How the rise of open, flexible, heterogeneous architectures have reshaped the technology stack and distorted winner-take-all dynamics in IT
Traditionally, tech has been characterized by discontinuous innovation – that is, innovation which is not built on top existing standards or infrastructure – giving rise to entirely new markets each supported by unique value chains that standardize and then coalesce around one dominant player. Semiconductors, PCs, relational databases, local area networks (LANs) are all examples of such innovations that spawned, what many refer to as, the modern day tech giant – in the case of the innovations cited above those corresponding giants would be Intel, Microsoft, Oracle and Cisco, respectively. These companies, whose products became the standard around which entire new supply chains were formed, fundamentally built and shaped the technology stack and as a result were able to establish protective moats around their businesses. Accordingly, these companies were afforded tremendous competitive advantages as they were able to erect seemingly insurmountable barriers to entry and enforce punitively high switching costs on the entire technology value chain.
However today, these companies are facing unique sets of challenges which, in turn, are curtailing growth and compressing margins. Indeed, each of the four companies cited above is trading at or near historic lows (on a price/earnings basis). There are myriad secular reasons that help explain why, arguably, the four most dominant tech companies in the last 2-3 decades are struggling, however, I want to put forth a broader, macro-rooted explanation: simply that, as we continue to move closer to an IT model that is characterized by flexible, open, highly heterogeneous architectures, the tech paradigm shifts away from a winner-take-all dynamic to one such that no single player exerts a disproportionate amount of force on a particular market.
Before examining what’s different today, it’s helpful to understand historically how these tech giants came to dominance. Traditionally, a discontinuous innovation would spur a period of hyper-growth that coincided with mass market adoption of the new technology. During this time, several companies would come to market with competing offerings, yet in an effort scale rapidly, market stakeholders generally would standardize around a product from a single vendor, building compatible systems and getting a whole new set of product and service providers up to speed to build a new value chain. This act of standardization, catapulted a single company into a position of overwhelmingly dominant competitive advantage, as seen with Intel’s x86 chip architecture, Microsoft’s Windows operating system, the Oracle Database and Cisco’s TCP/IP network routers.
So, what’s changed recently? I argue that there isn’t one principle catalyst for this shift, but rather many small evolutions in the way technology is developed, procured and deployed that have distorted dynamics. Here are several important factors:
- Increased complexity: As the tech stack has evolved, new layers have emerged (hypervisor, management, etc.) and new models have been created for developing and deploying different sets of applications – all which is to say the datacenter has grown increasingly more complex. There is no “one-size-fits-all” approach to IT.
- Prevalence of open source: Open source software, which is highly flexible and customizable (and free!), has proliferated within the datacenter in recent years, lowering reliance on proprietary commercial offerings.
- Rise of IT-as-a-Service: More and more IT professionals have espoused a service-based, on-demand approach to deploying and consuming IT resources – cloud computing. This, in turn, has necessitated infrastructure that is modular and highly automated. In this approach, many of the underlying IT building blocks (compute, storage and soon network) become commoditized with management and/or infrastructure software becoming the value-additive differentiator.
- Increased tech fluency: In general, there are more skilled IT professionals and engineers capable of creating complex systems out of disparate IT building blocks. There is less reliance than ever on fully-baked, out-of-the-box solutions from a single vendor.
This all implies that barriers to entry for competitors and switching costs for customers are falling rapidly and the disproportionate weight once-dominant tech players could exert on suppliers is being eroded by new entrants, open-source solutions and even individual engineers working out of their parents’ garage. In many ways, the tech giants of yesterday are victims of their own dominance, as customers today are wary of closed, complex proprietary architectures and are incredibly sensitive to vendor lock-in. Certainly Intel’s, Microsoft’s, Oracle’s and Cisco’s statuses as markets leaders will not disintegrate overnight, but this is all to say that the previous levels of growth and margin expansion are not sustainable in this new IT paradigm, and, moreover, to win status as a “tech giant” is harder than ever, if not impossible – just look at VMware, the company which, in my mind, was closest to reaching near giant status on the back of its virtualization platform but now is in the midst of a difficult product transition. It makes me wonder if we’ll ever see the likes of Microsoft or Intel dominating IT in future generations, or simply have winner-take-all dynamics shifted entirely into the application layer?