Hal Varian makes an observation that we all too often forget: “Profit comes from scarcity“. He then argues that well all have to agree with Carr’s main thesis, that it is not information technology itself that matters, but it is how you use it. Although, its quite an obvious statement however is surprising how many MIS departments fall into this trap. This fact points out the scarcity that prevails in the industry, most MIS departments don’t know how to use IT technology. I personally have been in 3 companies in the last year and I’ve got to admit, none of them seem to understand how to exploit IT.
Varian’s main arguments focus on the higher value activity of component integration:
In my view, companies cannot afford to ignore information technology, or relegate it to the back burner. Commoditizing it does not necessarily mean innovation slows. If anything, it could accelerate as more and more innovators experiment and tinker with those cheap, ubiquitous information technology commodities.
How you integrate functionality so that its useful for the corporation is today the high margin business of IT, just ask IBM. IBM’s largest growing revenue stream has been in its Global Services division (i.e. consulting). However, if you think about it, isn’t consulting just another commodity? In short, I think Varian’s arguments are pretty weak.
However, I can think of two better arguments against Carr’s thesis. The first is that commoditization of the hasn’t truly happened yet. After all, why do we still have applications that are built in a stove pipe manner? That is, despite all the componentization of various technologies, IT continues to build monoltithic applications. The monolithic applications continue to be extremely inflexible and lack the agility to integrate with other corporate functions in a rapid way. This is the crux of my argument in a piece I wrote last June.
The second argument is one I a law that I had recently stumbled on. That is Christensen’s Law, “the conservation of attractive profits”. Christiansen theory is about the migration of value of time, high margins move up and down the value chain over time. It doesn’t move always in the direction of going up the food chain, it can go the other way too! What has become commodities, may become profit centers in the future.
In summary, today’s high margin business will be based on the Manageability of our software. However, that doesn’t mean it will always stay that way, that’ll be a commodity some day. When that happens, the higher margins will belong to those specialists in component development. Look at it this way, if complete systems becomes a commodity, parties will attempt to derive differentiation from its various components. It’s just the natural flow of things.