Thursday, June 13, 2024

The Next Wave of Commoditization

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A friend of mine runs a company that provides remote back-up and recovery. A very nice little company that makes money and provides a valuable service to its customers.

About a year ago they piloted their technology at my university. The results were great. They quoted us a price of around $14 per month per user for automatic, almost limitless back-up with guaranteed recovery of any file within hours. Good stuff. But just last month the university signed a deal with a competitor for around $2 per month per user for pretty much the same services.

In one short year the price had fallen from $14 to $2! How is that possible? Will the $2 vendor make money on the deal? Yes. How is that possible? Well, just like so many other things in our business, remote back-up and recovery simply got commoditized.

Here’s a better story. In 1999 I worked with a company that built Web sites for Fortune 500 clients. Actually, in those days companies that built Web sites were often referred to as “agencies,” since they liked to combine eBusiness marketing strategy with Web site development.

Many of these engagements resulted in the exchange of millions of dollars for hundred-page Web sites – and a marketing strategy, of course. Today anyone can hire some freelancers to build a hundred-page Web site for well under $10K.

Even better, one can post an RFP on the Web and receive bids for a site’s development from all parts of the world. I bet you could get the same hundred-page site for less than $3K through this bidding and negotiating process. (I’m confident because a friend of mine just did it with some Eastern European Web developers.)

The Big Challenge

What else is getting commoditized? PCs and servers have already become commodities. So have a variety of services, like desktop and laptop support, legacy system maintenance, and even data center management.

What’s next? Ah, this is the challenge – predicting the next wave of commoditization (especially as you’re negotiating for the services as though they were still specialized).

What do you think? Here are five things that may or may not be true in a year or two (or three). You be the judge.

  • Back-up and disaster recovery will be fully commoditized by 2008. The cost of storage and storage area network (SAN) technology has fallen so dramatically that security and/or SAN companies may well give back-up and disaster recovery services away for free – in exchange, of course, for some other higher-margin services like the development of security architectures.

  • PCs, laptops and especially thin-client prices will fall dramatically over the next year or two. The age of the $200-$300 PC is upon us – again, in exchange for higher-margin services (in fact, many companies and organizations are working on $100 PCs and throwaway thin clients).

  • Data base management platforms will become commoditized in exchange for long-term deals for data warehousing, business intelligence and data mining, which is where the money is today (and likely to be tomorrow). I’d gladly give away a DBMS in exchange for a long-term DW/BI/DM deal. Wouldn’t you?

  • The same fate will commoditize ERP applications, which will eventually give way – after a period of software-as-a-service delivery – to full commoditization where all sorts of services will be added on, a la carte, to the “free” platforms. This one will take more than a year or two, but certainly within five years there will be very few – if any – companies willing to pay $100 million to $300 million (or more) for an SAP or Oracle implementation. Would you?

  • Broadband may well become a free commodity – in exchange, of course, for more profitable content-based services (yes, content will become the anti-commodity).

    What do you think? What else will become commoditized?

    Just don’t sign any long-term deals for hardware, software or services that might just turn into grain, soy, livestock or heavy metal.

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