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Archive for January 11th, 2008

The Big Switch Requires A Big Shift In Thinking And Strategy

Posted by Bob Warfield on January 11, 2008

The Big Switch is Nick Carr’s term for the emergence of Utility Computing in the cloud over software installed in individual data centers or machines.  It’s also the title of a new book he has out on the topic.  There’s a lot for everyone to be thinking about with respect to The Big Switch.  It’s full ramifications are still far from clear, but the areas it has touched so far are profoundly changed.  We are further along in The Big Switch than most people suspect, and the momentum to continue is unstoppable.  Google is accessing 20,000 Terabytes of data a day and growing rapidly.  Consider that The Big Switch’s electric utility meter.  That little disc is only going to spin faster and faster and its already whirling at a fantastic rate.

The software world has felt it in the transition from perpetual license software to Software as a Service.  Many are still unconvinced that there is a transition, and feel it’s only an alternative market, but there’s more to it than that.  SaaS is a disruptive and corrosive influence.  It is simultaneous cheaper and better for the customer and much more costly for the seller.  This makes it hard for the incumbents to consider switching wholesale and protects the SaaS upstarts long enough for them to reach dangerous critical mass.  SaaS insulates its providers to a degree from the vagaries of economic ups and downs.  A SaaS company has the benefit of recurring revenue to help tide it through while growth slows.  Provided it treats customers right to minimize churn, a SaaS company can even show growth in down times.

Chris Cabrera says, “SaaS is becoming increasingly savvy.”  He’s talking about SaaS vendors, but it applies to buyers too.  Any recession in 2008 will make SaaS the new black.  Companies will find it is an extremely effective way to cut costs while increasing service levels.  That’s part of its disruptive nature.  Dan Farber quotes Jeff Kaplan saying:

In this tenuous climate, consumer and executive confidence could decline, leading to an economic slowdown. As a result, many companies could hold back on their capital investments to mitigate their risks. The ability to adopt on-demand services on a pay-as-you-go basis will be a perfect sourcing strategy for businesses seeking greater cost-controls and flexibility.

Farber calls this “recession proofing”, both for IT and SaaS vendors. 

Cabrera adds an interesting booster stage to what was already poised to be an exciting launch:  this comes at a time when SaaS is maturing to it’s “2.0” phase.  The first generation products were regarded as having limited functionality.  They were okay for small businesses, but not good enough for big.  That’s changing rapidly.  SaaS vendors are listening to their customers and filling in the blanks.  It’s hard to argue today that the leaders such as Salesforce or Concur in any way have compromised functionality relative to other “big” players.  The listening process works all the better because SaaS vendors have a much closer relationship with customers than conventional software vendors.

SAP blogger Michael Altendorf is hesitant to make predictions for 2008, but he does notice some similarities in the predictions of others.  Specifically, he looks at those of IDC, Battelle, and Dion Hinchecliffe and tacitly predicts himself by choosing what to emphasize.  His list is interesting:

  • Small and Medium Business is More Important in 2008:  This is the sweet spot for SaaS right now.  It invariably starts with SMB and then moves up market, much as the PC started out small and got very big.
  • More Mobile Internet:  Another symptom of the Cloud.  The more capable your mobile device is, the more inconvenient it will be if your data isn’t in the cloud and accessible 24×7.
  • Macro-economic forces will drive change.  Again, this is plays to The Big Switch because switching is a cost savings move.  Globalization is made easier through the Cloud.  Either way, The Big Switch wins.

Another trend that’s clear is consumer applications lead business applications in The Big Switch.  We’re watching a mass exodus to online gaming, online video, online music, and online Social Networking.  I wrote recently about the massive market forces at work here, but we ain’t seen nothin’ yet.  That’s all about entertainment and leisure, but there will also come a slightly more delayed Big Switch for productivity applications.  Already we see a migration of communication to pure online venues like Twitter, blogs, or the news feeds in Social Networks.  It’s hard to quantify that migration, but its happening.  In fact, the pundits are uniform in their conclusion that a wave of consolidation among Web 2.0 is likely.  That’s a necessary precursor before the next punctuated equilibrium creates a whole raft of new applications that will further fuel The Big Switch.

