Ray continues -- How has the formula changed?

90s formula -- ROI = I x M / C

invention times momentum divided by the cost

NOW -- ROI - P(I) x U / TCO

Proof of innovation times useability divided by total cost of ownership

Software industry at the start of this decade is a $200 billion industry, 70% in the US, representing 1% of the US GDP, and employing 325,000 people

Today, (2004), Open Source Software and Web Services changes the marketplace. Apache is 2x Microsoft. Microsoft is only 3x Linux. India and China are becoming enormous. And the enterprise is adopting OSS

Here is what enterprise CIOs are saying about Open Source:

Positives -- Lower TCO, Equivalent Functionality, Equivalent Quality, Bi-directional scalability, Faster bug response fixes

Some challenges -- Informal support, velocity of change, no roadmaps, functional gaps, licensing caveats, ISV endorsements

What does the software industry look like in 2010?

OSS destruction > Growth -- the industry will be the SAME SIZE at the end of the decade because Open Source will destroy as much revenue growth as occurs in other parts of the industry

US Share < 60% -- more and more is going to move off shore

<1% of US GDP -- GDP will grow faster than revenue in the software industry

< 325,000 people -- the US is not supplying the engineers for this industry

Ray continues -- what the software industry needs to do

More predictability -- not necessarily perfect software, but better predictability about when software will work

Ubiquitous Access -- this is a worldwide marketplace

Continuous Updates

Service-Oriendted Architecture (network/federated data)

Flawless Service

Ray Continued -- Compare to the automobile industry...

Ray's comments

Progress on auto industry:

• Replace Horse
  
• Build for masses
  
• Make better, faster, cheaper
  
• Mass customization
  
• Differentiate on service

The software industry has done this --

• we replace Labor
  
• PCs were built for the masses
  
• progress on Moore's Law drove better, faster, cheaper
  
• the Internet drove mass customization
  
• Now it is about service

Ray Continued -- "New" Enterprise

Ray's comments:

The Software industry's technological progress is our vulnerability

Innovation-- emphasis on "how" vs. "what"

Scarcity -- focus on management vs. engineering

Entrepreneurs -- focus on Renovation vs. Invention

Investment -- "OP Ex." vs. "Cap. Ex."

Technology -- "Service-centric" vs. "Component-Centric"

Ray continues -- What does the next decade look like?

Constraints:

Volatility -- we can resolve for some time the assymetric threats in a conclusive manner. It was much easier to deal with the Soviet Union in the cold war. Now how do we operate? How do we plan our business and invest in the stock markets with the invisible threats?

Transparency -- if you are the CEO of a public company your shareholders should thank you every day -- why would anyone want this job? You run your company in a fish bowl and get no appreciation for this.

Low Growth -- focus on profitability instead of growth

Enablers:

Knoweldge Work Globalization -- it doesn't matter what your politics are, you have to decide where you stand on globalization of work and free trade economied. I just came back from India and I learned a whole lot about what is going on over there. India is not a black box that you shove work into. There is a lot of innovation goin on there and it is driven by an outstanding educational system over there. Either we use this advantage or someone else will.

Network Based Service Providers -- ASPs are NOT a flawed business model created by the Internet bubble. They are a capital intensive investment because you have to invest a lot to get the service level up by the time you have a first customer. End users are going to, more and more, say "I get it now" Instead of talking to my commercial software vendor and putting software on the shelf I can buy what I use.

Rationalize IT Infrastructure -- there is a modern IT infrastructure sitting out there now. CEOs say all that money I spent in the 90s I didn't get a return on so there is a negative attitude about IT. But what you have to convince them of is that they have to invest more now -- because the next set of technologies will leverage the infrastructure that was installed in the 90s and really deliver on that investment

Portable Computing -- Mobility is finally here -- we don't even need laptops as mobile devices, anywhere, any place, can provide communications and computing in a handheld platform.

Ray continues -- A New Economy?

Ray's comments:

A few years ago everyone was saying that the aggressive investment in IT technology was supposed to create an unending improvement in worker productivity that would allow economies to grow at a faster rate than at any other time in history.

Now people are asking, does IT matter? Quotes Nick Carr in the Harvard Business Review as saying "no"

The mistake -- it is not the IT that matters, it is the USE of IT that matters. How do you change the prospects of leadership in your industry because of the IT possibilities?

Nineties Optimism makes today look like a recession but if you look at the past 30 years, today looks like normalcy.

