Tuesday, August 29, 2006

Big Blue: In The Pink....

It's software business is thundering along, but is that a bit of gray showing on the services side..?

IBM, that hoary 90-something giant of the computer industry, has been through it all. After pioneering the 3rd generation of mainframe computing with its stupendously successful IBM System 360, it strode the computing world like a colossus thru the 1960s and 70s. Then, when the world went the PC way - a revolution IBM itself helped trigger - it appeared IBM's heyday was over. Until the 1990s brought a marvelous transition under the leadership of Lou Gerstner - to being a services company.

Challenges to its software business also continued - for example, in the key relational database market, Oracle grew strongly thru the 1990s to match (or overtake, depending on whom you ask!) IBM's sales of its flagship DB2 product. The services business received a further fillip when it bought PriceWaterhouseCoopers (PWC)'s consulting unit in 2004 for $3.5 Billion*.

Then in a surprise move towards the end of 2004, they jettisoned the PC business, citing a desire to focus on high margin businesses such as software and services. During this period, they also became the largest technology services provider in the world.

Now, IBM is poised at an interesting juncture - there are indications that services growth has tapered off. The latest quarter (June 2006) results show revenues from software sales are growing faster, and are also contributing more to profits, says Business Week.

Of course, IBM's official position is that portraying their business focus as software vs. services is a false dichotomy - in reality, both businesses reinforce each other. While that is undoubtedly correct, here's something intriguing that I found myself dwelling on for a bit: IBM has added its latest purchase - Internet Security Systems (ISS), a security software company it has bought last week - to its services business rather than to its software group! This departure from the norm suggests that they feel they could use the extra revenues to boost services performance!

Perhaps IBM's services group will come back with renewed vigor to overtake software sales again, or perhaps it will cease to matter as hardware, software and services increasingly meld into one unified technology solution offering. Any which way, it will be interesting to watch the continued march of IBM, in the third century of it's existence**.

P.S. By the way, if you've been in the industry for a couple of decades, you will recall the constant cries of the impending death of the mainframe. Listen to this: said Mark Loughridge, the IBM CFO while announcing the results for the June quarter of 2006, "The most profitable business segments in the second quarter were software, microelectronics and IBM's System z mainframe computers". And so the mainframe lives.

*incidentally, a song compared to what others had tried to buy the same unit for earlier. How much was that, you ask? Hold your hat - Hewlett Packard (HP) had bid $18 Billion for PwC !! Talk about the Winner's curse!.

** the company was founded in 1888 (although it was incorporated only in 1911 - hence the "90-something" reference earlier!).

Tuesday, August 08, 2006

Long Live the Long Tail

Serving the small guy has become big business

Until not so long ago, the words "long tail" only conjured up images of the Long-tailed Langur, a rather loose-limbed, lanky monkey found on the Indian subcontinent. Or if you were mathematically inclined, it probably made you think of Power Law distributions.

Well, those words may just be the hottest two words in business right now. Since the 2004 article of the same name by Chris Anderson, a former writer for The Economist, and now the chief editor of Wired magazine, and more recently, his book, The Long Tail: Why the Future of Business is Selling Less of More.

Sure enough, the concept is based on the same principle as power law distributions, which govern how sales of most products are distributed. For example, most publishing house revenues are represented by a few best-seller books, while a large number of smaller-selling books contribute just a tiny fraction of revenues. At its heart, the long tail concept holds that the conventional focus that businesses have placed on selling big hits, or selling to big customers, is essentially an artifact of constraints on storage space, information and distribution. With the web and attendant technologies breaking down those constraints, not-so-big hits and smaller customers get to be in the limelight too. Businesses can thus focus down the long tail of the power law distribution.

And it's getting lots of attention. No less a person than Eric Schmidt, CEO of Google, has said that the long tail concept has "influence(d) Google’s strategic thinking in a profound way", and refers to Google's mission as "serving the long tail".

Anderson even furnishes credible arguments to show that the celebrated 80/20 rule, or the Pareto Principle, that states that "80% of the revenues come from 20% of the products" is really a consequence of similar constraints, and will in time give way to something that is more like a 50/50 rule.

There is a long tail for software as well: the variety of software needed to automate a large number of highly customised processes within businesses.

Big business has traditionally scoffed at small customers. Now with the arrival of the long tail phenomenon, perhaps the meek shall indeed inherit the earth - or at least get to preen in the attentions of lots of marketers .