Who will be the next industry winners? That depends on how the Attackers, Defenders, Arms Merchants, and Customers play their roles.
I get most nervous when too many people are agreeing with me. So it was with a sigh of relief that I heard hissing and booing after I said recently to a high-tech audience: "When will the venture capital industry start making the returns it posted in 1998 and 1999? Never."
Does "never" work for you? Clearly, it didn't work for this audience. It was like announcing to the College of Cardinals that the Pope had decided to get bar mitzvah'd.
Think of the high-tech industry as a tragedy/comedy with only four sets of protagonists: Attackers, Defenders, Arms Merchants, and Customers. How each plays its role will determine who the new winners will be.
Despite the occasional gloom in the financial markets, the Internet itself has never been healthier. But it's never been harder to be an Internet/cloud startup. Think of sperm swimming upstream. For all but one of them, it's going to be a very bad day.
We in the venture industry poured billions of dollars into cloud startups last year, and in doing so we created artificial demand. Everyone was going to be the "uber"-something or was going to be a "platform company" or was going to build a cloud "solution" or was going to go "viral." Let me translate "viral" for you: "We don't have a clue."
Those cloud startups were Attackers, each trying to unseat a Defender IT company in its sector; each without the internal IT expertise to do the job; and each, in the end, a potential Customer of the systems integrators. When these new Attackers got sick -- i.e., their business models turned out to be flawed -- their attendant Arms Merchants got pneumonia. We had too many solutions chasing the same rabbit.
The traditional large IT companies (the Defenders) may be dumb, but they're not stupid. No one wants to be just a Defender, so every Defender has begun spending like crazy to morph into a Counter Attacker. "Don't go away. We have a cloud solution too!" Even though the real threat to their mainstream businesses was small, the perceived threat was large.
We calculate that the Defender IT companies have spent $15 billion to $20 billion just to put their businesses online and buy the networking gear necessary to support their cloud responses to these upstart Attackers. Will this spending stop now that the perceived enemy combatants, the Attackers, are frozen in their tracks? If history is any judge, no. Because their fellow Defenders/Counter Attackers are spending 40 percent of their IT budgets on building Internet/cloud businesses that will work with their bricks-and-mortar mainline businesses. The Arms Merchants supplying those companies include Oracle, Cisco, EMC, and Amazon, not so much IBM and HP.
The Arms Merchants don't really care which of the Counter Attackers win, as long as there's a war.
If you're in IT at any major company, the one thing you always need is an enemy. It's the only way you can get more funding. Did you really think more than a dozen years ago that there was a Y2K problem? Those of us who knew what was going on kind of giggled when the mass media were going bonkers over the "Y2K threat," which was just a way for every CIO in America to get additional funding. Was your salesforce automation system getting a little long in the tooth? No problem, call it "not Y2K-compliant" and use that one-time funding to rewrite your legacy application.
Now it's 2013 and the largest companies need a new enemy. China? Google? Amazon itself?
Google and Amazon are interesting companies. They're IT suppliers and competitors. If not competitors now, how about in the next five years?
Bottom line: No one wants to go to war with obsolete weapons. The Arms Merchants are happy to sell to anyone and everyone, but they now realize their best shot is to align with the Defenders/Counter Attackers. The Defenders need an upstart enemy (the Attackers) to make their case for more funding.
The Attackers as a group will fail, but a few (Salesforce.com, VMware) will become established and become tomorrow's Defenders. Hell, they already are. In its day, IBM attacked National Cash Register, and even AT&T fought against Western Union. The venture industry backs, without fail, Attackers and Arms Merchants, and, yes, there will be another high-tech boom, but the winners will not be those Internet companies we're now mourning.
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