Tuesday, June 3, 2008

How to Survive the SaaS Revolution: Learning from the Death of DEC

The story of Digital Equipment Corporation goes something like this: it rose to power in the 60's and 70's by being an industry leader in minicomputers, competing against IBM which was pushing larger mainframes. DEC was a powerhouse of innovation and grew impressively to become the number two hardware vendor. However, the 80's saw DEC struggle because it missed a fundamental shift in the industry - the rise of the personal computer. This struggle eventually led to its demise - in the 90's the company succumbed and was acquired.

Today, large software vendors are being faced with a revolution of their own - the rise of Software as a Service (SaaS). SaaS has the potential to be as disruptive to the software industry as the PC revolution was to the hardware industry in the 80's. I don't think SaaS will necessarily produce the exact same results with the software industry, but I do believe that it shows what could happen. It demonstrates that even giants can fall.

This blog entry focuses on a single article from the NYTimes in 1983 which shows an interesting snapshot of DEC in the midst of failing to adapt. This will lead to a larger lesson about what software companies need to do to avoid the same fate.

Note: the views in this blog are my own opinion, and do not represent the official position of my employer.


The Demise of DEC - a Failure to Adapt

I was not even in high school 25 years ago when the following story was published in the New York Times. Older members of the blogosphere have more context into what was going on, but I think the article provides a great glimpse of a computer giant a few years before its downfall. Some of the quotes are shocking in hindsight, as you can see the disaster unfolding in the words of the company president.



Author: Leslie Wayne

Published: September 4, 1983

Note: the bold text is mine, and the text in quotes is from the original article.


Setup for the downfall, the giant stumbles:

"Digital, one of the stars in the computer industry, has stumbled into tough times. After nearly two decades of almost 30 percent annual growth of sales and profits, Digital reported a 32 percent earnings drop, to $284 million, for its 1983 fiscal year, which ended July 2, the first such drop in 12 years."

because the giant is late to invest and deliver on the next industry revolution:

"Particularly troubling has been Digital's lateness in entering the explosive $5 billion personal computer market. The delay reflects the company's careful and methodical approach to doing business - an approach that some say is inappropriate in an industry where being first with new products is becoming increasingly important. Never before has Digital had to rush a new product to market and, given its size and slow planning cycle, it did not do so with its personal computer. This, critics say, has been a mistake."

while its former profit centers are eroded by the maturing industry:

"At the bottom end of the market, Digital is being squeezed by the growth of personal computers that can do much of what the larger minicomputers can do - and for a lot less. Thus, Digital must defend its position in the maturing minicomputer market with an aging product line, while making inroads into personal computers and office automation, markets where others have already established beachheads. It is uncertain whether the revenues to be gained in these new areas will offset declines in the old."

Decades of prior success may not help the giant:

"Digital gained a reputation as a sophisticated engineering company making high-quality products for scientific and technical uses and for such office functions as payroll accounting and data processing. (Mainframes, by contrast, are used for large, complex computations and huge information storage.)"

and may actually hurt because the same strategies don't play in the new market and it is blind to the danger:

"Mr. Olsen [Digital company president], who presided over the 10-day show, is far more optimistic about Digital's prospects. ''Things have never been better,'' he said in an interview at the crowded Digital show in Boston's Hynes Auditorium. ''I've never been as happy with our products as now, and even though there's been a slight drop in earnings, we've had no layoffs. I see no real problems with our business" ...

Moreover, he is not concerned about Digital's lateness in getting into personal computers. ''We're sticking with the same old strategy, even though it doesn't look too exciting,'' he said. ''We may be the last kids on the block, but we wait until we have a better product.''

Product development is not enough, the entire culture must adapt:

"Digital's difficulties are compounded further by the fact that its essential personality has been that of a company dominated by engineers who sold to engineers and let the technical razzle-dazzle of the machines do much of the selling. Unlike many companies, the Digital sales staff is on salary, not commissions, a practice that Mr. Olsen defends as bringing in higher yields per salesman."


Lessons to be Learned

Important take-aways from the article, all of which are pretty obvious but are important to list explicitly:

  • The Chief Executive must take the lead in proactively addressing the shift
    • Revolutionary change must be supported by the top leader
    • Denial is unacceptable: ''Things have never been better...''
  • Leadership must formulate and execute on a good strategy
    • Hopefully something better than: "We're sticking with the same old strategy.."
  • Respond in a timely and effective manner, or risk being shut out of the new market
    • "Digital's lateness in entering the explosive $5 billion personal computer market..."
  • Old revenue streams may decline
    • "Digital is being squeezed by the growth of personal computers that can do much of what the larger minicomputers can do".
  • Internal cultural changes may be necessary
    • "Unlike many companies, the Digital sales staff is on salary, not commissions"

Counter examples of DEC include these established companies, which all responded to the PC revolution during the same time period with better results:


How Disruptive is SaaS?

In hindsight, we know that the PC shift was an enormous change in the way people interacted with computers, and a massive market opportunity for computer suppliers. Will SaaS be as disruptive to the software industry? Many believe so, as do I, but only time will tell. Instead of selling the vision, I will offer a number of links that will help you come to your own conclusion:

But please understand that disruption does not mean on-premise software will go away. Just like mainframes still crank away in basements everywhere, on-premise software will not go away any time soon, if ever. Disruption in this case means that I believe SaaS will take a significant market share next to on-premise software. I will leave it to the analysts to predict the actual market sizes.


Looking at the Software Giants of Today

Remember that DEC was once the second largest computer company on the planet. By the late 90's, after years of struggle, what remained was acquired by Compaq. What does this mean for today's software giants:

  • Oracle
  • IBM
  • Microsoft
  • SAP
  • Intuit

Is it possible to determine if one of these giants is on the way to destruction? According to Bob Warfield's recent post, Salesforce Headed for Siebel’s Fate?, put all but IBM in the dead pool (IBM gets a free pass because they also have significant hardware and services businesses) . Bob states:

"All good things come to an end, especially for software companies.  Very few live through a paradigm shift of any consequence."

Bob does great work, but I think this statement is far too pessimistic. Software vendors have been living through constant revolution - since the mid 90's we have seen major waves of change in the software industry:

  • Java
  • Internet
  • Free Open Source Software
  • SOA
  • Social computing
  • Dynamic languages
  • and now SaaS

Software companies have learned to adapt. For example, free open source was supposed to kill all software product businesses, but vendors are still seeing growth (e.g. Oracle DB revenue still growing). As for SaaS, each of the giants have initiatives underway. Some are having more success than others, but I think it is too early to draw any long range conclusions.

As an Oracle employee, I am happy to see that Larry has been heavily involved in the space (including personal investments in Salesforce and Netsuite), and that multiple initiatives are already being delivered with success.  SAP has stumbled recently with delays in the Business By Design program, while IBM, Microsoft and Intuit seem to be making some progress.

Which of these giants will pull through, and which will fail? Check back here in 25 years for the definitive answer.


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Bertil said...

Thanks for the post! Great analogy and background research. I'd be interested to hear your position on other hosted services like Platforms of Data Services. Where do you see platforms like EC2 or data services like strikeiron going?

Bertil said...

I was, once again, too quick too comment. Am now reading your post from last week: http://peterlaird.blogspot.com/2008/05/saas-soup-navigating-a-service-acronyms.html

Thanks for the information!

BobWarfield said...

Peter, wonderful post. Thank you for bringing it to my attention. I agree there is a lot of relevance to my own post over at SmoothSpan:


I expand more on the parallels over there.



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