Artist: Eric Hopkins, Waypoints #2

User Experience: RIMM & Salesforce.com

Waypoints Release 2.0
September 9, 2005

Focus stocks

Upcoming catalysts

Change

RIMM, Salesforce.com, Apple

Conferences and September earnings

Applying the Change Framework to Salesforce.com

The significant problems we face cannot be solved at the same level of thinking we were at when we
created them Albert Einstein

Thanks for joining us!

We hope to have you with us every two weeks as we journey together
through the changing tech universe. This is the second of four planned
Beta releases of Waypoints. After issue four, well be moving to a paid
subscription basis.
We aim to help make sense of the sometimes overwhelming and
confusing world of global tech, telecom and media and perhaps help
increase the clarity and conviction around the investment decisions you
make and save you time in clearing though the muck.

Pip Coburn
pip@coburnventures.com
David Bujnowski
dave@coburnventures.com
Faye Hou, CFA
faye@coburnventures.com
Pamela Maine
pamela@coburnventures.com

2005 Coburn Ventures, Inc.

All rights reserved. No part of this document may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy,
recording, or any information storage and retrieval system, without permission from Coburn Ventures

BETA
Waypoints Release 2.0 September 9, 2005

Global tech stocks Our Buys

Another strong month for Apple

GLW

RIMM

MOT

XMSR

AAPL

CTSH

INFY

B01NPJ

TXN

QCOM

CRM

DELL

ACN

NVDA

HYSL

ATVI

Buys

Mkt Cap

2wk %

1mo %

3mo %

12mo %

vs 50day

vs 200day

Rev's 05

Rev's 06

Corning Inc
Research In Motion Limited
Motorola Inc
XM Satellite Radio Holdings Inc
Apple Computer Inc
Cognizant Technology Solutions
Infosys Technologies Ltd
Tata Consultancy Services Ltd
Texas Instruments Inc
Qualcomm Inc
Salesforce.com Inc
Dell Inc
Accenture Ltd
NVIDIA Corp
Hyperion Solutions Corp
Activision Inc

$29,485
$15,158
$55,208
$7,818
$40,396
$6,339
$19,339
$15,306
$54,048
$66,195
$2,243
$84,203
$23,006
$5,299
$1,774
$4,520

0
1
2
0
4
2
1
-1
2
2
8
-1
6
2
3
-1

2
15
5
4
12
-1
-2
9
2
4
-15
-12
2
13
0
11

26
3
24
11
32
-1
-1
9
19
10
5
-13
9
16
10
38

97
22
48
19
168
66
31
40
77
3
57
-1
-3
155
25
129

1.08
1.09
1.09
1.02
1.13
0.98
0.99
0.02
1.06
1.06
0.97
0.91
1.05
1.11
1.01
1.14

1.42
1.06
1.28
1.06
1.25
1.05
1.02
0.02
1.25
1.07
1.19
0.89
1.05
1.24
1.00
1.34

19%
128%
15%
126%
68%
50%
50%
34%
5%
15%
81%
19%
3%
10%
13%
43%

17%
52%
8%
79%
18%
41%
33%
31%
12%
21%
75%
15%
9%
18%
7%
9%

0.98

1.07

42%

28%

$26,896

12

58

PE 05

PE 06

25
39
21
nmf

21
31
18
nmf

35
46
48
nmf

31
34
37
nmf

26
36

22
29
126
22
16
21
21
31

nmf
27
18
62
24
33

34

33

Best 1mo performer? Quietly RIMM

Global tech stocks Our Buy candidates

not buys but aligned with themes we like. Well keep close tabs on them
Buy candidates
SAP

ORCL

ADBE

COGN

JNPR

CACI

CSC

MSFT

ATYT

SAP AG
Oracle Corp
Adobe Systems Inc
Cognos Inc
Juniper Networks Inc
Caci International Inc
Computer Sciences Corp.
Microsoft Corp
Sapient Corporation
Logitech International SA
Marvell Technology Group Ltd
Tietoenator Corp
ATI Technologies Inc

Average of All

Mkt Cap

2wk %

1mo %

3mo %

12mo %

vs 50day

vs 200day

Rev's 05

Rev's 06

$54,847
$69,279
$13,366
$3,723
$13,346
$1,843
$8,325
$287,636
$884
$3,687
$13,022
$2,723
$3,257

3
3
1
13
5
-2
1
-2
-2
3
-2
2
6

1
0
5
14
1
-4
2
0
-2
-4
7
4
6

4
6
-16
17
-3
-1
-1
6
-16
27
17
12
0

18
36
14
26
1
23
-4
-2
-11
62
101
24
-10

1.02
1.00
0.97
1.11
0.99
0.96
1.00
1.02
0.92
0.83
1.07
1.30
1.04

1.06
1.03
0.90
1.03
0.98
1.01
0.95
1.04
0.92
0.99
1.23
1.37
0.82

2%
17%
18%
19%
52%
41%
11%
8%
22%
15%
49%
2%
12%

9%
20%
14%
14%
21%
12%
1%
11%
24%
19%
33%
7%
1%

1.02

1.02

21%

14%

$36,611

Page 2 of 30
Version 2.1 2005 copyright Coburn Ventures.
www.coburnventures.com

21

PE 05

PE 06

28
21
25
30
34
22
14
24
26
30
56
15
46

29

25
17
23
26
27
19
14
21
20
26
36
13
36

23

BETA
Waypoints Release 2.0 September 9, 2005

Global tech stocks Our Sells

Can the companies that lost money in 2005 recover in 2006? Were not betting on it
3Com, Sun, Webmethods, Ciena

614682

A CS

AMD

B M CS

CIE N

COM S

E DS

E X TR

FDRY

RS A S

S A NM

S E BL

S NW L

UTS I

W E BM

S UNW

Sells

M kt Cap

2w k %

1m o %

3m o %

12m o %

vs 50day

vs 200day

Rev's 05

Rev's 06

PE 05

PE 06

BM C Softw are Inc

Via Technologies Inc
Affiliated Com puter Services Inc
Advanced M icro Devices Inc
Lenovo Group Ltd
Ciena Corp
3Com Corp
Electronic Data System s Corp
Extrem e Netw orks Inc
Foundry Netw orks Inc
RSA Security Inc
Sanm ina-SCI Corp
Siebel System s Inc
SonicW all Inc
Utstarcom Inc
W ebm ethods Inc
Sun M icrosystem s Inc

$4,535
$825
$6,609
$8,983
$3,176
$1,225
$1,327
$11,676
$536
$1,673
$905
$2,612
$4,429
$386
$909
$374
$13,386

4
6
1
9
3
-6
1
0
2
3
-3
-2
3
1
0
3
3

4
-22
5
9
17
1
2
0
-5
11
0
2
2
6
-6
7
5

23
-13
5
27
39
-8
-8
19
1
30
7
-5
-5
0
-9
38
9

40
-3
-5
108
36
17
-17
16
-5
26
-27
-24
14
14
-49
58
3

1.07
0.03
1.02
1.12
0.15
0.97
1.00
1.07
0.97
1.13
1.02
0.97
1.00
1.04
0.94
1.12
1.05

1.20
0.03
0.99
1.24
0.17
0.91
0.95
1.08
0.83
1.14
0.86
0.85
0.94
1.03
0.63
1.21
0.95

3%
-19%
5%
7%
4%
42%
-7%
-2%
9%
-7%
1%
-4%
-5%
7%
17%
6%
-1%

3%
16%
26%
12%
317%
18%
14%
1%
7%
13%
9%
1%
4%
11%
3%
3%
5%

34
nm f
17
115
166
nm f
nm f
41
43
38
25
21
84
33
nm f
nm f
nm f

22
nm f
15
36
148
nm f
nm f
22
25
30
20
16
44
26
13
50
186

0.92

0.88

3%

27%

56

47

PE 05

PE 06

nm f
nm f
nm f
96
nm f
30
34
18
8
67
3
nm f
9
nm f
61
88
18
nm f
nm f
17
16
nm f
8
27
nm f
10

nm f
80
nm f
76
55
27
21
16
7
62
3
17
8
nm f
39
nm f
17
nm f
69
13
13
nm f
7
22
26
8

$3,739

12

Global tech stocks Our Sell candidates

Lot of work to do on small cap software names. Consolidation is happening but at what
premiums? SSA 8% for EPNY BEA 13% for PLUM hmmm
Sell candidates
J DSU

