copyright 2004-2008 by Nicholas G. Carr
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Nick Carr's essay blog
April 29, 2005
By Nicholas G. Carr
The following is an excerpt from the article "The End of Corporate Computing," which appears in the Spring 2005 issue of the MIT Sloan Management Review. A copy of the full article can be downloaded here.
Something happened in the first years of the 20th century that would have seemed unthinkable just a few decades earlier: Manufacturers began to shut down and dismantle their waterwheels, steam engines and electric generators. Since the beginning of the Industrial Age, mills and factories had had no choice but to maintain private power plants to run their machinery — power generation was a seemingly intrinsic part of doing business — but as the new century dawned, an alternative was emerging. Dozens of fledgling electricity producers were erecting central generating stations and using a network of wires to distribute their power to distant customers. Manufacturers no longer had to run their own dynamos; they could simply buy the electricity they needed, as they needed it, from the new suppliers. Power generation was being transformed from a corporate function into a utility.
Now, almost exactly a century later, history is repeating itself. The most important commercial development of the last 50 years — information technology — is undergoing a similar transformation. It, too, is beginning an inexorable shift from being an asset that companies own — in the form of computers, software and myriad related components — to being a service that they purchase from utility providers. As the earlier transformation of electricity supply suggests, IT’s shift from a fragmented capital asset to a centralized utility service will be a momentous one. It will overturn strategic and operating assumptions, alter industrial economics, upset markets, and pose daunting challenges to every user and vendor. Ultimately, it promises to transform the vast $2 trillion IT industry that provides corporations with computing and communications hardware, software and services.
Exactly what the new industry will look like remains to be seen, but it’s possible to envision its contours. It will likely have three major segments. At the center will be the IT utilities themselves — big companies that will maintain core computing assets in central plants and distribute them to end users. Serving the utilities will be a diverse array of component suppliers — the makers of computers, storage units, networking gear, operating and utility software, and applications. And finally, large network operators will maintain the ultra-high-capacity data-communication lines needed for the system to work. The boundaries between these sectors will be fuzzy; some companies will no doubt try to operate simultaneously in more than one.
What’s particularly striking about this model is that it reveals the unique characteristics that make IT especially well-suited to becoming a utility service. With electricity, only the basic generation function can be centralized; because the applications are delivered physically, through motors, light bulbs and various electronic devices, they have to be provisioned locally, at the user’s site. With IT, the immediate applications take the form of software, which can be run remotely by a utility or one of its suppliers. Even applications customized to a single customer can be housed at a supplier’s site. The end user only needs to maintain various input and output devices — monitors, printers, keyboards, scanners, portable devices, sensors and the like — necessary to receive, transmit and manipulate data, and, as necessary, reconfigure the package of services received. Some customers may well choose to run certain applications locally, but utilities will be able to own and operate the bulk of the hardware and software, further magnifying their scale advantages.
Which companies will emerge as the new IT utilities? At least four possibilities exist. First are the big traditional makers of enterprise computing hardware that have deep experience in setting up and running complex business systems — companies like IBM, Hewlett-Packard, Sun Microsystems, and Fujitsu Services, all of which, not surprisingly, have already been aggressively positioning themselves as suppliers of utility services. Sun, in fact, not only rents processing and storage capacity for a fixed per-unit fee but is also setting up an on-line auction to sell excess computing power.
Second are various specialized hosting firms, like VeriCenter in Houston or MCI’s Digex subsidiary, that even today are running the entire data centers of some small and mid-sized companies. These specialized firms, which struggled to survive after the dot-com collapse, are beginning to resemble the operators of the original central stations during the early stages of electrification. Third are Internet innovators like Google and even Amazon.com that are building extensive, sophisticated computing networks that could theoretically be adapted to much broader uses. Finally, there are the as-yet-unknown startups that could emerge with ingenious new strategies. Because the utility industry will be scale-driven and capital-intensive, size and focus will be critical to success, and any company will find it difficult to dominate while also pursuing other business goals.
To date, utility computing seems to be following the pattern of disruptive innovation defined by Clayton Christensen of the Harvard Business School — initially gaining traction at the low end of the market before ultimately emerging as the dominant supply model. As such, it may pose grave threats to some of today’s most successful component suppliers, particularly companies like Microsoft, Dell, Oracle and SAP that have thrived by selling directly to corporations. The utility model promises to isolate these vendors from the end users, forcing them to sell their products and services to or through big, centralized utilities, which will have significantly greater bargaining power. Most of the broadly used components, from computers to operating systems to complex “enterprise applications” that automate common business processes, will likely be purchased as cheap, generic commodities.
Of course, today’s leading component suppliers have considerable market power and management savvy, and they have time to adapt their strategies as the evolution of the utility model proceeds. Some of them may end up trying to forward-integrate into the utility business itself, a move that has good precedent. When manufacturers began to purchase electricity from utilities, the two largest vendors of generators and associated components, General Electric and Westinghouse, expanded aggressively into that business, buying ownership stakes in many electric utilities. As early as 1895, GE had investments totaling more than $59 million in utilities across the United States and Europe.
But that precedent also reveals the dangers of such consolidation moves, for buyers and sellers alike. As the U.S. electricity business became increasingly concentrated in the hands of a few companies, the government, fearful of private monopoly control over such a critical resource, stepped in to impose greater restrictions on the industry. The components of IT are more diverse, but the possibility that a few companies will seize excessive control over the infrastructure remains a concern. Not only would monopolization lead to higher costs for end users, it might also retard the pace of innovation, to the detriment of many. Clearly, maintaining a strong degree of competition among both utilities and component suppliers will be essential to a healthy and productive IT sector in the coming years.