The curious consolidation in technology sector:

The economics of the operating system business is so profitable that it has been likened to printing money. The operating profit margin for Microsoft’s Windows division hovers around 65% and its marketshare in the personal computer business is more than 90%. No hardware business, including that of Apple Inc., can match this in terms of economic attractiveness. 

Then why are Google and Microsoft buying hardware companies such as Motorola and Nokia? The reason could be the the rapidly shifting trends in the sales of the operating systems. PC sales this year are expected to be over 300 million worldwide, whereas computer tablet sales alone could exceed 200 million and smartphone sales, a staggering 1 billion. Tomorrow’s market leadership in the operating system business will depend on their strength in the tablet and smartphone segments. While Microsoft has won the game in the PC world, it has again become wide open now with Google’s Android emerging as a dominant player along with Windows and Apple’s iOS. The value of the software depends on the number of devices using it. While there could be other reasons for the recent acquisitions, I primarily see these as a way of insuring their market share in the operating systems business. 

On the surface, it may seem Microsoft’s acquisition of Nokia’s mobile phone unit is a way to prevent it from switching to the Android platform but there is more to the deal than meets the eye. In today’s economic scenario when margins of hardware manufacturers are shrinking by the day and there is no advantage one hardware manufacturer has over the other, there is little room left for innovation in hardware on its own. 

Traditionally, software companies had an upper hand on the hardware companies. For instance, Microsoft always dominated the personal computer market even though a majority of the PC market used to run on Intel hardware. This makes hardware companies increasingly irrelevant for consumer-oriented devices on its own.

On the other hand, there is severe competition that software companies face even from smaller and newer companies in niche areas, which makes the software market even more volatile. For example, use of Skype as a messenger and for voice over Internet protocol call dominates all other messengers combined. None of the technology giants could beat Skype for such communication. This makes software companies quite vulnerable to innovations by smaller companies.

 

Apple  has been successful in the last decade not just because it made great consumer-oriented devices but because of a unifying platform for both users and developers. Software development is inherently a costly and time-consuming task, which is why developers want a stable and mature platform to develop on. In contrast, Facebook as an app platform could never take off because of its volatile and unstable nature and, even with all its might, Facebook has failed to lure developers to its platform. Another glaring example is Google’s acquisition of Motorola. 

Google has openly stated, “Google is great at software; Motorola Mobility is great at devices. The combination of the two makes sense and will enable faster innovation.”

In tried, tested and well-proven markets, separation of concerns for hardware and software makers might be more efficient but in the emerging and yet to be proven markets, where greater innovation is required, companies need closer interaction between hardware and software divisions to innovate.

 

Thus, consolidation of hardware manufacturers and software companies is not just a trend, it is inevitable to remain relevant in the volatile consumer oriented markets. There will be multiple hardware and software platforms where there will be greater opportunity for developers to create apps on these new platforms.

In the world of technology, a good company always starts with an innovative and brilliant idea. Over the course of its journey, it is either acquired by another large company or has to become very strong in a short period of time to survive.

Companies, which can do something outstanding for themselves, tend to convert this into a business opportunity and sell those services. For this reason, it is not surprising that someday, we may see Google managing energy for other companies (Google applied and was granted a permit for energy trading). There are four good reasons why this phenomenon is prevalent and is going to become even more prevalent in the future.

Size does matter

When it comes to technology, size is often synonymous to strength. We are very familiar with the phrase “No one ever got fired for buying XYZ (XYZ in this case being a large company with strong brand).” People make buying choices not just based on the features and quality but also on how big and strong the company is. You can’t blame them for making such a choice, because it is important to choose a good product but it is more important to choose a company, which will be able to support and further enhance the product.

Customers buy solutions and not components

There are enough horror stories of customers buying products from different companies and then spending millions of dollars to integrate those products. Therefore, it is a compelling proposition for a technology company to offer an end-to-end solutions and as a result reducing the overall cost of ownership.

Keeping pace with change

Jack Welch said, “If the rate of change on the outside exceeds the rate of change on the inside, the end is near.” The biggest victims of change are technology companies. To fight this reality, we have seen technology companies either expand into new areas or acquire other companies to remain relevant to changing market needs.

Metcalfe’s Law

Metcalfe’s law states that the value of a network is proportional to the square of the number of connected users of the system. This is another reason technology companies tend to enhance their solution footprint so that their network of connected user base increases, thereby multiplying their value.

Integration isn’t a silver bullet though

While there are good reasons to expand beyond the core to stay competitive and relevant, the strategy doesn’t work all the time.

There are a number of cases where technology companies have entered new areas and as a result, have lost focus on their core proposition. Many times, a company is able to deliver outstanding outcomes as long as it remained focused in one particular area.

When such niche companies go beyond their core, they may not be able to deliver similar results.

The key to success simply lies in making sure that the integrated offering is more relevant than the current position and the combined offering delivers multiplier factor without compromising value to customer. As told to Sunil B.S.

Gauri Kesarwani.

pgdm, 1st-sem

19th-sep.-2013