SANTA CLARA, Calif.—The U.S. software industry is losing its dominant position in the global market as India and China graduate far more software engineers than graduate from U.S. universities, says Ray Lane, general partner with venture capital firm Perkins Caulfield & Byers.
U.S. software firms are not only facing more global competition than ever, but also face the daunting task of generating truly innovative new product ideas if they are going to survive amid the dominance of the three largest software companies, SAP AG, Oracle and Microsoft, said Lane, former Oracle president and CEO.
"I believe the enterprise software industry is at a crossroads. Its economic structure may be unsustainable," because most software companies can no longer afford to plow 50 to 60 percent of their revenue into sales and marketing or 25 percent into R&D, said Lane as he kicked off the Software 2006 conference here.
The profit pool for software companies has shrunk over the past five years, Lane said.
Almost 80 percent of the profit generated in the software industry is concentrated in three companies, SAP AG, Oracle and Microsoft.
More than half of the profit is concentrated in one company, Microsoft.
Only about 15 to 20 of the largest companies generate enough revenue and profits to enable them to sustain the level of reinvestment to let them perform the "continuous innovation" that allows them to maintain their dominant position in the software industry.
This leaves 5,000 to 7,000 software companies to struggle for the remaining slender share of profits, he said.
The U.S. software industry is facing more global competition that ever before, with both India and China working ceaselessly to expand their domestic software industry.
As a result, Lane said, the software industry "is not in a dominant position any longer" and will likely soon find itself at a distinct disadvantage because India and China are graduating 10 times the software engineers that the United States is.
Click here to read more about the IT industry in India.
If the United States doesn't educate more software engineers, then it has two alternatives: bring Chinese and Indian engineers to the United States, or invest to employ these same engineers in their homelands, he said.
Next Page: Investment trends.
Several years ago Lane said he concluded that there was no reason for Kleiner Perkins or other venture capital firms to have an investment presence in India and China.
"Now we have made investments in both counties. Other Venture firms are tripping over themselves" to invest in Chinese and Indian software ventures, whether they are for domestic markets or for technology exports, he said.
The venture capital industry currently supplies about $5 billion in funding for the United States.
Lane said he is "shocked" that venture capitalists are still providing this level of funding at a time when many startup software companies will struggle to achieve profitability.
Far fewer startups are going public since the end of the dot-com boom in 2000.
For some of the most promising startups, the best outcome is that they get acquired by larger companies, he said.
That leaves a lot of software startups in the "no man's land," where they have poor prospects for achieving profitability or being acquired before they run out of money, he said.
This problem could become even more acute if "a lot of that $5 billion goes to China or India—do the math," he said.
A related trend is the fact that that for the first time, private equity funding—that is, funding from individual private investors and banks—is providing more software industry funding than the professional venture capitalists are providing, Lane said.
Private equity may be picking up more of the slack from venture capital, he said.
But that doesn't relieve any of the pressure on software startups to achieve the means to pay off their investors, he said.
To survive, software companies have to think of new ways to innovate, and Lane said he is confident there are still plenty of business processes that IT hasn't yet found a way to automate.
Lane advised software entrepreneurs to look for product development opportunities in the six Web modalities defined by technology pioneer Bill Joy.
These include the "near Web," which people access at their desktop; the "far Web," where they access films and other entertainment; the "here Web," where they access information through mobile devices; the "weird Web" where people interact with cars, homes and electric appliances, business-to-business Web communications and device-to-device communications.
Furthermore, Lane offered seven laws to guide software entrepreneurs in their search for opportunities:
A new product should serve individual need. It shouldn't have to be sold to 1,000 people before it gains market value.
It's a technology can be virally adopted so it gains value from personal recommendations.
It should provide personalize information delivered in a useful context.
It shouldn't require data entry or training to be useful.
It should also deliver instantaneous value.
The idea should utilize communities, relationships and social networks.
And finally, it should occupy virtually no IT footprint.
Check out eWEEK.com's for the latest news, reviews and analysis about productivity and business solutions.
Channel News and Analysis 
