Commoditization is about as fundamental a process as exists in virtually every industry, which is why the search for differentiation in every industry is so feverish. One might say the same about the search for new value creation that drives much differentiation.
One of the connectivity industry’s responses to deregulation and privatization that became global in the 1980s is “segmentation.” Creating a niche of customers, products or solutions is one way to increase perceived value.
The computing industry likewise has been driven by Moore’s Law, in particular the increasing power and ever-lower computational cost that have “commoditized” computing.
Other key trends since the end of the monopoly era are lower prices, lower profit margins, and an end to industry moats (allowing new competitors to emerge). The computing industry arguably has faced similar developments. Are they all related?
Almost certainly, one might argue. Commoditization of connectivity and computing tasks--with lower prices and higher capabilities--underpins the modern internet and all next-generation networks (computing or communications).
Most observers might agree that competition leads to lower retail prices, causes supplier restructuring to lower operating costs and boost marketing. Most might also agree that competition affects value. As core products are commoditized, the search for new forms of value intensifies.
But commoditization might also be an evergreen problem for the connectivity and computing industries. Some might argue it is a primary innovative force. Richard Slater, Amido principal consultant, argues that commoditization of IT in fact drives innovation.
Commodity electricity leads to commodity computing (PCs). Commodity computing leads to commodity business computing (data centers).
Commodity data centers lead to commodity cloud delivery (public cloud). Commodity public cloud leads to cloud diversity (public, private, hybrid, multi and poly cloud).
Commodity cloud diversity leads to commoditized data, he argues. We might suggest that commoditized data leads to commoditized insight, as well. In other words, ample big data combined with ample artificial intelligence to mine that data will lessen the value of insight itself.
Once every competitor can do so, the value of that insight is itself commoditized.
“Industry-specific clouds are part of a cyclical pattern of commoditization, and by that, I mean that where there is a need, or demand, for something, typically there will be a move towards commoditizing the answer to that need,” he said.
Most connectivity and computing firm executives likely would agree, at least privately. No public company executive would be caught saying--in public and on the record--that the existing core business is commoditized and that every succeeding value-creation effort similarly will be commoditized.
The unspoken but implicit reality is that profit margins also will be commoditized as value is likewise commoditized. This is the reality behind the phrase “dumb pipe.” Observers often warn about commoditization, but it remains an arguably fundamental process.
What often is not recognized is that the internet is built on dumb pipe. By definition, the value of apps, services and content is structurally separated from the transmission network functions.
Think of the ecosystem roles played by electricity, computer chips, shipping, roads, water systems or waste management. Then think of all the value created by apps, services, products and content that use electricity, roads, shipping, chips and water.
The same analogy applies to communications networks. They are essential, but essentially commoditized. We might debate the extent to which that happens in markets with facilities-based competition or wholesale mechanisms; markets with fewer or more platforms. But the commoditized character remains.
Like it or not, Slater seems to imply, each advance in communications or computing gets commoditized, setting the stage for the next evolution, which in turn is commoditized. That will drive the search for creating new sources of value, endlessly.
“We have seen the same in IT, to satisfy the need of running a business process we had servers, then virtual machines, then virtual machines in the cloud, then PaaS and then SaaS,” he said. “Industry-specific clouds is about commoditizing a common need, typically this is taking the form of emphasizing specific quality attributes of that cloud.”
Like it or not, commoditization drives prices and value in every industry. The search for additional value continues precisely for that reason.
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