Based on a perspective from the bubble, it looks like we crashed the "new economy" -- wars, terrorism, market crash, job loss... but I contend that the new economy survived all of this.

Look at Amazon, EBay, knowledge workers at work anywhere in the world. Yes we destroyed it temporarily but it is being recreated.

I contend that by the end of this decade most of the predictions made during the Internet bubble will have come true

Ray continues... 2004: Things Are Looking Up, but...

Ray's comments:

The economy is recovering... so why the paranoia in the software industry?

This stuff is still not easy to sell, the buying activity is still back-end loaded at the end of the quarter, prices are at an all time low -- you are plagued with the thought "how long can I manage my cash flow burn rate to get out of the recession or is this the shape of things to come -- it isn't getting better? What is the next big thing to get us out of this rut?"

We all hope that this big new thing is going to solve all of our problems. But the wait for the next big thing is probably a decade away.

Examples of "big things" -- Transistor, Microprocessor, operating system, personal computer, Internet

Is open source a "big thing"? No, it is a shift in the existing set of paradigms that will effect incremental change in the way the computer industry operates.

Ray Lane's introduction...

Ray's comments:

This industry is at a watershed.

A sum up of all of our successes and problems.

The computer industry has become one of the largest in the world -- 3rd or 4th in the world

Yet we still operate with a lot of proprietary baggage that forces the end user to integrate and make it work

One of the significant events that is not often recognized is Andy Grove's horizontal stack chart which was designed to attack IBM's dominance of the computing marketplace.

This chart was one of the first attacks on the set of assumptions about proprietary advantage - that proprietary products will work better, have a lower cost of ownership, and give the company's that make them lasting profitability.

This is the subject that we will address today

Open Source Business Conference

I'll be blogging the conference today here in San Francisco -- the Open Source Business Conference or just OSBC...

This morning's keynote is by Raymond Lane, former president of Oracle and currently General Partner at venture fund Kleiner Perkins Caufield & Byers. His speech is entitled The Macro-Economic Impact of Open Source Software and should start momentarily...

Here is the abstract:

The bubble and subsequent crash in Information Technology will be recorded in history as a normal growth phase all industries inevitably go through. Our industry is maturing, moving from the "installation" phase to the "deployment" phase where mass adoption occurs. The next ten years will be the "golden age" of technology where the focus will be on applications and services, rather than the technology differentiators themselves. Profits will be attained by those that drive low prices and achieve volume adoption, rather than pure specialization. We will see widespread adoption of standards. This keynote will cover the economic impact of Open Source Software (OSS) and its benefits of no vendor lock-ins, significant cost savings, shift of IT spend from infrastructure to applications, and open standards based architecture. We will also discuss about where OSS has impacted today, where it will reach in the next 5 years, steps to accelerate its adoption and to exploit it to the fullest extent.

By the way, kudos to the show organizers. It is great to be able to get power connections and wireless Internet access from the main conference ballroom and thus to be able to blog the conference in realtime. It would be nice if there were more power outlets though... despite all attendees having laptops we live in perpetual fear of running out of juice so whenever possible, we plug in... thus the hall is filled early with people strategically sitting at the edges of the room so that they can reach the wall plugs.

Anonymous office buildings...

It used to be that companies would fight for the opportunity to have their names on the outside of office buildings -- every little bit of advertising helps, the reasoning would go.

I was just on the phone with a friend at a large company (which shall go nameless...) who told me why this practice may be waning -- due to international terrorism...

Why advertise your presence if this could make you a target for terrorism? The friend cited a number of examples where his company and others had been removing signs from properties they inhabit in order to be (or at least appear) proactive in protecting their employees.

Will the future bring vast anonymous office parks where it is hard to tell who the tenants are in any of the buildings?

Open Source Capitalism

Very interesting conference this week in San Francisco, the Open Source Business Conference or OSBC is being held March 16-17 at the Westin St. Francis in San Francisco, CA.

A great set of speakers: Clayton Christensen, Ray Lane, Larry Lessig, Chris Stone, Tim O'Reilly, Mike Evans, Bud Tribble...

Their self description:

Open Source Software (OSS) is rapidly coming to dominate certain areas of IT. Despite this advance, few beyond hardware vendors have developed solid models for leveraging OSS to boost margins or revenues. This inability to monetize OSS is perhaps its greatest inhibitor to thriving beyond the commodity server.

