Bring On the Innovators

Professional prognosticators aren't the only ones with a less than sanguine outlook. In a recent interview with The Wall Street Journal, Oracle skipper Larry Ellison predicted an industrywide movement toward commodity products, bigger and fewer vendors, and thinner profit margins. Ellison envisions the demise of a thousand companies over the next year or two as the industry settles into a protracted slowdown.

These predictions shouldn't come as revelations. IT vendors, despite their collective superiority complex, aren't impervious to the economic forces that reshape every other maturing industry. Whether companies make servers or switches or cars or light fixtures, whether they provide software or bandwidth or financial advice or air travel, economies of scale dictate that a handful will eventually dominate, often with homogenized products.

Giant Innovations

But consolidation doesn't preclude innovation. Even in industries with the mightiest giants, start-ups fill market niches and keep the behemoths on their toes. Wal-Mart may be the world's biggest company--its 2002 revenue of $244 billion represented 2.3 percent of U.S. GNP--but it's hardly resting on its laurels, launching and testing all kinds of new services. Wal-Mart may have wiped out thousands of mom-and-pop stores, but thousands of specialty retailers still flourish in its shadow, while big discounters such as Target and Costco are holding their own. No market position is unassailable. Just 20 years ago, Sears (whose 1983 revenue accounted for 1 percent of GNP) was considered invincible; then Wal-Mart reinvented the industry.

Even as profit margins narrow, innovators will pile in. What were Southwest and JetBlue thinking when they decided they could make a go at the profitless airline business? They were thinking clearly, it turns out. Both carriers are quite healthy today thanks to their leaner cost structures and superior service, while the industry "leaders" are nearly bankrupt.But high tech is different, some argue. What of the immense R&D, capital and marketing barriers to entry? That's what the critics said a little over a decade ago about the prospects for Dell, Cisco, EMC and SAP. And that's what the Japanese government said 30 years ago when a motorcycle maker called Honda dared enter the auto business: There were simply too many first-rate, dominant players already slugging it out. Evidently, there's always room for more.

So, too, will you find start-ups challenging current IT industry leaders. Prices will continue declining, not just for PCs and switches, but also for operating systems, enterprise applications and consulting services. Commoditization can spawn more-mundane products--think Ethernet networks and Wintel computers--but at least they're easier to support and tend to work together well. So while we may lament the plainness of a Ford-designed Jaguar, we should be thankful for the simplified, standards-based networking, hardware and application environments inspired by IT industry consolidation. Meantime, however, don't expect innovation to just fade away.

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