WRFest 30Mar08(Tech Industry): Commodization, Consolidation, Consequences
In case noone's noticed the Technology Industry as a whole has reached the point where it is mature, which we define as being able to provide products and solutions who's capabilities exceed customer requirements. If that sounds a bit like Clayton Christiansen's arguments in the "Innovators Dilemma" it should because it is. In fact we're on record as arguing that the PC industry reached that point circa '98/'99 when speeds and feeds were adequate for the software, e.g. Word, who's functionalty was well beyond any reasonable cutoff point, say 60/40 and meandering around the 95/5 or worse. Unfortunately costs tend to go up non-linearly as you add bells and whistles.
The chart at right traces out this industry dynamic. It's kind of simple but hopefully it gets the point across. We show customer requirements slowly evolving over time along with two products which have high demand initially because the gap between requirements and capabilities is large and negative, that is customers want more than can be delivered. New products may have some special capability or vastly lower cost but not meet current requirements and have to be introduced in a niche. So does a company keep investing in old products or gamble on new and jeapordize the franchise and cash flow ? You have to apply this thinking to each major business segment in the stack as well because their history, status and outlook are all different. But for the bottom layers of the stack, by and large, capabilities vastly exceed requirements. The top layer, applications and business alignment are very different as the capabilities are vastly exceeded by requirements, especially in the SMB space. But NONE of the customers believes the industry can deliver value-enhancing, businss-driven solutions. As you go thru each of the readings below you might keep all this in mind because a lot is explained.
For example Dell is outsourcing much of its' sourcing to China which it wouldn't do if innovation were still the main driver. Similarly IBM has developed a reputation as the steady-goer but when you look at its' financials and investor presentations most of the earnings growth comes from buybacks and other financial engineering. Similarly Oracle's acquisitions sprees are hallmarks of a mature industry.
For a short introduction to how the industry changed and evolved in the '90s you can read and download this short note on industry evolution: Technology Industry Changes and Evolution. BTW just in case you're interested in understanding the history of the technology and consumer electronics industries, who the players were/are, how they did and why and how the ecology of the industry was shaped and evolved over decades we can't recommend enough Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Industries, with a new preface (Harvard Studies in Business History) by Alfred D., Jr. Chandler. In or humble opinion a great, insightful and well-written book that any serious student (investor, employment, market player) would benefit from reading. For our prior posts on the stack, industry evolution, business vs IT alignment, et.al. issues see the industry archive where we've built up quite a "stack" of charts to help you with your analysis ala Buffett'; that is understanding as best we can manage how the business works :).TECH INDUSTRY READINGS
Quit Griping, CIOs--You're to Blame for IT Skills Shortage CIOs keep complaining that they can't find workers with the skills they need. In fact, two recent surveys on top issues among IT executives--one from the Society for Information Management and another by Robert Half Associates--rank finding skilled IT professionals as the No. 1 issue. Many IT executives gripe that universities are not producing a stream of IT graduates who are prepared to function in the business world. Some worry about the unflattering image of technical professionals as socially awkward. But no one is more to blame for the skills shortage than CIOs, especially those at large companies. The reality is that IT executives are creating the skills shortage they grumble about. If companies were serious about ending the skills shortage, they would make more investments in IT training.
Industry Giants Try to Break Computing’s Dead End Intel and Microsoft said Tuesday that they planned to finance two groups of university researchers to start over and design a new generation of computing systems intended to break the industry out of a technological cul-de-sac that threatens to end decades of performance increases in computersThe research grant, worth $20 million over five years, will create independent laboratories at Berkeley and at the University of Illinois, Urbana-Champaign, that will be charting a way to reinvent computing. Each will work on hardware, software and a new generation of applications powered by computer chips containing multiple processors. The University of Illinois plans to contribute an additional $8 million to the project and the Berkeley project is applying for an additional $7 million from a state-supported program to match the industry grants. The computer industry has generally stopped relying on regular increases in the processing speed of chips. In recent years it has bet instead that future advances in speed and energy efficiency will come from putting multiple processors on a single silicon chip. Numbers of computer functions can then be done in parallel rather than sequentially. The new research agenda was motivated in part by an increasing sense that the industry is in a crisis of a sort because advanced parallel software has failed to emerge quickly. Most programmers today still write programs that solve problems in a serial fashion. Currently, the most advanced consumer-oriented microprocessors have up to eight processors, or cores, on a chip, but the industry is moving toward chips with 100 or more. The problem, according to academic researchers and industry executives, is that the software to keep dozens of processors busy simultaneously for all kinds of computing problems does not exist.