U IS

N O VL

RHAT

333544

605142

6479

B OB J

KEA

LU

LX K

SMI

S S AG

V IS G

G TW

A TAR

AV

JDS Uniphase Corp

U nisys Corp
N ovell Inc
R ed Hat Inc
M arconi C orporation PLC
R ealtek Sem iconductor C orp
M inebea C o Ltd
B usiness O bjects SA
K eane Inc
Lucent Technologies Inc
Lexm ark International Inc
Sem iconductor M anufacturing In
SSA G lobal Technologies Inc
Viisage Technology Inc
G atew ay Inc
Atari Inc
B rocade Com m unications System
M idw ay G am es Inc
K em et Corp
Jda Softw are G roup
N etw ork Appliance Inc
JDS Uniphase Corp
Palm Inc
Altiris Inc
Epcos AG
M ercury Interactive C orp
R ohm C o Ltd
Avaya Inc

M kt C ap

2w k %

1m o %

3m o %

12m o %

vs 50day

vs 200day

R ev's 05

Rev's 06

$2,245
$2,353
$2,659
$2,719
$1,113
$922
$1,689
$3,343
$701
$14,135
$7,399
$3,609
$1,066
$215
$991
$169
$1,122
$1,327
$712
$409
$8,683
$2,245
nm f
$371
$845
$3,208
$10,828
$4,780

-2
4
6
8
3
9
2
7
0
3
-1
-2
1
3
-12
9
4
1
1
1
-1
-2
-5
1
4
1
1
-2

1
8
18
8
-4
-5
0
9
-6
10
0
-7
9
-12
-31
4
4
7
3
1
4
1
8
-2
1
-3
2
4

3
1
11
28
-5
11
8
29
-11
14
-7
-9
37
-10
-19
-44
6
59
22
14
-19
3
18
-27
-1
-12
0
14

-49
-32
21
18
-52
-7
-3
81
-23
3
-26
0
nm f
-34
-38
-10
-14
29
-1
39
13
-49
1
-50
-15
12
-9
-18

0.99
1.06
1.13
1.05
1.87
0.03
0.01
1.42
0.91
1.07
0.98
0.94
nm f
0.92
0.75
0.65
1.03
1.12
1.09
1.08
0.92
0.99
nm f
0.95
1.21
0.97
0.01
1.05

0.80
0.92
1.15
1.20
1.22
0.03
0.01
1.67
0.87
1.03
0.84
0.95
nm f
0.84
0.63
0.55
0.79
1.40
1.07
1.13
0.82
0.80
nm f
0.59
1.23
0.87
0.01
0.84

11%
2%
1%
56%
-17%
3%
4%
4%
7%
5%
4%
24%
11%
14%
8%
-6%
-4%
22%
-3%
-1%
36%
11%
34%
13%
-10%
25%

60%
3%
4%
38%
-4%
12%
0%
9%
7%
6%
6%
38%
4%
15%
11%
-35%
7%
25%
10%
8%
26%
60%
19%
7%
9%
17%

20%

6%

0.93

0.86

10%

14%

$2,958
Page 3 of 30
Version 2.1 2005 copyright Coburn Ventures.
www.coburnventures.com

(8)

28

32

23

29

BETA
Waypoints Release 2.0 September 9, 2005

Tech Safari: Growth

Communication
BRCM

FFIV

jnpr

MRVL

NTGR

NETL

SONS

AUDC

xmsr

AVid

CREAF

637248

SFA

SIRI

TSRA

TRID

011827

cogn

hysl

BOBJ

MERQ

MSTR

NTAP

4704

GOOG

WIND

Mkt Cap

2wk %

1mo %

3mo %

12mo %

vs 50day

vs 200day

Rev's 05

Rev's 06

$15,120
$1,564
$13,346
$13,022
$710
$401
$1,176
$397

3
1
5
-2
-2
8
0
1

7
13
1
7
-2
18
-9
5

30
-18
-3
17
15
47
2
-15

76
71
1
101
73
203
-10
-13

1.10
0.99
0.99
1.07
1.03
1.14
0.98
1.01

1.31
0.89
0.98
1.23
1.23
1.58
0.96
0.82

5%
63%
52%
49%
19%
68%
14%
40%

21%
27%
21%
33%
13%
15%
27%
22%

Content / Dig Home

Mkt Cap

2wk %

1mo %

3mo %

12mo %

vs 50day

vs 200day

Rev's 05

Rev's 06

XM Satellite Radio Holdings Inc

Avid Technology Inc
Creative Technology Ltd
MediaTek Incorporation
Scientific-Atlanta Inc.
Sirius Satellite Radio Inc
Tessera Technologies Inc
Trident Microsystems Inc

$7,818
$1,570
$665
$7,881
$5,986
$9,282
$1,519
$874

0
19
-6
10
2
2
3
-2

4
15
5
-1
10
6
1
4

11
-20
2
20
14
20
7
58

19
6
-23
40
39
158
58
186

1.02
1.02
1.08
0.03
1.06
1.04
1.03
1.15

1.06
0.81
0.77
0.04
1.21
1.12
0.95
1.64

126%
31%
nmf
2%
11%
250%
31%
32%

79%
33%
nmf
23%
14%
141%
30%
94%

Autodesk Inc
Autonomy Corporation PLC
Cognos Inc
Hyperion Solutions Corp
Business Objects SA
Mercury Interactive Corp
Microstrategy Inc
Network Appliance Inc
Trend Micro Inc
Google Inc
Wind River Systems Inc

Mobility
rimm

txn

qcom

armhy

598427

GRMN

651053

JMDT

NVT

B08TZQ

avg 06 rev growth 28%...

Broadcom Corporation
F5 Networks Inc
Juniper Networks Inc
Marvell Technology Group Ltd
Netgear Inc
NetLogic Microsystems Inc
Sonus Networks Inc
Audiocodes LTD

Integration
ADSK

57 names

Research In Motion Limited

Texas Instruments Inc
Qualcomm Inc
ARM Holdings PLC
Gameloft
Garmin Ltd
High Tech Computer Corp
Jamdat Mobile Inc
Navteq Corp
TomTom NV

User Experience

PE 05

34
32
34
56
21
27
78
33

PE 06

28
25
27
36
18
26
30
23

PE 05

PE 06

nmf
21
nmf
nmf
25
nmf
37
185

nmf
16
nmf
nmf
22
nmf
23
39

Mkt Cap

2wk %

1mo %

3mo %

12mo %

vs 50day

vs 200day

Rev's 05

Rev's 06

PE 05

PE 06

$10,013
$784

1
3

20
15

16
59

95
108

1.18
2.33

1.29
3.06

28%
42%

24%
31%

51
nmf

35
nmf

$3,723
$1,774
$3,359
$3,208
$1,051
$8,683
$4,849
$82,341
$1,103

13
3
8
1
-1
-1
4
3
0

14
0
11
-3
1
4
7
3
-18

17
10
31
-12
49
-19
15
5
-14

26
25
89
12
124
13
-19
188
22

1.11
1.01
1.17
0.97
1.09
0.92
1.04
1.01
0.83

1.03
1.00
1.32
0.87
1.22
0.82
0.88
1.29
0.91

19%
13%
13%
25%
16%
36%
nmf
81%
15%

14%
7%
8%
17%
10%
26%
nmf
42%
15%

30
24
30
25
18
38
nmf
52
113

26
21
26
21
16
31
nmf
39
45

PE 05

PE 06

39
26
35
30
38
24
nmf
32
48
29

31
22
29
23
19
21
nmf
25
38
20

PE 05

PE 06

Mkt Cap

2wk %

1mo %

3mo %

12mo %

vs 50day

vs 200day

Rev's 05

Rev's 06

$15,158
$54,048
$66,195
$2,928
$441
$6,464
$3,822
$590
$4,181
$4,101

1
2
2
3
-2
4
0
4
-1
6

15
2
4
-2
-1
9
-4
-16
12
18

3
19
10
8
37
42
61
-9
29
87

22
77
3
45
139
50
260
#N/A
51
#N/A

1.09
1.06
1.06
1.02
1.36
1.14
0.03
0.93
1.12
1.64

1.06
1.25
1.07
1.07
1.85
1.19
0.05
1.10
1.12
1.81

128%
5%
15%
43%
75%
27%
76%
119%
25%
189%

52%
12%
21%
19%
54%
18%
34%
53%
20%
60%

Mkt Cap

2wk %

1mo %

3mo %

12mo %

vs 50day

vs 200day

Rev's 05

Rev's 06

$18,013
$40,396
$29,485
$338
$54,779
$3,396
$3,257
$5,299
$1,933
$447
$927

2
4
0
0
0
3
6
2
0
0
3

-2
12
2
-10
-3
-2
6
13
-5
6
12

26
32
26
-12
9
29
0
16
-5
68
47

15
168
97
19
-9
65
-10
155
5
62
148

1.07
1.13
1.08
0.90
1.04
1.05
1.04
1.11
0.96
1.09
1.16

1.16
1.25
1.42
0.96
0.98
1.21
0.82
1.24
0.93
1.55
1.57

24%
68%
19%
-21%
35%
15%
12%
10%
27%
2%
-6%

18%
18%
17%
11%
28%
16%
1%
18%
13%
17%
37%

Virtual

Mkt Cap

2wk %

1mo %

3mo %

12mo %

vs 50day

vs 200day

Rev's 05

Rev's 06

Citrix Systems Inc

Infosys Technologies Ltd
Tata Consultancy Services Ltd
Cognizant Technology Solutions
HCL Technologies Ltd
Salesforce.com Inc
Rightnow Technologies Inc
Satyam Computer Services Ltd
Wipro Ltd

