THE ECONOMIST: SURVEY OF THE IT INDUSTRY

The May 10, 2003 issue of the Economist magazine has an excellent survey of the information technology industry. I strongly recommend it. I can not do justice to it in a short blog entry.

The survey suggests that while Moore’s law may hold at least until 2010, cost reduction for chips may not be the key issue for the information revolution. Hardware is no longer the major portion of overall costs that it once was. PCs and even smaller devices have already become “commodities” rather than expensive “appliances”. The article suggests that in a maturing hardware industry, good manufacturing practice may be the thing of the future, rather than huge profit expectations. The article notes how Google gets by with self-built hardware, and indeed benefits from its ability to modify hardware at need. Computing may become a utility, as software develops the ability to assign as much hardware capacity as is needed to each user demand.

Industry leaders will then “move up the stack”, focusing business models on the emerging, more profitable markets. As in the past action moved from mainframes (60s), to minicomputers (70s), to PCs (80s), and then to servers (90s), it may now move to grid computing. The survey notes that “firms spend 70-90% of their IT budgets simply on keeping their systems running. And because those systems cannot adapt quickly to changes in demand, companies over-provide. They now spend almost $50 billion a year on servers, but the utilization rate for these computers is often below 30%.” While 20 years ago, data storage hardware costs dominated business data storage costs, today administrative costs are dominant.

The Survey goes on to suggest that software will become a service, with users pulling down needed general purpose software from the computer utility as needed, and paying for the use of the software service. Before this can happen, there has to be, according to the Economist, the development of “web service” – a standard way for software applications to work together over the internet. The Survey notes that “IBM was making a $10-billion bet on what he (Samuel Palmisano, IBM’s CEO) called ‘on-demand computing’—essentially an effort to turn IT from a fixed into a variable cost. American Express has already signed a seven-year, $4 billion contract with IBM which allows the credit-card company to pay only for the IT resources it needs.”

Another article notes that “for the first time, the IT industry is widely adopting open standards—thanks to the internet.” The development of open standards has characterized the later mature stages of other industries -- notably “railways, electricity, cars and telecommunications all learned to love standards as they came of age”.

An article notes that given the maturity of the industry, and the magnitude of investments and expenditures to be made for IT goods and services, government and businesses will become more cost conscious, placing high level managers to oversee IT budgets.

In the past, the IT industry benefited greatly from government support. Yet during the hayday of the IT bubble, many companies shied away from the government. The Economist predicts that the industry will again strengthen ties with government not only as a customer, but as the agent defining the rules of the game. Spectrum allocation and IPR are identified in the article as two key areas.

There is a nice short bibliography attached: