TiEcon 2006: Software Luminaries Panel : The Software Richter Scale: 1, 3 or 7?

Liveblogging the Software Luminaries Panel at TiEcon 2006.  (Note: I am obviously publishing this, as well as other TiEcon posts after the Conference, but will only do very basic editing, and some linking, essentially posting my original notes.   I’ve also deviated from the role of passive note-taker here, as this is a subject where I am somewhat competent, and can’t help but insert my own comments here and there – you will see those in italics.  I invite Panelist, participants to feel free and correct / add to my notes in the form of blog comments. Thanks).

There were parallel sessions run with industry luminaries in ballrooms next to each other. Moderator  M.R. Rangaswami opened on the humorous side: the audience picked the right session, as he peeked into the next room where the Semiconductor luminaries session would take place, and saw a sign there saying “semi-luminaries” 🙂   M.R. is Co-Founder of the Sand Hill Group and host of the recent Software 2006 conference (an annual event).  .

As introduction he uses his Software 2006 slides about  Software’s quiet revolution. Three major realities:

1. Changes represented by SaaS , Open Source, while CIO’s indicate increased spending on software.
2. Real business is in the Enterprise (but consumer technologies find their way into the Enterprise)
3. Thriving ecosystem critical

Panelist(s)

• Larry Augustin , Angel Investor, Founder VA Linux, SourceForge …etc.
• Amit Chatterjee , VP Strategy SAP
• Mark Gorenberg , Partner Hummer Winblad Venture Partners
• Jason Maynard , Research Analyst Credit Suisse
• Zach Nelson , President and CEO Netsuite
• Sanjay Parthasarathy , Corporate Vice President Microsoft Corp. (Chief Evangelist of Microsoft Church)

Starting with a few canned questions for warmup, then taking audience questions.

Question:  Will there be a billion-dollar software company in SaaS? 

Jason:  Yes, Salesforce, NetSuite to begin with.. Client-server, on-premise screwed customers, overpromised, underdelivered. SaaS will be huge, it has barely  scratched the surface so far. 

Mark: Agrees.  Hummer Winblad did 12 pure-play SaaS investments. SaaS is most disruptive.  Siebel was the uncontested market leader and the appearence of Salersforce.com killed it. (I can’t help but insert my own opinion here: Sure, Salesforce squeezed Siebel from the bottom up, but two other factor were just as significant in their demise: the “overpromise, underdeliver” syndrome, i.e. customer dissatisfaction after expensive and lengthy projects; and the fact that SAP that already owns the Enterprise market significantly improved their own CRM  offering, and the integrated approach offers a better value proposition to their customers then the standalone Siebel CRM-only solution).  

Sanjay: We’ve already seen billion-dollar  SaaS companies:  eBay and  Google, just not in Enterprise.

Amit:  SaaS by itself is not a business model… for larger organizations hybrid models work better …with increasing process complexity and integration requirements there is a need for a mix of  on-demand and on-premise solutions.

Question specifically to Zach: Larry Ellison (Oracle CEO, owns over 50% of NetSuite, which is expected to pull off a billion-dollar IPO this year) stated that SaaS is only for SMB’s not for large corporations. Is that so?

 Zach: He is generally trying to avoid speaking for Larry. (They clearly have an interesting relationship, Larry has to be somewhat anti-SaaS, and Zach can’t really get into a public debate with his absolute majority owner. It seems to me that Larry is betting on two horses at the same time)  Nobody will switch software because they want to, or because SaaS ismore fashionable. First and foremost customers have a functionality challenge, which the software company has to meet.. Functionality is the primary consideration, and the delivery model supports it.

Sanjay:  We shouldn’t be talking about software as a service, it’s actually software + service.

Mark: A number of companies are selling to both small and large organizations. What’s exciting is that this is the very first time when medium sized companies can get the same functionality as the large guys! ( I tend to think the same is true for small businesses, in fact that may be an even more radical change, and it’s a mistake that analysts often only think of the midsize market when they speak SMB )

Jason: Disagrees with SAP’s Amit on the notion of need for hybrid.  Software needs to become a utility.  There is no room for innovation in most corporate  IT budgets, 80% of which is spent on running the infrastructure.  Let go of thee server!  I know it’s hard …it’s your baby … you may get visitation rights at your SaaS provider:-) (huge laughter at audience)

MR  makes a comment/question on recent high-profile outages in the industry, largely at salesforce.com but elsewhere, too.

Zach: Not all delivery models are created equal.  Sforce runs on “big iron”, (find article here) while Netsuite opted for a grid-like system based on cheap boxes. When a salesforce.com server goes down, it effects the majority of customers,  when NetSuite loses a box, a maximum of 50 customers are effected. This setup  also helps rolling out new versions smoothly, in a phased fashion,  while  Salesforce.com has to do it in “big bang” style.   Zach predicts Salesforce moving to a grid-like environment soon.