$4,241

16

56

1.08

1.08

18%

14%

24

21

$19,339
$15,306
$6,339
$2,982
$2,243

1
-1
2
-3
8

-2
9
-1
4
-15

-1
9
-1
20
5

31
40
66
34
57

0.99
0.02
0.98
0.02
0.97

1.02
0.02
1.05
0.03
1.19

50%
34%
50%
14%
81%

33%
31%
41%
30%
75%

47
nmf
46
nmf
nmf

36
nmf
34
nmf
123

$399
$4,501
$14,019

13
3
1

17
1
1

20
14
-6

38
29
11

1.12
1.03
0.99

1.04
1.14
0.95

37%
39%
35%

29%
34%
29%

79
31
39

51
23
32

Average of All
$9,852
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16

63

1.01

1.11

39%

28%

45

31

AMZN

aapl

glw

AFCO

EBAY

LOGI

atyt

nvda

CREE

GNSS

CTXS

infy

b01npj

ctsh

629489

crm

RNOW

SAY

WIT

Amazon.Com Inc
Apple Computer Inc
Corning Inc
Applied Films Corporation
Ebay Inc
Logitech International SA
ATI Technologies Inc
NVIDIA Corp
Cree Inc
Kopin Corp
Genesis Microchip Inc

58
34
25
50
48
25
45
61
22
71
118
PE 05

44
30
21
42
38
21
35
21
23
51
37
PE 06

BETA
Waypoints Release 2.0 September 9, 2005

Waypoints Release 2.0: short questions short answers

Every product according to its maker is easy to use. And for the folks who designed it, Im sure it is. But,
say what you will, so many products that should be easy to use, just arent. This exasperation factor
the sigh you heave when you hit that brick wall undoubtedly causes many would-be buyers of a demo
package just to leave, never to return. Still, vendors seem to be blissfully unaware of the opportunities that
they are losing Kevin Tolly, Network World
This week, we talk a lot about the user experience / perceived pain of
adoption component of our Change Framework and focus on three stocks
that are investment ideas off this themeApple, RIMM, Salesforce.com

Yi Tan Technology Call:

Date: Monday, Sept 12th

Q: What do we make of Intels mid-qtr? Any change to our thinking?

Time:10:30 PDT, 1:30 EDT
No no change. Broadly speaking, tech estimates are still reasonable and
end demand looks fine. But inspiring? Nah not enough to make us want
to buy tech broadly. We are in a stock picking market unlike the 1990s.
Q: STOCKS: What takeaways do we have after modeling RIMM?

Dial-in:1-800-615-2900
1-661-705-2005
Passcode: 778778

Wed love to hear mgmt not only talk about continued strong growth but
also more about process efficiency and margin expansion. We run
sensitivity analysis to see what type of margin expansion wed need to see in FY07 to make 50% upside on
a current investment in RIMM more on page 9.
Q: STOCKS

As we head to Salesforce.coms User Conference, what key questions are on our mind?

Lots, but one key question involves their SG&A expenses. Currently at roughly 70% of revenues, its a big
In 2007, all else being equal, SG&A of 65% of sales gets us $0.43
lever in their model. Sensitivity
EPS whereas SG&A of 55% gets us $0.83. Huge lever. Where can it head?...more on page 12.
Q: CHANGE

How does Salesforce.com fit into our Change Framework?

Conventional wisdom on CRM for the bulls at least says its just about hosted software. We love the
CRM story, but for an entirely different reason Salesforce.com is a champion of user experience
by co-designing products with the actual user as opposed to selling to a C-level executive.
Salesforce.com lowers the perceived pain of adoption for the end usermore on page 19.
Q: CATALYSTS

What are the key events on the tech calendar?

Next week, well be at CRMs user conference and Merrills Media Conference. On the earnings front,
Best Buy and Adobe next week with several key software reads the week after Oracle, Cognos, Tibco
Just remember: youre not a dummy, no matter what those computer books claim. The real dummies
are the people who, though technically expert, couldnt design hardware and software thats usable by
normal consumers if their lives depended upon it Walter Mossberg

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Waypoints Release 2.0 September 9, 2005

Lets kick off Waypoints 2.0 with an email we

received last week from someone near and dear to
our hearts
Talk about analogists!!! I've been working at
setting this monster up all night!!! My head aches,
my eyes hurt and I'm exhausted!!! What fun!!!
;-) Love ya, mom Ellen Bujnowskiafter
installing a home PC and wireless router
Why on earth are we starting with a quote from
Daves mom?
cuz were gonna talk a lot today about user
experience, perceived pains of adoption, and our
Change Framework.

Coburn Ventures Research and Change Fellows

Arnie Berman - aberman@tech-focus.com
Dave Burstein - daveb@dslprime.com
Jennifer Corriero - jenergy@takingitglobal.org
Adam DeVito - adevito@bigboing.com
John Dillon - jdillon@navis.com
Howard Greenstein - howard@howardgreenstein.com
Eric Hopkins - eric@erichopkins.com
Carl Johnson - infras@infras.com
Zachary Karabell -lzkarabell@alger-ny.com
Polly LaBarre - polly@bbridge.net
Jerry Michalski - jerry@sociate.com
Paul Pangaro - pan@pangaro.com
Timothy Prickett Morgan - timpm@computerwire.com
Josh Wolfe - josh.wolfe@luxcapital.com
Keith Yamashita - keith@stoneyamashita.com

Most importantly, were gonna talk about how all

this user experience and Change Framework stuff
fits into our investment strategy. See our Change
Framework isnt just some an avocado eating, feel-good, academic exercise we like to philosophize about.
Nopeas always its about making money.

So, in a bit were going to drill into a few stocks that are direct plays off user experience and our Change
Framework. But first, a super-quick primer about what the Change Framework is, for those of you who
arent completely sick of hearing us talk about it already

Primer

Whats our Change Framework?

Its about the USERS.
Its about changing habits.

What the Change Framework says is that we only really need to care about what goes on with the users
prior to their handing over money for a new thing.
Seetechnology adoption demands a change in habits so, we want to consider why someone would
change habits a phenomenon we consider veeerrrrryyy difficult but that the technology industry
implicitly considers rather easy to pull-off.
So when does a person change a habit?
Our answer: When the pain from being in a certain state today is greater than the total perceived pain of
adopting a solution to todays pain. If todays crisis is greater than the total perceived pain of adoption
change will occur. Thats it in a nutshell
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Crisis

Perceived Pain

Crisis

High

Vs.

Indifference

Low

When you ask a simple question, you should expect a simple answer. Except when youre dealing with a
computer, that is, in which case all bets are off Lee Gomes, WSJ
So... why did Daves mom change habit and get a PC?
The easy answer the PC was a birthday present she had no choice
OK, so maybe a more relevant question is why didnt she have a PC
until now?
Hmmmone clue might have something to do with the headache, hurting
eyes, and exhaustion she mentioned

What do we mean by
CHANGE?

www.coburnventures.com /
about_change/Index.html

you could literally hear her pain of adoption

The good news is that, well, my favorite analogist successfully installed a
both the PC and a wireless LAN on her own. Cool. But the bad news is
that, yeah, there was painboth perceived and actual in her change of
habit. Bummer.

Other forms of TPPA?