It’s clear what The Big Switch means to business and consumer software companies, but what about IT?  Nick Carr himself became famous for announcing that IT Doesn’t Matter.  Now, he’s back pedaling a bit on that by saying that IT’s Alive!  Why the, ahem, big switch?  Because the rumors of IT’s demise were greatly exaggerated.  The Big Switch does not presage the demise of IT, but rather, it’s repurposing and retooling.  The Big Switch frees IT of the burden of dealing with commodity tasks that others can often do better.  Why tend to a data center if Google has perfected the task on a far larger scale?  Why not focus on things that uniquely differentiate the business?  The latter has always been a mantra for IT, it led to the great outsourcing shift, but it is difficult to live by.  In many ways, The Big Switch is Bigger Better Outsourcing.  Why hire a 3rd party if you could have the guys who wrote the software tending to it for you?  Surely they can do it better and more cheaply.  And in fact, they almost always do.

In Nick Carr’s view, the IT department will not cease to exist, but it will look a lot different, and a lot less technical:

Many of the information-management and process-design skills currently housed in IT departments will continue to be of great value to companies, of course, but they will likely have been absorbed into business units and other departments instead of being isolated in a technically focused corporate function. Many of the purely technical jobs will have shifted from the users to the suppliers or been automated out of existence.

I’m not sure I agree with the “less technical” aspect.  Nuts and bolts technologies associated with the care and feeding of datacenters will be greatly diminished.  However, an entirely new list of technical skills will be needed for companies to be good at evaluating, using, and most importantly, integrating a set of software solutions delivered in the cloud.  When everything changes, I think it raises the bar on skill sets rather than lowering it.  It also changes the focus.

Even more interesting is the potential the Big Cloud has to free up resources to spend more time doing unique work.  There will always be opportunities for software to give a business competitive advantage.  Freeing up resources that are not delivering any technical advantage by outsourcing to a SaaS provider may enable businesses to invest more in such unique opportunities.  This too is a highly technical area.  Writing software isn’t easy, after all, but it is getting easier.  In fact, the Cloud has the potential to make it much easier in a variety of ways.  Why should IT cash in on this as much as anyone else for their internal projects?  And so Platform as a Service has an important role to play.  With it comes a renaissance in tools and other platform-related software.  With the infrastructure moving into the Cloud and being run by someone else, IT may find its less important to focus on complex tools like Java or C++.  It may make more sense to focus on newer simpler tools such as Ruby on Rails.

Which brings me to the next arena where The Big Switch is being felt.  Benchmark recently made an investment in Engine Yard, which is a perfect example of what I just mentioned.  First it capitalizes on a newer platform: Ruby on Rails.  Second, Engine Yard is focused on delivering the new platform from the Cloud and on dealing with scalability so developers don’t have to.  Perfect!  It will make it that much easier for IT and other users to put together new applications that deliver unique value.  Expect to see a lot more of the investment community wondering how to cash in on The Big Switch.  They’re all very much aware of it and interested, although so far they are much more interested in the consumer side than the business side, let alone the tools and platform side.  Yet the other two will follow as they so often do.

David Feinleib, a VC with Mohr Davidow Ventures, recently called The Big Switch “The New Tech Investment Wave”.  I think he’s right, and the wave is just gathering steam.  Aside from some expected consolidation in the Social Networking arena, it should have a good long ways to go before it crests.  Feinleib likens The Big Switch to a shift from client-server to cloud computing.  Remember how big and how long the client-server switch lasted?  Aren’t most of the business software companies of today, especially the biggies like Oracle and SAP drawn from that last wave?  Quick, does anyone remember the companies that preceded them?  And therein lies the interesting game.  The Big Switch is disruptive as I have mentioned. 

