TechCrunch's Erick Schoenfeld had an eye-opening article earlier this week about how Salesforce.com (CRM), a very large software company runs all of its data and services on a very small number of highly optimized servers. "Salesforce has more than 55,000 enterprise customers, 1.5 million individual subscribers, 30 million lines of third-party code, and hundreds of terabytes of data all running on 1,000 machines" tweeted Schoenfeld from a Salesforce.com event. The implications of Salesforce's efficient cloud computing on the enterprise software business itself is already very clear.
As more and more enterprise software moves into the cloud, then companies like Oracle (ORCL) and Microsoft (MSFT) will have to deal with dramatic downward margin pressure because software-as-a-service simply can't post the same margins as traditional software models where the purchaser also bears or pays for most of the installation and maintennance costs. For that reason, Microsoft sports operating margins north of 30% while Salesforce.com puts up operating margins less than half that size.
Who else will feel the bite? Server sellers like Dell (DELL), HP (HP) and IBM (IBM). Their gear has stocked data centers and, while it's a brutally competitive area, cloud computing will make it more so by allowing enterprises to more easily share hardware and software and more fully utlizie computing equipment. Data center operators like Equinix (EQIX) could also feel the pinch. They all expected massive demand for custom designed homes that featured servers and other critically important hardware used to run networks and businesses. But if there is less need for servers, there is less need for data centers.
Salesforce.com is in the vanguard of this movement, no doubt. And the full impact of the cloud on the hardware and software sectors remains several years off as CIOs get used to the idea of a completely virtual existence. But this shift is going to exert considerable sentiment pressure going forward against traditional suppliers of software and hardware as they have to fight harder to keep selling licenses and boxes apace.
