“Combining Slack with Salesforce Customer 360 will be transformative for customers and the industry. The combination will create the operating system for the new way to work, uniquely enabling companies to grow and succeed in the all-digital world.” (link – has the “operating system for x” analogy/strategy ever worked?)
“We’re going to help them to just redefine the entire industry,” Benioff said of Slack during a conference call with analysts. “When the moment and the opportunity arises, you have to look and ask yourself, are you strong? Can you do something like this? Or are you weak? Or is it a moment where you just don’t have the swagger?” (link – too little swagger likely the least of their problems…)
“What this is all about is the value of the social enterprise,” Benioff said on a call with analysts after the announcement, “And creating this incredible idea that you have this amazing hub of productivity, of collaboration and integration and applications that now leverage all this amazing data.” (link – “x but for the enterprise” has a decidedly mixed record, but we’re long past the window when copying and pasting “social” into the enterprise might have seemed like an unequivocally positive thing)
“This moment is one we will remember a couple decades from now,” Slack CEO Stewart Butterfield said Wednesday during an appearance at Salesforce’s annual user conference. He likened the deal to the debut of Microsoft’s Windows 95 and the emergence of the cloud. “This is a pivotal moment and the opportunity to really transform the way that we work so we’re not relying on the physical office, so we can have a digital HQ,” Butterfield said. (link – did he say this with a straight face?)
If there was a Magic Quadrant for Marketing Hyperbole, Swagger and Tchotchkes, Salesforce would occupy the highest and rightmost position in the entire history of Magic Quadrants. They would just redefine the entire Magic Quadrant in amazing ways (their language is remarkably Trumpian – just need ALL CAPS and a few typos…).
But the extravagant rhetoric did distract from several harsh realities:
REALITY #1: SALESFORCE HAS BECOME A FINANCIAL ROLLUP
Salesforce has become a financial play that is dependent on buying revenue to keep up its growth and thereby valuation. The incremental revenue from Tableau just rolled off, so Salesforce’s growth rate dropped in the quarter that was coincidentally reported concurrent with the acquisition announcement. And they are forecasting their slowest growth since 2009 next quarter. Hence it is time for another deal. Timing may take precedence over price or strategic plausibility.
REALITY #2: THIS IS A VERY, VERY EXPENSIVE ACQUISITION
Salesforce is paying 33 times Slack’s TTM (trailing twelve month) revenue (as of the Dec 2 close). Salesforce itself trades below 10 times TTM revenue. Even the untethered to reality Telsa only trades at 19 times TTM revenue. They are paying a premium of over 50% relative to where Slack’s stock was trading before the deal leaked (which is spectacular for Slack shareholders). $27.7 billion is an awful lot to pay for IRC chat, without competitive video or audio, and not much of a developer platform. Wall Street, who can usually rationalize any valuation, are questioning the price (and the strategic rationale). As Salesforce’s stock wilts due to a lack of enthusiasm in some circles for the deal, it becomes a bigger and bigger transaction for them, making it even harder to pay off. With Salesforce’s valuation down ~$35 billion since it leaked, this deal might not get consummated (Benioff previously backed off buying Twitter when investors failed to share his enthusiasm).
There are many better discussions of the financial aspects of this deal, but the key point is it is priced for absolute perfection. That means, among other things, they will have to generate a lot of revenue from Slack and can’t just give it away for free to existing customers to claim victory.
REALITY #3: SALESFORCE HAS A TERRIBLE RECORD AT INTEGRATING ACQUIRED PRODUCTS
Salesforce has bought a lot of companies (60+), but has struggled to integrate them at the product level, or consolidate them onto a common platform. They even bought an integration product (Mulesoft), but it hasn’t helped. The glass-half-full take is they have let their acquisitions “be” and instead focused on selling the hell out of each product (and Salesforce can sell if nothing else) versus integrating across the portfolio. But once under the Salesforce umbrella, product roadmaps evolve on geologic time.
Letting Slack just “be” is not an option for this deal, as the entire premise is Slack will be threaded through everything and provide a coherence across the entire Salesforce portfolio that has never existed. They even see it as the common thread for all other business apps:
“As the new interface for Salesforce Customer 360, Slack will transform how people communicate, collaborate and take action on customer information across Salesforce as well as information from all of their other business apps and systems to be more productive, make smarter, faster decisions and create connected customer experiences.”
This is a big ambition for a company that has consistently struggled to do this kind of engineering (this is a company that is in its second decade of trying to figure out how to get off Oracle). Lets call it a major risk factor. Lets call it a major potential distraction from the real prerequisite for this vision, which is a singular, underlying data platform.
