5th April 2006 By Staff Writer

That was one of a series of tough prescriptions he gave during a sobering keynote speech. His remarks were delivered at Software 2006, the annual business conference of the software industry held by angel firm The Sandhill Group.

In his reference to Gmail, he described how Google gives you several email accounts so you can share them with friends or family. And, he continued, Gmail is easy to install, meaning there is low barrier to entry when it comes to implementation.

Translated to enterprise software, he says that software vendors should aim modestly at a few points of entry with functionality that is innovative, yet simple to install. And they should make it easy for champions whom they've sold to share it with colleagues, and thereby expand the base of converts virally from within.

Lane's most controversial point however was on the business model. He suggested that software vendors rely on the honor system, giving their software away initially with the hope that when customers find it valuable, that they will pay up. Admittedly, that's not exactly revolutionary, as many open source providers like JBoss follow the same model in charging, not for the software license, but for support.

But those comments were not comments were not necessarily universally received. Outside the keynote, we overheard a number of attendees asking how thinly capitalized software providers could realistically afford the strategy in the long run.

Nonetheless, Lane maintained that the industry was overdue for a shakeup, pointing to the fact that three quarters of the profits are concentrated earned by Microsoft, SAP, and Oracle alone (he didn't count IBM). To rub it in, Microsoft alone counts for half the software industry's profitability.

One of the heaviest attended sessions was Sonata Software CTO Jnan Dash's panel on software as a service. For vendors, the challenge is that customers of software as service expect more frequent updates and subscription based pricing. That's a complete turnaround from traditional models. The difference extends beyond the business model down to the software development process, which requires more concurrent engineering principles.

According to Sand Hill Group president and conference chair M.R. Rangaswami, the software industry in a period of transition to a new business technology, and product delivery model.

"It's the end of the traditional licensing model, but people don't know yet how to replace it," he said, adding that software vendors should choose whether they are in the product or service business.

Panelists at Dash's session said that reality wasn't quite that simple. Deborah Magid, IBM director of strategic alliances noted that for many vendors, customers want it both ways. Some prefer traditional software licensing while others expect software delivered as a service, or combinations of both.

Naturally, as a business conference, Software 2006 couldn't avoid the issue of globalization. Referring to the fact that India alone now turns out 10 times as many software engineers as the US, Lane's response was, essentially, 'do the math.'

But according to Dr C.K. Prahalad, University of Michigan professor of corporate strategy, the fact that there are new development centers emerging means that India, China, and other regions are not replacing Silicon Valley, but supplementing it.

He suggested that Silicon Valley and other established centers could learn practices of low-cost development from offshore centers, much as the offshore centers are dispatching personnel to North America and Europe to gain domain knowledge.

And, showing a map displaying that in India, the centers of software and automotive production are concentrated in the same three regions, Prahalad also suggested that the industries could cross-pollinate each other. Looking five years out, he concluded, "The barriers to innovation will get lower."

Lane: Software shake-up favors new thinking

By Dawn Kawamoto

Staff Writer, CNET News.com

Published: April 4, 2006, 12:30 PM PDT

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."