Comment: New challenges

26 May 2004

Long-time observers of the technology industry would note that the sector globally is a dramatic one in the sense that it has an all-star cast of charismatic individuals that flout the popular notion of an industry populated by Megadeth T-shirted geeks. Individuals including Steve Jobs cranking out the first Apple Macs from a garage, Mig fighter jet-flying Larry Ellison’s aggressive sales tactics and the first lady of IT Carly Fiorina’s sublime handling of one of the largest mergers in business history, the multibillion-euro merger of Hewlett-Packard (HP) with Compaq, make it an industry not short of rollercoaster rides.

High drama of the past decade includes the Kyoto earthquake making computer chips more valuable than gold into the investment frenzy that was a tulip auction for our times, and the dotcom boom of five years ago for which we are still paying the price today.

Observers of the industry will note that the sector is also one not averse to risk and big mergers, multibillion-euro alliances and dramatic forays into challenging new markets are the hallmark of an industry on the move.

While investment houses are still paying for the exuberance of the late Nineties – Credit Suisse First Boston banker Michael Quattrone was recently found guilty for obstructing federal investigations into some of the largest stock offerings of the last decade – the industry has been dusting itself off and embarking on its next phase.

The IT industry is like a caged animal anxious to break through the chains of obscurity and take its rightful place in the mainstream. It is no accident that hardware and software giant Apple has been reinventing itself as the future shape of the music industry to come – the company is claiming more than 70 million songs have been downloaded from its iTunes music service and attributed its dramatic return to profitability to a 900pc increase in sales of its iPod music player.

Apple’s long-time nemesis, Microsoft, is also keen to get into the music scene. Its recent antitrust court case with the European Commission – which resulted in Microsoft being fined €497m for bundling its Media Player technology with its Windows operating system – attests to its hunger to be a dominant player in the future media scene.

Earlier this year Microsoft unveiled its ‘iPod killer’ technology, the Portable Media Centre, which would power mobile devices with a 40GB hard drive and make them capable of storing 175 hours of video; 10,000 songs or 100,000 pictures. Proposed devices would also boast a battery that would last long enough to watch one of the three-hour Lord of the Rings movies or listen to 12 hours of music.

Telecom companies are also watching these developments quite closely and are on a parallel course with the IT industry to carve a slice of the future movie, music and games business, not to mention mobile services and the traditional bedrock of IT, areas such as integration and storage. You only have to look locally at Eircom, which for a number of years has its own data centres, has engaged in IT systems integration projects and in recent months launched its own music downloading service, The Music Club, which undercuts the prices of CDs on the high street by as much as 50pc.

The parallel or collision course that the IT industry and telecom industry have embarked upon was brought closer to bear in recent weeks by the recent €1.5bn alliance between UK telecoms giant BT and IT industry juggernaut HP. According to local sources, the seeds for the alliance were sown when both companies worked together to win the €600m Bank of Ireland outsourcing contract. The irrevocable truth is that both the IT and telecoms industries need each other to win projects of this scale. The strategic alliance will see BT and HP develop a strategic go-to-market alliance to address mutual growth opportunities in the global information and communications technology marketplace.

Such alliances have been welcomed by their respective industries, but analysts have admonished that these alliances won’t be without their share of danger. A recent advisory note from Gartner said that the potential, nonetheless, is significant. “The deals match the core focuses of the two players: BT for networks and contact centers and HP for mid-range and desktop services. They are preliminaries for an alliance aimed at delivering new end-to-end services spanning networks and IT services,” it states.

“There is nothing new in alliances between network and IT service providers, but market shifts are accelerating the convergence between the two sectors and the collisions among players,” it adds. Gartner cautions, however, that partnerships are difficult to implement, as AT&T found with its alliance with IBM. And BT failed twice with Concert – first with MCI and then with AT&T. By contrast, HP and BT appear to have aligned their deal to avoid conflicts. They are emphasising that their alliance is not exclusive, because they do not wish to damage their relationships with other players. For BT, this means IBM and other leading service providers; for HP, it means other telecom carriers.

“The companies need to develop useful service offerings and the ability to deliver them. They expect new end-to-end service offerings to be available in 12 to 18 months. Overall, the move has an interesting potential for large enterprises looking for integrated services. It is a move in the right direction, according to both market shifts and Gartner’s conception of the IT services value chain,” the analyst says.

If the HP and BT alliance works, don’t be too surprised that it could spawn a flurry of outright mergers between globe-straddling IT players and telecom operators.

By John Kennedy