is a good way to look at this big companies.However, I think Google’s strategy is too fold.One, get as many people to be part of the Google’s ecosystem so that it can monetize through ads or otherwise. You know “organize the world’s information” including your documents, presentations and spreadsheets.Second, distract Microsoft to invest and compete in this space. Just make it hard for microsoft to make money in its main profitable sector – Office. That would make Microsoft a softer competitor in the internet space and if nothing else, in the long run (5 to 10 years) decrease the profits and high margins of Microsoft.Everything else is incidental.Cheers,
    Suhit

  16. Thank you very much Sridhar. I missed that angle and the main point – hit ’em where it hurts the most! And perhaps, if I am getting it right, there are a lot of hidden messages behind this thought! With the price you have, the people on board who are hungry and with your take on “high flying PhDs” and “costly education” (Google perhaps has the most) – I really wonder what Google can do to counter. Good lord, you are exeptionally smart. If you can hold your nerves, it may be a dream revolution for your company…waiting to happen!

  17. The economics of SaaS… Zoho CEO Sridhar Vembu posted an entry yesterday entitled “Why we compete with Google,” going into some detail on the economics of the business software market in the process. It&#39s worth a look, if only to understand the rationale……

  18. Interesting discussion points, Sridhar, but the metric mixes too many apples and oranges, and as a result looks at the software market from the wrong end of the telescope. The analysis needs to look from the user viewpoint, not the shareholders’ I posted more on my own website.Apples and oranges: It’s not fair to compare CRM’s SaaS-loaded (i.e., slower but steadier) revenue ramp with those like SAP and Oracle that have traditionally received most of their revenue frontloaded (but would like to go SaaS). Yahoo and ebay are not in the software business. It’s not fair to compare Google’s revenue model with the classic enterprise software guys but if you want to try, take out Google’s TAC. Microsoft’s revenue stream should really be divided into its four major business units to be compared separately with SAP/Oracle in one perspective, Adobe/Intuit in another, etc. And Adobe and Intuit are point products.But the bigger issue is that some of these companies are crossing into each other’s territories not based on near-term profit motives but based on target market. Google is coming at productivity software so it can provide one-stop services for its already large individual-oriented base (will take enterprise/business IT as a bonus), Microsoft is coming at Search to try to win that battle among its enterprise base (will take the individuals as a bonus), the other heritage enterprise software guys are quickly becoming simply techology providers ripe for acquisition (e.g., Google should buy Intuit, Oracle should buy CRM and reacquire N to hasten its attempts to become stronger in SaaS, IBM should buy SAP).I suppose ebay could buy Yahoo but since they are not in the enterprise software business, I don’t know enough about them to comment.

  19. Interestingly enough, this post has got a very gracious nod from Matt Cutts on Twitter; but I am personally interested more in finding out not so much WHY you compete with Google, but HOW exactly will you get the competitive edge necessary to make this enterprise worthwhile.

  20. I think you’re saying that Google doesn’t _need_ to succeed in this market in the same way the Zoho does, so you’re much more motivated to optimize to fit your business to the revenue opportunity.But does Google really care about building a profitable business?Let’s ignore the chaff about Google trying to build new businesses (frankly, as you note, they are simply not going to get another leg to their stool that’s nearly as attractive as the first) they have one major business.With a single substantial business – the strategic imperatives are clear:1. Build the existing business = optimize for eyeballs. That is, extend existing offerings and build new offerings that provide commodity appeal to the masses – and find ways to monetize with advertising.
    2. Protect the turf = where challenge is expected, remove the challenger advantage or scare ’em off. This is where they would be motivated to spend to slow or challenge Microsoft.So from here – How would you characterize the Zoho strategic focus? What are you optimizing for and where does that give you advantages over the Google ‘broad brush’?Thanks for a thought provoking article.
    Michael

  21. *I am saying support staff is absolutely vital to succeed in the business software market. That is one of the reasons revenue/employee numbers are lower.*Google does want to reap money from such low-margin, support-intensive “business software markets” too. But not directly. It enables 3rd parties to build such applications over it’s platform (GAE). Such suites may soon show up to compete with the likes of Zoho/Salesforce/Intuit/SAP.A quote from “Fear the Right Things” section in http://www.paulgraham.com/star…*What you should fear, as a startup, is not the established players, but other startups you don’t know exist yet. They’re way more dangerous than Google because, like you, they’re cornered animals.Looking just at existing competitors can give you a false sense of security. You should compete against what someone else could be doing, not just what you can see people doing. A corollary is that you shouldn’t relax just because you have no visible competitors yet. No matter what your idea, there’s someone else out there working on the same thing.That’s the downside of it being easier to start a startup: more people are doing it.*Google makes starting such startups easier and it becomes a mass market again, with apps competing against each other, run on its platform.Whoever wins/loses, Google ends up making better revenue.

  22. >> hard to stomach to adjust to lower marginsAdsense is a ultra-low margin busines but it didnt stopped Google. I truly believe Google will try everything to find the next growth engine & the top 3 in its list would be mobile, video monetization and enterprise s/w

  23. It’s an interesting article, the first of yours I’ve read.Your thought process is certainly shrewd and it seems likely you’re right with regards your market’s lower appeal. Are you saying then that you, and your company, will be satisfied with this low-profit, (possibly) high-headache area? Or will you use your ability to outflank some of the giants to execute better in the space, thus lowering the associated costs?Thanks for the write-up, was nice after-dinner reading.Regards,
    Sean

  24. Jeevan,
    I think you may have misunderstood my point: I am saying support staff is absolutely vital to succeed in the business software market. That is one of the reasons revenue/employee numbers are lower. But a company like Google that has such sky-high margins today will find it hard to stomach to adjust to lower margins. That is my real point. Thanks for your feedback.Sridhar

  25. Sridhar,I am a huge fan of your thought process. But here, I beg to differ.You are building a suite of office applications and even if you put them in the cloud, there will be support cost.If you are having a set of applications maintained for your customers (the prosumers), there will be issues, breakdowns, slowtime, new feature requests etc. And you are bound to have staffs. The other consumers, who will be purchasing your data center/entire apps and want to host on their own, may not require much attention. Still then, you have to pull in people to support! Google’s main business is search, rest to support search for better monetization. YouTube has so far been ridiculous failure and so has been Orkut with all their effort to “adify” the applications.So as your whole argument is based on to have better revenue/profit per employee by having core work rather than support so that you do not add unncessary headcounts – where do you compete with Google? I think your argument is fundamentally flawed!Regards,
    Jeevan

Comments are closed.

By submitting this form, you agree to the processing of personal data according to our Privacy Policy.

Related Posts