Larry Ellison: The Old Valley Is History

Oracle Corp. CEO Lawrence J. Ellison has always been a provocateur. Whether it’s trading barbs with his rivals at Microsoft Corp. or mocking Wall Street analysts enamored of Web startups, Ellison has never minced words. In a June interview with senior writer Steve Hamm and a July interview with Silicon Valley correspondent Jim Kerstetter, the software executive once again ruffled feathers with his take on the future of technology.

Why do you think the tech industry is mature?
There used to be hundreds of railroads in the U.S. And then there was a crash. And a lot of those railroads merged. Interestingly, after the mergers, the railroads were actually more efficient and delivered more value to their customers than they did during the go-go wild fantasy days of the railroad. The same thing was true in the automobile industry.

Let’s think more recent. I remember sitting at dinner at my house with Michael Dell, trying to remember how many PC companies there used to be in the U.S. I remember saying: “Michael, there must have been at least 50 PC companies.” Michael said: “Fifty? There were 500.” The industry starts out with lots of startups, and then companies vanish, and there are a handful of winners. There’s General Motors and Ford (F ). There’s Dell and HP. And I think there’s going to be Oracle, Microsoft, SAP (SAP ) and maybe IBM in enterprise software. There aren’t going to be hundreds of enterprise software companies.

Who will be the winners and the losers in this consolidation?
The largest companies win, and the small companies lose. Dell and Hewlett-Packard. Microsoft won in the PC software industry.

How will this affect innovation?
Innovation increases. Big companies do at least as good a job of innovating as little companies. Marc Andreessen said innovation was driven by 19-year-olds in startups. It’s a very interesting perspective. It shows how young Marc is. Most of the innovation in our industry has been driven by fairly large companies. Take IBM. IBM invented the disk drive, core memory, and fractal geometry, for God’s sakes. IBM has been a cornucopia of invention. And they stand in stark contrast to a much younger company, Microsoft, which has done no innovation at all.

What technologies are you excited about now?
We are the leader in bio-informatics, and a lot of things there are exciting. Sure, Wi-Fi, even 3G, is fairly cool, albeit expensive. But the thing I’m most interested in is software as a service. That idea that every customer who wants to do accounting on computers, or every customer who wants to do inventory, or manufacturing, has to figure out what computer to buy, what operating system to buy, what Cisco router and switch to buy, what database to buy, is just nonsense.

0333_120covstoCompanies should be experts in their business, and computing should be available on the Net as a service. So more and more, our business is changing from selling our applications to our customers to: We buy the computers, we run the applications, and you use it. We’ll be the experts. And you just pay us a monthly fee. That really is utility computing.

You’ve been saying that Silicon Valley as we knew it is dead. What do you mean by that?
The idea that Silicon Valley is going to come back and be anything like it was in the past with hundreds and thousands of startups, the Silicon Valley of old where people talk about deal flow and venture capital, a new company every day — that’s over, and that’s a good thing.

What should startups be thinking about, then?
There will be innovation. But it will be in molecular biology, wireless, smaller, faster, cheaper chipsets for wireless.

Do you think the Valley can continue as the center of tech innovation?
Can it move from software to molecular biology? Yes. But it’s a very different metabolism than when enterprise software was hot. There will be some innovative little companies like NetLedger [Ellison owns a controlling interest in NetLedger] showing up — hot little companies offering software as a service for small business. But by and large, the really innovative companies will not be software companies. [Innovation] will move to a whole new field of molecular biology and life sciences.

Some economists say tech can’t grow at its historic levels, around 10% a year. Do you agree?
I actually think the high-tech industry shouldn’t grow. I think companies spend much too much money already on computer systems. I think my industry is deflationary, and prices will come down. Let me be precise. The winning companies will grow quite nicely. But the industry in total will shrink. People will spend less and less money on IT as it becomes more efficient and less expensive. So at the height of the madness in the year 2000, 50% of capital expenditures were on tech. That’s insane.

Is a tech rebound in sight?
I don’t think that there’s going to be a turnaround. This is it. This is a new baseline. I don’t see a lot of companies turning in great quarters. I think people are holding their expenses and turning in decent quarters. People are comparing the terrible year we had last year to this year. But there is no turnaround.

To what extent are your views colored by your own maturing markets — databases and enterprise apps?
That’s an interesting question. Our profit margins in the last quarter were 45%.

The profit margins were great, but I’m talking about top-line growth.
We did have a little bit of top-line growth. Not much. But don’t fall into that Silicon Valley trap — who needs profits? The only thing that matters is profits. I don’t know why it took so long for people to figure out Oracle generates $4 billion in cash a year. We’re wildly profitable. The only business that’s better is Microsoft, and they have a monopoly.

You’re increasing your presence in India. What sort of jobs are headed to India?
It’s not just software engineering. I think accounting jobs are headed to India. I think accounts payable clerks, accounts receivable clerks, and CPAs will be in India. It’s not just IT. Once you have a global computer system, you can locate your labor anyplace. We went from these national IT systems to a global IT system, and it gives us tremendous flexibility on how we support our customers.

If you were starting all over again today, would you start your company in Silicon Valley?
Silicon Valley is a great place to start today. There’s tons of engineers that are unemployed. There’s tons of office space for a buck a foot. I can’t think of a better place to start than Silicon Valley today.

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