Niche players are the face of things to come
THE disintegration of the 'old' computing industry structure will continue to accelerate through the 1990s and more niche-market players will capture bigger portions of industry revenue, according to the latest McKinsey & Company annual report on the computer business.
Where a few large integrated systems suppliers dominated the '70s and '80s, in this decade a new form of competition in the computing industry has grown in which a highly fragmented chain of companies are carrying out increasingly specialised tasks.
The McKinsey Report identifies three fundamental building blocks that the industry's most successful companies have used in their successful strategies.
These were: traditional product and service-based competition; targeting surplus concentration; and developing market specialisation.
The report maintains that the industry's continued drive towards adopting open systems platforms - which has very effectively created a 'buyers market' - will fuel the continued disintegration of the industry, with more new players targeting specific profit niches.
Overall, the report is good news for users: they will have more choice in suppliers in the newly competitive market niches and the open platforms.
Improved productivity inspired by this competition should be passed directly to the end-user in better performing products and lower prices.
Not so rosy is the outlook for some systems vendors. The changed market conditions have created structural turmoil that has pulled down profits.
The McKinsey figures illustrate the point: as late as 1983 systems companies captured 69 per cent of industry revenues and 75 per cent of profits.
Yet by 1993, the revenue stream was shared between many more players, so that systems vendors' revenue share had fallen to 62 per cent.
Far more telling, though, is that by 1993 the systems vendors' share of profits was down to 28 per cent.
Two forces are driving the profit shift from traditional systems vendors McKinsey says.
The first is that the new entrants have concentrated on the most profitable portions of an 'integrated' business - picking and choosing the most lucrative slices of the market.
The second is that more end-user companies are buying applications and services 'off-the-shelf'.
These purchases create new revenue opportunities that would otherwise have gone to the traditional system vendors.
The report says under the old industry structure it was hard for new companies to enter the market, where the end-user companies were forced to rely on the proprietary operating environments of the integrated system vendors.
The new open platforms have given these new, smaller companies an entrance to the market.
As a result of these new companies 'slicing' into the 'value chain' at the points where the economic value was concentrated, there has been a fundamental redistribution of profits, rather than merely a redistribution of revenue.
McKinsey often cites where this 'slicing' has occurred and has created new and highly profitable niches that have allowed these new market players to grow spectacularly.
Among these were: new operating systems 'sliced' between the processor and applications (such as UNIX and DOS/Windows); new multivendor GUI (graphical users interfaces) between the operating system and the user; and whole, new networking interfaces that now bridge systems and the network.
The industry changed fundamentally because many of these 'sliced' product categories greatly simplified the users' access to the underlying technologies.
McKinsey maintains that this in turn has often 'commodised' the products 'upstream and downstream' from the slice.
The Windows operating system provides an excellent example. Because Windows will run equally well on any personal computer, customers' decision on what hardware to buy will come down simply to price/performance.
Upstream, applications software also becomes 'commodised' - or shrink-wrapped - because it is designed to run on the Windows platform.
This trend will continue to accelerate simply because customers have encouraged it - with every new slice in the industry, new competition is created, and that exerts pressure on pricing, and on performance and functionality.
The result is that users are getting better value for money from the industry.
The McKinsey report also identifies as an important industry trend that even in large end-users - companies - no longer feel they need to develop systems internally.
Although information technology is now considered more 'mission-critical' than at any other time, companies are more likely now to 'outsource' their IT requirements - including supply, integration, customising and management of these systems. This has created a vast new outsourcing market.
The trend has also fed the shrink-wrapped applications software market.