To many, the demise of Kodak was entirely predictable. But, the reasons for its demise are not yet widely understood. There remains a mainstream view that Kodak's fall was due to its failure to embrace digital technology. This is not true. In fact, Kodak engineer, Steve Sasson, invented the digital camera in 1975. Kodak marketed digital cameras from 1995, which was years before most of its competitors entered the market. In other words, Kodak did not succeed in a market that it developed.
Digital technology cannibalised Kodak's analog business. The analog business was much more profitable than the new digital business. The company sought to maximise the profits that it could generate from its traditional business while controlling cannibalisation. Given that Kodak dominated its market, executives felt that they could manage the impact of digital technology on their hugely profitable analog business.
The two businesses were very different and needed to be managed in different ways. Kodak may have been better off if it had spun off its digital division and allowed it to compete, unconstrained, with the traditional business. Managing a less profitable business (digital) that cannibalises a more profitable business (analog) is almost impossible given the comparatively short term requirements of shareholders. It is difficult to justify a large investment in the less profitable disruptive business at the expense of further investment in a more profitable traditional business that continues to require additional resources.
Today, multiple disruptive technologies are changing the IT industry and similar challenges are being faced. For now, I'll focus on what, in my view, is the most disruptive technology that is impacting both IT firms and their customers. This technology is cloud computing. As I have mentioned before, it is the shift to the public cloud model of computing that will have the biggest impact on business. IT will truly be bought as a service and paid for on the basis of usage. IT resources will increasingly reside in remote data centres and be accessed from multiple devices using browsers or apps.
In this new computing paradigm, it is likely that, for the first time in many people's 'technology memories', Microsoft will not have a dominant role. Public cloud computing is disrupting the software product business. Microsoft's results for the quarter ended 31 December 2011 showed a fall in revenue for the Windows and Windows Live Division of 6.2 percent from the same period in 2010. This is being driven by a downturn in PC sales which, in turn, is being driven by the growth in shipments of tablets and smartphones. It is an ominous sign for Microsoft.
Tablets and smartphones are designed to access IT resources from the public cloud and are leading a wholesale shift away from the traditional PC centric model of computing.
Like Kodak 10 years ago, Microsoft is by no means ignoring the trends that are taking place around it. Indeed, it remains a highly innovative company and has developed very competitive products that embrace cloud computing such as Office 365. Its Azure product is also a leading Platform-as-a-Service offering and has proved to be very popular with developers.
Given that the bulk of Microsoft's revenues (and profits) are generated from its traditional PC centric products, will it place sufficient emphasis on cloud computing in order to become a leading IT vendor in the future? It is reasonable to predict that Microsoft will not dominate IT over the next 10 years to the extent that it has done previously. We are definitely witnessing Microsoft's relative decline compared to competitors such as Google and Apple. In light of this relative decline, will Microsoft be able to establish itself as a leading vendor in the markets that we can now see emerging or will it end up like Kodak? In other words, will it fail to transfer its leadership in the PC centric world to the cloud computing world?
In the IT industry, few firms have succeeded in marketing products that cannibalise one another. Apple is the best example of such a firm. It is attempting to lock its customers into its ecosystem of products and services and with much success. Many Apple customers own an Apple PC, an iPod, an iPad, an iPhone and use iTunes and Apple's new iCloud. Apple's iPod and PC markets are being cannibalised by its iPad and iPhone products. This does not matter to Apple as long as customers continue to buy its products and operate within its ecosystem.
Consider Microsoft's position today. PCs are being cannibalised by products that run Android and iOS. Microsoft has not developed an ecosystem and keeping customers loyal will be a major challenge for the firm in the coming years.
IBM has also succeeded in marketing products that cannibalise one another. It successfully moved away from its mainframe business into client/server computing. It also transformed itself into the world's leading IT services vendor. However, like Microsoft, public cloud computing challenges its current business model. Unlike Microsoft, its IT services focus will give it wider opportunities to address disruption.
We are currently witnessing a highly disruptive shift to cloud computing. This shift is being accelerated by the rapid uptake of tablets and smartphones. How can IT firms that dominated the PC centric world manage the transition to cloud computing? How can they ensure that they continue to benefit from the markets that they dominate while also ensuring rapid uptake of their cloud-based offerings? How can these companies transfer their leadership in the PC centric world to the cloud computing world and avoid sharing the experience of Kodak?
This article was authored by Andrew Milroy, ICT Practice, Frost & Sullivan Asia Pacific.
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