NYTimes.com Article: Technology Hits a Midlife Bump

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Technology Hits a Midlife Bump

May 4, 2003
By STEVE LOHR




 

MARTIN PICHINSON is one of Silicon Valley's undertakers.
His company, Sherwood Partners, has carved out a prosperous
niche as an expert in shutting down failed technology
start-ups on behalf of venture capital firms and other
disenchanted investors. And, this summer, he plans to move
his company's headquarters to Palo Alto, Calif., the
heartland of opportunity for his rapidly growing business.

Mr. Pichinson, 57, does not always bury companies. Some
can be rehabilitated or sold off. But Sherwood Partners has
shut down 150 once-aspiring start-ups in the last two
years, and Mr. Pichinson figures that thousands more are
destined to fold. His company stands ready to help things
along.

"We're doctors of reality," said Mr. Pichinson, who began
his business career in the garment industry. "You don't
have to have a Harvard M.B.A. to know that more money has
to come in than go out."

The winnowing of the corporate population is just one sign
that the information technology industry is maturing in
ways that will affect technology companies, their customers
and investors for years to come. But what's painful for
Silicon Valley is beneficial for those who use the stuff it
produces.

The industry, according to Irving Wladawsky-Berger, a
strategy executive at I.B.M., has entered "the
post-technology era." It is not that technology itself no
longer matters, he explained. Instead, he said, the steady
advances in chips, disk storage and software mean that the
focus is no longer on the technology itself - with its
arcane language of processing speeds and gigabytes - but on
what people and companies can do with it.

As a result, industry executives and analysts say, the
balance of power is shifting away from technology suppliers
and toward their corporate customers. At the same time, the
use of lower-cost building blocks of computer hardware and
software is spreading, making it easier for companies and
individuals to share data and work together using industry
standards rather than remain dependent on one or two main
suppliers.

These trends, they say, point to increased pressure on
prices and profits for most technology companies, a good
deal for corporate customers and a very tricky time for
investors.

This is more than a backlash against the bubble years, or a
mere pendulum swing in attitudes and practices. The
technology itself will still deliver waves of innovation in
the future. Yet an industry that has risen to account for
10 percent of the economy and nearly 60 percent of business
capital spending can no longer play by its own rules.

"I don't see a loss of faith in technology, but gravity has
been turned back on," said Dick Lampman, the director of
Hewlett-Packard's research laboratories.

Yet an article published last week in The Harvard Business
Review does question corporate America's faith in the value
of technology. Titled "IT Doesn't Matter," the article
argues that information technology is inevitably headed in
the same direction as the railroads, the telegraph,
electricity and the internal combustion engine.

All of these industrial technologies aged from their
boom-time youth to become, in economic terms, ordinary
factors of production, or "commodity inputs," the article
noted. "From a strategic standpoint, they became invisible;
they no longer mattered," wrote Nicholas G. Carr, editor at
large of The Harvard Business Review. "That is exactly what
is happening to information technology today."

Most corporate executives, however, still think there is a
lot they can do with technology to give them an edge. Glen
Salow, the chief information officer of the American
Express Company, sees the recent trends in the industry as
working to his advantage. First, he said, the hard times in
the technology business have increasingly meant that big
corporate customers hold the upper hand in their dealings
with suppliers. That shift, Mr. Salow added, has given him
not only more bargaining power on price, but also more
influence in the products and services that are developed.

Corporate customers want to use technology to achieve
goals like cutting costs, improving customer service and
speeding the pace of bringing new products to market. But
in the past, the computer industry has often treated
customers with a certain arrogance, selling raw technology,
take it or leave it.

 
MR. SALOW recalled a conversation he had in the late 1990's
with the chief executive of a major computer company, whom
he declined to identify. As Mr. Salow recalled, the
computer executive told him, "My job is to make the hottest
box on earth and deliver it on your loading dock."

"You don't hear that kind of talk anymore from him or
anyone else," he said. "There has been a huge change from
that perspective. The voice of the customer is being
heard."

