Ellison says tech industry as large as it will get

Wake up, Silicon Valley. Your misspent youth is behind you.

That's the unlikely message from Larry Ellison, chief executive of Oracle Corp. and a longtime captain of the valley.

Ellison disputes the popular, romanticized vision of the computer industry as always growing and reinventing itself. He says the high-tech world, now in the throes of a devastating downturn, might not be immune to aging.

"What's going on . . . is the end of Silicon Valley as we know it," the co-founder of the world's second-biggest software company after Microsoft Corp. told a group of Wall Street Journal editors and reporters. "The next big thing ain't computers." Instead, he says, it's biotechnology.

Ellison, sounding like a modern-day Cassandra, paints a dark vision of the computer industry's future: increasingly standardized products with little distinguishing technology and thin profit margins. Sweeping consolidation, prompting the death of 1,000 tech companies. Fewer startups. And a handful of category-dominating winners that will control innovation.

"There's this bizarre notion in the computer industry that we'll never be a mature industry," Ellison says. In his view, the industry "is as large as it's going to be."

The Oracle chief says his analysis is based on economic principles that he jokingly suggests should win him the Nobel Prize: "I call it "specialization of labor' as well as "economies of scale.' "

Among his predictions: Cheaper computers that use the free Linux software and other technical efficiencies will drive down prices. More software development will move overseas, seeking lower-cost labor. Maturation of the industry will lead to bigger companies, which will offer a wider range of products and take more market share from everyone else.

All this is good for customers, he says. Technology companies will be forced to simplify their products and services. They will have to innovate and be smarter about how they operate, he says.

In short, Ellison says, Silicon Valley finally is discovering that it is subject to the same laws as other businesses have been for centuries. "These are Industrial Revolution concepts," he says.

One anomaly in this vision is Microsoft. Since it has the enviable position of being the dominant provider of computer operating systems, it can do what it wants, he says. A longtime bitter rival of the Redmond, Wash., company, Ellison often has gone out of his way to bash or challenge the company, ranging from supporting Java software, which was intended to be an alternative to Microsoft's Windows, to creating startups that support the idea of less reliance on the personal computer, Microsoft's bread and butter.

"How did Bill (Gates) handle the recession? He raised prices! Why didn't I think of that? He's a genius!" Ellison says, adding: "When we raise our prices, people stop buying from us."

There will be survivors in his predicted industry shakeout, of course. Beyond his own company, which makes relational-database software that helps businesses store and analyze customer records and other data, Ellison picks familiar names such as Cisco Systems Inc., International Business Machines Corp., Dell Computer Corp., Intel Corp., SAP AG, Yahoo Inc., eBay Inc., Amazon.com Inc. and Microsoft as winners.

Unlike most of his peers, however, Ellison also is willing to name likely losers, such as onetime business-to-business software darlings Ariba Inc. and Commerce One Inc. "One-trick ponies" _ narrowly focused softwaremakers such as BEA Systems Inc. and Siebel Systems Inc. _ are on the cusp of sliding, he contends.

Granted, these could be raving reflections on a maturing industry by a man increasingly fixated on defying his age. A fitness buff who looks a decade younger than his 58 years, he commits about $20-million a year to fund research on aging, as part of some $50-million he commits a year to his medical-research foundation.

His predictions also are borne of the confidence of a self-made man. Raised by an aunt and uncle in Chicago, Ellison attended the University of Chicago and the University of Illinois at Urbana-Champaign but didn't graduate from either. He moved to California to work as a programmer at various computer companies before co-founding Oracle in 1977. The company's stock has made him a billionaire.

These days, he unabashedly enjoys the finer things in life: He owns a pleasure yacht called Katana and a racing yacht, and last year he put up about $80-million to finance his America's Cup team. He owns three palatial homes in Northern California, including a Japanese-style mansion that is being built in a traditional style without nails. He has been married and divorced three times; he's currently engaged to a novelist.

He also is known to be somewhat of a daredevil. A competitive world-class sailor, he nearly died in the 1998 Sydney-to-Hobart ocean race in which six people perished and several boats were destroyed in a storm.

Ellison has a long record of contrarian views about technology _ better known for their boldness than their prescience. In 1995, he predicted the death of the personal computer. He backed two companies to create slimmed-down "dumb" terminals called "network computers" that would let users do all their computing over the Internet. One morphed into Liberate Technologies, which no longer makes such devices, and the other, New Internet Computer Co., failed.

His pessimistic outlook is heresy in most of Silicon Valley, where optimism fuels the industry as much as venture capitalists' cash, and the revered icon is a creative startup in a garage, not a tech behemoth.

