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Annex Bulletin 90-13, March 30, 1990
NEW MACRO TREND
Single, Narrow-line Vendors to Become Sub-Contractors in 1990s
Leading-edge Users to Become Vendors
PHOENIX, Mar. 30, 1990
- At IBM's
last month's Executive Briefing in Palm Springs, George Conrades, the head
of IBM's U.S. sales and marketing, said that in the 1960s, customers would
have thought of IBM as "THINK" and "SERVICE" -- IBM's
marketing slogans. "Increasingly we are becoming a consultant to the
customer," he added. "We
are in the solutions business. That
means we are on the leading edge of change."
Conrades also said that he was optimistic about IBM's success in
this new business. This, he
said, was "based on our belief in the ability to deliver what the
marketplace wants -- the information."
That is why we asked Conrades during the question period if he
would share with us his vision of the information service (not computer)
industry in the 1990s. We
explained that we could see that this new trend toward the bundling of
products, software and services into global solutions will probably spell
problems for some single-, and narrow-line vendors.
And with a prospect of such industry shakeout, we wanted to know
who, in Conrades' opinion, would be the major players in the information
services (not computer) industry circa 2000.
"But Bob, that's how you make your money," replied
Conrades, dodging the question while drawing a big laugh from the crowd at
the same time. He then went
on explain that all IBM is trying to do is be "responsive" (to
customers). We could not help
but think of a similar answer we got from Allen Krowe in May 1983, whom we
then questioned about the reasons for IBM's change from rent to purchase (i.e.,
that it was "market-driven" !? -- see ACR Jul/83). As
you know, IBM is now working hard on reversing Krowe's
"market-driven" trend (see
CMS BULLETIN 90-12, 3/27/90).
So, is IBM's "market-driven" trend of the 1990s going to
end up in the same circular file of failed strategies as did Cary/Opel/Krowe's
rent-to-purchase escapade? We
don't think so. To understand
the difference between the two IBM situations, let us turn to Mr. John
Naisbitt, the author of the bestseller "Megatrends" from the
early 1980s. "Trends
are bottom-up, fads are top-down," was one of his postulates. In other words, new ideas, no matter how appealing at first (remember
"hoola-hoops," or "cabbage-patch dolls," for example),
have to find meaningful "grass roots" support in order to gain
permanence. Otherwise, they
end up as short-lived "fads."
IBM's rent-to-purchase strategy was born out of IBM's misguided
strategy that, if the company became a low-cost producer (by
mass-producing its products and then merchandising them off aggressively
at low purchase prices), IBM would somehow be able to "hold the
Japanese at the beaches." Meanwhile,
just because IBM wanted to sell its products outright, didn't necessarily
mean that the customers wanted to acquire them that way, did it?
As you know, customers' decisions to buy versus lease have a lot
more to do with their own balance sheets than with that of the vendor.
So, even at the peak of IBM's purchase activity (which we put at roughly mid-1988), the vast majority of high-end
users, for example, continued to lease
their mainframes -- either through IBM's or through independent leasing
companies. In other words,
IBM's move was "top-down," to borrow Naisbitt's terminology, not
The quest for global integrated solutions, on the other hand, is a "bottom-up" trend. It is born out of most users' fear of the complexities of the "wired world of the 1990s." And fear is a powerful buying force. IBM happens to have "read" this trend early, and positioned itself to take advantage of it before others clued in (see our CMS BULLETIN 86-29, 7/07/86). That's a "bottom-up" change, however, which is the reason it is likely to survive the decade ahead. "Trends, like horses, are easier to ride in the direction they are already going,", concluded Naisbitt, as evidently did IBM.
IBM Driving The Demand For Bundled Solutions
If you know where to look, you will find IBM as the driving force
behind this new industry trend. Since
July 1984 (see "IBM Software
Prices To Skyrocket" -- CMS BULLETIN 84-02, 7/19/84), we have
been periodically explaining to you the reasons behind IBM's software
price hikes and its increased emphasis on this business segment.
In July 1986, we did the same with respect to IBM's systems
integration strategies, and its new self-appointed role as the world's top
consultant (see "Systems
Integration/Solution Selling: New Role/Old Tactics" -- CMS BULLETIN
Finally, in August 1987, we also commented about "possibly
the most important aspect of CSA,
is that this bundling of service will make IBM more competitive across the
board." This report repeated our October 1986 observation about the
CSA, that "it represents a
combination of bundling and volume discounting... Some IBM competitors may
grumble that IBM's bundling of maintenance isn't fair... but bigger and
more pragmatic IBM competitors (e.g. DEC) are busy copying IBM's tactics
In other words, after a few years in the "incubation stage," the new industry trend toward bundled global solutions should have finally become obvious to most informed participants in the industry. What will be the consequences of this new trend?
1. Value-added Pricing.
One of the consequences of the demand for global integrated
solutions will be a change in the way the industry prices things.
Customers will be paying for the value added of the best solution
for their global "Problem X."
They will obtain the solution from a vendor prepared to provide
such a "soup-to-nuts" service,
over a multi-year period of time.
An inevitable "sub-trend" inherent in such pricing
changes will be a gradual transfer of
wealth from the hard to the soft assets.
As Jim Cannavino, the head of IBM's Personal Systems LOB, told us
in Palm Springs, "in 1900, the U.S. manufacturing (sector)
represented 75% of the U.S. employment.
Today, this percentage is about 28%."
By the year 2000, it will be down (conservatively
estimated) to less than 25%, according to another senior IBM
executive, Steve Schwartz. "The
future is in the software and services," Cannavino predicted.