Silicon Valley's Bubble 2.0 Think of it as Silicon Valley's seven-year itch. That's about the length of time needed for the typical investment, employment, and emotional bubble to inflate and then burst in the global center of the technology industry. The last bubble, known forever as the dot-com craze, started and ended in the Valley. Those who watched its giddy rise and sickening fall remember the predictable way the collapse began: in denial. Smack in the middle of the fun - and well after the good times had ended - the common refrain was that the IT business was immune to the vicissitudes of the macro economy. It wasn't then, of course, and it isn't during the ad-driven, Googled techland of today either. The difference this time around may well be that some of the loudest and most thoughtful voices are aware that Silicon Valley's quaint notions of exceptionalism are a thing of the past.
Dell to Buy $52 Bln in Components From China The commoditization of computer hardware means competition is more a function of price and efficiency than quality and branding, making China a favorite place to source a broad range of goods, including electronic components. The world's second-largest personal computer maker, Dell is far from alone in looking to China to reduce manufacturing costs and remain competitive. Last November, Cisco Systems Inc (NasdaqGS:CSCO - News) said it would almost double its purchasing from Chinese suppliers over five years to $16 billion. Cisco is the biggest maker of routers, switches and other equipment that make up the Internet. Hardware makers such as Dell, Cisco and Hewlett-Packard (NYSE:HPQ - News; HP) could be hit hard by a U.S. economic downturn, Dell even more so because it relies on the U.S. for about half of its revenue, a much higher proportion than larger rival HP. That makes China's role as a customer equally important to Dell, which saw a 54 percent rise in unit sales on the mainland during its last financial quarter.
Big Blue's steady approach Then there is International Business Machines Corp., which has managed to defy nearly the entire sector and post healthy gains this year. Since Jan. 2, IBM's shares have risen more than 9%; the stock is up more than 20% since hitting a year-to-date low of $97.76 on Jan. 9. Big Blue also has showed its muscle compared with some of the leading market gauges over the last year. According to Toni Sacconaghi of Bernstein Research, IBM's stock has outperformed the S&P 500 Index by 18% since the start of the year and 31% since the end of the first quarter of 2007. "While IBM has materially outperformed the S&P 500 and appears relatively fairly valued vs. average historical levels, we believe several factors suggest that IBM could/should earn a higher than historical relative multiple in the medium term given its defensive nature, strong expected [earnings per-share] growth and the beginning of a new mainframe cycle," Sacconaghi wrote to clients Tuesday.
Ellison Buying Spree at Oracle Adds Mix of Programs, Wards Off U.S. Slump -- Oracle Corp. Chief Executive Officer Larry Ellison, who led the software maker on a $33.5 billion spending spree, did more than add 39 businesses and 20,000 customers. He bought armor against a U.S. economic slump. The company today may say sales grew by at least 20 percent for the eighth straight quarter, fueled by a wider range of products and more customer-support contracts. Third-quarter sales rose an estimated 22 percent to $5.41 billion, according to the average projection of 20 analysts surveyed by Bloomberg. Ellison's acquisition strategy helped the third-largest software maker take orders from rivals and withstand a slowdown in U.S. technology spending. Oracle bought makers of software that analyzes and secures data, gaining programs that are in greatest demand, according to a Goldman, Sachs & Co. report on information-technology spending.
Oracle sales fall short Software giant Oracle announced fiscal third-quarter earnings rose 30% from a year ago, in line with Wall Street expectations. But sales missed forecasts, a possible sign that big businesses may be starting to pull back on tech spending. Shares of Oracle plunged more than 8% in after-hours trading. The company said in a conference call Wednesday that it expected a strong fourth quarter. Despite that good news, new license sales were only up 16%, not as high as some analysts would have liked. This could be an indication that the economic slump is taking its toll on Oracle.In a weakening economy, business managers may wait to install new software, says Damon Ficklin, an analyst for Polen Capital Management, a money management firm that owns shares of Oracle. Oracle is the firm's third largest holding.Ficklin points out that Oracle is not immune to a pullback in corporate spending but he does think Oracle will probably do better than other technology companies in the coming months because the software giant is so diversified. In addition, Ficklin says Oracle is a global company that will profit from the weak dollar. Oracle has a large presence in the Middle East, Europe and Asia and international sales account for half of the company's total revenue.