Microsoft and Siebel Make Strange Bedfellows

Things got even more interesting Monday. As Gates and Tom Siebel gave back-to-back keynotes Monday morning, Microsoft and Siebel announced a multiyear alliance that will involve selling Siebel CRM software on Microsoft's .Net Web services platform.

Mixed up between the event's golf tournament at the luxurious Lost Canyons (insert your own joke), race car diving at Irwindale Speedway, and an Earth, Wind and Fire concert at the Hollywood Bowl was a most puzzling alliance--one that essentially makes Siebel software and Microsoft Web services inseparable. You had to scratch your head. And if you didn't, here's why you should have.

First, Siebel and Microsoft recently broke up their alliance around Great Plains Siebel Front Office, which combined Siebel CRM with Great Plains accounting and back office software. You could see this coming from miles away. The alliance and joint product was several years old and was considered expendable after Microsoft acquired Great Plains last year and shortly after announced it would develop its own CRM product. Microsoft CRM is now in limited beta release. Thus, there was no need for Siebel anymore. Yet less than two months later, Microsoft and Siebel patch things up and announce a landmark partnership. I've seen stranger things, but not many.

Second, Siebel already has a major alliance with a Web services power --IBM. Siebel is one of IBM's two or three biggest ISV partners. In fact, Siebel was a major factor in IBM's decision three years ago to get out of the applications business, partner with leading ISVs and focus instead on middleware. With IBM, Siebel could be sure that its partner would never encroach on its CRM turf. So why would Siebel shun IBM and standardize on .Net? Not only does IBM lose Siebel's Web services business, but they lose it to their strongest competitor as well. Microsoft had been in a frantic search to find premier ISVs to support .Net, and the company finally succeeded. What a slap in the face for Big Blue. If I'm IBM right now, I'm feeling like the poor schmuck who goes to the prom and watches his date leave with another guy.

Last and probably most puzzling is the fact that Microsoft wants to be the number one CRM software player in the industry, a distinction that currently belongs to Siebel. The interesting thing about Microsoft's CRM strategy is the collective denial it's inspired from competing ISVs and other CRM firms, including Siebel. People pretending to shrug off the news that Microsoft was eyeing their turf.

Microsoft officials insist the software giant isn't targeting the enterprise and that Microsoft CRM is purely mid-market. Microsoft critics and competitors across the board have recited the same chorus, arguing that the software behemoth's new product simply doesn't have the functionality to compete with already-established products--just like early versions of Internet Explorer and Pocket PC and a host of other Microsoft products that enjoy dominant market share today.

You fools. How could you forget so quickly? How many times has Microsoft done this? If there's one quality where Microsoft exceeds its rivals, it's tenacity. The first release of a new Microsoft product is rarely anything dynamic. In fact, it's usually garbage. It sounds harsh but I remember the days when IE couldn't touch Netscape Navigator. Now that equation is completely reversed. Forget the antitrust case for a moment; would anyone argue that Netscape is a superior browser now?

And that's the whole point. Microsoft is tenacious. It's methodical, diligent and patient. The company does nothing halfway. It may take five long, painful and even humiliating years for the company to get a new product up to snuff, but Microsoft will do it. Sometimes it will buddy up to establish players in a market, familiarize itself with game and then burn the alliance after the learning curve is gone. They have done it in the past and they'll do it again (by the way, if you think Dell isn't taking a page from the Microsoft playbook and trying to pull the same ploy with storage, printers and--pinch me--white-box makers, then this industry is in deeper trouble than I anticipated).

Plus, anyone who buys that Microsoft doesn't want a larger chunk of the enterprise market isn't watching the software giant close enough. While many large technology vendors, including Microsoft, are paying lip service to the juicy small and midsize business market, the largest software company in the world has been making steady inroads into the enterprise market, moving upstream with technology like Exchange Server, Windows 2000 Server and now .Net. In fact, the Siebel alliance has everything to do with the enterprise market. Gates even said so in the press announcement. "Microsoft and Siebel Systems share a common vision for how enterprise applications should evolve to meet the demands of the marketplace," Gates said.

This is why I think something sinister is taking place. When two companies that should be bloodthirsty enemies jump into bed together, one of two things is happening. Either one party is so completely moronic and naive that it ends up getting devoured by the other stronger party, or the two parties are laying the groundwork for a merger.

Siebel merging with Microsoft? The market leader in CRM software? Come on. Couldn't happen, you say. But here's an important point you may be missing--Siebel is in trouble. The company won't admit it, and Tom Siebel won't show any signs of wavering confidence anymore than former boss Larry Ellison would. But here are some things to consider. First, Siebel's reputation is not the best right now. Long deployments, high prices and, most of all, integration headaches are adding up. After talking with a number of customers and solution providers recently, I'm beginning to wonder if anyone is happy with their Siebel CRM system. The results are obvious. In the third quarter ended Sept. 30, Siebel reported $357.2 million in revenue--a whopping number for sure, but also an 18 percent decrease from a year ago. Even more telling is the 34 percent drop in license revenue, down from $193.5 million last year to $126.8 million in the current quarter. If CRM is so hot, why is its market leader bringing in numbers like that?

Second, CRM software as a whole is getting slammed. It's not just Siebel. Survey after survey indicates that users just aren't satisfied with what they're getting. That's a huge problem for an industry that's supposed to know the customer better than anyone. Third, Siebel is attempting to branch out beyond CRM with partner relationship management software, but beyond that, the company's portfolio is quite narrow. If CRM continues to get a cold reception and is sacrificed by the IT Spending Gods, Siebel will truly be hurting.

Maybe the folks at Siebel see the forest through the trees and want to pull a Compaq before it's too late. Or maybe Tom Siebel is making a huge error and leading his company into the jaws of the hungry lion. Or maybe I'm crazy and the alliance will work out great for both sides and Microsoft and Siebel will live happily ever after.

Sure. And maybe we'll see Michael Dell and Carly Fiorina holding hands at Comdex, too.