Why does technology have to be like this?!!!

the prospect of feeling

stupid, confused, frustrated
upon purchase or

Its a crisis and an opportunity for those companies that address it and
more importantly for us, an investment opportunity for those of us who
care to identify those companies

if youre a CIO the

prospect of being fired upon
purchase if youre a CIO

Every product according to its maker is easy to use. And for the folks who
designed it, Im sure it is. But, say, what you will, so many products that
should be easy to use, just arent. This exasperation factor the sigh you heave when you hit that brick
wall undoubtedly causes many would-be buyers of a demo package just to leave, never to return. Still,
vendors seem to be blissfully unaware of the opportunities that they are losing Kevin Tolly, Network
World
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Change = f (users crisis v users total perceived pain of adoption)

BETA
Waypoints Release 2.0 September 9, 2005

Just remember: youre not a dummy, no matter what those computer books claim. The real dummies
are the people who, though technically expert, couldnt design hardware and software thats usable by
normal consumers if their lives depended upon it Walter Mossberg
OK with that quick, warm-fuzzy primer on change behind us, lets apply
the thinking to a few stocks we like largely because they fit so nicely into
the Change Framework and user experience... Apple, RIMM and
Salesforce.com
Are there more?
Absolutely we list other candidates in our Tech Safari on page 4, but lets
stick to AAPL, RIMM, and CRM for now.

Other User Experience

plays?
Amazon.com
Google
Logitech
Any flat panel play GLW,
GNSS, Radiant

How do these three fit into our Change Framework?

Lets break down the crisis and perceived pain of changing habits for each

** Apple:

Apple's magic lies in lowering the expected pain of adoption. Sure, the crises driving
demand for Apple are strong
social pressure and the cache around the iPod is a real driver the
desire to manage more and more our own personal content is a longer-term theme we like and having a
more secure experience addresses another important crisis too. However, we see Apple primarily as a
perceived pain of adoption story a user experience story helping analogists migrate to the digital
world. They get it. The user experience is baked into their culture

** RIMM:

Inside the enterprise, the crisis around mobility is very high. Both management teams and
users love the Blackberry
even Fazias addicted
thats a great starting point for RIMM. On the
perceived pain side of the equation, RIMM makes the CIO's job easy with turnkey, integrated, secure
solutions. Maybe most importantly, CEOs know Blackberry. Its a de facto standard and when a
CIO knows he/she won't get fired for implementing your solution, perceived pain of adoption is very
low ... a very good thing.

** Salesforce.com:

More on this later in our CHANGE section, but as a crisis inside the
enterprise, customer relationship management software is growing. However, Salesforce.com's real magic
lies in the user experience and lowering the perceived pain of adoption for their users
they co-design
their products with their actual users as opposed to selling to the "big brother" CEOs.
OK, so they fit your Change Framework nicely we get it, but why should I care as an investor?
Ah, great question another way to ask it might be

How are we going to make money?

so, after we identify positive change, we repeatedly ask two questions with every model we look at:
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Apple, RIMM, Salesforce.com and user experience

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Waypoints Release 2.0 September 9, 2005

Can estimates change materially?

Can valuation change materially?

For Apple, the positive change that came with the iPod affected both these levers.
Positive Change at RIMM?
roughly 17x. Apples
Valuation: Apples average PE in 1998
average PE in 2004 roughly 40x. Wow
RIMM FY06 estimates 12
months ago
Estimates: Check out whats happened to Apples iPod unit
estimates and company EPS estimates over the past 12 months
Revs: $1.7b
EPS: $2.20
alone
o
o

2005 iPod unit estimates a year ago: roughly 7m

2005 iPod unit estimates now: 24m+

o
o

2005 Apple EPS estimates a year ago: $0.45

2005 Apple EPS estimates now: $1.41

RIMM FY06 estimates today

Revs: $2.1b
EPS: $2.57

Wow
Note to self

when positive change happens, folks often underestimate its eventual

impact

Reminder to self when positive change happens, folks often

underestimate its eventual impact
OK, so the key questions
what are the key levers in the financial models of AAPL, RIMM, CRM and is it reasonable to
think that these levers might take estimates significantly higher or lower from here?
Lets see

Business Models -- what matters?

Well dig into Apples model another time focusing intently on their opportunity on retail stores.
Nothing against their iPod desktop or notebook opportunities, but were interested in their stores too.
We see the as cozy conduits that analogists view as a safe haven again, user experience. Well want to
see how this theme can impact Apples model
For now, lets check out RIMM and CRM

RIMM
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Top line is expected to grow roughly 50% in FY06 after 95%

growth in FY04 and 125% in FY06. Were still very excited about
RIMMs top line story

Gross Margins increased from 39% in FY03 to 53% in FY05.

Most models we see have gross margins increasing to the 56%
range in FY06 and FY07. Key question is there any reason to
think theyve peaked out particularly as higher margin software
revenues become a bigger portion of revenues?

Operating expenses: SG&A as a % of sales fell from 34% in FY03 to 14% in FY05 any more
likely not
wiggle room here? R&D is down to 7% of sales from 18% in FY03. Our hunch
much room to take this lower.

Revs
Rev Gr%
Gross Mar
SG&A
R&D
EPS

FY04
$594m
94%
46%
18%
11%
$0.62

Given
FY05
$1.4b
127%
53%
14%
7%
$1.08

FY06
$2.1b
50%
56%
14%
7%
$2.55

Case 1
$2.7b
32%
56%
13%
7%
$3.30

RIMMs carrier
agreements:
Feb2005 year end -- was
75 but by the time their
published 10K, the # had
grown to 95

FY07
Case 2
$2.5b
20%
55%
14%
7%
$2.85

Case 3
$2.9b
40%
60%
13%
7%
$3.90

What does this table say?

Well to cut to the chase we conclude that not only are RIMMs top line prospects still great, but
we realize the importance of continued margin expansion.
We start our modeling exercise by asking what do we need to see in order to make 50% upside on RIMM
stock in 12 months time? .
At $80, RIMM currently trades at about 30x its FY06 EPS estimate. Lets
assume in 12 months, its still trading at 30x but then, itll be trading at
30x FY07 estimates.
So, what kind of 2007 EPS # would generate 50% upside in the stock from
here?

For quotes about user

experience or our
favorite books about user
experience
www.coburnventures.com /
About_CHANGE /
What's_Pip_Reading.html

Case 1 above which approximates current consensus 2007

estimates would suggest a $103 share price in 12 months up
14% from here, if we use a PE of 30x. In other words, if RIMM grows top line 32% and holds its
op model roughly where it is, FY07 EPS would be about $3.30 and wed need to see some
multiple expansion to make 50% on our investment

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First, the headline takeaways from RIMMs model.

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Waypoints Release 2.0 September 9, 2005
Case 2 is more bearish whereas Case 3 assumes some margin expansion from 56% to 60% and
revenue growth of 40% instead of the current consensus # of 32%.

So what?
The potential upside with is notable
30x a 2007 EPS estimate of $3.90 gives us a share price closer to
$120 50% upside from here. Not bad but the key question
Are Case #3s margin estimates reasonable???
Can RIMM get to 60% gross margins in 2007????
Our point

were gonna focus just as much on RIMMs attention to its operating model as we do
on their growth prospects

Question 1: What would we love to hear from management?

Well, in addition to great sales growth a checklist item for our basic excitement about the RIMM story
we would love to hear that management will be able to further drive margins and specifically why.
Demand has been and still is great. But, we have been cranking the
business to grow as fast as we can for a long time. We still think we can
grow top line at a healthy 25% for several years, but by doing {this or that}
we can get margins up another 500bps and bring opex down 200bps .etc
Maybe we wont hear it but well watch the margin line closely and
well watch software higher margins as a % of RIMM revenues closely
currently 10% of sales and growing.

Still early in growth

phase
Current expectations are for
RIMM to ship roughly 3.9m
Blackberry units this year
and 5.4m next
reasonable

Question 2: What would we hate to hear from management?

Wed hate to hear any talk of the consumer 7100 product being the next big growth opportunity.
Hates a strong wordbut yeah wed hate it.
Why?
cuz the 7100 just doesnt fit as cleanly into the Change Framework.
Do consumers have a crisis to have mobile e-mail like the enterprise does? Nope.
Is a consumers perceived pain of adopting a mobile email device higher? Yep we have no IT staff to
fix bugs at home. Ugh
Also our comments earlier about a CIO knowing he/she wont get fired for implementing Blackberry
does not exist at home competition for the 7100 at the consumer level will be stronger than it is for
Blackberry inside the enterprise. If the 7100 becomes the growth engine were concerned
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Salesforce.com
With Pip heading to San Francisco for CRMs user conference next week, we looked at the companys
model to see what matters most and come up with some questions to dig into
Our model takeaways?

