The End of Software – Timothy Chou

January 22nd, 2007 |
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Timothy Chou, author and entrepreneur, is the latest guest in this series of discussions with thought leaders, presented by WebEx. Chou was the president of Oracle’s On-Demand business from 1999 to 2005, the author of the book The End of Software, and he remains an influential figure in the on-demand world.

Transcript:

Host: Paul Lancour – PodTech

Guest: Tim Chou – Author and Entrepreneur

Tim Chou – Author and Entrepreneur

The idea that they are software companies! You could argue, if we were sitting here 10-20 years from now, we maybe looking around going, you had what?

Paul Lancour – PodTech

Welcome to Connecting with Revolutionary Minds. Conversations with IT and business leaders from WebEx. In this series of Podcast you’ll hear from IT and business pioneers working on the leading edge of the On Demand Business. I’m Paul Lancour and for this Podcast, Tim Chou, author of the book ‘The End of Software’ stopped by the PodTech studios for a wide ranging discussion about On Demand software and the future of computing among other things. I started by asking Tim to give us a little of his background.

Tim Chou – Author and Entrepreneur

I’ve been in the software business for over 20 years. I’ve worked at companies like Tandem and little ventures called Reasoning and most recently, I was President of Oracle’s On Demand Business for the past five or six years.

Paul Lancour – PodTech

And now you’ve written a book about ‘The End of Software’ having spent your entire career working with the software industry, what are you talking about?

Tim Chou – Author and Entrepreneur

Yeah, why would you do that, right? You know I think the title is probably appropriate because I think for the first time there has been an economic shift in the software business. I think that has clearly been a transformative effect in the hardware business, the example I always use is that, well, Intel once upon a time was a little baby hardware company, no one cared much about. Today, right now, since every market process — every processor in every server is an Intel processor, how did that happen, right? Well, that revolution was a revolution of economics, simply, right? They were able to take cost and take it down, down, down; function up, up, up and by virtue of staying on that relentless path in essence re-evolve the entire industry.

This movement to quote software as a service or software On Demand is no different, it’s fundamentally an economic shift, right. We are changing the fundamental economics of the software business, which is why the old traditional software world will end, has ended, and a new one will emerge.

Paul Lancour – PodTech

But in the same way that the chip evolution was market-driven, this is not necessarily anybody’s grand-design, this is a market-driven change. This is as technology advances and as users change what they ask for from technology, the market is following that. Is that a fair parallel with the chip industry?

Tim Chou – Author and Entrepreneur

I think it’s a fair parallel to refer to the fact or the idea, that in essence by giving people more technology and lower and lower price point, more and more people can take advantage of it. That certainly has happened with hardware technology. But I think in the software world — here is a simple example, I think most people will grasp, I always say, well a lot of people know what eBay does, right? eBay, let’s put it back now 15 years ago, prior to the Internet, could you have found a couple of programmers to write auctioning software? I said, well yeah, I mean it wasn’t that hard, they would have written C++ or something. Okay cool. Next step, how are we going to get our auctioning software to everybody? Oh, I have a really great idea, let’s put it in the Sunday paper, right.

Okay, we’ll put it in the Sunday paper. What happens on Monday morning? My bet is, the phone is going to start ringing, and the questions going to be asked, well shoot! You know my Windows 95 machine used to work and I downloaded your software and you know still it doesn’t work and my Shockwave dll is broken or blah…blah…blah… right? Oh, hey no problem, we’re software guys, we know how to deal with this, we’ll hire a support organization, they’ll answer the phones, they’ll sort this all out, right? Okay cool. Let’s keep going forward. It’s a year later, my great product manager shows up, Lisa, and she says, I guess, really cool idea, the Buy-It-Now function, let’s get it out to everybody.

Figure out how do we do that? No, well, Sunday paper! Right, all right we are back in the Sunday paper. Monday morning, my bet is, the phones ring again, it’s my Windows 2000 XP configuration with my Linux Box doesn’t work anymore and — no problem we’ll hire more support guys, we’ll move some of them to India, no big deal.