When told of our 1986-dated theory of "free MIPS" ("except perhaps for the mainframes for the time being"),
this IBM executive who formerly headed up the company's mainframe (DSD)
division, disagreed with our conservative assessment.
Cannavino said that when he was a young engineer, he advocated that
IBM should "give its mainframes away and charge only for the MVS"
(i.e., its operating system).
By the end of this decade, 85% of the U.S. work force will be
employed by companies with 200 employees or less, according to Conrades.
"Today, there are five million small companies (with less than 50 employees) in the U.S.," he said.
"But there is only a 30% (MIS)
penetration! Two thirds of
the revenue in the small and mid-range market comes from software and
Another "sub-trend" will be a slowdown
in the overall "price/performance" improvement in the
industry, measured in terms of the price of the total solution's
because the "cheap" hardware will become an ever decreasing
component of the users' total costs.
On the other hand, while a single vendor with an early jump on the
market enjoys a (temporary)
monopoly with its unique solution in a given industry segment, the prices
may well actually increase until such
time that the competition catches up.
Given the above "rising price" market scenario, the third
pricing "sub-trend" will be a renewed
preference for leasing as a method of acquisition (as opposed to purchase). That's
not just because the vendors like IBM will drive it that way so as to
maximize the return on their "rising price" products (e.g.,
software). It is also
because the massive investments which huge global integration projects may
put a crimp on the users' ability to fund them out of their own cash
Finally, the fourth "sub-trend" is that the above
financing requirements will likely result in the birth of a new
breed of lessors, whether captive (as
with ICC), or independent (actual examples
are yet to come). Unlike
the traditional computer lessors which focused on the financing of
hardware with ever-declining residual values, the new breed of lessors
will also have to become industry
application specialists in order to accurately assess the changes (up
or down) in the value of the assets which they help finance.
Needless to say, if any of the current independent lessors are to
play a significant role in this "brave new world" of the 1990s,
they will have to invest heavily in the upgrading of their peoples'
professional MIS skills, including those of their senior management (see
CMS BULLETIN 88-49, 8/31/88).
2. Proficient Users Turning
Vendors. Users who first
become very proficient with implementation of their industry's integrated
global solutions are likely to market that "know how" to other
users in competition with today's
computer vendors. The
competition between IBM and EDS, for example, which has intensified in the
last 12 months after EDS/Hitachi's buyout of NAS, is only one of the early
examples of this phenomenon. By
the end of the 1990s decade, we suspect that it will be rather difficult
to differentiate the vendors from the users using the same definitions as
we know them today.
Forecast. Answering the question which IBM's Conrades dodged, by the
time the next millennium begins, we suspect that there will only be about
six leading "cross-industry vendors" left in this new information
services market. Among
the U.S.-based companies, besides IBM, of course, you can expect to still
find EDS, DEC and AT&T as cross-industry "general
contractors." The rest
of today's U.S. "vendors," will be selling most of their
products and/or services to one of the above "general
contractors," rather than to the end users.
In addition, there
will be a new crop of "user vendors" (even as this today appears
a contradiction in terms) which will compete with the above "general
contractors" in specific industries.
Currently, it looks like American Airlines, Boeing, American
Express, Citicorp, Aetna -- to mention some front runners in the airline,
aerospace, financial services, banking and insurance industries -- will be
the leaders. But this
industry pecking order can easily change during the next decade, as a 10
year-time frame offers ample opportunities for major corporate "faux
pas." Just ask IBM...
3. Single-, Narrow-line Vendors
As for the single-, or narrow-line vendors (e.g.,
Compaq, Apple, StorageTek, SUN Micro, etc...), they will find the
sledding much tougher in this new "bundled" world of the 1990s.
Since customers will be paying for "solutions" value
added not "boxes," it will be very hard for a narrow-line
company to single out the "boxes" out of a big bundle with which
it can compete. Consequently,
the narrow-line vendors will be forced, either to exit the market, or to
reposition their marketing strategies from the "end user" sales,
to selling to the "general contractors" as in 2.
4. Technological Foundries, Trouble
For Japanese. Fueling
both the "general contractor" and the "subcontractor"
products, will be the various
"technological foundries," including those of today's vertically
integrated vendors like IBM, Fujitsu, Hitachi etc.
In the mainframe business, we expect to see the above three vendors
still around in this role as the "Big Apple" drops on New York's
Times Square signaling the "year 2000."
But, their customers will have changed.
IBM may still be producing most of the basic chip technology for
its own consumption in year 2000, but it may also be selling it to some
other enterprising "general contractors."
Other general technological foundries (mostly
Japanese), on the other hand, will be selling their goods either to
the "general contractors" as depicted in 2. above, or to the
"sub-contractors" as in 3. above.
In either case, however, unless they do a 180°-turnaround, the Japanese computer makers are likely to be virtually shut out of the global integrated solution markets of the 1990s. That's because IBM, EDS, AT&T, DEC -- to mention some of the U.S.-based multinationals -- have all demonstrated greater international software and service aptitudes than did the Japanese, who have mainly focused on developing their domestic, and/or the neighboring Asian markets based on largely hardware-related solutions. In addition, the market potential which the opening up of Eastern Europe will represent in the coming decade, should give the European language-vendors an edge over the Asian-ones. The key word in the above assessment being "should." As IBM has so aptly demonstrated, having a "built-in" advantage and capitalizing on it can mean two entirely different things...
Happy bargain hunting!
latter included deep discounts which perplexed the industry.
Volume VII, No. 90-13
Editor: Bob Djurdjevic
P.O. Box 97100, Phoenix, Arizona
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