The Open Source Business Conference (OSBC) is the first forum to bring together established technology vendors, startups, open source community members and enterprise IT users/customers to jointly explore new oppotunities for OSS deployment and how to capitalize on them.

Who should attend? Senior technology executives (both vendors and users of OSS); venture capitalists; in-house and outside counsel for IT vendors or buyers; analysts; strategy consultants; and members of the media.

Databases are the next to fall to open source...

Anyone wondering why Oracle's Larry Ellison is spending so much time pursuing an acquisition of Peoplesoft need look no further than open source database company mySQL and today's news (care of CNET) that mySQL will soon offer database clustering technology previously only found in high end commercial databases (like Oracle). Clustering is one of the few remaining reasons to buy a commercial database product.

Open source is an unstoppable market phenomenon. We will see open source projects that provide as good or better software to commercial competitors in every software category over time. Infrastructure elements such as operating systems (and now databases) are the first because the characteristics of these products are broadly understood in the marketplace and technical innovation in these categories tends to be incremental and not transformative.

Larry is right to try to move Oracle away from its dependence upon that core database revenue but wrong in trying to replace one software revenue stream with another. IBM is the only one of the tech giants that seems to clearly understand the future -- software is something you give away in order to lock customers into your other revenue streams.

Maybe Oracle should be trying to buy Accenture...

VoIP and the Telecom Giants

I happened to sit next to an AT&T exec on the plane last night. He commented that "...two years ago I would tell customers that while VoIP is coming, it is still a long way off..." And what do you tell them now, I asked? "VoIP came."

It was interesting to speak with him about their VoIP experiments though. AT&T is still spending a lot of time worrying about priority packet routing and trying to focus on the highest quality possible on the voice connection. I observed that 8.5 million people find Skype acceptable (he had never heard of Skype) and that the wireless providers have trained us all to expect a little fuzziness on our voice connections... so won't businesses choose "good enough?"

He admitted that this scenario worried him...

Interesting VoIP statistics

These statistics were provided by Federal Communications Commission Chairman Michael Powell in a speech that he gave today at the National Association of Regulatory Commissioners. You can download the entire speech from here.

• 2 percent of US firms currently use some form of IP telephony, and this number is expected to grow to 19 percent by 2007
  
• 73 percent of wire line service providers and 31 percent of wireless operators either have implemented, or are testing packet telephony in their networks
  
• 50% of Internet households are interested in Internet Voice as a way of reducing monthly long-distance charges
  
• Starbucks offers its customers 19,000 ways to have coffee (ok, not about VoIP but interesting nonetheless...)
  
• The US is 11th in the world in broadband development
  

More on Skype

Great post on Skype from Lance Tracey. I love the quote from Federal Communications Commission Chairman Michael Powell:

"I knew it was over when I downloaded Skype. When the inventors of KaZaA are distributing for free a little program that you can use to talk to anybody else, and the quality is fantastic, and it’s free—it’s over. The world will change now inevitably.”

Still don't know what Skype is all about? Find out....

Skype

North American Bandwidth News has some really interesting comments on Skype. If you aren't familiar with Skype you should be. As you'll read in NA Bandwidth News -- "Skype is a large bulldozer for destroying and rebuilding the telecoms industrial complex..."

The perfect fractalized enterprise

I encountered a terrific example of a fractalized enterprise a few days ago. A friend has started a business that takes professional photos of children's sports events and then sells prints or other items (coffee mugs, mouse pads...) back to the parents. It combines his interest in photography with his daughter's passion for sports and parents seem to love the opportunity to purchase professional quality photos of their children.

What is really amazing to me about this business is how Bob uses technology to create a business that appears significantly bigger than the one person shop he really is. The Internet provides a mechanism for Bob to outsource every part of his business that isn't core. Here is the formula:

Web site hosting company: YahooDomains
E-Commerce Storefront: PhotoReflect (specializes in photography e-commerce)
3-4 photo processors, all available on the web (some are better at posters and prints, some are better at mugs and mouse pads...)
Accounting and CRM: Intuit
Receptionist and personal assistant: CallTrex (my own company)

Add in a few friends who enjoy being weekend photographers and are willing to work for $10 an hour and a local camera shop that rents high-end photography equipment (REALLY big lenses for those close up shots from across the field) and you have a complete business set up for almost nothing.