Okay that’s a software business we’ve all been good at this, right. My conjecture is that, that business eBay could never have existed because the cost of an auction would have been thousands of dollars to compensate for the cost structure of what I just described. So, the ability for eBay to be delivered as a service to auction software in the story to deliver as a service is fundamentally, I’ll say, at least ten times cheaper than it would have been done in the old fashion way. In the technology business, anytime you change the economics by an order of magnitude, you change the industry and we’re already seeing that.

Paul Lancour – PodTech

So, this evolution has been going on for a while and I know it’s a kitschy title to talk about the end of software, but is it in fact that strong of a shift to something — this is an evolution that’s been going on, but it is something happening right now that — I mean software is still involved in this and there are plenty of programmers, you’re going to still have work to do, but it’s — I guess the question I’m asking is, is there a tipping point that we’ve reached rather than just the gradual evolution? Is there a — as they say, a paradigm shift it’s going on right now?

Tim Chou – Author and Entrepreneur

Well, I think the paradigm shift is going on, has been going on, you could make a conjecture that every major software company that has gone public in the past ten years, whether that’s WebEx or eBay or Amazon etcetera, which I all count as software companies have all been software as a service. We’re already shifted out of the world of the old fashion traditional software. I think what you’re saying right now is that the traditional world in essence has moved into a model of consolidation and in essence atrophy, it’s just sitting there, most people will say, well enterprise software, business software is dead, and it is in so many different ways: it’s atrophy, it’s over. What we’re sitting in the middle of is a transition that’s already happened on the consumer side by the way, we just used eBay, Google, Amazon, any of these guys, it’s already happened on the consumer side.

What the real shift is now is it’s happening on the business side and new companies are being created whether it’s like Concur and Enviance etcetera all building up in this model. I think that shift has happened. We actually — in my opinion, we have shifted into phase one of this already, meaning we have an operationally more efficient model. It is manufacturing wise more efficient. That’s not the end of the story. When you look at and let’s just use Salesforce as an example; that is really operationally more efficient than Seibel. It is cheaper to deploy, to manage etcetera, etcetera absolutely, right. Intellium right now etcetera.

The next step of this evolution is really when I’ll say; you begin to integrate data and software together. So, let me paint you a spectrum here. You got Siebel in the traditional world, Salesforce in version one, phase one of this new world of software as a service and Amazon in phase two, because most people, when I look — well, is Amazon a software company? They all look you like, ‘No’ well, wait a minute. If you go to Amazon right now, okay I know they have some loading docks with some books in it and what not, but you look at the core of what it is, it’s a software company.

Paul Lancour – PodTech

But from a user’s point of view they don’t think about it in terms of software it’s a bookstore.

Tim Chou – Author and Entrepreneur

Amen! and I think that’s because what happened is these two worlds have connected, meaning the world of data, meaning when you look at Amazon, you’re not like going oh let me enter in the user ID, the VIN number etcetera, etcetera, you look there was the book, right and I want to go by the book or I want to read about the book. The software in essence has disappeared, this is where I think we’re now transitioning to the world where in the hardware world, silicon is a very important constituent or part of building hardware, very important, but who the hell cares about it? I think that’s where we are headed to. I mean software is a very important, but who the hell cares about it? It will completely disappear. The idea that there are software companies, you could argue, if we were sitting here 10-20 years from now, we maybe looking around going, you had what? It’s like, oh I know there are silicon companies but who the hell are they?

Paul Lancour – PodTech

Well, is this — I think this happens with a lot of technology and in the early stages, the early adopters or people who are more technically adept, but ultimately as computers become more and more flexible and more and more ubiquitous, the average person doesn’t care about computers anymore than they care about how the television signal gets into their house. So, I know what they want to watch and so it becomes user-driven, I think that’s what we’re just talking about anyway but it becomes a user-driven rather than a technology-driven medium.

Tim Chou – Author and Entrepreneur

I think user-driven in a very importantly different way, let me give you an example, I was helping a company out about a year-and-a-half ago who was in the — it’s called the Incentive Management business. So, it’s like managing what Salesforce compensations are like, it’s traditional software company, right.

