Flashback to 1956: IT for Rent
May 17, 2004 Timothy Prickett Morgan
If you have ever worked in product sales, you know there is a certain charge that comes from having a good product, from knowing it is a better product than that of the competition, and making a big sale. While some sales people enjoy the risk of failure, many more enjoy being a reflection or an extension of a good product and the company that created it. But both sellers and consumers of IT products are just plain sick of the game. We’ve had quite enough.
While IT sales can be fun–there is a rush that comes from winning a deal and killing the competition–almost no sales person really enjoys the ever-lengthening sales cycle, the creeping featurism, and the need to make sales monthly, quarterly, and yearly, which is the hallmark of the IT market.
With many types of capital equipment, you buy a new factory, truck, or machine press when the old one breaks or no longer suits your needs. It is usually the former. And as far as the “needs” go, you can always work around the limitations of what you have, so you don’t have to buy something you would like but do not want spend the money on. In the computer business, even though we talk about the feeds and speeds of hardware and the new bells and whistles of software, the need to actually move from one product to another is less concrete when the computer or software is actually functioning. And computers are pretty reliable and do what they say they are supposed to do.
This makes selling hardware and software a serious drag. And as computers have matured (hardware and software both have become much more reliable, and the extra gadgets don’t seem to be worth as much as they did when hardware and software were more primitive), the sales cycle has lengthened and the economic usefulness of an IT product has shrunk to zero.
It should come as no surprise that IT consumers and vendors have had enough and are both looking for a different way to sell and buy IT components and services.
There are really no new ideas in the computer business. The basic fundamentals were worked out a long time ago, and ideas are rediscovered and modified to fit a slightly different set of circumstances. The underlying components of IT change all the time, but the ideas keep coming around again and again.
People talk about ubiquitous computing, utility computing, and pervasive computing, but what we really want (and what the vendors surely want) is thoughtless computing. They want to simplify computing as much as possible so we get something that looks like a monthly cable bill. They want a recurring revenue stream that is predictable and a bill that is impenetrable and inarguable. They want to get off the sales cycle and return to the glorious dawn of the Computer Age, in the early 1950s.
During the Depression and World War II, IBM was the dominant supplier of punch-card equipment used for early government and business accounting systems. Because of predatory technology and pricing practices that yielded IBM profits even Microsoft cannot match today with its software, Big Blue grew to have about 95 percent of that tabulating equipment market. And as the Computer Age dawned, Big Blue was sued by the Department of Justice on antitrust grounds. The company had always leased its equipment, which gave it tremendous control over pricing, but also gave customers the option of unplugging their gear with 30 days’ notice.
In 1956, IBM signed a consent decree with the U.S. government that forced the company to sell its tabulating and computing equipment at a reasonable price, based on its leasing rates for the same equipment. This consent decree did a lot of things, including fostering the leasing of IBM equipment by third parties. But more than anything, it set the precedent for acquiring rather than renting IT equipment. With that IBM consent decree, IT moved from an operational cost to a capital equipment investment that had to be depreciated. And while that has been great for the industry in many ways, this move from one side of the balance sheet to the other inevitably led to adding bells and whistles to products, to adding hype in marketing, and other destructive behavior. We end up with computers that grow ever more complex and rigid, which makes the next computers even harder to sell.
That is why vendors are all, in various ways, talking about moving away from product sales as we know it and toward recurring revenue streams that smell like the punch-card business of days gone by. IBM already has about 40 percent of its revenue and 60 percent of its profits coming in on a recurring basis through services deals, equipment leases, and monthly rentals on systems software. It has done a good job of trying to get back to where it once belonged, and with the consent decree nullified in 2001, it has a very good chance of reemerging as one of the dominant powerhouses of IT. IT players are desperately trying to think of new pricing schemes and product packaging to get out of the continual sales business and into the services business. But they are not as much interested in providing services as they are keen on not having to sell.
This means pricing for IT components and services is going to get fuzzy. Application software maker PeopleSoft has, for instance, instituted so-called value-based pricing, which uses an algorithm based on company size, revenue, users, profitability, and comparisons to competitors in order to reckon what it should charge a specific customer for a suite of software. List price is, in effect, history. And so will be comparison shopping, since every customer gets a truly unique price and has no way of knowing what other customers pay.
This type of pricing will in many ways simplify the acquisition of IT products, which will be sold as services, but it will complicate the process of reckoning one product or service against another. And vendors could not be happier. They are waiting for customers to throw their hands up in frustration, which will make picking their pockets that much easier. And after a few decades of this services phenomenon, there will be another antitrust suit, another consent decree, and the cycle will repeat again. Mark my words.