Larry: It’s about ease of adoption.  Software has become a lot easier to create, it’s acquisition is a painful process, and that’s the part that SaaS improves.

Sanjay: Service orientation helps picking best-of-breed solutions, mix and mach. The current trend of consolidation in the industry is actually contrary to it.

Amit: SOA is critical, some services in the cloud, others in the enterprise. 

Zach: Picking composite applications to mix and match is difficult, especially as business processes get more complex.. Composite transactional  applications are a fantasy –  far to difficult to synchronize.  Example: Microsoft CRM and Great Plains are hard to synchronize, even though MS owns the code for both.  Integrated transactional systems are unbeatable – that’s why SAP owns the Enterprise.

Question:  Consolidation, Oracle acquisitions .. getting bigger and bigger – is there room left for innovation?

Larry: Oracle is buying since it’s not doing a great job of innovation itself.  Startups have the benefit of new distribution mechanisms, SaaS, Open Source, user base helps them.

Amit: Lot of room for innovation by partners id they participate in verticals.  He “only” has 6000 developers, cant cover the whole world.(audience laughter)  Larry interrupts: I’d like that problem, I have 12. With 6000 how can you NOT cover the world? (even bigger laughter). Amit: Citibank has more developers then SAP.

Question about data privacy, Security. 

Zach: Especially for small, midsized businesses NetSuite’s security is better than running on local server next to coffee machine. 

Larry: Security is still a huge  unsolved issue.

Sanjay: The real data challenge is mashing structured and unstructured data. 80% of corprate data is unstructured  without business processes: xml is the glue. 

Larry: Html amplified the problem of huge amount of unstructured data, the future will be to move to have data in xml and html is just the presentation.

Question: Are there profitable SaaS companies?.  Sforce is barely profitable.

Mark: Salesforce.com is barely profitable, .Rigthnow is making decent profit,  employees (?_) is largely profitable.

Jason: Many are profitable,  SaaS lowers the cost of distribution – there is price elasticity in the market.  SaaS also helps reducing R&D, support costs – salesforce only needs to support one version, SAP, Oracle multiple ones.

Zach: When he joined NetSuite their sales model was direct. Now with success ecosystem develops.  Typically start with direct, build customer base, then ecosystem develops.

MR‘s comment/question: Software 2006 had a panel: Open Source: money machine or money pit? 

Larry: Open Source is a young model, there can not be a lot of profitable companies yet,  Red Hat beng an outstanding example.  On $10M in R&D Salesforce.com spends 100M in Sales & Marketing..  It’s cheaper to create software then sell it > Open Source helps eliminating the huge sales costs.

Jason concurs,  sales is 80% of cost.  Enterprise Software companies don’t make a lot of profit on software sales, their profit comes from maintenance.  Smart Open Source companies jump out of this expensive sales cycle and focus on support only.  They will increase botttom line while reducing top line.

Larry:  There is also a culture change: people did not understand software, they had to be educated and had to pay for that education.  Now everyone is computerized, carries a PDA, cellphone ..etc.  This means the  education need is reduced, good opportunity for Open Source’s pull model.

Question: SAP , MSFT will you be giving away your products free? 

Sanjay: Fuzzy answer on giving away software and promoting distribution. 

Amit: Support, explore Open Source, but not fully embrace.  SAP does not have the distribution channel that MS has. SAP needs to build ecosystem.

Question:  Will MS look into buying SAP?  Tried. Jason: pragmatic approach: it won’t happen, if for no other reason, the fight with the  EU..

Question: What Open Source opp’s exist? 

Mark: Recently made two investments into companies that develop applications for the lamp stack.  Issue: IP ownership, integration.  Sales issue: agree with the Open Source effect on lead generation, but how to close sales?  What happens when you move to markets that people don’t understand?

Question: any Open Source  companies to go public?  

Jason:  Potentially MySQL.  Markets pay 10-times sales, 30-times cashflow. Fewer, but better , more sustainable companies.

Question (more a remark) on SAP’s new compensation plan. Hasso Plattner recently  announced he is aiming at doubling the market, if they achieve that, the top 100 execs will make 100’s of millions.  Is that a realistic objective? 

Amit: The announcement certainly helps: -) but the true driver for growth  is product innovation.  

MR askes the panelists for their final remark

Mark: We’re in the greatest disruptive times. Hummer Winblad invested more in the past few years than in the previous 17..

Sanjay: Software industry does not spend enough time with users. 

Larry: Fantastic time to be a software entrepreneur.  Small team , little $, reach to market – not possible 10 years ago

Zach: It’s a great time to start a software company, when you do it, remember  you need a great application to run the business. (audience laughter; good plug for NetSuite …possibly the last one before going into pre-IPO silent period?)

Amit: Customers matter. SAP needs to focus more on the ecosystem.

Jason: MS announced spending additional $2B on emerging areas. Look at areas they are spending… go in those “white spaces”, since  they are good in seeing the  opportunities, but can’t exploit them properly.

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