So, the CEOs like, what should I do and I’m going to just move to software as a service, get out of the traditional world, move to software as a service. Okay great, six months ago I’m talking to him and he said, “Hey you know, we made the transition, you know we’re now software as a service,” I said, “That’s cool.” He said, “What’s next?” and I said, “Well, what’s next is that as I said the data and the applications come together, these are indistinguishable from each other” and he goes, “Well, that’s really weird, because you know what question I get asked now the most is what Salesforce compensation plan works the best? What Salesforce compensation plans work the best?” He is not — as a traditional software company, he would never been ask that question.

All you’ve been asked for is, I need this feature to be able to give my sales guys a 10% kicker in the last quarter of the month or some such thing. He is not being asked a very important question. You think about the value of the answer of that question; it’s gargantuan, but it’s only possible because the software and the information have now become one and I think that is exactly — we have been building capability to store information for years.

Now, it’s really the defragmentation of information and of people that is a huge step forward and we only need to look at Google as a simple example of this. That is what it is. It in essence is saying, I’m wanting to defragment information and give you knowledge, there is a shit load of software — once again most people don’t think that Google is a software company. Go down to Mountain View and walk around; I’ll tell you most of those guys are programmers.

Paul Lancour – PodTech

So, are we running into a problem here where you’re going to go to somebody who’s designing software and say to them what’s the best compensation plan for my Salesforce? Are you asking the right question to the wrong person or do these companies need to evolve in such a way that they can think differently?

Tim Chou – Author and Entrepreneur

Companies are going to have to evolve. I think new generations of companies are being created as we speak, where it’s about knowledge and information much more than it is about a hunk of software, much more than it has to do with processing of financial transaction. The history of computing is, it came from basically being a large calculator to basically being a giant spreadsheet that keeps a nice record of how many dollars I spent. We’re way, way beyond that, and the world we’re headed into is not a world of spreadsheets and what not; it’s a world of information, knowledge and whole new ways to work.

I think one of the things that people have not spent much time on at the enterprise world is relationship of what is going on in multiplayer gaming. Multiplayer gaming is another fascinating example, what the hell is that, it’s software, it’s a software company. Nobody would call World of Warcraft a software company by conventional standards. But what is it there, but an immense amount of software wrapped with an immense amount of content and information. But the paradigms that are being established within those worlds to allow — one of the ways I describe – oh no, your listeners may not know much about World of Warcraft but for those who do, my abstraction of World of Warcraft is quite simple. It’s an environment in which a group of people from around the world who do not know each other, come together to achieve something and go away.

I’ll tell you if you ask every manager of every — in anything, software or hardware, trucks, I don’t care and ask them what their number one challenge is in the modern world; it is precisely that how do I get group of people together from around the world, to cooperate and achieve something and go away, and it is happening inside these virtual worlds.

If we start to learn there’re so many aspects of what is happening in the — what I would call the Consumer Internet that can be brought into morphed, extracted from, that world I’ve moved into the world of business that have game changing so over years but have huge shifts and we are at the very, very, very, very, very beginning of this, and software as a service phase one, which is the one that we are in right now, I think is going to give way to the next step where information and data come together where verticality is important, right. Where if I can defragment information and people, I change the way business is done.

Paul Lancour – PodTech

Can you be more specific about this? I can understand what a bunch of kids in their basement playing endless hours of World of Warcraft is like, how will that apply to the business worlds directly?

Tim Chou – Author and Entrepreneur

Let me talk about the problem or the challenge or the opportunity of the idea of defragmentation of information and people. Let me put in the context of venture that’s been worked on out right now called Open Water. In Open Water one of the things that working on is, really the problem today. Let’s start where problem is, how much it costs service software on the planet? A servicing and managing software and I’ll put PCs, servers, big IBM mainframes in the background. The number is about $80,000 a second, spent by corporations around the world, managing existing systems in about — at this point in time in the world-wide economy is $2 trillion. Now, $2 trillion is being spent fundamentally on one thing — this is going to sound really stupid but it is really on one thing and it’s really on the ability to find a piece of information or a person and that is it.

