When I was first starting off in the technology industry, IBM was way ahead of any other tech company, and by a huge margin. Minicomputers, which had been on the scene for a decade, had really started to grow. Companies like DEC and Data General, and a lot of smaller firms like Prime, Control Data, SEL, Interdata, Perkin-Elmer, to name just a few, also sold their wares at a brisk pace.
Now, IBM is an also-ran, behind the Dell, HPE, Apple, and others. They are out of the personal computer business altogether, leaving that market to the aforementioned companies along with Lenovo, who bought IBM's PC division.
The minicomputer companies vanished, sinking without a trace. They are all gone. Poof. Vanished. Their carcasses picked over, like some industrial road kill. Sure, the technology was bought by other companies, but technology is actually only about 20% of a company. Data General was acquired by EMC, and the mighty Digital Equipment Corporation, was bought Compaq. Remember Compaq? They're gone too.
I could use examples of workstations from the 1990's. Sun, HP, Apollo, and IBM split the market four ways. Now, HPE isn't the company HP was, and Sun and Apollo are gone altogether.
Why do I bring this up? What does that mean for today?
I'll get back to How to Port Unix in another post, but this week I want to talk about an idea that has crossed my mind and has slowly begun to grow. I've come to realize that there is an unknown number of seedling companies that will form the new generation of major tech companies. They’re already operating, already slowly growing, and will come to dominate the computing landscape in the future.
This is a kind of manifesto, a sharing of my thinking. I think that fiscal responsibility, caring for the user, and a focus on pricing for the benefit of both the user and the company, will create a hearty group of technology companies that will replace the big box, what-the-market-will-bear, unfeeling tech giants of today. I'll explain why I think this, and why there's nothing that the big box brands can do about it.
You might find that hard to imagine. But we often imagine the current state of things as the status quo. But I've been in this business a while, and I have seen a lot.
I've very sure that the current badges in your machine rooms, Dell, HPE, IBM, EMC, NetAPP, will disappear. I brought up the minicomputer companies to show that major companies, ones that you think will never be moved, can disappear, and do so quickly.
Replacing them will be a new group, and for reasons I'll explain, this group will be around for a very long time. It has to do with the end of Moore's Law, what that means to the economy, commoditization of the hardware, and the craft aspects of the software.
(I think that some of the badges in the room might be the same, but the companies behind them will not be. A New Generation company can buy one of these old ones and retain the older name.)
Reasons for their Demise
A perfect storm of economic, technology, and marketing changes put all the above mentioned companies on the long-term endangered list. First, they all have acquired a huge amount of long term debt on their balance sheets. After 2008, money was cheap. The Federal Reserve interest rates were basically zero. Why not grab a bunch of cash when you could?
The problem with borrowing a bunch of money, as any person who has been around a while knows, is that you spend it. These companies service the debt (that’s business speak for paying the interest only), with gross profits, and just keep carrying the debt.
What happens if they can't make those payments? Or the interest rates start to climb? Today they are just above 2%, a pretty large increase from 0.06% on February 3rd, 2014. Not being able to pay the interest usually causes a bankruptcy of one chapter or another. They get protection, make a deal with the lenders, and try to reform something profitable.
This is very often doable. Delta Airlines, started in 1924 by a bunch of crop dusters in Macon Georgia, filed for bankruptcy protection in 2005. They revamped their operations, and emerged again in 2007. Their operation operated with a certain required net profit margin that was no longer possible in the post regulation era.
(None of the histories of these companies are simple, and the causes are many. But if one looks past the details, one can see bigger things going on.)
But can't these technology companies do the same? Just get protection then reorganize? Well, no. Keep reading.
Can't they issue more stock to raise the money to pay the debt? Certainly there are a lot of companies out there today that have done that, and continue to do so. But that low interest rate also meant that banks were not paying any interest. So, naturally, people were a bit desperate for returns on their cash and started putting it into the stock market. Some small portion of those investments usually went into higher risk stocks with a promise of raising prices that would yield higher returns.
But with the return of reasonable interest rates, there are now more places to put your money, much safer places. So, I suspect issuing more stock is going to be a lot harder in the coming years.
Besides economic, there are massive technological reasons for a New Generation of tech companies. The details of this are a bit intertwined. Hardware is now, in truth, a commodity, and software is a craft - about as amenable to industrialization as writing mystery novels or composing symphonies.
I've been saying that Moore's Law is dead for a while, and now most agree. I realized this later than some. I attended a talk by the CTO of a major chip vendor who was asked that question directly. His reply? “Well, if you mean just CMOS, then yes.'' That moment I realized that we were at end of Moore's Law.
Note that Moore's Law, as an economic driver of the past 50 years, affecting every business in most of the world, is best stated: the cost of a transistor will drop by 50% every 24 months. I don't have time here to explain that, but the logic, and the history, are pretty sound.
Is it really done? Well, in a 2012 interview, Gordon Moore said it was. In 1958, Fairchild produced its first silicon transistor, the 2N697, and set the price at $150. In 2012, your purchase of an Intel processor bought you 70,000 transistors for each penny spent.
