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Is Google Ring Fencing IBM?

There may well be a simple definition for the phrase “ring fence,” but Google (the search engine) doesn’t seem to know much about it. The best it came up with was something related to “project finance,” whatever that means. It should, therefore, be no surprise that when I used it in conjunction with some talk of Google to a bunch of IBMers a while ago, I was met with some blank stares. So let me explain.

IBM’s history vis a vis the operating system market is fairly well known at this point, so I won’t rehash it in detail. The short version of the story is that IBM dramatically underestimated the importance – both technically and more importantly, financially – of the operating system market, and opened the door for a little known firm called Microsoft. This came about, I’d argue, because IBM had its eye mainly focused on the hardware – rather than software – dollars.

It’s an easy mistake to second guess after the fact; the PC business was commoditized and was subsequently sold off, while the operating system opportunity made Microsoft into the single largest software firm in the world. But that hardly makes IBM unique; Microsoft in turn missed the search opportunity that Google seized on, as Ballmer and co have confessed. We all have our regrets; just talk to all of the studios that passed on American Idol. The interesting question then as far as I’m concerned is not whether or not IBM missed the operating system opportunity – they obviously did – but whether or not the lessons learned from that may prevent them from seizing on a similar opportunity today.

IBM, as many of you will know, stands for International Business Machines. The name is certainly no accident; IBM is and always has been singularly focused on businesses rather than consumer technologies. The failure of OS/2 just validated this focus for many that worked for Big Blue, proving once and for all to those around during those days that “we just don’t get consumer technologies.” And so, for most of their existence, IBM has turned their backs on consumer technologies; effectively ceding that market to the Microsoft’s of the world and more recently the Google’s.

The question is, does this strategy make sense, strategically? At RedMonk, we don’t believe so: James has written any number of pieces critiquing this approach, and Cote’s discussed its impact on the SMB market opportunity. Personally, I think Google is increasingly ring fencing IBM.

I can’t use the word niche, a.) because IBM’s the second largest software company in the world and b.) because the enterprise software “niche” is worth billions upon billions of dollars. So instead I argue that IBM is being fenced in, walled off from the volume market – the consumer market.

In a world where the distinctions between consumer and enterprise grade software are both sharp and appreciated – i.e. the world IBM has operated in for most of its existence – this is a sound strategy, as the firm has proven to the tune of a multi-billion dollar revenue stream. But as those distinctions begin to break down (just ask how many Exchange and Notes customers forward their email to Gmail), it’s a strategy worth reconsidering. Particularly because counter-intuitively, it may be easier for consumer technologies to move up the stack into the enterprise than vice versa. IBM once dismissed the importance of the non-business operating system market, and that decision has colored everything that came after it; is it all that far-fetched to think that SaaS has similarly disruptive potential?

It’s fairly clear that Google thinks so. While Google the search engine may have no idea what ring fencing is, Google the firm appears to have an excellent grasp of the concept. The key, of course, is to appear non-threatening as long as possible.

“Our webmail? Don’t worry guys, it’s “consumer-grade,” which we all know – hahaha – is a euphemism for crap. Yes, we run our own multi-billion dollar business on it, but we only hire PhD’s so they get around it. Our domain registration services? Well, that’s just, you know, because it’s more convenient. The calendaring? Well, people kept complaining and, you have to admit, the PTAs of the world need a solution. Yes, that’s all it is, we promise, despite the fact that our free/busy service actually works and is easy to use. No reason to be nervous. The office productivity stuff? How could you be nervous about that? It doesn’t even do mail merge. Remember, it’s all “consumer-grade.” Yes, yes we now have a paid corporate version that offers SLA guarantees. But don’t worry, we can’t compete because we don’t have offline access, and of course we’re not working on that. Trust us.”

There’s no questioning that IBM learned hard lessons from its past history with Microsoft – lessons that have served it relatively well in the ensuing years. But if I called Armonk home, I’d be more than slightly worried about the lessons Google has in store.

Categories: Software-as-a-Service.