I’ll give you some simple statistics. This is actually a study that was done at Oracle about two years ago on the number of service and support transactions coming into the systems. There was about a 100 million transactions that came in one year. Now, most people think that out of those 100 million transactions, that a lot of have to do with bug fixes or software. The truth of the matter is, the number was less than 1/10 of 1%.

Now, think about what I actually said, that’s out of 100 million request for information coming into Oracle. Now, there is tons of questions and request for information coming in inside Citibank or inside a Unocal or whatever. Probably in order of magnitude beyond that. So, we’re talking about a billion of these. If you did that statistic, it is less than 1/100th to 1/1000th of a percent. So, what the hell is all this stuff? It’s basically trying to figure out how to attach an optical cable to my iPod, try to figure out how to make my WebEx session run faster. So, they’re trying to figure out information, but it’s hugely-fragmented, it lives in 100s of different places. It’s not that the information is not known; it’s that it lives in 100s of places in 100s of people’s brains.

So, at the end of the day, we already know the power of defragmentation and I’ll make it even simpler than World of Warcraft. Look at Google, all that Google has done has fundamentally made it so that I can defragment an interesting amount of public information, in some useful way in a very wide context and we see the power of that. If I can begin to defragment information in a more specific domain and if I can defragment people — we all know, I mean what ends up happening, people joke about this, but most kids my age serve as their parents’ IT department.

We’re the ones that get called up, hey what’s up? Well, are we really the best people? The answer is no, but how would I know, how would I know who these people are and how would I begin to bring them to collect together in a collaborative environment? I think that’s where when you start to look at the guys like — the technology that WebEx brings to the fore, which is really to say, “Hey look, if I can defragment the people and their interaction models,” so we’ve all learned that — we’ve all come from the age where the old people, where we used to write letters — we don’t write letters anymore, well so we write email but our kids don’t write email, they do IM, and they do chat, and now we’re doing Skype and we’re doing Skype conference calls and etcetera, etcetera. Can I bring together, a collaborative environment which allows people in a multichannel way and where that’s occurring in a virtual world such as Second Life, or whether that’s occurring in a Web World, whether that’s occurring by me sharing applications.

If I can begin to defragment information and people in a collaborative environment, I can fundamentally, in this one little small problem I talked about, which is $2.7 trillion of spend every year, make a huge dent in that, because if you think about what’s going on in the modern world, the modern world is moving all to a service based economy, manufacturing is not the game anymore, it’s all a service based economy, if it’s a service based economy it’s all about information and people. If I can defragment information and people in useful and productive ways and segments etcetera, that’s the backbone of the entire future economy frankly.

Paul Lancour – PodTech

What can our listeners take away from this in terms of taking action? Is there something I should be doing right now with this as the future, in order to position myself to take advantage, full advantage of the future of computing and of networking?

Tim Chou – Author and Entrepreneur

Well, I think probably that statement goes to different people as different things. To the technology community, particularly those in the enterprise side, my counsel is get smart. Start learning what’s going on here because it is game changing, whether that’s becoming smarter about what’s going on in multiplayer gaming or what does it mean to defragment information in an unstructured world, get smart, because this is going to change fundamentally everything it’s going on in business software that we see.

To the consumer of the stuff I think you’re already seeing it. There is not a one of us who’s not already a consumer of Google and eBay. We already experience what I’m talking about. I think it’s up to them and to new generations of workgroups there to begin to redefine how they do work, I mean whether I’m a Ford Motor Company or I’m a 35% startup sitting in Palo Alto. How I redefine, how I do work in this new world, how I defragment information and people in a different way? I challenge all those people to rethink that in a networked environment.

And to the investors, a lot of people say to me, why enterprise software is dead and I well, yeah, I guess by the old definitions of this absolutely, but the software business is not dead, it’s just changing and it’s changing in dramatic ways and I think those that are starting to understand how it’s changing can stand to benefit an enormous amount.

Paul Lancour – PodTech

Tim Chou, thanks a lot for taking your time out to talk.

Tim Chou – Author and Entrepreneur

You’re welcome.

Paul Lancour – PodTech

Join us next time right here for our next Podcast in the series Connecting with Revolutionary Minds from WebEx. Thanks for listening.

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