SANTA CLARA, Calif.--Enterprise software makers should embrace "software as a service" and a new payment model to survive, said former Oracle executive Ray Lane.
Lane, now a venture capitalist at Kleiner Perkins Caufield & Byers, said at the Software 2006 conference here on Tuesday that the software industry's current economic structure and business model is not sustainable.
Over the years, the profit pool for the software industry has declined, leaving three dominant players to reap roughly 80 percent of the profits, Lane noted. Microsoft, with roughly 50 percent, has the largest share, he said.
Investors, as a result, are looking to fund companies that can either be a dominant player or an innovator in their respective slices of the market.
"We're seeing a lot of Fortune 200 companies that are coming to Silicon Valley looking to find innovative companies," Lane said, who noted that more software start-ups are being acquired than are launching initial public offerings.
Innovation is now on a 6-year cycle, compared with the 3-year cycle experienced during the market's boom in the late 1990s and early 2000, he said. Lane offered suggestions to companies trying to find success in the new, more challenging environment.
As companies try to adopt offering software as a service, the model will challenge every part of their business, he said. Technologies that make software installation easier and faster are an area to focus on, suggested Lane, who saw one of his Kleiner Perkins portfolio companies, Virsa Systems, sold to SAP using this strategy.
In the future, the Web-enabled enterprise will become even more prevalent. "Over the last seven to eight years, the Web has gotten easier to use. So if you project out five years from now, it will be even easier and more secure," Lane said.
He added that there will be more collaboration via the Web--using wikis, for example--and contextual search to find everything from corporate information to personal calendars. Virtualization, convergence and on-demand technologies will also be part of the Web-enabled enterprise.
"And the cell phone is the new platform. It's where it all will connect," he predicted.
One interesting way that enterprise software vendors could approach their market is to go to the consumer. Wikipedia, instant messaging and Google desktop were some of the examples Lane cited as consumer applications that have found a home in corporate America.
"Consumer applications are becoming enterprise applications," Lane said.
Software companies, which are accustomed to customers paying upfront for technology, will have to retool their payment model to fit new services models, which call for customers to pay as they use the software, Lane said.
"It's difficult to go from a product mindset, where you are selling just the software, to a service mindset, where you need to provide a service 24/7," Lane said.
And despite a desire to go head-to-head with a dominant player, companies should look for the path of least resistance.
"Go for open space," Lane advised. "There is still a lot of manual procedures and costs that can be taken out of the enterprise, and innovation can happen there."