Ray Lane, a general partner at Kleiner-Perkins is discussing the macro-economic impact of open source software. He talks about the parade of people who come into his office everyday who talk about proprietary software because its (their words) higher quality and better able to differentiate. Ray believes that we need to change how we do things and become more modular and open. He thinks that recovery in the software market requires a sea change in development methodologies.
Software is still a buyer's marketplace. Customers all line up at the end of the quarter and beat the vendors up on price. This doesn't feel like recovery.
What's the next big thing? That's the number one question Ray is asked. Its idiomatic of our industry that we expect new things to come along every so often and shock us out of "the old thing." Often we don't recognize the "big thing" like client-server or PCs until later.
Ray does not believe Open Source Software and Web Services are tectonic events on the scale of the transistor or operating systems. Rather they are tactical events that are still important. VC's looks to invest in tectonic events. Ray contends that we need to learn to invest in more tactical changes as well.
IT along doesn't change the equation. Saber (the airline reservation system) didn't save TWA. IT enables management to execute their business processes. He references Carr's "IT Doesn't Matter" article and concludes that IT matters if it helps management.
The nirvana of the 90's has melted away, but even with that, the forecasts of the 90's around the Internet bubble are coming true. Witness Amazon, eBay, Google, and others.
Global peace was shattered by 9/11. Market economies have been beat-up by scandal. Global growth has stagnated. Technology has more capability than anyone's ability to use it. "It's like the Concord." Companies spent countless hours trying to pick "the right ERP system" for example, even though it doesn't really matter. Throw a dart and any one of the systems will be good enough. The problem is that we then "regress" the new system to match what we've done before and make it inflexible and hard to use.
Ray seems some constraints that the software industry needs to pay attention to.
- Volatility. We cannot resolve the assymetric threats that terrorism brings to our world.
- Our businesses are transparent. Why would anyone want to be CEO of a public company? There's Sarbanes-Oxley, but also the transparency imposed by new business models whereby customers and partners have to be part of the equation.
- Low growth. Focus on profitability, not growth.
There are also significant enablers:
- Knowledge worker globalization. No matter what your politics are, you have to decide where you stand on free markets and globalization. India and China have focused on Math and Science over the last 25 years and we can either use them of someone else will. If we don't, we'll be France.
- Network based service providers. ASPs were a terrific business model, but VCs weren't willing to invest capital in it. In the service business, you can't have your customers beta test it (unlike software). Customers expect service providers to be reliable from day one. He references salesforce.com as an example of a model that will become very popular.
- Rationalize IT infrastructure. Many CEOs feel like they didn't get a return on their investment in IT in the 90s. Opportunities exist for software companies to provide ways for companies to exploit the IT infrastructure they now have.
- Portable computing. Laptops, PDAs, wireless change how people work.
The new enterprise needs to be able to grow or shrink to meet demand. They must recognize that investments in fixed assets and labor is bad. The technological progress of the software industry is its vulnerability. The software industry is too big and too expensive relative to the value it generates. Its too labor intensive.
In the 90's engineers were scarce. Now managers are scarce. In the housing industry, there are two industries: building and renovation. We must learn to concentrate on "renovation" instead of "invention." Companies feel like they've spent enough on IT. They might be convinced to spend more if you can make what they already have work better. Think "op ex" instead of "cap ex." Think "service centric" instead of "component centric."
Ray says the service-oriented architectures and "federated data" is real. The ERP era created too many databases and they have to be rationalized.
Ray went out and talked to 30-40 CIOs of Fortune 100 companies. They liked open source software because of lower TCO, equivalent functionality, and quick bug fixes (I missed a few). They didn't like informal support, the velocity of change, no roadmap, functional gaps, licensing FUD, and lack of ISV endorsements.
We're moving into the "golden age of computing" where everyone in the world will participate in the computing industry as a user or developer. Every industry goes through this stage. Open source software is an important part of that. Software is a service and a service company has different DNA than a traditional software company. There's nothing so pure as a new software company. Yet, there's nothing as scary as a mature software company. A handful of people make a software company work and the rest are providing service. We need to recognize that.