Milestone Group Quarterly: January 2005
Articles
Face to Face:
Halsey Minor, CEO, Chairman and Founder, Grand Central Communications
Milestone: Grand Central has been positioned as a Salesforce.com style subscription based software model for application integration. Can you elaborate?
Minor: Well, it’s not positioning, we are identical and there is a reason why our models are identical. Like salesforce.com, our delivery model doesn’t require the installation of any software or hardware, it’s truly service based. Second, Grand Central is cut from the same cloth as salesforce.com. In 1999, I was the founding investor in salesforce.com and remain the second largest shareholder today because I am a fervent believer in the model. Marc Benioff and I share a philosophy about the direction enterprise software is heading. And while he has attacked the CRM category and more broadly the application category, we are going after the integration category. We are replacing a whole, very sophisticated stack of enterprise software that companies have historically run internally, with an on demand service.
Milestone: Give us a couple of examples of how CIO’s are currently using Grand Central for business critical applications.
Minor: Almost all of our use cases tend to fall into the same general area with a couple of headlines. First, we tend to work with companies who have already chosen some sort of on demand service provider. Rarely are we the tip of the spear in terms of convincing corporations to move to this model. We simply don’t engage in a sales cycle with companies that have their heads in the sand with regards to a new model of software deployment. We are not evangelists - we don’t have to be, there are enough other companies out there.
The second area where we add huge amounts of value is when an enterprise has a relatively high number of distributed end points, or when their system deployments are widely distributed. Our greatest value comes when an enterprise crosses boundaries of trust and control. To give you a very specific example if you are trying to integrate your ERP system into your CRM system, but your CRM system is at salesforce.com, you are dealing with an application that is outside of your boundaries and your own firewall. We find over and over again that we are being asked to solve integration problems such as these. Whether it’s an on demand application across divisions or supply chains, we make it much easier to cross lines of boundaries of trust and control.
Milestone: Are on demand business models a tectonic shift for the software industry? Do you believe licensed software will be extinct in five years?
Minor: I think it is hard to predict timing; it seems in the front end tectonic shifts always happen slower and in the back end they always happen faster. By and large though the model for enterprise applications delivered as traditional software is in decline.
It is very clear that everything that’s happened in enterprise software to date is really a warm up for what’s about to happen. In the same way that the horse and buggy proved the case for the wheel, traditional enterprise software delivery is proving the way for a new and better model. It wasn’t until the automobile came along that we had something truly revolutionary. I think that if you look at all the things that people have tried to do with enterprise software, the vast majority of them have ended in failure. The ideas are all there but the technology isn’t there to support it. We are now are going to see an evolution in the industry towards a model that works.
One of the greatest predictors is that because the on demand model actually works, pricing is going to change to reflect more value. People are going to start actually charging based on success and not based on front-loading costs and taking no responsibility for the end outcome. That tells me we are moving to an industry where vendors have a higher degree of comfort that what they are selling will actually be used. That’s why salesforce.com charges on an ongoing basis, why we charge on an on-going basis and why most of the traditional software business charge huge amounts of money upfront and make no guarantees whatsoever about the success that enterprises are going to achieve.
Milestone: Your proposition sounds attractive. However there are a lot of large incumbents that already offer on demand solutions and are prepared to loss-lead and provide free pilots to preclude competition. What else is uniquely compelling about Grand Central’s value proposition that would create an executive call to action in this risk-averse climate?
Minor: I don’t think there are any large incumbents who offer on demand solutions. There are some large incumbents that are doing on demand advertising, but it is actually shockingly difficult to find companies that are actually providing on demand solutions. The advertising is being provided by the big companies, but the solutions are all being provided by the small companies and those solutions are maturing at a very fast rate. It’s still a very new, maturing industry. I think some of the risk aversion comes from the fact that most of the companies that are being considered in this new on demand world are themselves, relatively new. Quite frankly we are all being helped by the larger companies who don’t really have solutions, but have very large advertising budgets. They are conditioning, and softening the battle field for the small guys.
Milestone: Your business model looks somewhat federated where Grand Central is the trusted source at the hub. How do you build and sustain that trust as a relatively small company? Why would a Fortune 500 company bet their integration on you?
Minor: No Fortune 500 company is going to bet anything on us, we don’t want them to. All we ask is that we be given the opportunity to earn their trust over time. We have a model that is predicated on our customer’s success. With our model, enterprises start with a simple project which is basically free. Once the project is successfully deployed and an enterprise drives more and more transactions, and builds more and more processes on our network, they pay more – it’s that simple. With our model enterprises don’t pay $3 million up front and pray for success; they only pay for success, and with a zero dollar cost basis there’s absolutely no risk. That’s the way people buy phone service, office space and airline tickets so why not software.
