Friday, April 22, 2011

Less Than Free

In Bill Gurley post about Google's castle-and-moat strategy with Android and Chrome, he writes that Google is:
... not trying to make a profit on Android or Chrome. They want to take any layer that lives between themselves and the consumer and make it free (or even less than free). Because these layers are basically software products with no variable costs, this is a very viable defensive strategy. In essence, they are not just building a moat; Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it.
The "less than free" economic model got me to thinking about the history of technology-induced economic shifts.

When I worked at Sun in the 1980s, we watched one industry after another make the uncomfortable transition from hardware to software sales. CAD, medical imaging, Artificial Intelligence (LISP), and other vertical-focused vendors sold special purpose processors to speed specific calculations their customers made over and over using their software. As general purpose processor prices dropped and performance increased, inevitably the special purpose processors lost to general purpose processors in the market. Vendors ported their software to Sun and other general purpose platforms and jettisoned their costly hardware engineering and manufacturing.

Since the emergence of the Internet, two important shifts are taking place.

First, large Internet companies are supplying what is now called "Cloud Computing." In much the way that vertical-focused vendors in the 1980s built special purpose processors, Internet companies build large clouds, or computing infrastructures, that specialize in particular tasks. Google has built a search infrastructure, Amazon an online commerce infrastructure, eBay an auction infrastructure, SalesForce a CRM infrastructure, and so on. Some infrastructures are more "tuned" than others, more focused on a particular calculation. It's safe to say that you wouldn't want to use eBay's infrastructure to search the Internet, or Google's infrastructure to auction your collection of crock pots. Unlike vertical-focused vendors in the 1980s, cloud infrastructures won't be replaced by a general purpose cloud.

Second, the rapid proliferation of low-cost networked (usually mobile) devices (think iPad or Galaxy Tab) coupled with increased fluidity in employment and contract practices in the workplace (think frequent layoffs and organizational engineering) are changing asset ownership and use policies within organizations. A contractor, for instance, prefers to interface with a large firm's networked infrastructure using his or her own laptop rather than with a firm-issued laptop. The Bring-Your-Own (BYO) trend is now called "consumerization." This phenomenon is pushing IT departments to act like specialized Internet companies. More and more, a firm's IT infrastructure will work like a cloud service provider, a provider whose infrastructure is tuned for that firm's business processes rather than, say, for search or auctions.

This first trend (specialized consumer Internet infrastructures) has enabled and encouraged the second trend (consumerization). Consumer Internet companies leverage the consumer's device to provide service and generate revenue. Declining consumer device prices translate into more available consumers. As Google is showing, less-than-free software can not only drive device prices even lower, but also create stickier revenue channels.

The different objectives of consumer Internet companies and Corporate IT departments are coming into conflict, and Corporate IT departments are in a bind. Consumer Internet companies want as many customers as possible, and most IT departments don't. Falling consumer devices prices coupled with end-user familiarity with and preference for new mobile devices mean the firm will be more efficient by leveraging BYO devices. Opening up the private infrastructure to public consumer devices, on the other hand, creates many problems for IT departments used to controlling all the end-user devices. Application portability is one significant problem. If an IT department has deployed all its applications to run on specific browsers or operating systems, portability is a large cost of opening up the infrastructure. Security is another. Who has access to what data on which devices? Who knows what malware is running on all those consumer devices?

Simultaneously, IT departments are faced with a completely different set of challenges employing clouds to increase efficiency of their own infrastructures.

I suspect that smart IT departments will learn from consumer Internet companies and markets. The future may lie in strategies to extend their infrastructure to as many users as possible. Financial institutions and other service firms have started this trend because they share the same goal as consumer Internet companies of extending the reach of their infrastructure to as many consumers as possible. To various degrees, firms also share infrastructure with their supply chain partners. Will the IT organization end-game include "less-than-free" somewhere? Don't be surprised.


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