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Trouble on Silicon Valley's doorstep

Software veteran Ray Lane says the industry has yet to grasp the implications of structural and technology changes that will force big dislocations.

    If you're going to inaugurate a new conference devoted to changes in the software industry, who better to pick as your keynote speaker than Ray Lane?

    As the former president of Oracle, Lane helped the database and applications company reposition itself to take advantage of the Internet era. Today, as a general partner at Kleiner Perkins Caufield & Byers, he is charged with investing in the software industry's next big thing.

    According to Lane, however, he doesn't have a clue as to what that is. What he has figured out is that the software industry--and its historical focal point, Silicon Valley--are at a watershed, and that the future is going to be radically different than the past.

    It's a future with which Lane is comfortable, based on his read that at least for the near term, customers will drive improvements in software.

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    It's a view he expounded at Oracle until a falling-out with Oracle CEO Larry Ellison. Today, the post-bubble software industry is beginning to come around to Lane's way of thinking: Renovation, not innovation, is what's important.

    After a recent speech outlining this vision at the Software 2004 conference in San Francisco, Lane spoke with CNET about the broader implications for the industry, Silicon Valley, software customers and entrepreneurs.

    When you say, "Our technological progress is our vulnerability," what do you mean by that?
    A lot of technology that's been developed and delivered over the last 10 or 15 years is not being used.

    I would never say Silicon Valley is dead. We're just going to have to learn to do things differently than in the past.
    So every year, a business gets the opportunity to ask, "How are we going to compete?" For instance, Chief Executive Ed Zander sits down at Motorola and wants to know ways to make it more competitive. Those ways include better information, better systems and better ways of going to market. The biggest challenge to him is in reorganizing his systems. Changing those systems is not easy. The more technology we have installed, the harder it is to change your business.

    Andy Grove's famous horizontal computing model, designed to take down IBM, was adopted to justify the construction of our current systems architecture. To compete with the vertically integrated IBM, Intel proposed separating each layer of the stack to improve quality and reduce prices. That certainly had its effect on IBM, which had to reduce gross margins from 75 percent to 25 percent. It also unleashed a complex, nonintegrated and difficult-to-maintain stack of software specialization.

    Now, customers are looking for simplicity, integration and security across releases. They want standards-based software that doesn't require the labor expenditure of the past. Software CEOs have two choices: They can try to impose their proprietary methods on the market or they can adopt a new service-based approach to providing and maintaining software.

    If we're in a period of renovation rather than innovation, how does that impact companies and their customers?
    For the big, established players, the cycles of innovation will slow down, yet the companies using the software will want to do more. They want to respond to spot markets--to grow and shrink very fast. They want more flexibility. They want to make what they have work. There's already a certain amount of infrastructure in every company, typically a mix of Unix, Windows and Solaris.

    If my business challenge at Motorola is to get more visibility into my supply chain--if there's too much inventory in one place or not enough in another--I need technology that analyzes the data generated by my supply chain infrastructure, whether it's Oracle or i2 Technologies. If I can integrate all the data from those disparate sources, I would have a much better way to manage inventory visibility.

    In the past, when customers have asked for improvements, we've said, "Replace your old system with this new system." That's not true anymore. You've got to use the existing infrastructure and take advantage of information already there. During the last 10 years, we did modernize the infrastructure. Now, I can actually do the renovation. I don't have to knock it down.

    What happens to Silicon Valley in a period of renovation? The Valley has made its mark with innovation.
    Silicon Valley could struggle with this. We've got to figure out what would be our advantage.

    Knowledge work globalization is an intractable trend, no matter who's elected. The only question is: Do we participate in it?
    Our mantra has been to take a brand-new idea and put it together with really creative engineers funded by venture capitalists. There's still going to be invention, but not at the rate it happened in the 1990s.

    When you start funding invention today, you better make sure that the invention is good enough that everybody is going to beat a path to your door. I would never say Silicon Valley is dead. We'll just have to learn to do things differently than in the past. We can't just keep funding tons and tons of inventions.

    You mentioned that you recently traveled to India and were impressed by the work ethic and skill set. What role does India have in this new world of software?
    An Indian company is a better renovator. They're going to be a real player in the renovation market, because their business model has the advantage in the renovation market. It's like the home-building world. Most new home builders are not renovators, and most renovators are not new-home builders. They require different skills. But renovation is just as important as building new homes.