Point #1
Salesforce.com is in growth mode. Revenues are
forecast to grow 70-75% in CY05 and another 50% in CY06 after
growing north of 80% in CY03 and 04. More importantly as
well see in a bit to generate this type of growth, the company
spent over 70% of revenues on SG&A.

SG&A as a % of revenues is
hovering near 70%

how long will it stay at

these levels?

Wow.

Point #2
Looking ahead, SG&A remains a huuuuge lever in their model. Most CRM
models weve seen on the Street show the company lowering SG&A as a % of revenues over time
but barely SG&A as a % of revenues still hover around 65-70% in CY05 and 60-65% in CY06.

So what? That bug us?

No at the moment, a big SG&A # makes sense for Salesforce.com theyre growing rapidly and they
have to spend money to support it. But we want to know whats behind the SG&A # and if its reasonable
to think it can come down more than folks currently model in the out years.
In 2006 or 2007, as revenues grow, will SG&A shrink to 65% of sales or is 55% attainable?
Now just how sensitive is the model to this particular lever? Lets see

Revs
Rev Gr%
Gross Mar
SG&A
R&D
EPS

CY04
$176m
84%
81%
72%
6%
$0.07

Given
CY05
$305m
73%
81%
69%
6%
$0.18

CY06
$451m
48%
81%
66%
6%
$0.31

Case 1
$600m
33%
81%
65%
6%
$0.43

CY07
Case 2
$600m
33%
81%
60%
6%
$0.63

Case 3
$600m
33%
81%
55%
6%
$0.83

Holding all other inputs equal, if SG&A holds at 65% of revenues in CY07, EPS will likely come in
around $0.40-$0.45 up from CY06s $0.31. Decent growth but not inspiring. Taking SG&A to 55% -still a big # btw -- takes that CY07 EPS to $0.80-$0.85. Now were really interested

The point

SG&A is a big big lever

Point #3
Ready for the most anti-climactic takeaway in the history of modeling? Well
CRM is really not model-able.

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where do we even start a bottoms up model? How big is their total available market? Theyre at 305k
seats now but is this out of an available market of 1 million seats or 4 million seats?
Very tough to tell
Question for CRM
management

So, why is CRM so difficult to model?

cuz a traditional approach would be to say OK, Salesforce.com can
grow to Siebels size in X years. Then, well count seats of
Salesforce.com vs Siebel and maybe also revs. And, voila, thatd give us
some numbers to at least start with
However... the problem is that comparing SEBLs market and
Salesforce.coms market isnt apples to apples.
In 1998, the market for CRM was the market of desperate CEO/CFO/CIOs
who wanted to appear cool. But, the average person on the street didnt
even know this stuff existed.

We've never seen SG&A

stay this high over this long
a period. Surely you much
think growth is
tremendous so help me
understand the
contradiction between this
and your cautious guidance
last month guidance

Seven years later life has changed. While CEO/CFO/CIOs are still open-minded to the utility of CRM,
today the big difference is that the end users have bought in. The want is much greater now than in 1998.
5 yrs from now, will we be embarrassed at a cocktail party to admit our business doesn't use CRM?
Yes! Great news.
More great news
To date, Salesforce.com has sold a mere 305k seats. Siebel has sold seats to 3.4m
users. And now were suggesting that the crisis inside the user base is only growing.
Our point
Its verrry tough to model CRM. But we have high conviction that the right form of
customer relationship management software has a much much much larger market than 305k seats.

User Conference Next Week

So, as we head to San Francisco to meet with CRM were working off the following assumptions

The culture inside the enterprise is adopting the customer relationship management mentality.
Good news

Past customer relationship management solutions do not supply what users really want whereas
Salesforce.com does. Salesforce.coms culture is about co-design so they're hitting where the
market wants to be as opposed to where vendors want it to be. Good news.

We have high conviction that there isnt much competition out there right now. Even if folks like
SEBL talk the user experience story it isnt in their culture. CRM is way ahead of its peers
Good news.

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Were only half joking

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On the total available market. We want to get some sense of

your ability to keep growth rates up if you currently have 300k
seats, is your total available market 5m seats or 75m seats?

How big is salesforce.coms

total available market?

On where the growth is coming from. Are you growing

inside companies youve already sold to? Or is growth dependent
upon entering new markets? Wed rather not hear were hiring
10 additional salespeople to attack the high end of the market
Wed love to hear stories about growing inside current customer
base like our # of seats inside the avg customer has grown
80% since the first sale

On hiring trends. One way to measure managements conviction in growth opportunities

"How many quota carrying salespeople are you adding?"
"How many did you add last qtr
relative to the quarter before?"

On SG&A. Help me understand SG&A. Either CRM grows into your SG&A -- -- or the
Whats the deal with last qtrs guidance? We've
model isnt very efficient -- . Big question
never seen SG&A stay this high over this long a period. Surely you much think growth is
tremendous so help me understand the contradiction between this and your cautious guidance
last month guidance

A peek at macro Tech sector statistics

Before we get to specific stocks, lets stop for a quick check on macro
tech and have a look at sector performance and growth expectations. Our
sample set for this particular exercise
232 North American tech stocks
w/market caps >$200m
** Price performance: Softwares far and away the top 12mo performer
up 30% vs an average of up 14%. Over the past 3mo, semis have
outperformed by a bit up 8% this summer vs a group average of 6%. But
for the most part, tech has traded as a group this summer with no single
sector wildly diverging from others

Because they deal with an

entirely different user base,
we cant use SEBLs served
market as a reference
point

"The threat to the telco will

be long term but is starting
to build. 'Right now, it's like
a lot of little Chihuahuas,'
said the Buffalo
spokesperson. 'But sooner
or later, if you get enough
bits, it's going to hurt.'"
... spokesperson for a
Buffalo, Minnesota hotzone
project on wireless networks
... in ReThink...

** Revenue forecast: Reasonable ests but uninspiring. Looking ahead to 2006, where is growth
expected to come from? Well, Semis and Software are the only 2 sectors expected to grow top line double
digits at 10-11%. Our take? Estimates dont seem egregiously aggressive good news but that said,
its hard for us to get overly excited about 8% overall top line growth in 2006. So what? We remain in
stock picking mode not sector picking mode.
** Valuation: No changes here over the past several months -- Software at 27x and semis at 25x are most
expensive off 2006 estimates while IT services trades lowest at 19x. The overall group trades at 24x.
Our take? PEs still seem a bit high to us given techs slowing growth, but were not making major
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So with that as a backdrop, what questions do we have for Salesforce.com management?

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sector bets on valuation. On the sell list, we are far more interested in finding specific names that are
experiencing negative change that appear rich that have overly aggressive estimates or that are
mispositioned. Examples SEBL, SUNW, CIEN

** Small vs Large cap? Well dig deeper into this one next time, but the bottom 30% of North American
tech stocks were trading at a 44% premium to the top 25 market caps 36x vs 25x. Hmmm Our take?
Some small caps merit a premium if their growth prospects are realistic thats what we look for in our
Tech Safari. But generally, the small caps are mispositioned and our Sell list is littered with them
The average mkt cap on our Buy list is $27.5b vs our Sell lists $3.6b.

Market Weighted Avg

Sector

Count

1mo %

3mo %

YTD %

12mo %

vs 200day

Rev Growth
05E

Rev Growth
06E

Equal Weighted Avg

CY05 E P/E

CY06 E P/E

Software
Comm Equip
Semis
IT Services
PC Hardware

67
48
66
34
17

-1
-2
-1
-1
-1

6
6
8
3
3

-3
-9
-4
-7
-11

30
10
16
15
12

1.04
1.01
1.04
1.01
0.97

10%
14%
8%
7%
7%

11%
9%
10%
7%
7%

32
29
37
24
23

27
24
25
19
21

North America Avg

232

-1

-7

14

1.02

9%

8%

31

24

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Upcoming Catalysts
Labor Day has come and gone Having just returned from a week
visiting with the bears, the beavers and a garter snake named Caitlin at our
lake house outside Parry Sound, way up north in Canada, it is quite an
adjustment to come back to the non-stop newsflow that is typical for this
time of year.
What will we be watching these next two weeks? A lot!