Benioff even almost acknowledges they have not had the technical wherewithal to make this supposedly long-held vision real (but expects a couple of new hires will single-handedly get it done…):
“I can’t even think about how many conversations Parker [Harris] and I have had on this vision,” Benioff said, “And then to see Stewart come in with Bret and make it all real. Well, that’s just awesome.”
Salesforce seems to be hoping an IRC chat company can build out a broad enterprise platform for them, because they have not been able to do it themselves.
REALITY #4: SALESFORCE IS NEITHER A BEAR NOR AN ALLIGATOR (MORE LIKE AMWAY)
There once was a folksy executive, who was better at aphorisms than email (unfortunately, his company sold email). He said:“In a fight between a bear and an alligator, it is the terrain which determines who wins”. To this day, I’m not sure if he thought his company was the bear or the alligator (he lost regardless), but the battle for information workers is (to change metaphors mid-sentence) an away game for Salesforce. They simply don’t understand or have experience with this customer audience, and previous efforts like Chatter and Quip reinforce this.
Some skepticism has been expressed at Salesforce’s ability to build software beyond that which you’re required to use if you want to get your commission check:
“If there’s anyone who knows how to make great apps and artfully-crafted user experiences, it’s Salesforce.”
More directly, as much as Salesforce wants to move beyond the back office, it takes more than desire to compete in new markets against entrenched competitors (most notably Microsoft Office).
REALITY #5: THE PANDEMIC TAILWIND ARGUMENT HAS A FATAL FLAW
Salesforce seems to say things are different this time because Slack has skills Salesforce doesn’t AND the pandemic changes everything:
“The events of this year have greatly accelerated the move by companies and governments to an all-digital world, where work happens wherever people are—whether they’re in the office, at home or somewhere in between. They need to deliver connected experiences for their customers across every touchpoint and enable their employees to work seamlessly wherever they are.”
The problem is we’ve already run this experiment. Slack is having to sell out because they “missed the pandemic boom”/”lost the pandemic”, in stark contrast to their competitors Microsoft Teams and Zoom. The outcome of a Slack-led assault on the Microsoft Office franchise is not some future hypothetical – we have already seen how this battle plays out. Beyond Teams, Slack has also lost significant ground to Discord.
Which at long last brings me to my actual point…
UNSUSTAINABILITY OF SAAS SPRAWL
Regardless of whether the Slackforce deal makes financial sense or can be successfully executed, it is just one (overly dramatized) episode in the unfolding consolidation of SaaS business applications.
On the supply side, we have too many SaaS apps, with the ocean of venture capital fueled by zero-interest rates funding ever more SaaS companies on the assumption that what worked a decade ago will continue to work a decade hence (financiers also like SaaS because it models out nicely in a spreadsheet). Most new SaaS companies are chasing ever smaller markets (the more interesting opportunity is to go after the bigger, horizontal OG SaaS companies, many of which like Salesforce have settled comfortably into a product middle age).
But the demand side is the real impetus for SaaS consolidation. Companies simply have too many SaaS applications and collectively it’s gotten too hard to procure, manage, and get value out of a vast archipelago of siloed SaaS applications.
We’ll see consolidation that leverages existing customer relationships, expands product footprints, and integrates adjacent functionality. Salesforce is a consolidator if not necessarily an integrator. Twilio, with the acquisition of Segment, has shown it intends to be a consolidator. Others are (or should be if they’re not) wrestling with the question of whether they are predators or prey. Private equity will continue to buy up software companies, but have yet to show they can consolidate and integrate at the product level (i.e. actual engineering as opposed to just financial strip mining). Other companies, like Workday, prefer to build a coherent and integrated offering from scratch, and leave the joys of duct-taping together a random collection of applications to others. But the end result is fewer SaaS vendors with broader offerings (SaaS is no different than any other category in that respect). And hopefully, market landscapes requiring a three point font will be a thing of the past.
The hyperclouds will also play in this consolidation, as they inexorably look up the stack. AWS is strangely absent in the SaaS space today, probably due to their early position as the platform of choice for SaaS companies. Except for Connect, their contact center service which is slowly backing into the CRM space, they seem reluctant to compete with their customers (though they exhibit no such qualms with customers lower on the stack). But inevitably, they will need to expand their portfolio into SaaS for sales efficiency reasons to compete for a broader share of the customer’s wallet (and because history says they just can’t help themselves). Microsoft is making Dynamics 365 a platform ISVs can leverage (as well as Teams), which is one of the things causing Salesforce so much discomfort that they’re will to roll the dice on Slack. And Google is busy addressing more basic issues with being an enterprise infrastructure provider. But they too will have to offer business applications if they want to be a full spectrum enterprise provider (and some have speculated that the insane price for Slack was due to another bidder, perhaps Google).
Game on!