This is the kind of entreprenuerial engine that the Internet can enable. Bob focuses on his "Core" -- marketing and sales -- and he uses technology to martial a set of organizational fractals that come together to serve his "Context" and present a unified face to the end customer.

An interesting idea -- what about creating a set of "recipes" for people that would like to start their own businesses -- essentially a list of the organizational fractals needed to construct a given type of business?

Greenspan on Intellectual Property Rights

As usual, Federal Reserve Board Chairman Alan Greenspan is eloquent, his position is well thought out, and his timeliness is perfect. But in this instance Greenspan is commenting on Intellectual Property, not interest rates.

At the Stanford Institute for Economic Policy this past Friday, Greenspan delivered an address on the importance of protecting Intellectual Property Rights. The full text of his speech can be found here.

He does not offer a specific remedy (as he did in the case of Social Security earlier in the week) but instead sensibly asks a set of questions:

If our objective is to maximize economic growth, are we striking the right balance in our protection of intellectual property rights? Are the protections sufficiently broad to encourage innovation but not so broad as to shut down follow-on innovation? Are such protections so vague that they produce uncertainties that raise risk premiums and the cost of capital? How appropriate is our current system--developed for a world in which physical assets predominated--for an economy in which value increasingly is embodied in ideas rather than tangible capital?

One thing that both sides in this debate are likely to agree on (at least privately) -- currently Congress, with the Digital Millenium Act for example, is primarily taking into account the interests of lobbyists, and not thoughtfully addressing the economic issues that Mr. Greenspan articulated. Hopefully his speech will spark a broader debate on these issues.

Revolutionize the PTO

Just about anyone who has had to deal with the US Patent & Trademark Office will readily agree that a major overhaul of this part of our government is needed, preferably as soon as possible. A significant portion of our economy is dependent on the principals of intellectual property protection and the PTO owns all of the passageways into these strange lands. With a wave of a pen fortunes are made and lost when a patent office action grants an idea the status of property, or takes it away.

The debate continues to rage (not least within this blog) regarding the merits of different types of patents, and the merits in particular of software patents. But both sides of this argument can probably see that the PTO as currently configured is in no condition to render intelligent judgements on a consistent basis as to the patentability of various software innovations.

At dinner with a friend last night, I heard the (not uncommon) story of receiving an official PTO office action memorandum, rejecting all claims for a filed patent due to the existence of "prior art" -- which is to say, someone else patented the idea first. However, upon review of the cited prior patent, the only conclusion a reasonably trained computer scientist could come to was that the rejected patent application and the prior patent both used the word "meta data" a few too many times and otherwise were not at all similar.

A Revolutionary Suggestion
In thinking about how he had arrived at this state, and whether the Patent office personnel were merely using a word search on prior patents to reject claims, my friend made an interesting observation: the business community as a whole has a vested interest in blocking the issuance of bad patents (that is, patents for ideas that are not, in fact, innovative), the business community has the resources and the knowledge to properly investigate a patent claim and uncover prior art -- why not have an open review process for patent claims?

This would radically change the role of the patent office from one of research to one of adjudication. Patent officers would have to determine whether or not the counter claims that competing businesses raise against a patent's issuance were accurate. But this role of adjudication would at least remove the patent official from the now almost impossible job of coming up with the potential prior art themselves.

The Fractalized Enterprise

Paul Kapustka notes in his most recent networking pipeline blog that small business is where we should be looking for growth in IT purchasing. As Paul points out, it is much more difficult for journalists and market analysts to pay attention to the behavior of small businesses -- but we all need to become better at understanding small business as a key underlying economic trend.

If Geoffrey Moore is right, the Internet is accelerating a movement toward what you could call the Fractalized Enterprise. Geoffrey explains his "core vs. context" concept as follows:

Activities that support ... differentiation are core to our businesses. Everything else we do, by contrast, is context -- that is, work that has to get done but cannot improve our valuation.

The interesting thing about the Internet is that it creates the opportunity to outsource context seamlessly. Every business can appear to be a big business, can have endless resources to handle customer support, sales, product development, marketing -- all by weaving together a team of disparate entities (organizational fractals) that cooperate together to create an enterprise.

That is the future -- small businesses, often sole proprietors, working together, mediated by IT, creating, marketing, distrubuting the brands, products, and ideas that we all consume. Much more powerful than corporations.

Of course our technology, government regulations, and personal dispositions must all continue to evolve for this to fully fractalize.