Understanding Zoho, The Company Taking On Google, MS

Here's an interesting strategy for a new software company: create applications that place you squarely in the competitive sights of Google and Microsoft, bypass venture capital funding, and rebuff an acquisition offer from Salesforce.com, the surging software as a service (SaaS) company that delivers its products over the Web.

That's been the exact path of Zoho, a SaaS company launched in 2005 that offers a wide range of online software, including e-mail, a word processor, spreadsheets, wikis, and even a customer relationship management application that it sells to sales and marketing departments. In all, Zoho sells 17 productivity and collaboration apps, all for prices that, by traditional software standards, are dirt cheap.

For the whole lot of Zoho's business applications, it costs a mere US$50 per user per year (the same price that Google asks large enterprises for its Google Apps software). By contrast, Professional Version of Microsoft Office, the popular software found on workstations throughout most of the corporate world, retails for as high as US$499, the same price as some personal computers on the shelf at Wal-Mart.

Like Google, Zoho is betting on the cheapness of delivering software over the Web and hosting the data on their own servers to cannibalize the traditional "on premise" method of businesses buying software (like Microsoft's) on discs and installing it manually on employee workstations and company servers.

Zoho's software doesn't care what kind of hardware companies use, or what operating systems run on top of them. People merely need an internet connection and a Web-browser to access and use Zoho applications.

"Software is commoditizing as a result," says Sridhar Vembu, the CEO of both Zoho and its parent organization, AdventNet, a privately held company that handles IT support and data center maintenance. "It's going to be a more high volume, low margin business now."

Despite Google and its deep pockets to invest in Google Apps, Zoho stays competitive with Google on price. Vembu has a 200 person developer team in India release new features rapidly. In the process, industry analysts say Zoho has developed a product capable of competing, impressive given what it's up against.

"They've got more applications than Google [Apps]," says Jonathan Yarmis, an analyst at AMR Research that examines emerging technologies. "The apps they have are richer. They just don't have the publicity vehicle that Google has."

Analysts such as Yarmis say Zoho has built a compromise between what's being offered by Microsoft and Google. Microsoft software, such as Office, has been criticized as bloated with features that most people don't use and as too expensive. Google's Google Apps have been described as cheap and pretty, but lacking some essential features found in Office.

Zoho, Vembu says, wants to embrace the feature-rich environment of Microsoft Office while offering the cheapness and user-friendliness of a Google Apps as a result of the software being delivered over the Web.

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Who buys Zoho?

The name Zoho is a play off the term SOHO (small office home office), which was the area of the software market that Zoho first intended to penetrate.

But as Zoho expanded the capacity of its data centers and its developers began building more online software beyond its first application (Zoho Writer, a word processor), the vendor gained more interest from small and medium sized businesses (SMBs), such as law firms and doctors offices who were looking for minimal IT costs, says Raju Vegesna, the company's chief evangelist. They have also received business from non-profits and the public sector, such as Teachers Without Borders and the Hawaii State Government.

More recently, they have begun seeing interest from large enterprises, particularly on the departmental level, where they have taken advantage of some of the collaborative functions (such as document sharing and wikis) and the addition of CRM software.

"They're coming in because they can see the productivity gains and they can see the savings," Vegesna says, who mentioned that the company has generated one million users from its business and free consumer versions.

Swisscom, a telecom company in Europe, recently began piloting the software, and Vembu says he has received interest from large enterprises in the United States as well.

Many parts of Zoho's offering are free for up to a few users. Unlike Google Apps, their experience is not subsidized by ads. Vembu hopes that these users will engage with the Zoho development group over the Zoho blog and give feedback about the software, then hopefully tell friends.

"That's our marketing expense," he explains.

Three's company

Zoho faces two challenges in cracking the software market. First, they must compete with the incumbent giant (Microsoft) over time by making Zoho applications just as functionally rich but available more cheaply on the Web. Secondly, Zoho must overcome the popularity of Google, which not only has spent lots of money making inroads with SMBs and large enterprises, but also has enticed a generation of future users with services such as Gmail, the email service that gives users free access to the consumer version of Google Apps.

Given this competitive landscape, it might seem counterintuitive that Zoho didn't decide to focus on one or two core applications, perfect them and see if other giants in the market take notice. But Vembu seems to be in this for the long haul: he says the diversification of the Zoho portfolio not only brings more value to his users, but it also will allow the company to remain independent.

