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Monday, January 31, 2005

The Paradox Of Technology Industry Solutions As Commodities

Jonathan Schwartz writes,computers aren't the commodity - computing (and bandwidth) are.He argues,just as power generators built at GE aren't the commodity,whereas electricity is. In his recent blog, Jonathan extends his reasoning to cover evolving developments in the technology industry. He argues, standardisation precedes commoditization and processing powers available on tap are setting the standards and more importantly, commodity selling enteprises are among the most successful profitable enteprises in the world. Excerpts with edits and my comments added:

Early in its evolution,only the wealthy could afford electricity (along with the requisite generator and electrician), and the technologies were fragile. Businesses that wanted power generation facilities were similarly wealthy enough to afford large-scale versions of the same, It took about a decade for those deploying electricity to settle on a few standards that ultimately accelerated consolidation. From voltage to cycle to plug configuration once the standards existed, businesses could plug into a grid - labor markets went through a fairly sizable dislocation, but electricity was firmly established as a ubiquitous service. Scale efficiencies and the resulting massive decrease in price allowed the government to bridge the power divide through rural electrification. Electricity that started out 20 times the price of gas lighting - obviously got a lot cheaper. Once the standards were set, and the grid powered up, electricity finally established a transparent price - the hallmark of a true commodity. If pricing isn't transparent, products can't be deemed a commodity - transparency meant to be defined for a standard unit of measurement like "5 cents per kilowatt hour," "2 dollars per gallon." It's either a standardized physical delivery (gallon, barrel, ton), or unit of consumption (typically time based, 100 megabit hours, megawatt hours, etc.) - but it's the same across the industry. Jonathan argues, by this definition, a 4-way x86 dual core Opteron server running an open source indemnified Solaris OS with a J2EE 1.4 compatible Java Enterprise System web services stack, optimized JVM and 256M of RAM is not a commodity.

Sun is all set to announce - the evolution of a true computing grid, priced at $1/cpu-hr; the business and technology models underlying such a transformation; and moreover, the impending impact on the marketplace for computing power and value.Jonathan adds,while power operators can't add a lot of value to a powerline, things are a tad more hopeful for the network operators.

The great thing about commodities, whether financial services, telecommunications, oil and gas, and now computing - is that the companies whose business it is to monetize those commodities, along with the businesses that supply the technologies necessary to compete in a commodity market, are among the largest on earth.
Vodafone, Citigroup, Exxon Mobil. What do they have in common?
1) They're among the most valuable businesses on earth.
2) They're primarily technology companies.
3) They're among the largest buyers of technology in the world. And
4) They're all in commodity businesses.
They all thrive on Innovation.

My Take: While Jonathan has made his point about the nature of commoditization, I think that neither computing nor applications can ever become commodities - wherever high technology is involved, wherever faster growth is seen, wherever innovation keeps happening and scope for further innovation exists,wherever multiple fields of study meld and fuse, chances of commoditization are very low.In fact, going by this logic, one will have to wait and see the nature of success of offering computing power on taps at predetermined prices as a packaged offering - we have to see how many customised offering exist and how many account managers need to gain insights into customers unique demands and offer differentiated services. The best example is aircraft and airline services - aircraft manufacturing is trailblazing -like the recent A380 Double Decker launch and innovative airline services like Jeblue and distinction by better service like Singapore Airlines, wherever there is a fusion of different experience, things can never get commoditised. Since technology industry is highly innovative, involves advances in multiple disciplines - I think neither computing nor computers can ever get commoditized(at least for the next fifteen years) - with infinite opporunities for technology industry to grow - I only see differentiation and premium pricing becoming more amd more well entrenched - cutting through the commodization trap.

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Sadagopan's Weblog on Emerging Technologies, Trends,Thoughts, Ideas & Cyberworld
"All views expressed are my personal views are not related in any way to my employer"