Commentary: Why Tech's Heavyweights Still Can't Crush the Small Fry
By Robert D. Hof
Everywhere you look, the strongest tech giants just keep on getting stronger. On Oct. 17, mighty Microsoft Corp. (MSFT ) more than doubled its net income, to $2.7 billion, just as most rivals' profits fell or disappeared. Dell Computer Corp.'s (DELL ) third-quarter shipments of personal computers jumped 23% from a year ago, far outpacing No. 2 Hewlett-Packard Co. (HPQ ), whose shipments fell 5%. Even Cisco Systems Inc. (CSCO ), despite struggling with the telecom meltdown, has hiked its market share of networking routers to 70%, from 60% a year ago. It's the same story with IBM (IBM ), German software powerhouse SAP (SAP ), and cell-phone leader Nokia (NOK ).
Good for them. But the rise of these bruisers on steroids raises a troubling question: Will their increased dominance harm competition, raise prices, and reduce innovation? Microsoft's market power notwithstanding, the surprising answer is: not likely. For now, of course, the relentless tech downturn means a buyer's market. Yet even longer term, many customers aren't worried, confident that a recovery will spark a new round of innovation and competition. Says David Watson, chief technology officer for the HMO Kaiser Permanente: "The cycles of innovation don't seem to be dampening."
Corporate tech customers are sanguine, in part, because they often prefer dealing with the giants. During downturns, too, tech buyers shy away from startups that may go bust. A recent Merrill Lynch & Co. survey of tech buyers found that 80% are consolidating purchases with larger suppliers, vs. only 5% favoring smaller outfits. Office-products retailer Staples Inc., for instance, will soon cut its PC suppliers from three to one. Says Bob Parker, an analyst with AMR Research Inc.: "People want one throat to choke."
Of course, buyers need to watch their own throats as well. Microsoft Corp., with no viable competition, recently hiked license fees for its Windows software, forcing many customers to direct scarce resources from other tech products.
The question is whether buyers, as they narrow their supplier lists, endanger the viability of struggling midsize or second-tier suppliers. Even large suppliers such as server maker Sun Microsystems Inc. (SUNW ) and customer software supplier Siebel Systems Inc. (SEBL ) are hurting today. Moreover, reducing the pool of strong competitors could eventually come back to haunt technology buyers by narrowing the wide array of choices that has kept tech vibrant.
But despite the risks, tech customers are convinced that they will remain in the driver's seat. Even if smaller and midsize companies face a tighter squeeze and dwindling resources, they believe small, innovative companies will continue to thrive in such markets as security software and wireless networking gear. Others are changing the game: Salesforce.com Inc. offers customer-management software online to nearly 5,000 clients. That's a cheaper, more flexible alternative to software from leaders Siebel and SAP. Such pressure keeps the giants on their toes.
There's another reason buyers needn't worry. Giants can be awfully nimble on their own, too. Thanks to its swift embrace of the Java software created by rival Sun, for instance, IBM logged a 27% jump in sales of Internet software in the third quarter. And in the key market for application servers, it gained nine points of market share last year, rising to a 31% share--nearly catching leader BEA Systems Inc.'s (BEAS ) 34% share.
Perhaps most important, customers wield more power than ever, thanks to a rising tide of industry standards. Software that conforms to agreed-upon specifications, such as Java, Linux, and the Internet data-interchange standard XML, prevents suppliers from locking in customers to their products as tightly as they once could--or Microsoft still can.
That power will only grow when the tech recovery eventually comes. While a few prominent giants clearly are turning on the heat during the downturn, most big tech suppliers are still cutting research and capital spending. That's the opening the giants always leave for upstarts in times like this. And it's why, when the economy turns, the tech industry's little guys will get another day in the sun.
Senior Correspondent Hof covers technology from Silicon Valley.