"We believe the software market will consolidate," he says. "We felt offering a breadth of apps would help us stay independent, and we believe those apps have the depth to compete."

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Despite that diversification, it drew acquisition interest from Salesforce.com prior to that company partnering with Google to offer Google Apps for free for Salesforce.com customers. Vembu says that Salesforce.com's CEO and chairman Marc Benioff offered to buy Zoho from AdventNet outright, but Vembu declined based on the belief that the two companies "would not be a good cultural fit" and that Zoho had more potential to grow.

It's hard to know what the price tag for the company would have been. Since Zoho remains privately owned, they don't specify how much money they make. But in an interview on Fox Business, when asked if they made US$1 million a month, Vembu replied, "it's a lot more than that."

The Great Compromise: How Zoho is the best of both the Microsoft and Google worlds

Since the launch of Google Apps, the product has been met with both praise and criticism, the latter centering around the fact that it offers limited offline access and functions in its productivity applications as those found in Microsoft Office.

Zoho has focused on bringing the rich functionality of Microsoft Office to the Web, something Microsoft themselves have failed to do for fear of cannibalizing their current business model of delivering software on premise and with higher margins. Zoho also used a Google tool, Google Gears, to make portions of the Zoho applications suite work offline.

When asked what Office-like functions Zoho has that Google Apps does not, Vegesna is able to rattle off a laundry list. Zoho Writer, for instance, has pagination, thesaurus, equation editor, footnotes, endnotes, TOC, and use of the applications with a mobile device that doesn't have an internet connection.

Like Google, Zoho also recognizes that imagining a corporation just ditching Microsoft Office entirely seems unlikely just yet. As such, Zoho boasts better integration with the Office suite than Google Apps. While the latter allows you to write a file in Google Docs & Spreadsheets and then export it to Microsoft Word and Excel, Zoho has a plug in that allows you to write files in Office and move them to the Web (in other words, files can move both ways).

What to Expect from Zoho, and why

Zoho develops its products in true form for a SaaS company. In the past, traditional vendors who supply companies with on premise software would send updates to that software not very frequently. When they did send an update, however, it was pact full of new features and functions that were sometimes nightmares for IT departments to implement, and left training issues for employees who used the software.

Zoho, by contrast, works on an agile development cycle, where small updates are made frequently (weekly or monthly). This allows Zoho to constantly innovate around the product and stay ahead of competitors such as Google, says AMR Research's Yarmis. "They will keep aggressively adding functionality in this Web-based development model," he says. "You can also update things without very much user disruption."

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As Yarmis explains, that's because the software is delivered over the Web and updates happen automatically when the user logs in, opposed to having IT departments have to patch updates through the company network on people's individual machines. He adds that this rapid pace can be too fast for some users, but if SaaS vendors can keep their products user-friendly, it offsets that problem.

Zoho typically hosts the data for its SMBs, though with enterprises that have asked to host the data on premise for reasons of security and compliance, Vembu says they're happy to do so. The Zoho data center is built upon the principles of multi-tenancy - servers are partitioned in such a way to maximize space. So two companies data might live on one machine, but it is separated.

Still, some companies find this close proximity uncomfortable even with the safeguards, and Zoho will set aside servers for companies (though that costs extra money).

"The benefit of multi-tenancy is that it saves us money, and that is savings we can pass onto the customer," Vembu says.

Vembu himself monitors the Zoho blog and feedback loops to see what users are saying about the product, and his development teams makes tweaks in turn. He also says that he constantly looks at what's happening in the consumer space to keep his product looking fresh. He has even taken design cues from Facebook.

According to AMR's Yarmis, it's tough to figure out what the end game will be for Zoho. While Vembu wants to remain independent, he says "never say never" about a possible acquisition in the future. Microsoft would be an unlikely candidate, for the mere reason that they'd prefer to build a Web-based productivity suite based on Office files. Google, on the other hand, could be a compelling option if they feel they have fallen sufficiently behind Zoho in functionality and don't want to build it themselves.

"Is it a foregone conclusion that Google can do a better job?" Yarmis asks. "Google has only taken over one market: search. Every other market they makes some noise in and get some penetration, but in the end, [with software], it comes down to this: 'do you do it better?'"