Can social apps kill enterprise software?

November 1, 2010: 10:46 AM ET

Big, expensive, custom software from blue-chip software and consulting companies has been a rule of thumb for giant corporations for decades now. Is it possible a new breed of cloud-oriented startups can change all that?

Anyone who's had to sort through a clunky "reply all" email chain at work or tried to post a document to the intranet knows that there's got to be a better way. In fact, they probably already know what that better way is: People are increasingly communicating and sharing information in real time on free services like Facebook and Twitter. Those companies are focused on the general public, but others deploying similar services are now trying to usurp the enterprise software that has long dominated the server farms of most major companies.

We're at a weird place in time in terms of enterprise applications -- those big, expensive, often heavily customized software packages companies like IBM (IBM), Cisco (CSCO) and HP (HPQ) sell to equally big companies, along with hefty service contracts. As much as they are having their moment in the sun -- Microsoft (MSFT) for example boasted record sales of Enterprise apps last week -- people are getting increasingly and undeniably comfortable with social sharing, and several start-ups are trying to capitalize on that.

"To deny enterprise workers the benefit of social networking is equivalent to, ten years ago, forcing them to communicate with colleagues by telegraph," says Matthew Cowan, co-founder of Bridgescale Partners, a tech investment firm that which works with several social media for business startups. He predicts that in two years, social media for business will be the norm.

But providing social networking to business is not as simple as building an encrypted version of the software and naming it after a cute synonym for "talk." Twitter and Facebook work because they are free, people can use them to say pretty much anything they want, they enable the viral spread of information, and the usage of the applications spreads virally too. In contrast, social applications for enterprise will need to make money faster and will have to limit the information people can share both outside and inside a company. Also, these new apps will have to be contained in some way to stay secure, limiting the potential user base and adoption rate. So how do these startups balance sparking an enterprise tool to spread virally, while keeping it in check and secure?

Different companies are looking at getting into the social media for business game at all angles. Take Jive, for example. It's the oldest player in the space, having launched in 2001 and has the most traditional approach-- spend money to reel in clients. Jive offers apps that target big corporations, and its business model depends on access to capital for sales and marketing. This summer, Jive received $30 million from two VC giants -- Sequoia Capital and Kleiner Perkins Caufield & Byers.

Another strategy is the Trojan Horse (without the typical negative software connotation) of letting the social app sneak in on the back of other software. That's what Salesforce.com is doing, leveraging its track record with tech companies to help launch it social media service, Chatter. Free for Salesforce.com customers, it's $15 per user for everyone else, so it's using it's existing paid user-base to grow, by providing the social media utility as a value-add. The company's typical points of contact in an organization are executives in IT, sales and marketing, says Sean Whitely, the Vice President of Product Marketing for Salesforce.com, so they're promoting Chatter through those channels.

The market is not only ready, but demanding, says Whitely. "We've been shocked at how quickly this has been adopted. Not only that, but how aggressive our customers have been about what they want."

However, the affiliation with another company could slow Chatter's spread, says to David Sacks, founder and CEO of competing software called Yammer. His model is to go in touting the best product rather than rely on a pre-existing business relationship. "Yammer can just spread frictionlessly across the entire enterprise," he says.

Yammer is probably most dependent on its service spreading virally. The business model for Yammer is to release it, let consumers use it for free, then approach companies, point out that employees are already using the service, and offer to sell top executives special features and control.

It's a "freemium" model, and Sacks believes it's working. He claims that Yammer has tallied 1.5 million users since it launched in September 2008. About 400 of the Fortune 500 companies have employees that use Yammer, he says, although not all of them pay. The rate for the fancy version of Yammer is between three and five dollars per user per month, although there's a discount for large corporations. He says that 15% of Yammer users convert to paying customers, which is enough, because the service sells itself.

"We don't do any search engine marketing, we don't do brand advertising, we don't pound the pavement. It spreads completely on its own. When you have a zero marketing budget, then you can afford to be freemium."

It's the same model that a company called Rypple is using. Rypple is a social software tool that facilitates employee feedback. The idea is that instead of writing performance reviews, employees will give constructive criticism or reward a job well done on a fast, webby platform, set up to host what co-CEO Daniel Debow calls "micro reviews."

Like Yammer, the basic Rypple service is free, and people can pay for premium service. Unlike Yammer or Chatter, Rypple doesn't aim to reinvent the business social media platform. But it does want to squat on whichever company ends up dominating that space, says Debow. "I kind of look at the model of Zynga. I'm happy to be Zynga."

Everyone in the space holds one belief in common—social media for enterprise will not be a work-friendly replica of Facebook and Twitter—it will not be a way to share cat videos colleagues. Instead, a successful platform will let you discuss documents, collaborate on projects quickly, and keep tabs on the CEO with the ease that you now tweet or read your friends' Facebook status.

But whichever company dominates the space will need to create an app that still spreads like wildfire between users, because all successful social media does—and it's going to have to do that without the help of lolcatz. And though all these companies are nascent and perhaps easy to dismiss, it's worth remembering that Cisco, IBM, Microsft and Hewlett-Packard once were too.

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About This Author
Shelley DuBois
Shelley DuBois
Writer - Reporter, Fortune

Shelley DuBois writes on management issues for Fortune.com. Before joining Fortune, she was a producer for National Public Radio's Science Friday and worked for Wired. Shelley has a graduate degree in science, health and environmental reporting from New York University. She lives in Brooklyn.

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