Technology Hits a Midlife BumpBy STEVE LOHR
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
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.
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.
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."
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.
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."
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.
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."
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.
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
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.
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
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.
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
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.
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.
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."