9/11-14: Salesforce.com User

Mtg
9/12-15: Merrill Lynch
Media Conference
9/15: Adobe Earnings
9/19: Vodafone Analyst Day
9/20: FOMC Meeting
9/20-24: Apple Expo
9/21: Cognos Earnings
9/22: Oracle Earnings?

Date

Conference

Location

Whats important?

Sep. 11-14

Dreamforce 05 User Group

San Fran, CA

Interact with users, better grasp of growth

potential

Sep. 12-15

Merril Lynch Media Conf.

Pasadena, CA

Robust agenda makes this event a good

use of time.

Sep. 12-15

Think Equity Growth

Conference

San Fran, CA

Sep. 13-16

Microsoft Professional
Developers Conference

San Fran, CA

Will we get a more detailed peak at

Windows Vista?

Sep. 19

Vodafone Analyst Day

London

Updates on 3G rollout and uptake and

any potential capex changes

Sep 19-22

Oracle Open World

San Fran, CA

Sep. 20-24

Apple Expo

Paris, France

Potential fast growth companies convene

The iPod Nano and the Rokr already

launched, will Jobs pull another rabbit
out of his hat?

We like salesforces user experience focus and their co-design strategy, but the recently lowered
subscriber guidance has us scratching our noggins a bit
Heres a company that is expected to spend roughly 70% of its revenues in the current fiscal year on
SG&A 53% in sales and marketing but at the same time guides to its first q/q decline in net adds.
Huh???
Some have argued that management is being conservative, or that theres likely a little seasonality at play
here given the quarter encompasses August and all.

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Catalysts

Conferences and Trade Shows

This coming week, we will be moderating a panel at the Think Equity
Growth Conference in San Francisco. While in the neighborhood, well
also do some legwork at salesforce.coms Dreamforce 05.

Events we care about:

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Chart 1. salesforce.com Quarterly Net Additions (in 000s)

45

41

41

40
35

32

30

27

25

15

11

21

20

11

6
3Q
06
e
4Q
0
6
e

2Q
0

1Q
0

5
4Q
05

0
3
Q

2Q
0

1
Q
05

0
4
4
Q
04

3
Q

2Q
0

1
Q
04

Source: company reports and Coburn Ventures estimates.

Well, we cant quite get our arms around the 53% in sales and marketing spend and the
conservative/seasonality commentary we hope to get some clarity during our visit
Elsewhere
The Apple Expo in Paris will also be a buzz fest though some of the fizzle has been let out by the
launch this week of the Motorola Rokr and the iPod Nano the much-anticipated flash based iPod
mini. With a color screen and a ultra thin girth, the iPod Nano is slick as opposed to the fun, carefree
quality of the multi-hued Mini linewe like it key question in Paris? Will Steve Jobs pull another
rabbit out of the hat? Apple reports on October 13.
Table 2. iPod Revenues and Growth Estimates
Revenues 2005e
iPod
iPod Access.

Y/Y Growth

As % of Total Revs

$4,767

265%

34%

$419

199%

3%

Source: Coburn Venture Estimates

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Catalysts

20

20

10

37

35

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Earnings and such

Earnings reports this month is largely back end loaded as companies with August year ends take the
extra time to dot their is and cross their ts in the new Sarbanes Oxley world.
Here are the ones we care about:

Sep. 15 - Adobe
Folks were disappointed with an inline mid
quarter update discussions re: slowing growth need to factor in
the pending Macromedia deal. Related Event: analyst day Oct. 25.
o

Nov. Quarter benchmark

y/y, EPS of $0.28.

$508 million in revs, +18%

Sep. 21 - Cognos
Making consensus revenues and EPS will be
key after last quarters miss.
o

Aug. Quarter Consensus

y/y, EPS of $0.30

revs of $213 million, +15%

Nov. Quarter Benchmark

y/y, EPS of $0.40.

revs of $235 million, +12%

Sep. 13 Best Buy

Sep. 15 Adobe
Sep. 21 Cognos
Sep. 22 Oracle, 3Com
PALM, Tibco
Verity
Sep. 26 Jabil
Sep. 26 Micron
Sep. 28 RedHat
Sep. 28 RIM

Sep. 22 - Oracle
Overall license revenues as well as database
and app license revs will be key numbers inside the numbers well
care about, though this quarter will include license revs from PeopleSoft and Retek in the app
segment.
o

Aug. Quarter Consensus

$0.14.

revs of $2.94 billion, +33% y/y (thanks to PSFT), EPS of

Nov. Quarter Benchmark

revs of $3.47 billion, +26% y/y, EPS of $0.19.

Sep. 28 - RIM
The key focus here will be new sub adds and new carrier adds. The company
has a stated goal to add 100 new carriers in fiscal year 06. The NTP patent suit continue to be an
overhang, but recent court rulings suggest that the patent battle is tilting in RIMs favor as six of
the infringement claims get thrown out by the court.
o

revs of $487 million, +57% y/y, EPS of $0.61. Handset unit

Aug. Quarter Consensus
shipments ~900k. Current subscriber base (end of May) 3 million.

Nov. Quarter Benchmark

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revs of $543 million, +48% y/y, EPS of $0.66.

Catalysts

Aug. Quarter consensus $487 million in revs, +21%

y/y, EPS of $0.27. Creative pro revs ~$290 million, or
+17%; Acrobat Revs to grow in the mid ~20%s to ~$170
million.

Earnings in
September:

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About Change
The Change Framework meets Salesforce.com
Every product according to its maker is easy to use. And for the folks who
designed it, Im sure it is. But, say, what you will, so many products that
should be easy to use, just arent. This exasperation factor the sigh you
heave when you hit that brick wall undoubtedly causes many would-be
buyers of a demo package just to leave, never to return. Still, vendors seem
to be blissfully unaware of the opportunities that they are losing Kevin
Tolly, Network World

Supplier Orientation:
is much better.

User Orientation:
More is confusing. More is confusing.
Much more is much more confusing.

books Pip has read on

CHANGE
more at
www.coburnventures.com /
About_Change /
Whats_Pip_Reading.html

More is better. More is better. Much more

So next week I will spend some time at the Salesforce.com user group
meetings at the Moscone Center in San Francisco.
How do I even begin to put Salesforce.com into our Change Framework?

So for heavens sake why like Salesforce.com?

Why like it when it epitomizes the ASP model to so many who are looking
and having difficulty finding an ASP champion!??

The Structure of Scientific

Revolutions
Thomas S. Kuhn
My favorite book on
change... published way
back in 1962...

Well, as I write from Borders Book store in my second home of Portland,

Maine on August 30th here is where I am gonna go
The Point:
Salesforce.com seems to live our Change Framework model
they live and breathe the end user
most today are wise enough to pay lip service to user experience and
simplify and hire an anthropologist or two but very few seem to really
know what it is to live what they have learned to say Salesforce.com is a
champion of user experience.
So we like it
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Unstuck
Keith Yamashita & Sandra
Spataro
Identifying points when
change is required in
companies and how to
implement

Change

Most say its just about hosted software and though I am a big believer in
Salesforce.com I am still not a fan of the broad-sweeping revolutionary
migration of once licensed apps to application service providers

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Our Change Framework says that users change habits which might include adopting a new technology
if and only if the pain of their current situation as measured on a scale from crisis at the top to indifference
at the bottom is greater than their total perceived pain of making the switch to a proposed solution for their
pain.

Current Pain versus Perceived Switching Pain

And the day came
when the risk
to remain tight in the bud
was more painful
than the risk
it took to blossom
Anais Nin

The Innovator's Dilemma

Clayton M. Christensen
Shows that innovative
companies are unable to
follow on with further
success due to cultural
problems

We frankly think that this is a tautology a fancy word for something that
is definitional!
Big insight!
Just imagine if you could go round saying things that are self-definitional
and get attention:
Hospital what is it?

The Innovator's Solution

Clayton M. Christensen
Superb sequel to his classic
Innovator's Dilemma...
focus on focusing on
"services" and a tie to a
brilliant 1975 article by Ted
Levitt

Its a big white building with lots of patients but thats not important right
now

If just if this is definitional, why is it a framework that lots of people

ask me about as if it wasnt a tautology but rather something creative???
Good question and heres our answer:
Because the implicit mantra in the technology world has been quite quite
different for 50+ years we here in the tech ecosystem assumed that it
wasnt really about the user but rather it was about us in the tech ecosystem.
The implicit mantra

Mastering the dynamics of

innovation
James Utterback
The distinction in between
product innovation,
dominant design and
process innovation... think
about Dell vs everyone else

That adoption by the USER was about availability from the SUPPLIER!