Nick Carr draws analogs to the early days of electricity.  Think Thomas Edison and DC as the incumbent client-server gang.  Think Nikola Tesla and AC as the Cloud challengers.  Guess what?  AC won the day because it was better.  Interestingly, even though Tesla’s ideas won out, a lot of the old guard was able to embrace and extend.  Times have changed.  The game moves much quicker now.  It’ll be interesting to see whether everyone can keep up.

Throughout all of this Sturm und Drang, it is important to keep ones wits about one’s self.  There will be tremendous turmoil for some.  Recession superimposed on change will supercharge the economic forces already at work.  It’s time to quit avoiding The Big Switch and figure out how to succeed by going with it.  That’s what I call The Big Shift.  Anne Zalenka reminds us on GigaOm that this is all really a Good Thing.  In his book Carr argues that The Big Switch disenfranchises the middle class and creates a new class of super wealthy.  He’s wrong and short sighted, and Anne brings back some much needed perspective.  Commoditization is always hailed as destroying the middle class.  Mass Production should have done it a long time ago.  Jeremey Rifkin, another academic like Carr, wrote a book called The End of Work that predicted we would have so few jobs that we’d have to ration working hours due to all the automation.  Since the book was written the Dow has flown higher than ever before, and despite the looming recession, times are really pretty good.

The reality is much different than Carr and Rifkin’s gloom.  Commoditization is a healthy force that increases the efficiency of the market.  It drives people to retrain and redeploy where new opportunity is available.  Carr says broadcast and publishing jobs declined by 13% due to the web.  But, as Anne points out, Network Systems and Data Communications is forecast to grow by 54%.  And, creative people are now empowered to go directly to their audience without so many middle men taking their cut.  Commoditization makes scarcity artificial, which creates rather than destroys opportunity.  And, when the pie gets bigger, there are more fortunes to be made.  Everyone won’t be Google, but who wants to be after a while?  The life of the commoditizer can get tedious too.  Have you seen WallMart and Dell lately?  What did they accomplish?  The Walton family and Michael Dell made fortunes, but they also cleared the way for higher end boutique stores in WallMart’s case and a variety of new and interesting PC players including Apple in Dell’s case.

Dan Farber summarizes well (as he often does) with:

More interesting and critical than the formulation of grid infrastructure is what emerges culturally, socially and economically from a super-high speed connected planet enabled by the Big Switch. Nick believes that wealth will be consolidated into the hands of a few companies, a concentration of power that could have negative implications. Given the changes we have seen in the first decade of the public Internet, the next few decades will bring accelerated disruption and innovation impacting all facets of our lives.

If you follow Nick Carr’s gloom and doom views, you’re going to be run over by the freight train.  If you see it for the opportunity it is as Zalenka suggests, you can reinvent your business and career to new heights that wouldn’t have been possible before. 

Vive la Big Switch!  It’s gonna be another great ride. 

Posted in saas, strategy, Web 2.0 | 2 Comments »

Unintended Consequences: How Market Forces Outmanuever Big Groups For The Collective Good

Posted by Bob Warfield on January 11, 2008

If you’ve been reading my blog for very long you’ll know I’m a believer that evolutionary forces are at work all around us.  The web behaves very similarly to an evolutionary system, even experiencing punctuated equilibrium as memes propogate throughout.  Free markets are another example.  There are at least three interesting big stories in the blogosphere right now that provide interesting examples to watch as they unfold.  Let’s consider each.