Corporate customers are insisting that technology companies
adopt industry-standard software formats and communications
protocols, so that the many different kinds of computer
systems in corporate data centers can work together. In
doing so, the companies are encouraging a technology trend
that was really kicked off by the Internet, with its global
reach that connects all sorts of technologies. For the
Internet to work, the computer plumbing had to cooperate.
And hardware and software standards make it more difficult
for technology companies to "lock in" customers to their
more expensive, homegrown technology offerings.

With their new power, customers are also pressing for
greater flexibility in how they buy computing resources -
especially as a utility-style service in which they pay
only for as much as they use, as if they were buying
electricity. Mr. Salow signed a utility pricing and
outsourcing deal with I.B.M. last year, in which 1,500
technology workers were transferred to I.B.M. The
arrangement, he explained, reduces fixed technology
expenses, giving American Express more flexibility.

The widespread use of software standards, Mr. Salow added,
enables the thousands of internal programmers at American
Express to build new applications almost as if snapping
together Lego blocks, reducing the amount of code that has
to be written by hand. A result, he said, is that the
software for, say, a new credit card offering or a
fraud-detection feature can be built and put into use in
about two weeks; five years ago, this might have taken six
months.

"It all frees you up to take more gambles because each risk
is not so costly and you can move a lot faster," Mr. Salow
said.

Several big companies besides I.B.M. - including
Hewlett-Packard, Sun Microsystems, Microsoft, Oracle and
Veritas - are moving to utility computing. But
Salesforce.com was founded in 1999 specifically to
capitalize on the trend. It sells sales-force automation
software over the Internet; users with a standard Web
browser get access to it for a monthly fee.

Marc R. Benioff, the founder and chief executive of
Salesforce.com, regards his company as a force for change
in an industry that he says is still mired in the
"preutility era." In the future, Mr. Benioff said, "the
risk and complexity of computing should shift to the
utility."

Mr. Benioff's message and his low-cost, no-frills offering
have gone over well at a time when companies are squeezing
technology budgets.

Salesforce.com expects its revenue to about double this
year, to $100 million. The company has started with
sales-force automation, a software market where Siebel
Systems is the leader.

Yet Mr. Benioff has ambitious plans to move into other big
software markets where companies like SAP, PeopleSoft and
others sell software for managing manufacturing, planning,
human resources and other operations for large
corporations. These big, complex "enterprise" software
systems can cost millions of dollars and take several
months or years to install and use.

"I think there is going to be a huge democratization of
these enterprise technologies because of this on-demand
computing enabled by the Internet," Mr. Benioff said. "Our
evangelical mission is to destroy enterprise software as it
exists today."

 
THE push toward utility computing, according to Mr.
Wladawsky-Berger of I.B.M., fits neatly into his concept of
a post-technology era. "In the last few years," he said,
"the underlying components have become so powerful,
reliable and inexpensive that you don't have to worry so
much about the underlying engine, and you can move up to
higher-level concerns."

I.B.M. has moved more and more toward becoming a provider
not only of technology, but also of business expertise in
17 industries from banking to electronics and
transportation. Its $3.5 billion purchase of
PricewaterhouseCoopers Consulting last year was a step
toward that goal.

Mr. Wladawsky-Berger is in charge of guiding that strategy,
which I.B.M. is promoting as "on-demand computing." The
on-demand concept represents a maturing of computing in a
sense, he said, but more as "the next evolutionary step in
information technology, where the fun really begins" rather
than an aging industry in decline.

Each successive wave of computing - from mainframes to
minicomputers to personal computers to the Internet - has
opened the door to new users and created new problems. Each
of those, in turn, must be addressed if the industry is to
move ahead. The Internet brought an explosion of computing
complexity. And while many dot-coms are gone, Internet
technology has spread widely, becoming a mainstream
technology in corporations.

Marc Andreessen, a co-founder of Netscape Communications,
whose software introduced Web browsing to millions and
touched off the Internet boom, is now chairman of Opsware,
whose data-center software is intended to tackle the
complexity crisis. "At Netscape, we were building all the
software components that made this possible and created the
problem, and we didn't grasp the implications," said Mr.
Andreessen, who is 31.