    So you wouldn't support legislation to limit offshoring?
    Knowledge work globalization is an intractable trend, no matter who's elected. The only question is: Do we participate in it? The United States will cease to become the productivity leader if we pass legislation banning offshoring. Offshoring enables you to buy functionality and have it operating in a very short time.

    If you look at our portfolio companies, out of about 60 that could be doing something offshore, 60 percent are already doing it--mostly in India but also in China and Canada. We're talking about it primarily as a cost move, where quality assurance and testing is moved offshore. You can't compete if you have all your resources in California.

    Will Kleiner be investing in Indian companies?
    I don't see us investing in pure-Indian companies. If a company had its headquarters in California and a lot of operations in India, that would be a much better model for us. For every 10 entrepreneurs who come to us, about eight of them will be Indian. They will start companies here, and a lot of the resources will come from India.

    How does software regain its leadership role in the economy?
    There will be another tectonic shift. The whole idea of information access, communication around the world, may be the next one. Revenue will start to grow again, and software will again be the biggest industry on Earth--until biotechnology overtakes it.

    What kind of issues do businesses face today that they didn't, say, five years ago?
    Every company out there will have to deal with volatility in their business--asymmetrical trends they cannot easily resolve. On a national level, when Russia was our enemy, we knew where the Russians were and how to deal with them. With al-Qaida, it's much tougher. On the corporate level, there's a need for transparency, in terms of governance and visibility into information, such as Motorola and its supply chain.

    The new enterprise has to do five things: respond and deliver to support demand; grow or shrink, based upon changes in demand; operate any time, anywhere, under any conditions; minimize asset and labor content per unit of production; and provide real-time transparency of operations, both internal and external. Those will be necessary to understand, as you build a software company. You can't go to the market now and say, "I've got a software package that will take a year to install." You need something that will install very quickly and update very easily.

    Oracle's argument for taking over PeopleSoft and refuting the U.S. Department of Justice lawsuit now seems to rest on identifying Microsoft as a competitor in the enterprise resource planning space. Do you agree with that?
    Microsoft's customer base is very small businesses. The Justice Department has to go out and seek customers' opinions. Let the customers vote. I think that they will feel as if their options have been severely reduced if Oracle takes over PeopleSoft. But if the customers say, "It doesn't bother me," then the Justice Department has got to back off.

    I would bet on the Oracle-PeopleSoft deal being dead. But you never know. We haven't yet heard from the European Commission, which tends to be tougher than the Justice Department.

    Will Oracle go after BEA Systems? That's often been mentioned as a possible target.
    Siebel Systems would obviously be a candidate, too, along with i2. Organically, Oracle has lost share in applications. It is losing ground. PeopleSoft is now No. 2. I agree that it makes sense from Oracle's perspective to buy PeopleSoft. But what it's doing is tarnishing its brand. Customers are angry at Oracle, and PeopleSoft is finding it easier to win deals. I don't think that Larry Ellison has ever gotten the application strategy right.

    Will Linux continue to make inroads against proprietary software?
    Open source will have a huge impact on the commercial-software industry.

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    Customers desire to rationalize hardware--use Intel-based Linux servers and save money. That trend won't stop with Linux. It will go up the stack to the Web server, like with Apache. BEA will get competition from Apache. The database will get competition from MySQL. There's all sorts of consolidation in the open-source stack for content management software competing against the commercial world.

    Will Linux ever be a major factor at the desktop level?
    Europe will be ahead of us there because of government pushes. We have one company, still in stealth mode, doing everything in open source. It's running open-source desktops.

    What does Microsoft do to combat Linux, in your opinion?
    Microsoft tries to scare the world by saying things like, "This open-source stuff gets you into licensing problems," or "It's a bunch of hackers," or "You can't build an enterprise, when you don't have anybody to go to for problem resolution."

    Microsoft has to depend on the enterprise saying, "Moving to Linux desktops isn't a high priority." For at least a period of time, the enterprise says, "We'll stick with what we have. But we might not go to Longhorn." If there's a legitimate alternative in open source, that might be the time to switch.