Quick Thoughts: A Match Made in the Cloud

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  • The CRM/IBM and GOOGL/SAP partnerships target major synergies between application SW companies and hyperscale datacenter operators as we move to a cloud/AI world
  • IBM acquired a major CRM integrator in 2016; both partners will now sell AI-powered APIs from Watson and CRM’s Einstein, strengthening monetization and lock-in
  • GOOGL gets an IaaS win and an entrée to SAP’s impressive customer list; SAP gets a better integrated public cloud option and a world class AI development partner
  • The sea change to the cloud/AI era will drive more and deeper enterprise application-platform partnerships in the future, consolidating to a handful of ecosystems

This week saw the announcement of two seemingly unlikely mega-cap tech partnerships. On Monday, CRM and IBM announced a tie-up to integrate IBM’s Watson AI platform into Salesforce, giving IBM opportunity for new recurring revenue from ongoing calls to its APIs and giving CRM access to IBM’s distribution and integration services. The next day, SAP joined GOOGL at the Google Cloud Next customer event to announce a deal to support its HANA database on Google Cloud Platform (GCP) and sell GSuite to its customers, while revealing ongoing discussions between the two companies to extend the relationship to levering GOOGL’s AI expertise into SAP’s applications. Both of these partnerships acknowledge the competitive implications of the ongoing paradigm shift toward a hyperscale cloud/AI era – application/platform synergy, extreme economies of scale, the value of data, and the scarcity of expertise.

At the surface, the CRM deal gives IBMs suite of Watson APIs another platform and channel to monetize AI-powered functions like real-time weather forecasting and natural language processing, while CRM gets a broader product line, and AI development partner and access to IBM’s customer rolls. But beyond sales synergies and the AI research benefits, the deal is rooted in IBM’s acquisition of Bluewolf last year. That company, one of the largest independent integrators of CRM, was founded with CRM seed financing by a CRM veteran with close personal ties to CRM CEO Mark Benioff. That relationship, and Bluewolf’s importance to CRM’s customer base, demanded that the two companies formalize their strategic relationship.

Under the deal, CRM will support Watson APIs in its platform, giving IBM a recurring source of revenue as customers access predictive models in areas like weather, financial services, health care, and retail.  In turn, IBM’s respected sales organization will cross-sell CRM’s applications while implementing them for their own internal use. The synergies to this partnership are obvious, with clear value likely to accrue to both companies.

Meanwhile, the fledgling relationship must be a disappointment to CRM frenemy MSFT. IBM had sold, supported, and even used Microsoft Dynamics CRM internally, while CRM has maintained a volatile relationship with MSFT supporting some of each other’s products while fighting over lost M&A battles such as the acquisition of LinkedIn. In 2015, it was widely reported that CRM and MSFT held formal acquisition talks that ultimately fell apart on valuation differences. It has also been often speculated that GOOGL and AMZN could be interested in CRM as a vehicle to strengthen their cloud thurst into the traditional enterprise market. The IBM partnership complicates any potential M&A, although we do not rule it out entirely. The wild card is founder and CEO Benioff, who has the voting power to scuttle a hostile offer.

The SAP and GOOGL partnership announced yesterday at Google Cloud Next is not the first time the companies have gotten together, as both agreed to long term patent sharing in 2015.  The certification of SAP HANA on Google Cloud Platform (GCP) is by no means an exclusive as HANA is already certified in AWS and Azure environments. However, the GOOGL/SAP partnership includes support for Google products, including G-Suite, machine learning, and data governance, through SAP’s salesforce, improving GOOGL’s access to 345K enterprise customers globally. This is a critical benefit for a company that has struggled to gain traction in the enterprise market as it looks to gain ground on cloud leaders AMZN and MSFT.

GOOGL Management has yet to quantify any revenue/success figures in the enterprise, but the addition of a high-profile enterprise partner like SAP could be a boon for the business. It gives GCP a large enterprise tenant with SAP planning to deploy its own platform-as-a-service offering on Google hardware. ERP applications like those offered by SAP tend to be very sticky with low customer churn and switching given the critical importance of the software to customer’s operations.  It also gives GOOGL an additional sales channel without investing in hiring sales teams or making a big acquisition. Google’s SVP of Cloud Diane Greene confirmed the company is seeking a strategy of partnering in commentary at the conference yesterday. In addition to its SAP partnership, GOOGL announced deals with Dell’s Pivotal Software to work on customer reliability engineering (CRE) during integrations and Rackspace to offer managed support for GCP. In the absence of cheap acquisition opportunities, we expect GOOGL will sign some more partnership deals as it takes on AMZN, MSFT, and possibly even IBM.

With the market continuing to rally, M&A opportunities for large tech players to bolt on capabilities are expensive. Both CRM’s Benioff and GOOGL’s Greene have indicated the window has narrowed and that they prefer to go the partnership route for now. Still, the potential synergies for data and customer rich applications to combine with AI capable and scale advantaged cloud players are substantial. As MSFT’s LinkedIn buyout last year demonstrates, deals may come together quickly. In that context, we still see CRM as a well-positioned and growing asset that could have major synergies as part of a bigger cloud operation like GOOGL, MSFT or AMZN. IBM continues to be acquisitive, with particular interest in unique industrial datasets through which it can expand its Watson AI offerings. Despite the benefits of the SAP deal, GOOGL needs to further expand its reach into the enterprise market. Look for it to keep all options open as it moves aggressively to fill that need.

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