First, there has been much ado about the idea that pirates come into markets due to inefficiencies.  This is a theme for the new book The Pirates Dilemma by Matt Mason.  What the owners of the assets in pirate-infested markets have done to prompt the pirates is they’ve created artificial scarcity.  It’s an interesting concept, but there are examples of it all around.  Music and video are the most obvious.  The music industry has all but given up on DRM because of the success of pirates, and their next salvo looks to be an attempt to tax us through ISP’s.  This is not unlike the taxes that were levied on videotape when it first came out.  You have to figure the music industry never imagined the pirates would get this far.  Their market and empires crumble almost continuously as time goes by.  Is it fair?  Perhaps not, but it is a natural consequence of market forces outmanuevering a group that had stalled in terms of innovation.  They were too focused on lawyers and control. 

Imagine what might have happened if one of the big labels had somehow adopted a radically different business model.  What if they’d made all the music free in exchange for accepting advertising, for example?  Wouldn’t the record companies love to be as successful as Google?  Ironically, I’ll bet a huge number of digital music playback devices and software could accomodate video ads that would be able to convey quite a lot of information.  One of the smartest things George Lucas did around Star Wars was to insist on retaining control of the merchandising.  Just consider all the ancillary merchandise that any entertainment brand has the ability to sell.  Perhaps the creative article itself should have been free and the merchandise charged for.

Software suffers from the same thing, which is another reason to convert to Software as a Service if you can.  The Service piece is harder to pirate, especially since some of the software stays in the cloud.  There are bound to be many other examples of artificial scarcity, but the owners of whatever is being made scarce don’t really want us thinking about it too hard.  Now we hear that AT&T is thinking of introducing the equivalent of DRM at the ISP level.  What a PR and sales disaster that would be.  What was AT&T thinking to have sent a lawyer to CES to talk about that?  It would simply be another case where Market Forces would outmanuever this big player.

The next story along these lines involves the Hollywood screen writers strike.  The BBC reports that according to Nielsen Online, YouTube usage has grown 18% and some sites have doubled since the writer’s strike.  The US-based Pew Internet Project has reported similar results.  Men slightly outnumber women in the switch, but it is the young who are most prominent, accounting for nearly 70% of that switch.  I feel younger just reading this–I stopped watching so much TV as soon as I had a broadband Internet connection despite also having an elaborate home entertainment system.

Mathew Ingram adds more color:

  • 15% of users visit video sharing sites daily, double what it was before the strike.
  • Ages 18-49 doubled their Internet video consumption.
  • Those 50-64 only increased 17% while those even older showed no increase.  Note that those older groups would have been in high school about 1975 or earlier–this is the first group for whom there were no video games or PC’s while they were growing up.
  • Comparitively less educated folks showed more growth as did slightly lower income households.

Artificial scarcity again?  Perhaps.  If so so, it was an artificial scarcity of the ability to create video entertainment.  Apparently people are finding its more interesting to watch amateur videos on the Internet than to watch reruns on TV.  Techcrunch was prescient in suggesting that this could happen, as Duncan Riley points out.  But perhaps there is another form of artificial scarcity at work.  The writers struck over a desire to get royalties when their work appears on DVD’s and the Internet.  The artificial scarcity was apparently the control the big media companies had on where that work was published.  Market forces will see to it that Big Media’s control is diminished first by switching attention to alternate channels and second by alerting the talent that they too can bypass Big Media for those channels.  From my perspective, the biggest risk is that once people have tried the alternate channels they likely won’t come back.

The last story concerns Apple’s iPhone.  Wired Magazine kicked this meme off with, The Untold Story: How the iPhone Blew Up the Wireless Industry.  In exchange for a 5-year exclusive, Jobs talked AT&T into radically changing the cellphone experience.  Visual voicemail and no need to visit a store to sign up would be just two revolutionary aspects of the new device.  And I have to say, I was blown away with my own new iPhone to learn I didn’t have to go to a store to activate it.  The whole thing took about 3 minutes over the Internet using iTunes.  Vive la Self-Service!  I’ve written before about the virtues of self-service, but the iPhone has to be my personal best experience with it.  It has been a huge success for Apple, for whom it is probably their most profitable device, as well as AT&T, where about 40 percent of iPhone buyers are new to AT&T’s rolls, and the iPhone has tripled the carrier’s volume of data traffic in cities like New York and San Francisco.

