For Sale: IBM i Is A Buyer’s Market
June 6, 2016 Timothy Prickett Morgan
There is an old adage that it is 10 times as expensive to acquire a new customer as it is to keep an existing one happy. I think that whoever lived in those times and coined that phrase did not live in an economic period dominated by the cheap money that was made available–some would say necessary–to keep the global economy humming along or recovering relatively quickly when it falters.
I think it is maybe a hundred or a thousand times easier to buy a company with a set of established customers than it is to acquire them one at a time by creating products and competing. Or it is orders of magnitude easier to let someone else innovate in new areas and let others do all that hard work and walk in with a big pile of money to cash in on that hard work. This is the ethos of private equity and venture capital alike, and it is something that has been normal for decades in Silicon Valley but is still, comparatively speaking, relatively new in the IBM i market.
But access to capital is, without a doubt, changing the face of the IBM i vendor community. It would take a long time to build an exhaustive list of acquisitions that have created giant conglomerates in the IBM i realm, but Infor, HelpSystems, and Vision Solutions started building out their customer bases through acquisitions many years ago and others have followed suit. From where we sit, the IBM i community is changing fast as founders of companies who have spent two, three, or four decades in the IBM midrange are selling off their companies to larger entities with more money and might. This may be the nature of things to consolidate–look at General Motors, for instance, or Fiat Chrysler or Ford Motor Company, for that matter–but it still feels a little unusual watching it happen time and time again.
One of the interesting things about the OS/400 and IBM i community was its diversity. At its peak in the late 1990s, there were over 8,000 suppliers of application and systems software for the System/3X and OS/400 platforms, and collectively they had over 20,000 different products that they sold. My best guess is that the vendor list has dwindled quite a bit since then, from acquisitions and mergers as well as from some companies leaving the field as their owners retired either because they wanted to or because larger and more powerful competitors kept on innovating and competing and drove them from the field. This vibrancy and diversity in the IBM midrange ecosystem made it a good place for customers to find software to solve their business problems, and they generally had access to source code for applications so they felt like they could make lots of modifications to code to have it better fit their businesses. Over time, source code became less and less available at the same time that vendors started snapping each other up. I would guess that there is a lot less diversity, but I would not go so far as to say that the pace of innovation has slowed. It may have, it may not have. There is still enough competition in segments of the market to drive innovation, and we have all been fortunate about that.
Call me old fashioned, but I like small businesses owned and operated by families who participate in a community. I like guilds a whole lot more than I like mega-corps, which is why I named my own corporation Guild Companies. I like the idea of multiple small companies working in conjunction with each other and sharing resources. Perhaps, ultimately, this is what is what is really happening at the big companies in the IBM i market that are snapping up smaller companies and building conglomerates. Perhaps they are just buying installed bases in 2,000 or 5,000 or 10,000 company increments in the hopes of eliminating back office costs and doing a lot of cross selling of existing products or merging products to create a new one that is inspired by multiple products. We have seen all kinds here in the IBM i base.
I don’t mind the conglomeration of companies all that much if there are a number of big firms duking it out and keeping each other on their toes. And I fully expect, should cheap money still be available from private equity firms or hedge funds, to see even more mergers and acquisitions in the IBM i software community. But I do worry about the barrier to entry for new companies to come onto the field. It is one thing to compete with a bunch of smaller companies to be heard above the cacophony, but it is another thing entirely to try to come up against a firm with equity backers and more than $100 million in revenues with tens of thousands of existing customers.
How do you start out in a world like that? Where do you begin?
I am not sure, but I tell you what. You can start right here at IT Jungle. We have done our part for lots and lots of newbie companies who are now name brands in this market or who had their own brands before they were acquired. So if you have a good idea and don’t know where to start, let us lend a hand. Maybe you can build a company that someone will want to buy some day. It is apparently the New American Dream.