<NAR>
'Gorilla' companies increasingly dominate
mercurycenter.com
Call them gorillas.
The top companies from the Silicon Valley 150's industry sectors -- 14 in all -- together account for nearly 90 percent of the profits of all 150 and more than half the sales. The gorillas' combined profit margin hovers near 13 percent. It's barely more than 2 percent for the other 136 companies.
In the Darwinian world of high technology, the gorillas shape and mold entire industries. They dictate the standards for research and development, guide investment decisions by venture capitalists, and nourish the supply chains that allow companies to grow.
''All over this business, there is this tendency for maturation into dominant firms,'' says Tim Bresnahan, a Stanford professor of economics. ''The valley has typically gone through a stage of a lot of innovation and entrepreneurial entrants that have later shaken out.''
As a general species, the gorillas have been around for decades: In the '50s and '60s, IBM dominated the market for mainframe computers and Fairchild Semiconductor Corp. dominated the emerging market for semiconductors.
But the gorillas grow up more quickly now. And their rapid emergence raises new questions about the broader economy: What kind of framework do they provide for innovation? Are they durable or fragile? And just how likely are they to devour the less powerful?
A few of the 14 gorillas have dominated their niches for a generation or more: The most obvious are Intel Corp. in semiconductors; CNF Transportation among non-high-tech firms, and Hewlett-Packard Co., which now produces computers and printers.
A clutch of them -- like Cisco Systems Inc. -- have burst into the lead in the past 10 years. And even companies middle-aged by Silicon Valley standards have dominated for less than 15 or so years: Adaptec Inc. in peripherals, Seagate Technology Inc. in disk drives, Solectron Inc. in contract manufacturing.
What's striking about the gorillas is that they emerge not just at the very highest levels -- the Intels and Microsofts of the world -- but also in sub-sectors, on a much smaller scale. In effect, the giants are aped by their littler brethren.
Siebel Systems Inc. of San Mateo, for instance, has carved out a powerful niche in sales-force automation software, acquiring competitors to enforce its hold.
And PeopleSoft Inc., a Pleasanton company, has become a dominant force in the software field that lets government and industry manage human resources, finance and manufacturing.
The reasons for this lie in Silicon Valley's relentless demand for uniform standards -- and for avoiding the hassles of dealing with multiple vendors.
An official running a network of corporate computers wants one kind of router. Another buying PCs wants one operating system. A third shopping for graphics software wants all programs to be compatible.
''This industry is full of de facto standards: the Intel microprocessor, the Cisco router, the Applied (Materials) machines for silicon manufacturing,'' says Martin Reynolds, vice president of technology assessment at Dataquest Inc., a Silicon Valley research firm. ''You may have a product that's just as good as these guys, but because you're different, you don't fit.''
In a new book called ''The Gorilla Game,'' authors Geoffrey Moore and Paul Johnson examine how companies dominate by exploiting new technological markets.
''It turns out that it is not a function of better marketing, or a better product, or any other obvious cause,'' they write. ''Instead, it is primarily a function of the market itself desperately needing to set technology standards.''
Even in niche markets, the odds favor the bold company that can get enough major customers early -- or make enough key alliances -- to be anointed a standard-setter.
''The early mover advantage is just huge,'' says John Rohal, director of research for BancAmerica Robertson Stephens in San Francisco.
Sun Microsystems Inc., for example, got a boost when its work stations were adopted by Wall Street. And Silicon Graphics Inc. -- which is now ailing -- became dominant in digital graphics when its products were embraced by Hollywood.
Once a gorilla commands a sector, it can preserve its dominance by moving laterally to other niches -- or by changing the standards in a way that forces its competitors to spend enormous amounts of money to keep up.
As an example, the two authors cite the way that Microsoft Corp. undercut networking pioneer Novell Inc. by introducing its Windows NT architecture.
''As soon as a clear leader emerges, everyone wants to get on their bandwagon, and pretty soon no one is left in the race,'' Moore and Johnson write.
The losers are forced to mine smaller and less profitable niches, usually working to complement the gorilla's technology.
Stanford professor Bresnahan and others call this phenomenon ''co-opetition'': It describes the wary position that a smaller company has in working with a Microsoft or a Cisco. While it's cooperating with the giant, it's also worrying about being quashed in the next round of competition.
Take Netscape and its browsers. First the Navigator and later Communicator were designed to run on Microsoft's Windows operating system. It looked like a safe and profitable niche until Microsoft began introducing its own Explorer browser.
In an earlier generation, much the same thing happened to Lotus Development Corp. WordPerfect Co., which were also overrun by Microsoft.
Microsoft is a gorilla of extraordinary heft: The U.S. Justice Department is now accusing the Redmond, Wash. company of illegally using its control over the operating system to leverage the market for the Explorer. And many of its competitors denounce its business practices.
But for the most part, experts in the valley -- venture capitalists, economists and others -- view the emergence of gorillas in technology as essential for stability and direction -- and generally benign.
A big reason for their optimism is that technology is much more fluid today -- and new niches open with amazing speed, particularly in the Internet realm.
''I think the whole software area is much more amenable to someone breaking into that upper group,'' says Walter Kortschak, a venture capitalist with Summit Partners in Palo Alto. ''That stuff is not nearly as capital intensive.''
A new fab for a semiconductor company, for example, can cost well more than $100 million. But it's not unusual for software companies to be launched -- and bring their product to market -- with $10 million to $20 million in venture investment.
Even in hardware, things move faster than a generation ago: It took Motorola Inc. 17 years, for example, to win general acceptance for the cellular phone. It took the inventors of the PalmPilot 20 months to dominate the hand-held computer market.
The biggest new gorilla in Silicon Valley is Cisco, which has acquired some 15 companies in the last five years. Since 1989, Cisco's sales have grown nearly 50-fold, from $130 million to $6.4 billion, now double the size of its nearest competitor, 3Com Corp.
Cisco shows every sign of durability, and even if it were to falter, other competitors would step into the breach. ''If you look at every one of these areas, they're all areas that continue to have phenomenal growth,'' says David Gold, a venture capitalist with Indosuez Ventures in Menlo Park.
Dan Hutcheson, president of San Jose-based market research firm VLSI Research Inc., takes an equally sanguine view of the life and death of gorillas. He argues that one of the unique things about technology -- different, say, from the steel industry-- is that new technologies are always coming along, catching the leaders off-guard.
Indeed, the high-tech landscape is littered with fallen giants, from Novell, which once dominated corporate networking, to Lotus, which once commanded the spreadsheet market and is now a part of IBM.
''If you take a snapshot at any given time, you'll find this huge base of guys at the top,'' Hutcheson says. ''But if you look 10 years from now, a lot of them will be out of business.''
***********************************************
Interesting to me how almost all of the "squashed" gorillas were in fact squashed by MSFT, the only bigger gorilla than Cisco.
Justin |
