Consolidation 2.0?

22 November 2007

Web 2.0 start-ups continue to catch the eye of investors, and the big software vendors are starting to pay attention. Is their new interest a threat to software entrepreneurs - or an opportunity?

Andrew McAfee, associate professor at Harvard Business School, has spent a long time looking at how Web 2.0 technologies could be used in business - and for the most part, he likes what he sees. The idea of bringing together collaboration and data gathering techniques from the traditional enterprise software environment with the 'unstructured' world of wikis, blogs and social networking presents huge opportunities. But as the two worlds merge, which players in the software development community are going to win?

Given that he was speaking in a recorded video interview for Oracle's annual OpenWorld conference in San Francisco last week, it's probably not a great surprise to hear that McAfee rates Oracle's chances pretty highly. As he pointed out, companies that come from a web background aren't used to dealing with the structured world that Oracle & Co inhabit - and although he didn't say as much, most start-ups lack the resource to bridge the gap back to the enterprise environment. By contrast, even if the likes of Oracle, SAP and Microsoft aren't yet blazing a trail in the Web 2.0 environment, they at least have the time and capacity to learn what's going on over the other side of the fence, and can clearly build and buy their way into the space.

The issue is more than just an interesting sideshow for IT industry watchers - it's important to any entrepreneurs that are gambling on 'Enterprise 2.0' or 'Office 2.0', two of the terms commonly used to describe the adoption of the latest generation of web technologies in the business environment. With 2.0 technologies still seen as a hotspot for investors, there are big potential opportunities for anyone who can crack the business angle. According to a McKinsey survey of IT directors, more than 75 per cent of IT executives interviewed earlier this year plan to maintain or increase their use of new collaborative techniques, including blogs, wikis, podcasts, RSS, social networking and above all, 'collective intelligence' (defined as the combination of communities and content).

As McAfee points out, of course, it's still early days for the business side of the 2.0 world equation - 'we don't know how easy it is to deploy the technology,' he says, 'and it's not exactly clear [what] magnitude of benefits we'll get from them'. There are also potential barriers to adoption - for one thing, enterprise 2.0 technologies need to be very easy to use to stand any chance of succeeding, because they're displacing an existing form of collaboration via email. But the potential benefits are also big, not least in providing new modes of collaboration and giving people a place to express their views.

That message now seems to be filtering through to companies. In the course of his research, McAfee has seen adoption of Web 2.0 technologies in a wide range of industries and from companies of all sizes. They include sectors you'd expect to see jump in early - not least the technology space and the financial services arena, where there's a big need for information sharing. But they also include a number of old-school industries. As McAfee points out, it's not necessarily the type of company that matters - it really comes down to the company's leadership.

With this kind of potential market to pitch for, it's little wonder that Oracle devoted several sessions at OpenWorld to explaining how it plans to build Enterprise 2.0 technologies into its own software platform, from its middleware and database to its applications.

Clearly, the emergence of the industry giants in the Enterprise 2.0 space presents both an opportunity and a threat for start-ups. Although their R&D budgets are spread across a wide range of products, in those sectors where they choose to focus their development efforts they'll clearly dwarf their smaller rivals - and better still, they have a ready-made customer base to sell to.

But at the same time, the top enterprise software players are hardly averse to buying rather than building. Oracle alone has been on a phenomenal spending spree in recent years to acquire enterprise software suppliers such as PeopleSoft, Siebel, and Hyperion. And the recent pace of change in the business intelligence market - where three market leaders have been gobbled up - indicates that acquisitions remain high on the agenda. While Web 2.0 purists may disdain the old-school, structured software world, money does talk - and if you have an attractive technology that the big players can easily assimilate, it's probably not a bad spot to be.

By Keith Rodgers, Webster Buchanan Research