"Innovation doesn't come from the big company. It never has and never will," says Marc Andreessen, co-founder of Internet pioneer Netscape Communications Corp. "Innovation is something new that looks crazy at first glance," says Andreessen, now chairman of Opsware Inc., which makes software to manage computers in data centers. "It comes from the 19-year-olds and the startups that no one's heard of."

Even those sympathetic to some of Ellison's views say his outlook is too dire. Hewlett-Packard Co. chief executive Carly Fiorina believes so firmly in an impending wave of consolidation that she endured a bitter seven-month proxy battle to buy Compaq Computer Corp. "In this era of technology, bigger is better," Fiorina says, adding that business customers want tech suppliers to have a broad suite of reliable products, which means less "experimentation."

But Fiorina doesn't think tech is in decline. She thinks the industry is likely to grow twice as fast as the rest of the economy. It just won't grow five times as fast, as it did in the late 1990s.

Others in Silicon Valley respond to Ellison's remarks with the verbal equivalent of rolled eyeballs. Gary Rieschel, a venture capitalist at Mobius Venture Capital, says Ellison is "out of his mind" to think innovation will slow or stop, though he agrees that many tech companies founded in the late 1990s will go out of business.

"Maybe he missed an appointment with his therapist," quips Tom Siebel, a former Oracle executive who later founded Siebel Systems Inc. to compete with his old boss. Siebel agrees that many tech companies will fail, although he dismisses Ellison's dire outlook for Siebel Systems as "a little premature."

Siebel says Ellison is overreacting to the long tech slump. "This is a cyclical event. It's a market downturn . . . and the economy recovers," Siebel says. "It happens every 10 years."

Siebel points out that Oracle itself narrowly survived a crisis in 1990, during the last big tech downturn. That year, Oracle reported its first quarterly loss since going public in 1986. Forced to slash expenses and staff, Oracle was close to running out of cash. Its shares sank to near $5 each, before Ellison arranged a loan from a Japanese steel company.

"He was on the brink," says Mark Hoffman, chief executive of Commerce One. "He obviously brought it back, to his credit, and built an incredible company."

Ellison says the circumstances were different then because the market wasn't as competitive or crowded. "When Oracle got in trouble, we were the No. 1 relational database company in the world. We didn't have any big competitors coming after us with a vengeance," he says.

Hoffman adds he is "quite optimistic" about his company, whose shares have plunged from a split-adjusted $1,356 in March 2000 to $2.21 in 4 p.m. trading Monday on the Nasdaq Stock Market.

Of the other companies on Ellison's likely casualty list, BEA chief executive Alfred Chuang says he "couldn't be in more disagreement." Ariba declined to comment.

Ellison thinks tech firms have sown the seeds of their demise by developing ever-more-complex "solutions," before identifying problems. Then, he says, tech companies try to fob these tough-to-use products onto unwitting customers. "We became the largest industry in the world by selling things that people didn't want to buy," he says.

Critics, of course, say this is precisely what Oracle has been doing since the company was founded. (An Oracle spokeswoman responds that the company has always tried to simplify products and services, when possible, to make them easier to use.)

Venture capitalists compound the problem, Ellison says, with a herd mentality that results in funding too many companies chasing the same idea.

But Oracle isn't above chasing technological fashion. The company has been moving aggressively in recent years to support Linux, an operating system maintained by a global army of volunteers. Ellison sees Linux as a competitive weapon against Microsoft. "You just can't fight it," Ellison says of Linux. "You embrace it or you die."

Oracle itself may be vulnerable to the same kind of "open source" technology _ cheap or free software whose underlying code is available to all users to freely customize. An open-source relational database called MySQL is gaining a small following among companies that don't like paying big fees to vendors such as Oracle.

Eric Schmidt, chief executive of Web-search company Google Inc., says Ellison has correctly diagnosed Silicon Valley's challenge. He says tech is plagued with chronic overcapacity, similar to the airline industry, because of rapid technological advances. But Schmidt thinks Ellison has the wrong prescription. "The only solution is to come up with grand new visions, which we're particularly good at," he says.

How to survive the coming shakeout

Larry Ellison says successful tech companies will be those that:

Recognize that simpler is better. He hopes to switch Oracle's operations, which span 160 countries, from 1,500 servers to just 24 Dell Linux boxes.

Don't reinvent the wheel. To fly to California, you shouldn't have to design your own plane, build your own airport and learn to fly. But that's how much of the tech industry operates.

Take advantage of proven technology. "Every child's unique. Every computer doesn't have to be."

Remember specialization of labor and economies of scale. "Companies will start doing less of their own computer operations and outsourcing more."

Take cues from the customer. "We became the largest industry in the world by selling things that people didn't want to buy." That has to stop, he says.

Larry Ellison's pessimistic outlook is heresy in Silicon Valley, where optimism fuels the industry as much as venture capitalists' cash. Even those sympathetic to some of Ellison's views say his outlook is too dire.