Silicon Valley’s Unique Cycle of Wealth Creation and Transfer - SiliconANGLE (2024)

Disruption in the technology industry is not new, but the agents of change will surprise you.

By Gary Griffiths, CEO of Trapit

A while back, Dan Lyons quoted longtime Silicon Valley investment banker Sanu Desai, who’s forecasting a “trillion-dollar transfer of wealth in Silicon Valley.”

This tsunami, as Desai sees it, will come from the deep pockets of Oracle, Cisco, SAP, Microsoft and others of the old guard, and flow into the hands of scrappy young technology startups – startups offering innovation solutions to enterprise problems at a fraction of the price.

I couldn’t agree more with Desai’s thesis of wealth transfer; though I’m surprised this is viewed as a recent phenomenon, and I’m shocked that he thinks all the money is shifting exclusively to the new, young players in the enterprise market. What we’ll see is Software-as-a-Service (SaaS) become the latest trend to finally break through and become the next focus of true enterprise-level innovation and expansion, and vendors of all sizes will have a hand in the pot.

Since the birth of Silicon Valley and IBM’s System 360 nearly a half-century ago, the narrative in the technology sector has been a bare-knuckled brawl of younger, smarter, and more aggressive competitors grabbing market share from the once nimble behemoths who subsequently allowed creeping sloth and bureaucracy to overshadow the technology and business chops that put them on top in the first place.

However, that wealth transfer doesn’t just go to the scrappy startup. There are also larger incumbents that ultimately play their cards quite well, and take their share of the wealth time after time.

The plot is perhaps more compelling when David is toppling Goliath, but the reality is more mixed, more complex, and a result of evolving patterns in the enterprise technology market.

This phenomenon that Desai predicted has been in the works for quite some time… but here’s how I think it’s going to shake out.

.

.

That the technology landscape is littered with the carcasses of fallen giants is not news.

Consider the then tiny Microsoft (in the 1980s) which, with accidental help from IBM and competitor Novell, became the world’s most valuable company, laying waste to a multi-billion-dollar mini-computer market. Microsoft relegated once powerful companies like Data General, Prime, Computervision, and Wang to quaint footnotes in the history of information technology. DEC, the undisputed leader in this space, suffered a fate worse than death: acquisition by Compaq.

But much of what happened was the result of the behaviors of major players, not just startups like Microsoft at the time.

The cycle repeated itself in the late 90s, as closed corporate networks of “Wintel” PCs powered by Windows servers cloistered in enterprise-raised floors gave way to the massive networking effect of the Internet and Internet browsers. This created tidal waves of new investment, new businesses and wealth creation, even dwarfing the PC boom of the 80’s.

Once again, the larger vendors still had major influence, and the terminal carnage coming out of the late 90s had more than its fair share of startups and new ventures.

Many of the giants came crashing down in the bubble too, of course, but that isn’t the whole story. We merely pay more attention when the giant crumbles. The story of a company failing before it even reaches a net profit just isn’t as compelling.

That’s what makes this moment so interesting. The enterprise cycle we’re in now is the logical next step after the rise of the Internet, but the winners and losers have yet to be determined. If history tells us anything, it’s still going to be tough to predict the winners.

.

.

In the past decade, the advent of Software-as-a-Service under Salesforce.com’s banner of “the end of software” shook the very foundations of traditional enterprise IT fundamentals, proposing that servers and software did not have to be entrenched behind corporate firewalls, but could be operated with more efficiency and enhanced capacity utilization remotely in the cloud.

For many hardened corporate IT executives, SaaS was heretical; the perceived loss of control for some was a threat to the prowess of IT in the corporate hierarchy. In fact, I’d argue that traditional enterprise software licensing models have survived not because lighter, less expensive technologies were not available, but because change is hard and naturally resisted, and that this resistance increases geometrically with the size of the organization.

Which takes us back full circle to Desai’s tsunami: there is no doubt that, while it’s been over a decade since Salesforce.com, WebEx, RightNow, Everdream and others pioneered hosted software solutions, we’re still in the early stages of this latest transfer of wealth.

In its earliest stages, SaaS – cloud computing – was embraced initially by small and mid-size businesses – companies more cost-sensitive than their deep-pocketed enterprise competitors dealing with complicated data structures, higher security risks, and the extensive deployment planning required for massive employee bases.

But with multiple releases and a decade of maturity behind them, these new solutions – many driven by a second generation of Silicon Valley start-ups – are ripe for enterprise adoption. And to Desai’s point — many stalwarts of the old guard are vulnerable because, in the cloud, does brand really matter?

To the extent that cloud computing services like Amazon’s wildly successful AWS are constantly driven to ever-increasing cost and performance improvement, rather than loyalty to specific vendors or architectures, the innovative startup has an advantage over a larger competitor with higher overhead and buyers who care less about brand than performance and flexibility.

That is, indeed, an advantage for startups, but it’s only one advantage in a complex and evolving market. Before assuming the demise of traditional enterprise solutions providers, it would be wise not to paint the players with the same brush.

.

Take IBM: a remarkable example of a technology company that has maintained relevance for nearly a century – from cheese-slicers in the 1920s to Big Data in the 2000s – with an unlikely bastion of adaptability and flexibility when considering a workforce of hundreds-of-thousands and revenues topping $100B.

IBM has maintained this edge with strong and insightful management that paradoxically has not been afraid to take risks, bucking the conventional wisdom and selling off hardware businesses while still profitable and growing. All while embracing information services years before “services” were vogue. In fact, while technology giants like Cisco, Intel, and Microsoft have watched their market capitalizations fall from their 1999-2000 Internet bubble, IBM has continued to create value, and today, with a market cap of roughly $220B, has traded at an all-time high.

Not bad for a “dinosaur.”

Likewise, Oracle and SAP, through strategic acquisitions and aggressive sales, have maintained market caps near their peaks of $150B and $95B, respectively.

Contrast that to HP who, through a revolving door of failed leadership and a penchant for overpaying and under-delivering on acquisitions, has watched nearly $75B in market cap – roughly 75% – disappear into competitor’s hands since their peak.

Meanwhile, Apple, rising from near obscurity to the world’s most valuable company, has proven that it’s not only gritty startups that initiate wealth transfer.

.

.

As Desai indicates, enterprise customers have been locked into overpriced, underperforming software and equipment for a decade or more. But this is not a new phenomenon. Every major cycle in enterprise technology has introduced greater cost savings, or more flexibility, or new efficiencies.

None of these have been tidal waves, either. The startup vendors are at the mercy of customers that need to be convinced to change their buying habits over time. And incumbents are at the mercy of their management’s willingness to kill off old-fashioned businesses before it’s too late, or else they cede the higher ground to those scrappy startups.

And that’s precisely why the transfer won’t be a tidal wave. That’s why the startups aren’t the only players that stand to benefit.

Savvy, aggressive businesses, whether they are large, medium or small, will almost always outmaneuver those competitors that choose to rest on their laurels, or to spend more time locking customers into long-term contracts instead of creating new value.

And enterprise buying habits will continue to evolve as they have… Gradually.

Which leads to the conclusion that you can expect Desai’s anticipated wealth transfer to be a gradually rising tide rather than tsunami. Much of this tide will flow to new venture backed startups, but significant wealth will flow from the giants who’ve resisted or denied change to other large, but more prescient and aggressive competitors.

For all of us earning a living in the technology industry, the good news is that while that wealth is in a constant state of transfer, its really just changing hands in an ever-expanding pie.