Milestone: What is the biggest challenge Grand Central faces, considering the new model?
Minor: Our biggest challenge is communicating the value of our model in the face of a software industry that has a lot of vested interest in doing things the old way, no matter how inefficient they are and no matter how obvious it is that they don’t work. Anytime there is something new, there are people who gain by the status quo, and the status quo is very large. There are also a lot of people who haven’t adopted the skill sets necessary to work in this new on demand world, so they are not willing to consider this model. It’s really about working with one company at a time to evangelize what is a fairly inevitable movement in the industry.
Milestone: We saw a lot of consolidation in application integration in 2004. CA acquired Adjoin, HP acquired TalkingBlocks, WebMethods acquired The Mind Electric, Actional acquired Westbridge and many more. How does M&A pan out in 2005 and 2006 for Grand Central? Are you the hunter or the hunted?
Minor: I actually think it’s highly likely that we could make some acquisitions in 2005. I really thought it would take until 2006 but given the way that things are happening right now, we could make an acquisition this year.
We are not a likely candidate to be acquired; in fact we are a very unlikely candidate to be acquired. There really isn’t even a logical buyer for us because part of our value is that we’re Switzerland. We make Microsoft work with Oracle; we make IBM work with Sun so for us to become part of one of traditional software vendors, we’d essentially lose part of our value proposition.
Milestone: Salesforce.com seems the poster child for on demand software. Why aren’t there equally known success stories?
Minor: It’s like saying in the early days Yahoo was the poster child for the Internet, and why wasn’t anyone else as well known as them? First of all, it’s because when a star shines brightly, you don’t notice the other ones that are around it, but they are there. There are lots of other companies like RightNow, NetSuite, and others that are doing very well in the on demand market, but they are just not as well recognized. The other factor is that the industry is very young; in 3-4 years there are going to be 5-6 companies you talk about in the same way you talked about Amazon, eBay, and Google today.
Milestone: In October 2004, you announced the formation of a $50M On Demand Venture Fund. Smart, because a lot of people would agree there is a lot of opportunity in subscription based business models. On the other hand, you’re betting an entire fund on a particular type of business model. Can you elaborate?
Minor: It’s the type of the model that I’m betting on. We are really in the formative stage of this industry. There is a new business Internet being built around a set of standards, called Web services, and businesses are going to drive real application benefits out of these new services. Whereas the last Internet was really a consumer phenomenon with end users benefiting from faster and cheaper access to media, products and information, with the business Internet companies are benefiting from being able to build and share processes and applications more simply and cost-effectively. It’s the business Internet that I’m betting on more broadly.
Milestone: Tell us a bit more about the fund. Will you lead? Co-invest and with whom? What software areas are most susceptible to on demand business models?
Minor: I will do all of the above. The areas that are most susceptible are really processes in and between organizations. The last B2B boom was driven by the realization that value chains could be much more streamlined if there was better process communication across the various companies that were involved. The problem was that the underlying technology, which was enterprise software, wasn’t sufficient to be able to make that happen so the whole thing caved in on itself. In an on demand world, people can take on these very same ideas and build marketplaces and process integration hubs that are sustainable. They can be built at a far lower cost on top of platforms like Grand Central. In a sense it’s a B2B renaissance, but it’s going to happen in the on demand environment.
A veteran entrepreneur, Halsey Minor founded CNET Networks (NASDAQ:CNET) in 1992 and as Chairman and CEO built CNET into one of the world's leading new media companies, recognized around the globe as the trusted source of information related to computers and technology. In 1998, CNET Networks became one of a handful of profitable Internet companies and, in May 1999, was named to the NASDAQ 100. In February 2000, Minor delegated his daily responsibilities as CEO, and in November 2000 he became CNET's Chairman Emeritus.
Minor's history of entrepreneurial ventures, savvy technology innovations and successful investments traces back to 1995, when he conceived of and developed a software technology called PRISM, which he sold to Vignette Corporation in 1996 in exchange for a 35 percent equity interest in the company. PRISM served as the foundation for Vignette's StoryServer, the industry's leading Web content application system. At the same time, he built and launched BuyDirect.com, which in 1998 was sold to online software retailer Beyond.com for $130 million. In 1997, he introduced Snap.com, redefining the search engine space with a new business model. Under Minor's leadership through March 1999, Snap quickly joined CNET as one of the top 15 most visited Web sites, according to Media Metrix.
Minor was a founding investor in Listen.com, which was recently acquired by Real Media (NASDAQ:TFSM), and Salesforce.com.
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