  • http://ianskerrett.wordpress.com Ian Skerrett

    Stephen,

    I don’t follow IBM as closely as you do, but with the exception of Lotus, I don’t see them being in the e-mail/calendaring/office applications. Do you see Google going after Tivoli, DB2, WebSphere and Rational?

    I don’t disagree that Google is trying to fence someone but isn’t it Microsoft?

  • http://redmonk.com/sogrady sogrady

    Ian: excellent question – let me answer it this way: if some increasing percentage of an enterprise’s IT infrastructure can run on Google’s apps – what’s the opportunity for IBM to sell the infrastructure that hosts and manages it?

    again, the point isn’t that IBM won’t have an addressable market – it will for the foreseeable future. i don’t see Google providing the infrastructure for, say, SAP anytime soon.

    it’s just that the growth prospects for that market, and in particular the ability to move downmarket, can’t help but be impacted by the rise of SaaS alternatives.

    Lotus is at the most risk, but the other brands will be affected as well.

  • http://www.redmonk.com/jgovernor James Governor

    Google’s ambitions go right to the heart of Information Management- an area IBM considers its bailiwick. Flat Table, Google Coop, Enterprise Search this ain’t no disco.

  • http://ianskerrett.wordpress.com Ian Skerrett

    Let me be a bit of a contrarian, to spur the conversation. :-) Ten years ago, when ERP or online commerce sites were huge, people said IBM needed to buy SAP or start a ‘marketplace’. Instead IBM adopted a strategy of selling their infrastructure software to companies that were building ERP systems or online commerce sites. The strategy seemed to have been pretty successful.

    Fast forward to today, why can’t IBM adopt a similar strategy of selling their software to vendors that provide SaaS? Therefore, IBM doesn’t need to move downmarket, they just need to be able to sell to those that service the consumer market.

    Now of course if the SaaS model consolidate into just Google or 2-3 other players then IBM is in trouble. However, I just find it hard to believe this will happen. Google and 2-3 others will be the gorrillas but there will be LOTS of high value niche players; can’t this be IBM’s market to lose?

  • http://www.redmonk.com/jgovernor James Governor

    its a good line to take, ian, but IBM has been failing to do just that (sell to SaaS vendors). i might even argue the chickens have come to roost when it comes to “not selling apps” – look at the position SAP and Oracle have established. When all your partners have been acquired what do you do? Oracle sells apps, and still sells database. SaaS vendors have so far chosen more open source and not so much IBM tech.

  • http://www.gandalf-lab.com/blog Niraj J

    The difference between Enterprise Grade and Consumer Grade is
    1. Customization : ability to fine tune the software to suit the perceived needs of the enterprise.
    2. Tradition : Enterprise Software has to have a stamp from the IT department.

    Traditions will change and Customization’s will be known as Mashup’s in the new world.

    Have a look at http://www.gandalf-lab.com/blog/2007/04/software-as-service-or-is-it-community.html

  • http://www.anshublog.com Anshu Sharma

    James: What is the solution to IBM’s woes in your opinion? They can’t wish Google away and its hard to beat them, just as the guys at Microsoft and Yahoo!

    Ian’s approach is probably the best of some really poor options.

    This is a topic close to my heart and I often blog on it.

  • http://en.wikipedia.org/wiki/Disruptive_technology dave

    Isn’t the more common term for this “Disruptive Innovation”?

    That is, you do something in a fundamentally different, often cheaper, way and eat away at the customer base from the bottom and work your way up as the product improves.

    http://en.wikipedia.org/wiki/Disruptive_technology

  • http://www.michaeldolan.com Mike Dolan

    I firmly believe Google’s greatest issue commercializing these services will be their channels to the customer. Not saying they couldn’t do it, but it’s also not apparent to me they are looking to make the required strategic investments to get there. Google is closer to MSFT’s back yard than IBM.

    Now if you want to talk about lost opportunity to grow more or shift technical direction long term…. that’s a different angle but doesn’t necessarily involve fencing.

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