A blog entry from ROI, TCO, and Cloud Economics Track Chair Joe Weinman.
IT, in terms of both applications and the infrastructure to run them, is becoming increasingly pervasive in our society, with the cloud playing a larger and larger role. CIOs and business executives understandably need to consider how best to leverage this technology. Is IT just plumbing, as relevant to the strategic needs of the business as, say, parking lot design or lighting fixture selection? Or is it a strategic weapon that when wielded properly can win battles, or even wars, in today’s hyper-competitive global marketplace?
Nick Carr has argued that “IT Doesn’t Matter:” IT is ubiquitous, thus a commodity. But, he continues, a commodity, widely available to all, can’t lead to competitive advantage. Further supporting his argument, IT, as a general purpose technology, can be used for the most mundane, non-strategic tasks, such as scheduling conference rooms, not to mention sharing videos of sleeping cats.
It might be a challenge to prove the correctness of the hypothesis that IT doesn’t matter, and several have argued against it. To prove that it’s false, though, all we need is one counterexample. As Karl Popper argued, a single black swan will falsify the hypothesis that “all swans are white.”
Similarly, we might believe that IT doesn’t matter, but if so, explain Google. To use Popper’s terms, Google’s success falsifies the hypothesis that IT doesn’t matter. If we go back to 1996, Google didn’t exist as a company; it was just a research project running in a dorm room. Google may be a top global brand now, but if brand were responsible for success in the search and advertising business, then Altavista, AOL, Compuserve, or Prodigy would be the dominant provider, or perhaps IBM or Microsoft. Or, viewed from the perspective that Google is in the advertising business, perhaps even the New York Times or Vogue.
Google didn’t have preferential access to resources, the way that someone owning the MGM film library or drilling rights to an oil field might. Google’s primary resource was the publicly accessible World Wide Web. Anyone could, and many did, access this information for the purposes of indexing the web and offering search services.
It wasn’t preferential access to capital. The BackRub project that implemented the PageRank algorithm was built on a few borrowed servers. In 1996, there were no enormous cash piles that could be used to fund research and development.
It wasn’t economies of scale. Google now may be able to exploit them, but certainly didn’t have many large IT companies offering volume discounts calling on two grad students cobbling together borrowed infrastructure.
It wasn’t preexisting customer relationships. Google had none. For that matter, it wasn’t an advertising and marketing blitz: Larry Page and Sergey Brin as grad students didn’t buy any full page ads in the Wall Street Journal or New York Times, nor did they snap up any Super Bowl ad slots.
It wasn’t a regulatory, judicial, or de facto grant of monopoly, as occurred with American Telephone and Telegraph via the Kingsbury Commitment.
Sir Arthur Conan Doyle’s Sherlock Holmes said that, “when you have eliminated the impossible, whatever remains, however improbable, must be the truth.” We can perhaps adapt this to intuit that when you have eliminated the false, whatever remains, including the obvious, must be the truth. If it wasn’t brand, preferential access to resources or capital, economies of scale, customer relationships, or special governmental policies, perhaps it was IT after all. Google—or Facebook, Salesforce.com, Harrah’s, Amazon.com, etc.—is the black swan (in Popper’s sense, not Nicholas Nassim Taleb’s nor Darren Aronofsky’s) confounding the hypothesis that IT doesn’t matter. A better algorithm, embodied as IT software, implemented in IT infrastructure optimized for performance, latency, end-user experience, cost, and power consumption, is what led to their strategic competitive advantage.
In today’s world, strategies are often perishable and strategic advantage is often fleeting. However, in Google’s case, the advantage has proven to be relatively sustainable, with Google still commanding 2/3 of the U.S. market for search. Google’s market capitalization is currently roughly two hundred billion dollars, and its revenues are close to forty billion dollars.
Even if not as dramatic as the creation of two hundred billion dollars in wealth from an algorithm conceived for a research project, IT is still beneficial. Leveraging sophisticated statistical analysis techniques, the latest research from Sunil Mithas at the University of Maryland and his colleagues shows that IT investments are not just correlated with, but drive profitability and revenue growth.
Next time someone argues that IT doesn’t matter, ask them to explain Google. Unless they are your competitor, in which case you may not want to set them straight.
We’ll address cloud strategy and economics, and a variety of other topics, at Cloud Connect Chicago, September 10-13.
Joe Weinman is Senior Vice President, Cloud Services and Strategy, Telx, the author of Cloudonomics: The Business Value of Cloud Computing, a periodic guest contributor to InformationWeek, and chair of the ROI, TCO, and Cloud Economics track at Cloud Connect Chicago.