Don't Miss the Big Trends in Tech By Andy Kessler
My partner at Velocity Capital, Fred Kittler, always reminds me that short-run fashions, like gaudy clothes (is he trying to tell me something?), sometimes distract us from the underlying fundamentals.
In the technology world, it's easy to be distracted by Y2K issues and Internet mania. Both trends obscure early signs of an impending massive change in the infrastructure of information technology and commerce in general. To help prevent you missing the forest for the trees, I offer you the following trends. Nota bene.
The PC
The PC, as we know it, is on the wane. The Windows footprint -- meaning the entire collection of software and hardware necessary to run a standalone PC -- is simply too big and unwieldy to satisfy the need for speed and mobility.
With Internet Protocol networks now reaching into the mass market -- witness the rise of Internet telephony -- the next generation of PCs can be optimized for Internet access. Where does this ultimately end? Over time, there will be no reason to buy software anymore because everyone will be able to rent it running off a server far more efficiently -- and yes, Bill will be doing that, too.
Hence, a PC architecture optimized for locality will evolve into one optimized for access, with a greater emphasis on high-speed shuffling of packets than those running pixel-popping programs. Once we adopt this model, a $300 PC becomes doable without much beyond the processor and memory and some molded plastic.
The Network
Information technology infrastructure is being rebuilt as a utility, which means that it must be capable of scaling up to millions of users, with 99.99% uptime, on a 24-hours-a-day/7-days-a-week basis. Vendors with hardware or software products that can't do this need not apply.
Delivering the uptime performance of the local phone company in a network setup is the big marketing push of hosting vendors. These companies, such as Digex and Exodus Communications (EXDS:Nasdaq) (which I helped fund years ago and now own stock in) provide high-speed data lines and host servers in big air-conditioned rooms. MIS guys hate getting paged on the weekend on the golf course because of some interruption in their data lines, so Exodus and others make a living from it by guaranteeing network reliability.
Open Intranets
Paralleling this phenomena, the job of a corporate management information systems, or MIS, manager is changing from a systems manager to that of a service provider. The MIS of tomorrow will be responsible not only for internal applications with thousands of users, but also for those customers and suppliers who are directly linked to the company -- thus adding hundreds of thousands of users.
These MIS pros are really scared to open up their network firewalls to allow either of these critical groups of users inside, yet that will be their charter beginning now.
In Software
Major software vendors are creating strategies for application hosting, which represents a huge shift in the software industry.
To understand this, realize that the present model -- the now-defunct client-server model -- had customized software code running on both PCs and on servers. This was hugely inefficient, of course, because every software repair or upgrade meant that someone had to touch every PC and server in the company. The latest strategy, called thin client because it was based on a Web-browser-based piece of software, was primarily a response to lower maintenance costs.
Over the next few years, software applications will be purchased as services from application service providers, or ASPs. These are companies like USinternetworking (USIX:Nasdaq) and others, which can be accessed through these same browsers.
This trend will quicken the pace of obsolescence for enterprise software companies, which, with their erratic earnings, have proved to be a tough area of investment. I think this trend is so powerful that I predict that most enterprise software companies -- which sell huge numbers of software in make-or-break-the-quarter fashion and whose business models require spending 50% of revenues on sales and marketing -- are now dinosaurs.
In Telecoms
After some initial reluctance, the telcos are beginning to install next-generation equipment, including digital subscriber line service and "Voice Over Internet" functionality. To accomplish this, they are integrating new Internet Protocol networks with the old circuit-switched networks. The idea here is to provide enhanced services at lower cost than with the Class 5 switches (the current standard telephone switch from Lucent (LU:NYSE) that currently populate phone company central switching offices). My bet is that within five years, the Class 5 switch will be functionally replaceable with Internet Protocol equipment, a la Qwest (QWST:Nasdaq) or Level 3 (LVLT:Nasdaq).
E-Tailing
Retailing always was tough, but it's getting tougher. Electronic commerce is collapsing the distribution channel, causing huge changes in how products are distributed from wholesalers to retailers. The biggest change arises from the fact that online retailers have separated merchandising from inventory management. So while new Internet retailers -- like Onsale (ONSL:Nasdaq) and Buy.com -- aggregate buyers, they don't get their hands dirty in the warehouse. That's left up to distributors, such as Tech Data. (TECD:Nasdaq), which now manages product logistics.
Amazon (AMZN:Nasdaq), with its recent success and additional product lines, has grown large enough to do both, thus it's building large regional warehouses. But that raises a completely different question: Will doing both slow the company down? |