A lot of innovation can happen with the current silicon technologies, and I wouldn’t think the sky is falling just because a transistor isn't getting cheaper any longer. I wouldn’t, unless, maybe,I was one of the big box tech giants of today.
What does the end of Moore’s Law mean for these companies? If they make money on high hardware margins, they have a problem.
What about software?
Some of these companies have ingested so many outside software firms, each bringing with it its own mound of truly horrid software, leaving a complex mess requiring a large number of expensive programmers just to keep bugs and security flaws at bay.
I've seen some of this software. Startup companies who have a future acquisition built into their plans can be trusted to create really junky software, since it's going to be someone else's problem anyway. This is a tendency, of course, not a hard and fast rule. I'm sure there must be some great software purchased by larger firms - but even that software gets dropped into a big mess.
The other software problem associated with the acquisition of a company, is that their coders usually leave pretty quickly. Most are on VC's lists of coders to grab, and leave to do the startup cycle all over again. I once thought that I wouldn't want to work for a company that was larger than the small Georgia town I grew up in. Or that had a cafeteria. Seems silly now. But for the good serial startup coder, it's a way to make a better living, so it seems most of them in places like Silicon Valley will go from startup to startup.
This is a business problem because the software is not really the valuable thing. It's the people that are valuable, not the software. A major function of a tech company is that the group of people are continuously learning. The software is a side effect of that learning, like honey in a beehive. And like honey, it’s the honey that users pay for, so it's easy to think the software is the valuable part.
Also, software is a model, in one way or another, of the real world, and the real world changes a lot. Software has to change a lot with it. Again, it's the people who know how to write good clean software that are valuable to the company, not the software that they create.
This notion is a problem for companies that buy other companies. They can't change their software easily, because a lot of the coders who knew the purchased code are gone. Buy enough companies and you actually can't change the software. I've seen this first hand as well.
And then there is the problem of inefficient software. Many years of Moore's Law made it so that coders were pretty sloppy. Even the tools can be inefficient, making writing efficient & fast code impossible. Only three of the top ten programming languages on the TIOBE index compile to machine code, the rest are wastefully interpreted.
As the full economic impact of the end of Moore's Law (computers not getting cheaper) is combined with inefficient software, a toxic gas is given off, causing major health issues with these big box companies.
An inevitable downturn in the economy will finish them all off.
But there is a new generation of companies ready to rise and take their place over time, filling real needs for real users for reasonable money, giving great service and creating innovative, efficient software.
I started SouthSuite, the final home of the Coraid brand, with a set of values in mind that are shared by a lot of other founders I have talked with and learned from.
First is the desire to keep helping our users for the long haul. The first program I wrote changed my life. It was the neatest thing I had ever done, and I wanted to do it all day, every day, forever. Then people started using my code. That was even better! The God-like joy of creation coupled with the satisfaction of helping others with that creation was a drug that was immediately habit forming.
I talk to many who feel the same way.
I think that motivates us to center on the purpose of our companies. When I raised VC money at the end of 2009, I really thought it was best for our users, and our employees. And it was, for a while. Elsewhere I've talked about how the VC system, coupled with a market of money-losing startup companies that are eventually bought, created its own toxic operation.
So, Coraid now has no venture money, will not go public, and is not for sale. We want to continue to grow on profits alone. Finding and helping more people, and employing more people, all to create, sell, and refine our useful technology products.
If I were to take Coraid public, at that moment I would cease to work for the good of the customer, and would immediately work for the good of the shareholder. My job would be to maximize shareholder value. I'm not saying that's a bad thing. I'm just saying that's not what we want to do. In most cases the customers interests are the same as the shareholders. But that is a different thing.
VC startups are dead to begin with. Their purpose is the provide the VC with an exit that gets them 20X return on their investment. In the past, that often all worked out well. But that was when the public investor required the IPO firm to be making money and growing in company value, which would reflect in the share price. Today, it's only the share price that matters.
So, our strategy?
First, our major purpose is to help users by innovating efficient, affordable technology that makes their lives easier, and their businesses more profitable.
Second, exercise fiscal responsibility, avoiding long term debt, growing on our reasonable profits. We want to be able to weather the inevitable economic storms.
Third, price our products reasonably. See the first strategy for why we want to do this. But it's a big thing. Henry Ford understood it. And the current software dynamic, where the real usefulness is located, allows for this even more than manufactured products.
As I said, I know we’re not alone. I run into folks all the time that are starting new companies with the same set of core values. We will all grow. We are all happy for a reasonable profit. I've talked with a lot of folks who aren't talking about getting rich (something that is overrated, by the way). They are talking about their users, their employees, and their technology, in that order.
In the end, it's our users who decide who goes and who stays. They are the ones who find the product of our creativity useful or not. They either buy or they don't. And they are smart. They have their own job to do, and if companies like SouthSuite can help them get better, at a better price, then we'll grow, and those faceless, big box monoliths will dissolve into history like so many others before them.
We are one of the New Generation Tech Companies.