But the real impact is yet to be felt.  There is an $11 billion a year mobile phone business in the US alone that is still feeling the shockwaves from the iPhone.  Why?  Because the iPhone shifted the emphasis from the infrastructure to the experience.  As Steve Jobs and others like to say, the user experience is everything.  It may be the only thing that matters, and the iPhone delivers in spades.  Ironically, this all started from humbler beginnings.  Jobs set out to create a three way partnership with Apple, Motorola, and Cingular to combine the iPod with a phone.  The initial result, called ROKR, was a dud.  As Wired put it, the ROKR failed because it came to “represent everything that was wrong with the US wireless industry, the spawn of a mess of conflicting interests for whom the consumer was an afterthought.” 

Artificial Scarcity at work again.  The wireless carriers were trying to control the consumer by limiting the infrastructure and the handsets, and it was a mistake.  The iPhone blew the lid clear off because AT&T was willing to gamble and follow Jobs, and what a brilliant move it has turned out to be in hindsight.  Motorola was the biggest loser because Jobs cut them out first and insisted on almost total control over the concept with Cingular (later acquired by AT&T).  Ed Zander is no longer with Motorola, though we can only speculate how much failure to participate in the iPhone’s incandescent success may have contributed to that.

For Cingular, now AT&T, the marriage was a beautiful thing.  It has given them a way out of the increasingly commoditized infrastructure wars with the other carriers.  Commoditization had led to price wars, and soon, loss of profit margins.  The answer was to create a new focus, and who better to lead that revolution than Steve Jobs?  Of course they would follow him. 

Does this mean Apple has taken over the wireless industry now as Scott Carp suggested?  There’s just one little problem with that theory:  now Jobs himself faces the spectre of dealing with artificial scarcity.  In order to get AT&T/Cingular to sign up, he had to promise a 5-year exclusive.  What could be more artificially scarce than that?  At the same time, his iPhone formula seems not to be especially well protected.  Every handset manufacturer on the planet is rushing to copy it.  Even Microsoft seems to have some iPhone like technologies up their sleeve.  And Apple has another artificial scarcity problem at hand since the iPhone is a closed ecosystem that Apple has yet to open up.  Meanwhile, the carriers have ceded the power to manufacturers, software developers, and consumers while they continue to deliver pipes.  Every boy and his dog is gearing up to deliver iPhone clones, and Jobs will need to think about the next move to retain his dominance.  He has time.  The iPhone has more web browser share already than all the Windows CE devices combined.

What’s next in the ending-artificial-scarcity game?  How about Zillow, which ends the artificial scarcity of MLS listings and evaluating what the value of real estate ought to be?  Fascinating stuff, this business of artificial scarcity.  It represents opportunity and risk.  It tends to be a dead end strategy in the long run.  Look for opportunities to exploit it, rip the cover off scarcity, and change the paradigm.  But be careful not to enter into your own artificial scarcity dead end while you’re doing that!

Posted in business, strategy | 4 Comments »

Avoid Network Solutions Like The Plague

Posted by Bob Warfield on January 11, 2008

From the department of really tacky business practices comes this:

If you search to see if a domain has been registered on Network Solutions, they will register the domain, forcing you to pay them to get it.  By the way, the also charge more than the competitors and have fallen into third place.

Those two are plenty of reason for me never to try a search there again.  Alternatives include GoDaddy and eNom.  Their claim is that they do this to protect you.  Yeah right! 

The irony is that the blogosphere is aflame with chatter about all this which is bound to make Network Solutions business even worse.

Kinda makes you wonder what other evil business practices are going on as people take unfair advantage of the knowledge you give them on the web.  Ordinarily I wouldn’t have repeated a story like this, but this is so annoying I want everyone to know and stop using these guys.

Posted in Web 2.0 | Tagged: | Leave a Comment »

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