Remember Lycos? One of the earlier leaders in search, it was sold to Spanish firm Terra for more than $12 billion ten years ago. This week it sold again to an Indian company, for a paltry $36 million. Ouch. That got us wondering how some tech companies seem to go so easily from standing on top of the world to the digital bargain bin.
For at least part of the answer, we contacted Ernest von Simson, a guy we like to think of simply as the brains behind many of the world's top CIOs, although his official bio puts it more eloquently. He told us about a few of the potential pitfalls for new kings of information and also looked into his crystal ball to see what could be in store for a few big names currently on top of the information universe.
Daniweb: Why do those companies coined the “great ones” by the press so often fail within a year or two of their initial success?
von Simson:There are many reasons, including journalistic naiveté and even conflicts of interests with major advertisers. But more frequent are two recurrent phenomena which are missed for understandable reasons but inevitably lead to business collapse:In assessing start-ups, there’s often too much focus on the newest technology and too little attention paid to the newest business model that’s of equal importance to success. In other words, the much touted first mover advantage is in reality often a disadvantage.
In assessing establishment companies, it’s too easy to miss the gradual development of the destructive factor until the damage has become visible and it’s too late to correct the problem,
As examples of first mover disadvantage, consider that point in PC history, 1979, when Apple, Commodore and Radio Shack led the market in share. All three used microprocessors. But at $600 with zero customer support, Commodore’s PET computer relied on the business model of either home entertainment systems or high end calculators and soon disappeared. And the Radio Shack TRS 80 with its totally integrated product from platform to applications to distribution to customer training, tripped into the business model of the rapidly disappearing minicomputer sector. And this last generation model couldn’t compete against Microsoft, armies of independent software firms and less encumbered computer stores. More recent examples of first mover disadvantage would include search engine Alta Vista and social network Friendster.
When establishment companies experience “sudden” collapses, the basic cause is failure to reinvent themselves quickly and radically enough to survive the tectonic changes that occur every ten years or so in the IT sector. Each generation (i.e. the ages of mainframes, minis, PCs, Internet and now mobile Internet and Software as a Service) has introduced not just a new technology but also a new business model that includes cost structure, product development formula and sales and distribution channels. In that context, it’s no surprise that the incumbents' previous assets dissolve into sludge.
As an example, Digital Equipment received a glowing cover story from Business Week in 1983, a year that became the company's apogee and marked the beginning of its ultimate collapse. But in 1983, the company's top management had just made enormous strides in product integration, cost structure and the centralization of the once powerful product groups. It looked great against traditional competitors like IBM and Wang and that's probably what journalists saw. But the journalists were looking at the present and not the future. Several disconcerting trends were already underway. First, the company spent much more time and energy on internal organizations than was healthy at that point -- the cusp of momentous change.
By 1983, Sun had been formed a year earlier and would soon begin to eat away at Digital's highly profitable scientific work station business. And Apple would introduce the Mac within months of the article and begin a revolution in user interfaces and self sufficient customer support. Second, Digital's organizational perturbations triggered the beginnings of an exodus by some of the company's most creative and idiosyncratic thinkers. Within six months, profits dropped 75 percent and the shares lost 20 percent in a single afternoon. Within two years, a sizeable number of Digital’s strongest and most innovative managers were gone, leaving an executive committee comprised mainly of the CEO, CFO and the heads of sales and manufacturing. There was no longer a strong innovative voice at the top. By 1985, Digital’s battle against Sun was essentially lost with the newcomer offering hotter technology and a ten percentage point cost advantage over the incumbent.
And most recently, what about HP? For the past three years, savvy journalists often praised Mark Hurd’s attention to the financial numbers and continuous cost cutting. But they weren’t critical enough of HP’s acquisition spree of last-generation also-rans like EDS, 3Com and Palm, all while decimating the company’s once proud R&D effort. Of course, that’s left a dangerous gap in future technology, especially with the IT sector about to undergo yet another tectonic shift. “This was once the world’s greatest company,” a former HP executive wrote me sadly a few days ago. Who knows whether a leader capable of reversing HP’s slide can be recruited by its board of directors. But the downfall will not have been sudden or unexpected.
Daniweb:So now what's the future for Apple and Google in two to five years?
von Simson: Clearly, continuing success in the self-immolating IT sector depends on management's continuing ability to reinvent the company. The biggest barrier to change is prior success. So the company that receives the most press kudos is also the one most likely to develop the greatest internal resistance to change at every level of the corporation. "Burn the place down," was Steve Jobs’s answer many years ago when I asked how Apple could survive the Mac's early adulation by the public.
And in some sense, Steve has done exactly that by moving Apple far outside the PC business into new technologies integrated into selected common carriers and new mechanisms of product distribution and payment. Just consider iPods selling music, iPhones selling mobile Internet applications, iPads selling content that was previously “free.” Obviously I’m oversimplifying, but you get the idea. The question for Apple’s future is obviously the succession of its founder and CEO. Steve Jobs has apparently recovered from his frightening illness but it’s fair to observe that his two most fervent peer competitors, Bill Gates and Scott McNealy, have both retired from active management roles. The replacement of a founder CEO has always been among the thorniest task for a board of directors. Very few have succeeded, witness Digital, Wang and most recently Sun. In fact, the gold standard for such rare transitions is still the two-step from Tom Watson to his son Tom Jr. to Frank Cary, almost fifty years ago.
Google has made significant efforts to reinvent its business model but perhaps not enough. Certainly Android would be considered an achievement comparable to the iPhone except that Android is not yet a business with a material revenue flow. And the Google cloud and Google apps are hardly enough to overwhelm the competition from Amazon, Apple, Facebook, Microsoft and Salesforce.com. Time will tell. The race will belong to those who are not just swift but can also change the rules of the game as these next “great ones” have done already.