I.B.M., Hewlett-Packard, Microsoft and Sun have also begun
major efforts to address the complexity problem with
automated management tools that can replace people. But
analysts say there is also room for innovative start-ups
like Opsware.

"At the same time there is this relentless cost-cutting,
there is also a lot of excitement about this market for
tools to cope with the complexity conundrum, where a
boatload of computer science is going to have to move into
the corporate mainstream," said Mark Stahlman, an
independent industry analyst.

Roger McNamee has been a professional investor in
technology companies for more than two decades, starting as
an analyst at T. Rowe Price. In 1991, backed by Kleiner
Perkins Caufield & Byers, the venture capital firm, Mr.
McNamee became a co-founder of Integral Capital Partners, a
so-called crossover fund investing in start-ups as well as
fast-growing public companies. Integral Capital thrived in
the 1990's. But late in the decade, Mr. McNamee said he and
his partners became "really concerned about how wacky the
market had become." In the second half of 1999, at the peak
of the bubble, Integral returned $1.5 billion to investors
in its main fund.

In 1999, Mr. McNamee and three colleagues founded Silver
Lake Partners to invest in mature companies. Silver Lake
quickly raised $2.3 billion from institutional investors
and wealthy individuals, including three of technology's
best-known billionaires, Bill Gates, Lawrence J. Ellison
and Michael Dell. Silver Lake's strategy is to make
longer-term investments, taking a five-year perspective, of
$250 million or so in each company. "We're looking mostly
for winners in consolidating industries," Mr. McNamee
explained. "This is a period of thinning the herd."

And once the downturn is over, Mr. McNamee is skeptical
that spending on technology will ever return to its
long-term trend, dating back to the 1960's, of increasing
at two to three times the growth rate of the economy. So,
he said, broad-based technology funds are probably a
formula for losing money. "This is absolutely a
stock-picker's environment," Mr. McNamee observed.

For its part, Silver Lake is betting that the corporate
winners will include Flextronics, a contract manufacturer
of computers, cellphones and other products; Seagate
Technology, a disk drive maker; Gartner Inc., the
technology research firm; and Ameritrade, the online
broker.

One of Silver Lake's investors, Mr. Ellison, the chairman
of Oracle, has been one of the most vocal proponents of the
view that the technology industry is graying. "Thousands of
companies are on life support that just have to die," he
said. "Our industry is in the inevitable process of
maturing."

Yet Mr. Ellison's concept of a maturing industry is not
exactly a listless old age. There will be fewer companies
and slower growth, he said, but still plenty of leeway for
entrepreneurial creativity. "There will continue to be very
cool new computing technologies," Mr. Ellison said.

Unlike so many industrial technologies - railroads, say, or
the telegraph - the stored-program computer is a
general-purpose tool, animated by software, a medium
without material constraints. The unrelenting pace of
improvement in processing speeds, data storage and
miniaturization means the tools are more powerful and
smaller; people then figure out things to do with them.

Indeed, innovation continues apace, despite the downturn.
Advances are evident in a range of technologies - wireless,
data center automation, speech recognition, intelligent
software, telephone service over the Internet, sensors,
natural language processing, and on and on.

Underestimating the potential for computing has proved a
common pitfall over the years, from Thomas J. Watson at
I.B.M. in 1943 ("I think there is a world market for maybe
five computers") Ken Olsen at Digital Equipment in 1977
("There is no reason anyone would want a computer in their
home").

Jim Gray, a computer scientist, has worked in the industry
for more than 30 years. For his pioneering research on
databases and transaction processing at I.B.M. and
elsewhere, he won the 1999 A. M. Turing Award, sometimes
called the Nobel of computer science. "I've seen the `end'
at least twice in my career - only to be surprised by the
next wave," said Mr. Gray, who now works for Microsoft. "My
guess is that this computer thing has just gotten
started." 


http://www.nytimes.com/2003/05/04/business/yourmoney/04TECH.html?ex=1053068378&ei=1&en=575ee79239617eac



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