Close the Patent Office?

Rumor had it that, back in 1899, U.S. Commissioner of Patents Charles H. Duell declared that everything that could be invented had been invented. In actuality, Duell’s supposed comment and his recommendation that the Patent Office be closed down proved an urban myth. Of course, that didn’t prevent the metaphor from being abused by pundits such as yours truly, or by presidential speechwriters.

Next week, debate over that urban legend -– as applied to the software industry -– will be the central theme of Software 2007, an annual gathering of the folks who buy, sell, and run software companies. Specifically, it’s the question of whether consolidation is killing innovation.

Clearly, unless you’ve been living under a rock, it’s kind of hard to not notice that software industry consolidation has sharply accelerated since 2000. And according to conventional wisdom, when you have fewer voices there should be fewer new ideas.

But let’s first ask if anybody cares. Is there such a thing as too much innovation?

Ask any SAP customer about how much they look forward to upgrades. Of course, in most cases, version upgrades are not necessarily innovation. They simply augment (or detract) from existing functionality.

And then there’s innovation that in actuality is little more than feature creep. Case in point: Microsoft Word 2003. An upgrade from Word 2000 –- which we fondly remember because, for us, it worked just fine, thank you. Yet the 2003 upgrade added “smarter” formatting that was supposed to be innovative. But in actuality, it ended up making our life more complicated and less productive. Obviously there’s such a thing as half-baked innovation.

Too much innovation -– good or bad -– can be clearly disruptive. But obviously, were the march of technology to cease tomorrow, you’d never be able to solve that perplexing integration problem, or discover how to rationalize IT service management.

So let’s return to the main point: if innovation is a good thing, does consolidation stifle it?

Obviously, acquisition strategies where vendors are swallowed up for maintenance streams certainly validate conventional wisdom, witness CA’s practices during the Charles Wang era.

But when a vendor acquires a microscopic startup, it’s usually about mainstreaming, not killing innovation. For instance, when BEA bought 12-person SolarMetric about a year and a half ago, it was a shortcut to adding a critical piece of Enterprise Java Beans 3.0 object/relational mapping technology to its products.

Arguably, the goal of most niche startups not to become the next Microsoft or Google. For instance, SolarMetric was not likely to find a mass enterprise market for such a niche technology – who would go to the trouble of buying something like an object/relational mapper a la carte? Such a technology had to be part of a broader product, offered by a vendor with sufficient market reach.

Whether acquisition spurs or suppresses innovation depends on culture and, obviously, where the vendor is in its product or market life cycle. When IBM bought Rational, Rational’s peak of innovation was behind it. Not surprisingly, in the years since, IBM has failed to renew the core product. Maybe IBM should have taken the steps that Rational failed to while it was still independent, but the innovation slowed well before IBM’s watch.

Similarly, when you look at the dramatic consolidation in the ERP market, from the standpoint of innovation, it’s made relatively little difference because ERP is a pretty mature technology. Whatever innovation is occurring is happening at the edges — such as deconstructing functionality into plug and play services.

Consolidation hasn’t prevented innovations, such as software-as-a-service (SaaS), the emergence of globalized development, or the rise of open source and service-oriented architecture (SOA). It also hasn’t prevented emergence of ITIL (IT Infrastructure Libraries), which is providing ERP-like roadmaps for IT organizations on how to deliver service, and for vendors to integrate their systems management and help desk offerings.

Focusing on open source and SaaS, both have lowered barriers to entry for new – or in the case of players like Ingres – enabling the resurrection of companies back from the dead. And they have completely disrupted the industry’s business model, with open source pushing commodity software down to commodity prices, and SaaS replacing up front purchase with pay-as-you-go subscription models.

Open source and SaaS have clearly disrupted software pricing, with open source pushing commodity software down to commodity prices, and SaaS eliminating the huge upfront purchase in favor of a subscription model that looks suspiciously like the 15 – 20% annual maintenance models that, some customers claimed, was a form of extortion. It also lowers the risk of test driving new software because customers can yank subscriptions anytime, theoretically providing more shots for new startups.

Admittedly, not all these changes are as radical as they seem. For instance, subscription pricing revives a practice of renting software that prevailed before the emergence of packaged software in the 1980s (and for SAS, which never went away). And in fact, subscriptions look suspiciously like those 15 – 20% annual maintenance charges customers have been paying all along. But is does eliminate the huge upfront cost, and that’s posed a major revenue challenge for traditional vendors.

Nonetheless, if you agree with Ingres president Roger Burkhardt, open source has had another major impact on the software market: it drives out useless innovation, such as what happened with Microsoft Word. “Open source takes the onus off upgrade creep,” Burkhardt told us. “We get the same subscription revenue as before, with no changes for new features.”

Paradoxically, while open source takes the pressure off innovation, theoretically it also lowers the barriers to it, as anyone who sweats through each incremental 0.2.x release of Linux will attest. On the other hand, constant innovation – even if useful – causes chaos. Here again, the changes aren’t as great as they seem: most commercial distributors of open source products tend to tamp down the release cycles.

Clearly, rising trends like open source or SaaS are promoting innovation have nothing to do with the pace of industry consolidation. These new modes of delivering software to market are becoming mainstream in spite of the fact that desktop platforms or enterprise software markets have become highly consolidated.

M.R. Rangaswami, cofounder of the Sand Hill Group, and a veteran of the enterprise software industry, predicts that multiple business models will proliferate throughout the industry. That to us does not exactly sound like a recipe that would kill innovation. In the long run, customer appetite for new technologies will dictate the rate of innovation