IBM’s dominance in the computing industry was unbeatable for decades. IBM owned 65%; the rest was divided between the companies known at the time as “BUNCH,” namely Burroughs Univac NCR Control Data Honeywell. Each company had its own proprietary software and hardware stacks, and they kept their secrets. Everyone was fat and dumb.
In fact, they were so excited that, in 1959, Digital Equipment delivered the PDP-1, a new breed mini-computer, with a standard memory of four kilobytes, words of 18 bits, and 200 kilohertz clock speed. This seemed insignificant compared to the IBM mainframe at the time. Digital Equipment’s annual revenue topped $14 billion in 1990. It spawned a whole new industry that included HP, Data General, and Prime.
UNIX was developed by AT&T and entered the market in the early 1970s. This snatched away IBM’s dominance and opened the door for microprocessor-based systems running UNIX. These were the main computing platforms of the 1990s.
By the end of the decade, these companies had defeated IBM and relegated it to its still profitable but shrinking mainframe business. IBM was mentioned in almost every business and industry article about the IT industry during the second half of the 20th Century. You’d have to look hard to find a piece that mentions IBM at all except to describe its descent.
These “small” players will eventually and inevitably eat their way into the market and capture a greater and greater share until the giants of the industry are forced to retreat into a smaller and smaller market niche.
I was the CEO of Veritas Software from 1990 to 2000. I witnessed IBM’s fall and other dramatic changes that took place in the technology industry. I watched as smaller companies, new ideas, and technologies ate into the complacent, larger players who seemed to be too big for failure. We’ll examine how this affects startup teams and what they can do to take advantage of speed, size, and simplicity in order to succeed.
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You can see this in all sectors of tech when you look at the world from this perspective. This phenomenon is so common that it’s been dubbed “Leslie’s Law” by some.
A sleek, small player entering the market creates a product with low friction and high fit that is then sold at an affordable price to a wide market. These products are targeted at a segment of the market that cannot afford the more expensive products because of the high cost (in terms of dollars and complexity) and the cost of owning them. It is possible that the larger company will not notice the entry of the new company because there aren’t any face-to-face customer interactions.
The smaller company can then expand into new markets. The company’s desire to expand its market upward and the needs of its leading customers, who are constantly changing, drive it to improve its product features and functionality. This upward migration is not noticeable to the big incumbents. Because they aren’t concerned, they don’t notice. It’s still happening.
By the time the danger becomes real, it is too late. Small companies have taken hold, gaining the benefits of a low-cost structure and a product that is simpler and has lower friction. Its core offerings have already created a new ecosystem. It is here to stay and can’t stop its invasion of the territory of incumbents.
Consider it. Mini-computers replaced mainframes and were then replaced by Intel microprocessors. Originally, mainframe software was based on products developed by each company. Those were subsumed by enterprise software packaged products and then by “client-server” software running on UNIX-based servers, which faded in the face of software-as-a-service and open-source options. In the 1980s, high-performance workstations were replaced by PCs. Now, tablets and smartphones are taking over. It’s a lot like:
This is particularly relevant as we move into an era of de-bundling. A startup can now do better and more efficiently what was once a small part of a large company. P&G is the leader in consumer packaged goods. Harry’sopen in a New Window wins by focusing solely on razors that are cost-effective, while Walker & Co. A New Window does well by focusing on cosmetics with definite missions. Nestopen, a new window, Dropcamopen, a new window, Ringopen, a new window, and Quirky are all tearing up the market for smart homes that Honeywell once dominated. Shyp, Uberopens in a new window, and Postmatesopens in a new window are turning FedEx’s world upside down.
We’re currently seeing a proliferation of small, lean, and mean players ready to take on the large to mid-sized players above them.
History is a record on repeat.
Over the past decade, it was hard to imagine that the UNIX-based desktop systems of SUN and HP would ever be replaced by the empire of computers that followed. As long as people continue to use their mobile phones as “first screens” in their lives, smartphones will be the most popular option.
Hardware is a good example, but software has been influenced by the same trends over and over again. Oracle has dominated the database industry for many generations. But smaller technologies are now challenging Oracle’s relative dominance.
In the area of CRM (Customer Relationship Management), one excellent example is. For as long as anyone can remember, Siebel has been the dominant player in this market. Siebel was a big player, offering a complex solution that had to be installed on customers’ servers. It also required bulk licensing, as well as a lot of training and support. It was a complex solution that had to be installed on customers’ servers, licensed in bulk, with tons of training and customer service attached.
Salesforce.com was born, and it offered just one of Siebel’s many capabilities. Salesforce.com offered a different solution. Instead of buying hundreds of licenses for each employee, companies could use Salesforce.com in their web browsers and pay per employee. The young companies who couldn’t start large with SaaS chose them.
However, even so, larger incumbents such as Siebel reassured themselves that their enterprise customers wouldn’t ever trust their valuable data and prospect lists with a cloud-based offsite system. Salesforce.com dominates today’s CRM market, and it has a huge ecosystem that surrounds it. Oracle acquired Siebel after they had their lunch eaten in front of them.
Salesforce.com’s rise is a testament to the growing popularity of cloud-based solutions. These are led by small, specialized firms that offer simple, easy-to-understand benefits for both consumers and businesses. Think Boxopens in a new window, and DropBoxopens in a new window. Cloud storage is now what people are thinking of when they hear “cloud,” not the large vertically integrated solutions of the past.