Beginning with a Different Perspective

The seminal achievement of SNA in the late 1970s to mid 1980s was to make minicomputers viable from an enterprise market perspective. Enterprise computer networks were completely dependent on the mainframe computers supplied from IBM or one of the minor mainframe suppliers. SNA was a proprietary solution implemented by IBM, but it was an open source solution. This enabled the suppliers of mini computers such as DEC, Wang, Prime, Data General, Apollo, and others to use SNA technology to deploy their systems into the network. Open source meant that competitors as well as providers of non-competitive systems had access to the technical implementation of SNA and thus could use SNA to add their computers to an SNA network.   The mini-computer vendors implemented a PU_Type 2 node capability on their computers, which enabled these machines to seamlessly interact with mainframe computers as well as each other. This was the genesis of distributed computing (Platform 1.0). It was a seminal moment that gave birth to the commercial network within the enterprise market and started the progression towards the client/server network, which is Platform 2.0. This occurrence may not have had the dramatic overtones of Roger Kildall flying his plane while IBM waited in his lobby to license CP/M for the personal computer – but it is significant because networking of computers started with IBM.

In America during the mid to late 1980s, the seeds of great revolution were being planted. The product of these seeds began to emerge when the personal computer was introduced to corporate America (i.e. enterprise market). This single achievement, primarily accomplished by IBM, set in motion a chain of events in 1981 that would last through the dawn of the new millennium. Consider that fact for a moment. The introduction of the personal computer was the fundamental element that spawned the creation of many new technology opportunities (i.e. markets), which in turn means financial opportunities. IBM introduced the personal computer to corporate America on August 12, 1981. The operating system called DOS was from a small company in Seattle named Microsoft. By the end of 1983, IBM had sold more than a half a million PCs. That is more than thirty thousand per month during that period. The PC was the foundation for what would become two major markets, the enterprise and consumer computing markets that, in turn, would drive the service provider market via the internet. “There are two major market opportunities for internet usage: enterprise and consumer. A recent survey by Dataquest showed that 60% of 100 medium to large organizations in the U.S., all departments had some access to the Internet. Similarly, the rapid take-off of America Online shows that consumer adoption of online/Internet access, while still less than 8% of U.S. homes, is growing quickly. The enterprise market is dominated by access for information services (internal or external), while the consumer market will likely be dominated by online/Internet entertainment and information services,” [see, The Internet Report, Mary Meeker and Chris DuPuy, page 1-2, February 1996]

Frame 1 – Changing GTM

Most people working in the technology industry today have only known the era of Platform 2.0. Platform 2.0 gave rise to the infrastructure giants of the technology industry: MSFT, CSCO, ORCL, EMC, HP, INTC, IBM, etc. In the Platform 1.0 era, the go to market (GTM) strategy was about vertical integration, closed systems, direct sales and was dominated by IBM, DEC, Wang, Data General, NCR, EDS, Tandem, etc. The changing nature of applications created the client/server era and with that change came internet deregulation and a different GTM. The era of vertical integration came to an end in the early 1990s and era of specialization emerged. That is the core thesis for the World is Flat crowd. That level of global specialization can be viewed as Taylorism taken to a global level.

Technology companies outsourced as much of the business model as possible in the late 1990s to mid 2000s and for most markets, the channel partner became the integrator of the best of breed products. For twenty years, this was a tried and true business model. It has only started to show the signs of change in past few years.

Frame 2 – The Innovator’s Dilemma

Recently I wrote a post in which I described a customer engagement and made a reference to The Innovator’s Dilemma.   It is from that perspective that we need to think about the iPhone. What is amazing about the iPhone is not the phone itself; it was the development effort and the different perspective that the team used to build the product. When I think about the iPhone and what made it different, what made it revolutionary, I think of the different development perspective. I mentioned the IBM PC in opening and if you read the history of the development of the PC there are many common threads with the iPhone.

As a matter of perspective, the iPhone team did what no other mobile device developer had done before. All of the prior mobile device development had been centered around the design objective of building a phone. Build a phone and put some features on it. The team at RIMM built a phone and found an innovative way to push email to the phone, but it was a phone first. The same is true for Motorola and Nokia. They built great phones for voice. The team at Apple took a different perspective. They chose to build mobile computing platform and make voice an application. Boom! Turn the development process around and see how the perspective changes. Build a computer and make voice an application – rather than build a phone and try to run applications on it.

How did the incumbent world of mobile phone manufactures (i.e. steam shovel manufactures) react to the iPhone? Here is a blog post by the CTO of Motorola at the time. The post is interesting, but the comments are well worth a read on a rainy night with a glass of scotch. In the CTO’s blog post the matter of perspective is completely missed as evidenced by this statement “There is nothing revolutionary or disruptive about any of the technologies. Touch interface, movement sensors, accelerometer, morphing, gesture recognition, 2-megapixel camera, built in MP3 player, WiFi, Bluetooth, are already available in products from leaders in the mobile industry – Motorola, Nokia and Samsung. So, what appears to be the initial pricing at $499 and $599 with a minimum 2 year service agreement seems a stretch.”

The beauty of the blog post is another example of Clayton’s steam shovels versus hydraulics innovator’s dilemma, which I recently encountered on a sales call and blogged about here. While Moto, Samsung, Nokia and others were selling mobile phones, the team at Apple was selling a mobile computer called an iPhone. Seven years later we talk less and use apps more. I think that is a trend.

Frame 3 – Protecting Margins and Top Line Revenue

Over the past few months there has been a lot of noise in the system around mergers between large cap tech companies such as Cisco, HP and EMC. Then there is the evolution of consortiums such as ONF, OpenDaylight and now ON.Lab. It has been widely reported that AT&T has been driving aggressive price concessions for vendors moving from Domain 1.0 to Domain 2.0. What is the motivation behind these concessions? I think the motivations between potential large cap tech mergers and need for aggressive price concessions by infrastructure consumers are the same.

There is a financial crisis underway that is a result of a structural weakness in the market. The term financial crisis is not intended to mean another Lehman default and market meltdown. The crisis I am referring to has to with corporate balance sheets. The pic below is AT&T’s cash flow over the past four years and (i) the effect that $20B in annual capex , (ii) rising dividend rate and (iii) stock buy backs have on the cash flow model.

The hypothesis is that we have reached the upper portion of the dividend/buyback range, the CAPEX and OPEX portions of the model are too high and the consumer does not have much more capacity to increase their monthly digital budget. That is the financial crisis that has already engulfed IBM.

The best of breed VAR model is under attack by the large cap tech companies and the poster child is VCE. VCE is system integrator now predominantly owned by EMC after Cisco sold down their stake. As the large cap tech companies focus on protecting margins and top line revenue, they have vacated the lower part of the market creating a vacuum. The vacuum in the lower part of the market is being filled by young companies such as Pure Storage, Nutanix, Actfio, Nimble, SimpliVity, etc.

We can see signs of the emotional and intellectual frustration with the construct of the current IT model building within the corporate environment. That is why we have a new development consortium almost every year:

• OpenStack – 2010
• Open Compute Project – 2011
• OpenNetwork Foundation – 2011
• OpenDaylight – 2013
• ONUG – 2013
• ON.Lab – 2014

If we need all these consortiums for IT innovation, something is clearly broken. The trend is even visible in the cloud space. Not only do we have Cloud Providers, but we also have infrastructure companies with cloud offerings to show end-users how it is done. There is even a broader macro set of concerns around growth, jobs and the lack of Animal Sprits to lift the economy. Just a cursory reading of the comments from people who think about on a daily basis is not really an uplifting endeavor:

Nobody can predict how long governments can get away with fake growth, fake money, fake jobs, fake financial stability, fake inflation numbers and fake income growth,” New York-based Elliott wrote. “When confidence is lost, that loss can be severe, sudden and simultaneous across a number of markets and sectors.

I am not the first to claim that we conflate technology innovation with advertising firms and we in the technology world are trying to build the wrong stuff. It will be very interesting to watch how this is going to shake out.

Frame 4 – Market Refining Process

I think the rewards are higher when value is defined by how you are different, not by how you are the same. The latter is represented by the Moto CTO comments regarding the iPhone and the embracing of Taylorism. Much as the early hydraulic sales people had to go find a new market for their product, I think the same is true for the truly innovative companies in IT. Selling a new method, a new technology to a person or organization that is used to doing the same for 20-30 years is not strategy for success. Three years ago I posted that I thought we were witnessing Moore’s Law Exhaustion and I think much of the stresses outlined in the prior frames is a result of this tension.  When I look across the market what see is a refining process. It will be interesting to see if more the same wins or something new is the long term winner.

/wrk