Cloud threatens to rain on Silicon Valley giants

A decade ago, Larry Ellison, the outspoken head of Oracle, declared an end to innovation in the software industry. No big new companies, he told the Financial Times, would ever rise up to challenge companies like his in the market for so-called "enterprise" software, used by companies and governments everywhere.

That message doesn't seem to have got through to the restless venture capitalists and entrepreneurs of Silicon Valley. Some serious amounts of money have been staked of late on the assumption that Mr Ellison is wrong, and even he is now having to move smartly to stay ahead.

This week it was the turn of cloud storage company Box, which has just raised $125m. In all, Box has now raised $280m – more even than its better-known competitor, Dropbox – and carries a private valuation tag of $1.2bn.

Such numbers give the lie to one of the prevailing myths in the tech world: that anyone with a laptop and an account with Amazon Web Services can turn themselves into an instant software multinational. Making it in enterprise software has always been a long and expensive slog.

At least the system for financing and building software companies like these seems to be working well. While Wall Street has been rethinking its recent enthusiasm for Facebook and all things to do with social media, its affection for enterprise software is untarnished. The stars from the latest round of initial public offerings – all of them trading comfortably above their offer prices – are companies such as LinkedIn, whose main value is as a hiring solutions provider to businesses; ServiceNow, which makes software for managing IT systems; and Splunk, a service for handling large volumes of data.

While not getting as far as a public listing, others have been selling for billions. The latest deals include VMware's purchase of Nicira, which makes software to automate data centres, and Microsoft's acquisition of Yammer, a networking and collaboration service for office workers.

Two interdependent forces have served to open up the market that Mr Ellison declared to be closed a decade ago. One is the cloud. Accessing a service online, rather than having to install software on a company's own computer, not only changes the economics of owning software, it also opens a new route to customers.

The resistance of many in the corporate world to entrusting their data to cloud services is fast eroding. One sign of how much attitudes have already changed among traditionally conversative chief information officers: the person representing General Atlantic on its Box investment is Gary Reiner, a former chief investment officer at General Electric.

The second force is consumerisation. Individual workers are choosing what to use rather than taking what their IT departments decide to give them. This is doing to the enterprise software business what smartphones and tablets are doing to hardware: Box, Dropbox and Yammer are all companies that have bypassed the IT department to reach workers directly.

Whether any of these companies can one day grow into a giant to rival Oracle is a different matter. Most will inevitably be absorbed as bigger companies look to extend their own capabilities. Yet the cloud does more than open the way for a new generation of applications: it also changes the technological foundations on which IT systems are built. This is where the true disruption lies.

VMware, a company founded only 14 years ago on the idea that servers could be used more efficiently if treated as pooled resources rather than standalone machines, is the first of the new cloud infrastructure companies to have a shot at the big time, with a stock market value approaching $40bn.

Other software start-ups are no longer building their own services on top of software from companies such as Oracle, says Roman Stanek, another cloud software entrepreneur. His company, GoodData, which last week doubled the amount of capital it has raised to $53m, relies instead on a new generation of cloud technology. Start-ups like these, he says, show what all businesses will one day be doing.

Mr Ellison is working hard to keep up. This week, he bought a data centre automation company that closely resembles Nicira, adding to a spate of cloud purchases. Having publicly ridiculed the very idea of the cloud a few years ago – a classic diversionary tactic from an arch-tactician – Mr Ellison is rebuilding Oracle to reflect the new realities.

The trouble with technology revolutions, though, is that they have a habit of devouring their forebears. If Mr Ellison and his ilk are to avoid this fate, they will have to move fast.

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