In 1991, Andy Rappaport, my partner at August Capital, wrote an award winning Harvard Business Review article entitled, "The Computerless Computer Company." As described by HBR, Andy's paper argued that:
By the end of the century, the most successful computer companies will be buying computers rather than building them. Defining how computers are used, not how they are built, will create real value. Three new rules will guide the computer industry's strategic transformation: 1) compete on utility, not power; 2) monopolize the true sources of added value; and 3) maximize the sophistication of the value delivered, while minimizing the sophistication of the technology consumed.
Well, that century has come and gone and Andy hit the nail on the head. The real value in computers was all about utility. Dinosaurs like Digital Equipment Corporation and Wang that were unable to evolve to deliver utility rather than compute power disappeared in the 1990's, while companies like Microsoft and Lotus thrived. Computers were no longer viewed as valuable independent of the software they ran. They became commodities, upon which value was created through applications.
In the context of Andy's description of the computer industry in the 1990's, I believe that a new era is upon us in the 2000's. I believe that we have progressed from the "Computerless Computer Company" to the "Softwareless Software Company." Taking the evolution of computer company one step further, "computer" companies are no longer about selling software, but rather about delivering services. Hosted services have the distinct advantage of meeting all three of the "new" rules suggested in the Computerless Computer Company: 1) they compete purely as a utility; 2) they monopolize the true sources of added value; and 3) they are designed to deliver the greatest possible sophistication with the simplest possible user experience.
Perhaps the best evidence that we are entering this era of Softwareless Software Companies is Microsoft's "Live" push. At a recent VC Summit, numerous Microsoft execs, including Steve Balmer himself, talked about Microsoft's focus on rolling out service offerings under the moniker of "Live." They are now offering LiveDesktop, LiveSearch, OfficeLive, LiveExpo, LiveMeeting, etc. And in support of their massive push into the services space, Microsoft has just opened a new datacenter that will ultimately span just shy of half a million square feet (I hope to write more specifics about this some time soon).
In the era of the Softwareless Software Company, in which value is measured by utility, simplicity and reliability, the greatest asset may ultimately be the near infinitely scaling data center. It will certainly be important that the new computer company deliver great utility through its software-delivered service. But the most significant differentiator may ultimately prove to be the capacity to scale with massive demand. And those companies best situated to deliver that scale will be the winners. Thus, it is no surprise that just up and down the river from Microsoft's new datacenter in Quincy Washington, both Yahoo and Google are contemplating building their own gargantuan datacenters. The Softwareless Software Company may have come full circle from the Computerless Computer Company and be more about hardware and infrastructure than about software after all.