HAMPTON, N.H. – The discussions of a Long-term Stock Exchange (LTSE), or an exchange that would reward investors the longer they hold their shares, flow out of Silicon Valley. Contrarians argue it is just startups with no short-term revenue seeking relief from the rules of the traditional exchanges. They are right on the intentions but wrong on the impact. The impact is something TBR described in a recent commentary as an impending Digital Dust Bowl.
If we do not want to exacerbate the impending economic disruptions that will accelerate as emerging technologies commercialize, we must have a national debate on how we regulate economic activity as the underlying economy pivots to radically different operating characteristics.
Rules designed for a manufacturing age cannot hold up in the emerging, technology-disrupted knowledge work era — you would not write code today using 1980s software, so why are we stuck with 1980s regulations?
- Like Class VI rapids: Cannibalization and disruption, platforms and monetization
Consider the following business-of-technology shifts:
• Virtualization of servers and storage severely disrupted manufacturers. IBM (NYSE: IBM) exited the PC business and then the server business, for example. Dell chose to go private to bypass the “90- day shot clock” evaluation of its business activities, consolidating and optimizing its hardware manufacturing businesses while pivoting to higher-value services. Next up will be network virtualization and the resulting cannibalization of hardware profit margins, apparently putting a dent in Cisco’s (Nasdaq: CSCO) earning performance as the company searches for software-related revenue streams.
• Technology enablement disintermediates value chains, shifting the critical success factors from manufacturing scale to ecosystem participation — think Apple iTunes platform. Without a platform, songs could not be distributed electronically, and artists could not bypass intermediaries such as music labels with their manufacturing capabilities to physically stamp CDs. But without popular songs, the content-less (or, at least, less-desired content) platform would have no meaning.
• New technology business models shifted risk from purchaser to seller. In the old dynamic, firms had to capitalize the investment, get it up and running, and then develop the applications. Commercial value or business benefit did not materialize for several years. Today, many businesses will not subscribe to a set of composable software services until the vendor has proven the value of the software by ingesting real prospect data into the software application and demonstrated its utility to the customer. The financial metrics of technology acquisition have shifted from capex considerations to opex considerations, and the risk has shifted almost entirely to the vendor to prove value in advance of the sale.
This latter dynamic mixed with the short-term orientation of the investor community damages technology vendors. Legacy firms have watched their traditional business models and monetization strategies erode while the emerging business model monetization strategies have radically different, and longer-to-develop, monetization dynamics. Today, technology vendors have to take the risk to prove value in the cloud-enabled economy rather than large enterprise. They have to build the platforms, invest in the cloud data centers, and then recruit the small firms with the niche IP end customers seek to sit atop their safe, flexible and agile platforms.
Part two: Sea kayaks in the rapids: IBM and EMC