Create cool things, reduce price and folks will buy

The old implicit supplier orientation seemed to serve us all well enough until a few years back when
Build IT and They Will Come was suddenly parodied!! What a change. The crisis in the tech world was
so high that the tech world itself was willing to embrace and begin to understand the user a little bit more.
The tech world as a whole, itself, was part of our Change Framework!!!! It was changing
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Change

But this is our framework: people change habits when the pain of the
current habit is greater than their total perceived switching pain of a
solution

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So lets get back to Salesforce.com and our thinking on the business model, the numbers, and our
question for this coming weeks gathering at the Moscone Center.
Way back in the 1990s, Tom Siebel helped a niche app become
mainstream and not just sales force automation which might be
good for sales forces but rather customer relationship management which
might be good for anyone in any part of any business that might have a
customer in other words, everyone!!!
So at a small dinner hosted by Goldman in 1998, Tom Siebel told me and
about five other investors at a fancy restaurant on the upper east side of
Manhattan that served very tall desserts that the number one challenge at
Siebel would be to educate end users after their companies had bought their
product. The number two challenge, incidentally, was to keep the number of
expensive sports cars in the parking lot down and instead keep employees
thinking about the business in the present tense.

Linked
Albert Laszlo Barabasi
One of the better entries on
"network effects"

Six Degrees
Duncan Watts
Another winner on "network
effects"... easy read

Notice they sold a lot of product and THEN dealt with education
Inside the construct of our Change Framework you know, end user crisis
and perceived pain why were folks willing to spends 10s of millions when
the vendor was highly worried about the problems in teaching the target end
users how to use it?

This was the Internet Bubble.

BTW that same day in 1998, Tom Siebel had been at a private and
periodic CEO roundtable and the BIG topic was Internet Strategies and
by days end it was clear to Tom that absolutely none of these venerable
CEOs had any idea what they were really talking at but if they could muster
up just one power point slide they could keep the board mystified and
investors at bay since those folks didnt know what an Internet Strategy
was either.

Guns, Germs and Steel

Jared Diamond
How did civilizations evolve
around the planet...
Unbelievably good...
Pulitizer winner

This was 1998.

The tremendous pressure to sell manifested itself in customer dissatisfaction. In fact, the whole market
became tarnishedBruce Cleveland, a Siebel exec in the 1990s, Information Week

So buying $10mm of Siebel software to spread across the organization made sense for CFO/CEO/CIO
types in 1998 even if training was a gigantic question mark and even if they found utilization stunk! It
was all worth those minor risks. Think anything like this would happen today?
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Change

Cuz in the 1990s the crisis was at the CFO/CIO/CEO level in most
organizations. The crisis was that everyone knew that you were
supposed to buy this stuff to track your business and if you didnt you
were obviously a dinosaur and certainly the board would wake up and fire
you... the sooner the better.

The Holographic Universe

Michael Talbot
A review of quantum
physics leads to a
comprehensive review of the
world of holistic thinking...
interesting collection

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NO! And it isnt

The old crisis of peer pressure to appear to get the Internet CEOs also
started toting Palm Pilots to look with it gave way after the bubble to a
new crisis that required CEO/CFO/CIOs to spend judiciously on positive
ROI projects. So folks like Siebel created ROI calculators to help aide more
and more $10mm deals they were raised on. But it ended.
The new crisis is?
USER experience in addition to positive ROI.
Here is the great news for CRM software. So long as employees are actually
using it no one bothers to do an ROI calculation which is near impossible
anyway btw.
BUT

What a waste! What does management know about managing my account?

Nothing! Who is senior management to buy software about my client
tracking without asking me what I think first!
Utilization rates were typically quoted at 15-35%. The dissatisfaction
became wide-spread and highly publicized.
Bad long term technology adoption strategy: Assume actual users will
use a new technology when threatened with dismissal if it gets to that
point there may be a long term issue.

Blink
Malcolm Gladwell
Very easy read about the
power of enhanced
awareness... popular hit

Chaos
James Gleick
Great survey of the history
of chaos theory development

Complexity
M. Mitchell Waldrop
Chaos and complexity -Brian Arthur plays the
central role

Even Siebels own research showed that as recently as [2004], 41% of its
customers felt they hadnt gotten the desired results from their Siebel
deployments Information Week
In 2002, Heather Bellini kindly included us in a five-person meeting with Salesforce.com management
that unfortunately included no tall desserts and I asked why Salesforce.com would be successful as an ASP
when I saw very very little real demand in the world for users to go thru the hassle to swap apps to an ASP
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Change

In the late 90s folks were experiencing very very low utilization rates with
Siebel and other CRM systems because tah-dah just as Tom Siebel
suggested to us while eating a tall dessert and warning about Porsches in his
companys parking lot the education issue was never solved AND AND
AND many employees felt that management was really playing big brother
and so they decided NOT to participate until they were threatened with
dismissal and even at that they participated half-heartedly since they dont
like Big Brother AND AND AND senior management never revealed the
brilliance that all this extra data input generated which suggested there
existed no brilliance in the data otherwise senior management would be
crowing about it!!!!

Does IT Matter?
Nicholas Carr
Nicholas Carr suggested
that Information
Technology was FULLY
commoditized... fails to
consider that nearly every
company on the planet is
either aiming to use
technology as a
differentiator or aiming to
keep up with someone who
is... see instead Jim Collins
p 144-163 of Good to Great

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model in order to support new clients. I hated the presumptive ASP model of telling folks they are dumb
if they dont swap out their current apps for hosted apps and pretty much still do

Quick can u name another successful publicly traded hosted software

company other than Salesforce that is replacing a traditional vendor?
Me neither
[sidebar: as a small greenfield start-up ourselves I am up for using
outsourcing where there exists no legacy and thanks to the Crown Peak
folks for managing our web site!]

The Celestine Prophecy:

An Adventure
James Redfield
a search for an ancient
manuscript leads to a
review of sorts of major
changes in society and
possible changes ahead

So back to the Salesforce.com meeting

I says to them, I says, you will succeed cuz folks inordinately trust you
all? and they says, They do but thats not it they choose us cuz we are
co-designing the product in a very iterative fashion with groups of sales
people who are responsible for actually using the software as opposed to
selling top down to CEO/CFO/CIOs So our utilization is really high
because users co-design what they really want as opposed to what Big
Brother dictates
That was my ah-hah moment.

Ah-hah!

So do people really really really care about buying web-based?

Nah!
Ask a salesperson if they care about where their app is located?
They dont.
Ask them if they care about its effectiveness and whether it was THEIR
choice or managements decision?
They do!
[Salesforce CEO Mark] Benioff took the opportunity to jab at chief rival
Siebel Inc by saying his company gained more new subscribers during the
past quarter than Siebels entire on-demand CRM effort
Computergram

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Good to Great
Jim Collins
All about the cultures that
create and extend
greatness discussion of
commonalities of great
leaders

Slack
Tom DeMarco
Tom DeMarco gets at
change in the enterprise and
about creating necessary
pre-conditions

Change

Salesforce.com spoke my language and a language that would work in the

2000 decade.

The Future of Peace

Scott Hunt
Scott Hunt interviews a
number of world figures to
ask there few of what peace
is and to understand how
their view of peace impacts
their view of how change
can occur. Psychotics of
"change" will love the deep
connections and others may
fall asleep. I LOVED it!

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Salesforce pumps out version 84 exaggeration of its software and Siebel still a monster of a company
but with little growth makes a promise to investors to grow but with no discernable growth plan and
what we suspect are dim prospects is finally moving to a hosted model.

Problem for Siebel: IT ISNT ABOUT HOSTED OR NOT HOSTED so the culture behind the
creation and the sales effort isnt changing and relatedly it will be tough for the old Siebel culture to
change even with Salesforce.com threat actually stealing share NOW to give way to a new way.
I have zero suggestions for Siebel to get out of the trap.
You think if Siebel said it would run itself for profitability and crushed its R&D to low teens levels as a
percent of sales far further than the 15% target -- that the multiple might get hit even though the
earnings numbers might be more legit?
Think the sales force at Siebel would be a tad disrupted?
Yep, to both.
So while everyone in industry that seems benefited to a move to the sales as
service model is talking about a revolution as such we arent.
The software industry is definitely being attacked from many many
directions India, open source, web services/service oriented architectures,
maintenance contract negotiations. There is NO EASY ANSWER if you are
a seller of software here in 2005 but if you want a better chance it seems
this is THE time to get inside the end users head with something special. It
seems to us Salesforce.com has done that.

