Why Oracle-PeopleSoft is a lose-lose

When Ray Lane talks about software, people naturally listen–closely.

Lane, formerly Oracle’s president and chief operating officer, is widely credited as the architect who saved the database maker when it was coming apart at the seams in the early 1990s. After a public falling-out with Oracle CEO Larry Ellison triggered his resignation three years ago, Lane joined venture capitalist firm Kleiner Perkins Caufield & Byers.

It is a different vantage point these days, but one that allows Lane more perspective than when he was in the trenches. Beyond the merger-and-acquisition-related news du jour, Lane believes that changes in the software industry are redrawing the relationship between customers and their suppliers. However, he wonders whether most applications makers really understand what that’s going to mean to their future.

The strategy pursued by his former boss also has him scratching his head. Watching his old company from the sidelines as the software business undergoes another merger-related realignment, Lane spoke with CNET News.com about the trends affecting Oracle, PeopleSoft and the wider IT world.

Q: Is there a common thread to what’s going on recently in terms of structural change in the software industry–or is it all happenstance?
A: I think it’s a little bit of both. You have to look at the individual acquisitions and understand that each was made for their own independent competitive reasons. If you do look for common threads, you will find one or two being that each of those industries has a dominant company where others are trying to compete with them.

SAP is the dominant ERP company with more than twice the share of its other competitors. So it makes sense that you can put a couple of them together and improve their position against the leader…In the case of Yahoo, they’ve seen Google come from nowhere in five years to take the dominant position in search, and that’s Yahoo’s primary business. So I think Yahoo felt it needed to acquire Overture.

Do the institutions know something that the rest of us don’t? Or is this a case of institutional herding, where fund managers are just jumping on and out of hot stocks or sectors? It’s almost as if the clock got turned back to 1999.
I don’t think you can generalize. Certainly, if you looked at all the companies losing money that only had “eyeballs” and only that, anybody can make a case that it was a ridiculous investing scenario. But even back then, there was an eBay or a Yahoo, which were good ideas. A company that’s growing at, say 30 percent, and is profitable and increasing earnings, deserves a high multiple. Now, whether that should be 30, 50 or 100 is a temporal issue. In time all those multiples will come down and will find their place.

Larry Ellison has talked a lot about how the software industry is destined to undergo changes–slowing growth, increasing consolidation, etc. Is the software business being fated to undergo consolidation? How do you see things evolving? 

Ellison has an ability to say things and cause the press to react. That’s what he’s best at, not at developing products. It’s like he’s going to say everybody is going to die. Well, of course we’re going to die. Guess what? The software industry is going to slow down and consolidate. The fact that he’s said it after the greatest wealth creation and bust makes it more dramatic. So, yes, he’s right. But does that mean innovation is dead? That Silicon Valley is dead? That’s ridiculous. Absolutely ridiculous. But will we ever see a period like 1998 again? No. But will it go back to the investing dynamics that we’ve seen in the last 30 years? Sure.

Then what trends do you think will drive growth in the IT business over the coming years?
I’ve been talking about real-time enterprises for five or six years now and that still has not occurred. And it’s not occurring with Web services. Why doesn’t computing process work the way that you, the user, want it to work? The biggest obstacle to changing anything in your company is computers. A lot could be done above the ERP (enterprise resource planning) layer to build composite applications better and offer better user access. A lot of what I’ll be doing is around finding a better process for integrating data and more intelligence. I’ve got a lot of data, but no freaking idea what it’s doing.

Speaking of users–in their other role as customers–do you think they are getting better or worse treatment than they received from software vendors five years ago?
From the supplier side, they probably believe it’s unchanged. My guess is if you go into an SAP or Oracle or Microsoft, they feel as if their customer service and ability to patch and fix and upgrade and provide extended service is the same. Or that they have always cared about customers. The customer’s opinion is that it’s probably less (than that).

Why is that?
Their expectations have changed and they expect more for less money. In the late 1990s, they were looking for innovation. You had Jack Welch saying that everybody had to become an e-business and there was all this integration and the clients didn’t know what to do. So they looked for advice from vendors about how to automate their businesses. All of a sudden, now they think they know what they need to do and they’re the ones telling the vendors. So the vendors are being held to a higher standard.

Can you be specific?
If you take a company like SAP, it has a lot of resources and deep management to service customers. I think they innovative less than an Oracle, which has a lot of technology skills. I would put an HP and an SAP in the same camp, where they have lead market share and understand customers and will help them to do more as partners. Sun and Oracle are more technology suppliers and will always want to lead with technology and less of a service model. During a time like the late 1990s, I think you’ll find the Sun-Oracle model fits better. But in times like these, where the customer says, “I need more of this,” companies like SAP, HP and IBM will do better. They basically ask the question, “what do you want?”

Speaking of Ellison, there are two scenarios for Oracle’s acquisition bid: In one case, Oracle acquires PeopleSoft; in the other case it does not. Do you think he’s going to be able to pull it off?
This is becoming very difficult because of the personalities and egos involved as opposed to the rational. Presumably, Oracle can’t get PeopleSoft for the current price, and the only way is to spend $8 billion to $10 billion. What they acquire they will lose a big portion of.

So if Oracle succeeds in acquiring PeopleSoft, you don’t think they will be able to successfully retain those customers?

I don’t think many of those customers will stay. They went with PeopleSoft for a reason. At the beginning now, they’re being told (by Oracle) “We’re going to force you to (change).” I think Oracle would be paying a lot for whatever they end up with–though they’ll have a bigger applications business. My prescription would be that this all kind of go away because I don’t see shareholders of either company getting a good deal. This is ill-conceived.

You’ve been a supporter of Salesforce.com’s business model. Do you think that the ASP (application service provider) approach has specific appeal to certain kinds of customers or do you think it’s going to be bigger than that?
Yes, I am a fan. The reason the ASPs had a volatile history is because of the investing environment. The press thinks that the ASP model was born with the Internet. It wasn’t. But when 2000 came, it became difficult for venture capitalists to pour money into a business model that wouldn’t make money soon. That didn’t support the ASP model because you have to put in a lot in before getting back a return. But those that got built are doing pretty good.

What happens to a company like Siebel Systems in all of this?
They need to think about partners and how to build a bigger platform. They will still have lead market share in CRM (customer resource management) but will be under attack from ERP companies that are bigger and from below by Salesforce.com and Microsoft. Either Siebel gets acquired, merges or builds a larger platform. But I think they have to change.