Software 2006: The shifting landscape
Rangaswami was followed by Ray Lane, the former Oracle executive and now Kleiner Perkins Caulfield & Company venture capitalist, who gave his annual state of the enterprise software address. "The old days are not coming back, and it will never be the same--the landscape is shifting," Lane said. Business models that include spending 50 to 60 percent of revenue on sales and marketing or 25 percent on research and development to compete with bigger players are over, he said. Suppliers are no longer in control, and buyers are not happy with the products, services and relationships they have with the software providers.
In talking to a hundred Fortune 200 CIOs, Lane said that the software vendors don't understand their businesses, want to sell the past, have no skin in the game and want them to pay maintenance fees to fix their software. "The entire software industry made one huge mistake in the late 1990s--it focused on buyers and not users," Lane said.
Ray Lane gives his recipe for success in the software industry.
Lane laid out the landscape as follows: Only a few enterprise software companies matter in a big way today. IT spending its rising, over 6 percent worldwide this year, according to IDC, including 9 percent in the Asia Pacific region. An estimated $5 billion in venture capital is going into software. About 80 percent of enterprise software profit goes to Microsoft (about half of the 80 percent), IBM and Oracle. Perhaps 15 companies have 80 percent of the business. Valuations are low, and it's hard to get earnings multiples in the industry. From a U.S. perspective, enterprise software is the next industry to globalize. "If we expect to maintain leadership, we have to put more [computer science and engineering] people in the industry or get more engineers from India and China to be in the U.S.," Lane said.
Lane gave his recipe for success in the software industry. "You need some proprietary aspects to software to make money--protectable IP," Lane said. "A business model change isn't sufficient to save a software company." It's not easy to change from a perpetual license to subscription model or from a product to a service."
The industry has also become very bipolar, Lane said. Large companies are spending huge amounts on R&D, piling on continuous innovations to a large customer base. "I see one or two startups a year that want to take on Oracle, Microsoft or IBM on the database. I don't see how that happens," Lane said. However, open source players like MySQL, Ingres and other smaller software companies can find the seams to build smaller applications that don't challenge the big three, he said.
"The industry has the largest no man's land in history. The top 25 companies are leaders with continuous innovation. There are thousands of startups, a fraction of which are doing fundamental innovation, and a couple of hundred attacking the current paradigm. That leaves 5,000 companies competing against big companies or startups," Lane said. The 5,000 or so companies in the vulnerable no man's land are fearful they won't be able to innovate, he said, and spend time changing their business models, searching out new channels. Only a few of those will get acquired, with 90 to 95 percent of investments going to the bigger companies innovating continuously and small startups with private equity investments, he added. As an example of the complex interaction in the software industry, Lane said that BEA would be in trouble if Oracle had acquired JBoss.
Lane believes that the software industry needs "rethinking." Every company he has invested in lately has taken a clean sheet of paper approach and changed their business models. He listed the opportunities and challenges for enterprise software companies as follows:
Opportunities
- White space--not open source ERP
- Low effort improvement--install software faster, for example
- Free now, pay later--trust that the customer will see value
- Individual value--take the mindset of individual in the enterprise
Challenges
- Evaluation cycle--long bureaucratic
- Integration--a integrated platform
- Installability--hours not years
- Value creation--immediate and apparent
- Business model--customer centric
- Renewal
He described the three characteristics of enterprise software companies as follows:
Low resistance
Clear value to user
Immediate value
Short decision cycleTCO (viral)
Low cost barrier to adoption--get the value and pay as delivered
Encourages viral spreadIntallability (viral)
Easy to install and use
Increased installation increases personal value
Viral effect
He gave iPod, Razor or Palm Pilot as examples of how a viral effect can take over.
The key themes, buttressed by cheaper and cheaper broadband, improved storage, etc., for enterprise software going forward include:
Collaboration
Virtualization
Convergence
On demand
Contextual search
Anytime, anywhere
Anonymous connection
Visualized search
Then Lane veered off into describing Bill Joy's six Web modalities, as Web capabilities that will advance enterprise software, and what he called the Inter-personal Enterprise, where individuals adopt interesting web applications, and as those apps virally grow, they enter enterprise.
He finished with his Seven Laws for enterprise software companies:
- Serves individual needs (if you have to think in terms of a thousand users, expect a committee to be formed to evaluate the software, which you don't want)
- Viral/organic adoption
- Contextual personalized information
- No data entry or training required
- Delivers instantaneous value
- Utilize community and social relationships
- Minimum IT footprint
Examples: WebEx, Skype, IM, RIM/Good, Salesforce.com, Google Desktop, Monster.com
Monster and Visible Path, one of Lane's KP investments that deal with "relationship management resources."
Lane concludes: "There are still a lot of manual procedures and costs that can be taken out of the enterprise and innovation can happen there."
Good food for thought...more to come...
See also Ross Mayfield's coverage