Although the economic landscape of the enterprise software industry has changed, there are still opportunities for those who adapt, said Ray Lane, venture capitalist and former Oracle president, at the Software 2006 conference in California, on Tuesday.
Lane at first presented a dire picture of the industry, noting that growth has slowed and the profit pool has shrunk. Currently, 85 percent of revenues are concentrated among 15 companies, with three companies making most of the profit. And one company, Microsoft, generates most of that profit, Lane said. Lane is a general partner at Kleiner Perkins Caufield & Byers and was both president and COO at Oracle.
Customers, meanwhile, are dissatisfied with software companies that do not understand their business and want to sell them more of the past, Lane said. For example, customers are wondering why they must for pay maintenance fees to fix bugs in the software companies' software.
"The customers just aren't happy with this industry and are unhappy with what they're seeing in products and unhappy with what they're seeing in services and the industry's understanding of their business," Lane said.
Also, countries such as India and China are producing far more computer science engineers than the United States, Lane said. The United States is no longer dominant.
"We've got to put more people in the industry or get more engineers from India and China to be here," Lane said. Additionally, investments are being made in those countries, he said.
"I believe that the enterprise software industry is at a crossroads," Lane said.
"Its economic structure may be unsustainable," Lane added. Companies can no longer spend 50 to 60 percent of budgets in marketing or 25 percent in research and development if they are a small company, he said.
Despite the negative outlook, there is opportunity, with a demand for IT professionals that outstrips supply and IT budgets rising, Lane said. Venture capital money also is there.
"I'm shocked that we're still seeing $5 billion of VC go into software," Lane said.
To succeed, companies must adopt new models such as software as a service, Lane said. Innovation is also crucial. Software companies also need to find the "white space," meeting a need that is not yet being met. Enterprises still have a lot of manual decision making for automating, he said. Also, individual value must be generated by software, Lane said.
Business models need to feature a low barrier to entry and even offer software for free and then seek a return later.
Lane cited seven "laws" for companies looking ahead in enterprise software:
-- Serve an individual need.
-- Seek viral, organic adoption.
-- Provide contextualized, personal information.
-- Require no data entry or training.
-- Deliver instantaneous value.
-- Utilize the community and social relationships to understand the user.
-- Require a minimum IT footprint.
Technologies such as WebEx and Skype abide by these laws, Lane said.
Web-enabled capabilities now seen as geared toward consumers must be introduced to the enterprise, he said. Enterprise software was built for individual use in the 1990s; now it must be geared toward collaboration, with technologies such as wikis, he said.
The Web, meanwhile, is based on modality. Lane cited technologist Bill Joy's concept of six Webs: the near Web, at the desktop; the far Web, for entertainment; the here Web, with devices such as PDAs; the weird Web, with Web-enabling of devices such as cars; device-to-device communication; and business-to-business communication. These modalities will lead to Web-driven capabilities being introduced into the enterprise, Lane said.
Noting the trend toward open source companies such as MySQL, which feature a service model, Lane said he did not see these companies challenging the database giants Oracle, Microsoft, and IBM. These larger vendors still can pour billions into research and development, Lane said.
Earlier on Tuesday, M.R. Rangaswami, founder of The Sand Hill Group, which is producing the conference, said Web 2.0 technologies now used in consumer applications, such as wikis and podcasts, will be introduced to the enterprise. "I think Web 2.0 technologies are really going to get profitable when they're used in the enterprise context," Rangaswami said.
Whereas consumers will not pay for podcasts or wikis, enterprises will if shown value, he said.