Living on the Fault Line

Geoffrey A. Moore
Outsourcing: why, what and
how

The Big Story CEOs vs real end users

And here is the really really good news that no one talks about and why
many situations exist in tech that arent analyzable from a traditional
method. Dave and I were talking about this yesterday.
how big is salesforce.coms available
Key question for investors
market? How much of it has been penetrated?
Hmmm
A traditional approach would be to say OK, Salesforce.com can grow to
Siebels size and then we count seats of Salesforce.com v Siebel and
maybe also revs and that gives you some numbers

Reengineering The
Corporation
Michael Hammer & James
Champy
Heroes of the 1990s -- later
the "reengineering" bug
wore off but the tenants of
the book were dead on
accurate

Or our right brain can remember the following. In 1998, the market for
CRM was the market of desperate CEO/CFO/CIOs who wanted to appear cool. The average person on the
street didnt even know this stuff existed.
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Change

Salesforce.coms barrier to entry is their culture of developing in a codesign and selling to sales as opposed to management.

Leading Out Loud

Terry Pearce
Superb piece on what
individuals can specifically
do to inspire change

BETA
Waypoints Release 2.0 September 9, 2005

But comparing CRMs customer base 7 sears ago and CRMs customer base now isnt apples to apples
Seven years later life has changed at the bottom rung. While CEO/CFO/CIOs are still open-minded to the
utility of CRM, today the big difference is that the end users have bought in. Here in 2005, the average
person on the street knows you should be using this stuff. At cocktail parties or neighborhood holiday
celebrations two people talking shop would largely agree that more intelligence on customers and
interaction with customers is just a base case for doing business and in a few years anyone NOT using
some form of CRM actually using the stuff will feel like an idiot. An idiot. Great news.
So we may have the wrong reference points in thinking about how big Salesforce.coms market is. At a
mere 308k seats up 83% from a year ago -- at quarter end do I think they are tapped out or would be
tapped out in a few years of rapid growth?
No. Not at all
Siebel has sold seats to 3.4mm users and I am suggesting that the crisis is growing all across the
economy. The right form of customer relationship management software has a much much larger market
than the 308k seats.
This Big Story might explain why Salesforce.com models exhibit continued low 70s sales, general,
administrative expenses as a percent of sales and only slowly moving down.
If the Big Story is real than management continuing to spend large makes sense.

But do we have concerns?

For starters, why would management expect a down sequential quarter of net adds this quarter if they are
expecting to grow so fast on the surface it doesnt make much sense Most hyper growth companies
fail to experience seasonality because the secular trend dominates the seasonality. Maybe management is
low-balling the growth?
Dunno?
They have done a good job of meeting and beating expectations after a tumultuous start as a public
company a couple years back so maybe they want expectations low but seasonality seems a bit much to
fathom when you are spending so so much on SG&A as a percent of sales. Something doesnt sync.
Next potential problem will the positive impact of the co-design process run out of steam?
At a certain point you can co-design away but if competitors are awake and fast followers this is
hypothetical at this point the incremental benefit is more incremental and less dramatic for now we
think commoditization of sorts is a good way off.

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Change

You bet.

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Always On
Next week we can talk about Intels seeming attempts to use the recent IDF gathering and the many press
releases to restore a sense of vitality thru a series of announcements with major partners around what seem
to me to be mainly features as opposed to fresh revolutions.
Or
We can talk of Intels lead in ushering real anthropologists on stage to demonstrate the company is
genuinely working to get what the user wants here in the decade of transition wakes up to serving six
billion as opposed to satisfying just the tech geeks with eloquence
Or
We can talk about the impact P2P will have on cable and broadcast television inside the next five years or
the impact Skype is beginning to have on the gigantic profit streams the telcos have enjoyed on the
growing number of international minutes round the planet
Or
We can talk of the coming collapse in traditional advertising as print, tv and radio all are attacked and
folks like Reactrix in a small way and Google and Yahoo in a big way steal budgets from the former
traditional mediums thanks to the web, satellite radio and the pvr
Or
We can talk about the growing number of analogists sporting bluetooth ear pieces and how quickly others
will feel the pressure of the evolving tech centric world to get with it and decide that immigration to the
digital world facilitates survival
Or

Or
We will talk about something else but if you join in on the next couple minutes you might want to expect
that I am gonna talk about some things I really really really dont know about
I appreciate any and all patience you might give
Lets start

This week a friend at the Wayfarer restaurant in Cape Porpoise, Maine asked me what I thought were the
best things I could do to help build my team at Coburn Ventures and grow my people in our new
venture.
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Always On

We can talk about how if one doesnt respond to an email inside a set time period folks now get real real
real angry even though 15 years ago few on the planet had ever sent an email

BETA
Waypoints Release 2.0 September 9, 2005

and
after relaying some very specific thoughts and ideas I have to give everything I can -- one way or
another -- to the spectacular individuals who have chosen to hang around me, I realized there was really
one good answer to my friend Hales question so I stopped myself and said:
I dont know.

I know I will fail.

But I wont quit.
I am committed to figuring it out as much as I can
In the scheme of things, I have no real idea of how to be of the most help to the group of people who work
with me, I am hopefully learning each day to do a better and better job of it and working hard at it and I
want to help them as much as I can in their careers and lives but in the cosmic scheme of things the best
answer is I dont know.
Next
Last week, my 8-year-old son Eamon asked me during dinner on our back porch as the night settled over
our community
What is the toughest thing about being a parent?
and I said that was easy
I know each day I am making mistakes in the most important thing in my life in wanting to help you grow
to be anything you ever want and I dont have any idea in the grand scheme of things how to be as good a
parent as I wish I could be even with as hard as I work to figure it out

I know I will fail.

But I wont quit.
I am committed to figuring it out as much as I can
Teach Your Children for Kelly and I could be re-titled Teach Your Children as well as you possibly
can and ask for help from the village whenever you see the chance for your children to grow more
successfully from outsiders involvement
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Always On

My wife re-entered the room and was asked the same question gave Eamon the same answer.

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Not much of a pop-feel to that title though

Theres much more I really really dont know
From somewhere I was traveling this spring, I asked my painter friend Eric Hopkins how the weather was
on his island, North Haven, off the coast of Maine since weather in Maine is never predictable and he
said
The weather is always great as long as there is some.
Good point I suppose although this week there are likely millions for whom the philosophy behind Erics
view is not recognizable.
I have been to New Orleans once. I have been barely in Mississippi once. I have been in 46 of the 50 states
united as the United States. I have been to several dozen countries and wish to visit every place on this
planet some day and I know I will fail.
I asked myself this week What in the world can I do to possibly help those in dire dire straights in New
Orleans? and another friend at the Wayfarer asked what I would write about New Orleans this week in
this technology blog and I dont know and I still dont.
I will fail to have anything to say that will make things better
After the tragedy in 2001 in New York I wrote a piece about technology not being inherently good or bad
and that I have been drawn to technology and am still attracted to technology like so many humans for
what Arthur C. Clarke suggested:
Hi-tech is indistinguishable from magic

There are many weeks technology seems to be failing Are levees a technology that normally makes life
livable or do they merely lead to ultimate tragedies? How about airplanes?
I have no idea.
I have no idea how to develop the members of my team, I have no idea how to raise my kids as well as a tv
superdad, I have no real idea of how to help folks who are desperate in Louisiana and Mississippi and I
have no idea how to help technology help us make the world a better place. I have no idea on any of these
things. I will continually fail. But I cant help but continue looking for the magic and looking to make
the world a slightly better place every time it all seems so completely hopeless.
We dont have water, we dont have gas. Ive got nine children, said Deon Ricard, 37, tears streaming
down her face as the rain started to fall in her neighborhood Wall Street Journal
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Always On

and we are all hoping that the magic can help us as 6 billion people make our one tiny planet at least a
slightly better place and not in the sense that I can watch Terminator 2 on a portable DVD player or
magic in the sense that I have cable, satellite or IPTV to our living rooms showing the Indians games but
maybe cuz technology might help us be safe, have the necessities of life, feel part of bigger community,
assist us in finding reason and meaning in our lives and maybe IPTVish technologies of the world could
play a role in our feeling and ultimately acting more as one global community.