The Rise of the Outsiders and the Future of the IT Industry

NotYourFatherYou probably heard the news about the CFO of Morgan Stanley becoming the new Google CFO and the on-going migration of Wall Street bankers to Silicon Valley (here and here). But did you know that this is just a surface manifestation of an underlying secular trend, nothing less than a new restructuring of the IT industry and the emergence of completely new developers and sellers of information technology products and services?

You could argue that at any point in time in the last half a century you could say about the fast-changing  IT industry that it is not your father’s IT industry. But remarkably, the structure of the IT industry has been very stable, with only one major redrawing of its landscape throughout its history. Today, the “IT industry” is being redefined with two major clusters of companies increasingly competing with the incumbents and reshaping the old IT world order.

First, what did your father’s IT industry look like? Until about 1990, the industry was dominated by IBM and a few smaller companies (e.g., DEC, HP, Wang, Prime). These companies were offering one-stop-shopping, providing to enterprises the entire IT stack, from hardware platforms (including proprietary chips) to peripherals to operating systems to networking to applications and to services.

The advent of the PC and, in particular, the networking of PCs in the 1980s, gave rise to a new tidal wave of digital data. As a result, between 1990 and 2000, the industry’s structure has expanded to include large vendors focused on one layer of the IT stack: Intel in semi-conductors, EMC in storage, Cisco in networking, Microsoft in operating systems, Oracle in databases. IBM saved itself from the fate of DEC, Wang, and Prime by focusing on services. DEC could have saved itself if it realized in time the value of focusing on its biggest competitive advantage—networking—instead of letting a number of focused players enter this market (which Cisco eventually dominated). At the same time, a number of focused PC vendors, primarily Compaq and Dell, carved a larger role for themselves by gradually expanding their reach into other layers of the IT stack, emulating the old model of a vertically-integrated IT vendor. By and large, they were less successful than the new, horizontally-focused IT vendors.

The restructured IT industry, and specifically, the focused, “best-in-class” vendors answered a pressing business need. Digitization and the rapid growth of data unleashed new business requirements and opportunities that called for new ways to sell and buy IT. The new competitive and business pressures to keep more and more data online and for longer duration, to mind and mine the data, to share and move it around, all contributed to the demand for a flexible IT infrastructure where buyers assemble together the pieces of their IT infrastructure from different vendors. Most important, in the late 1980s and early 1990s, businesses fundamentally changed their attitude towards and the scope of what they did with data: From primarily an internal, back-office bookkeeping, “how did we do last quarter?” focus on the past, to external, customer-, partner-, and supplier-oriented data creation, collection, and mining, with a focus on the present and “let’s understand how to serve our stakeholders better.”

Now, how is today’s or tomorrow’s IT industry different from what it was just fifteen years ago? We still have more or less the same dominant players—IBM, Cisco, EMC, Oracle, HP, a reinvigorated Dell, etc. If there has been any marked change, it has been a shift back to a vertically-integrated model, with all of these players providing the whole IT stack (or what they call, with their insatiable appetite for new buzzwords, “converged infrastructures”).

I would argue that this “back to the future” model is on its last legs and the real future belongs to two clusters of companies: Digital natives (e.g., Google, Facebook, Amazon) and large, IT-intensive enterprises (e.g., financial services companies).

In the mid-2000s, a new business need emerged: “Let’s make sense of the mountains of data we continue to accumulate,” focusing on the future and the mining of data to understand better the likely results of different courses of actions and decisions. Unlike the previous shift in the fortunes of the IT industry, the companies driving this shift were not old or new “IT vendors.” They were the companies born on the Web, the digital natives, with data (and ever more data) at the core of everything they did. Google, Facebook, Amazon, Netflix—all built from scratch their IT infrastructure to their own specifications, inventing and re-imagining in the process the entire IT stack. They were the first outsiders insisting that IT was such a core competency for them that they could not trust it to “IT vendors” and could do a more efficient and effective job on their own, thank you.

Google and Amazon later became insiders by offering their infrastructure as a service to small and large businesses. But other companies born on the Web, such as Netflix, simply continued to amass unparalleled knowledge about state-of-the-art IT, develop innovative IT solutions which they then made available to the world as open source software, and hire (or train) the best and the brightest IT professionals. This became a new IT ecosystem, a whole new world of IT far surpassing what was happening in the “IT industry” on any measure of innovation and competitiveness.

Some of the large enterprises which used to be the most important customers of the traditional IT vendors are now joining this new IT ecosystem, reinforcing the reinvention of how IT is developed, sold and bought.  Consider these recent news items:

  • Santander is the first global bank to offer cloud data storage services to corporate customers. “As I think how I am going to compete with all these new technology players, I can offer the same services as some of these big guys,” Santander’s chairman, Ana Botín told the Financial Times.
  • By 2018, Bank of America plans to have 80% of its workloads running on software-defined infrastructure inspired by Web companies, a process that began in 2013. “The transformation at Bank of America reflects the migration of state-of-the art information technology developed by Internet companies into the broader economy,” reports the Wall Street Journal.
  • Facebook announced a new type of server, a collaboration with Intel based on its own design which it hopes other companies will adopt as well. The announcement was one of many at a recent gathering of the Open Compute Project, a nonprofit group formed by Facebook in 2011 to adapt principles of open-source software to hardware. “Members develop and share designs for servers, networking gear and storage devices that any company can build and sell, creating competition that helps hold down hardware costs,” reports the Wall Street Journal.
  • Fidelity Investments reconfigured its data centers to better fit its business needs, engaging its engineering team in redesigning a revolutionary new rack, and reducing energy consumption by 20%. The announcement from the Open Compute Project reads in part: “Fidelity’s Enterprise Infrastructure team also wanted to transform the way its members worked. Instead of maintaining a closed shop, the team was looking to open up and engage with an external community of engineers as a way to keep up with the latest developments and innovate in-house… The Open Bridge Rack is a convertible datacenter rack that can physically adjust to hold any size server up to 23 inches across. It’s a key link in helping enterprises make the switch from proprietary gear to Open Compute… Fidelity designed (patent pending) and donated it to the Open Compute Foundation, making it available to different manufacturers.”
  • Apple has acquired speedy and scalable NoSQL database company FoundationDB, TechCrunch reports. With this acquisition, Apple aims to bolster the reliability and speed of its cloud services, and possibly provide video streaming for its rumored TV service.

The new “IT vendors” are companies that see IT not only as an integral part of their business strategy but go even further to view IT—and the data they collect and mine–as what their company is all about. This new breed of IT vendors have emerged over the last decade from the ranks of digital natives and they are joined now by large companies that want to get further return—and possibly new sources of revenues—from their large investments in IT. Furthermore, just like the digital natives, these large established companies don’t want to be beholden anymore to the lock-in tactics of traditional IT vendors.

The size of the IT industry worldwide in 2010 was about $1.5 trillion. Gartner predicts that the industry (including telecom) will grow to $3.8 trillion this year. The real “IT industry,” however, is much larger than that, given all the IT-related activities happening outside the traditional boundaries of the industry. And if you include in the “IT industry” everything that’s being digitized—content, communications, consumer electronics, commerce—we are looking at an industry that will grow to at least $20 trillion by 2020.  In this largely expanded industry there will probably be still room for the traditional IT players. But the growth spurts, innovation, and new skills will come from today’s outsiders, from the companies whose core competency is the collection, processing, analysis, distribution, and use of data.

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