Enterprise Tech at Critical Crossroad

June 16, 2016 James Kessinger

Earlier this month VMware (VMW) CEO Pat Gelsinger spoke about “violent shifts” in the tech industry. It was an understatement:

At a media roundtable in Toronto last week, Gelsinger said that in his 36 years working in IT, this mobile-cloud era is the most transformative, and that everyone – from vendors to channel partners – will have to adapt.

You might have read the recent blogs Chasm of Disruption or The Trillion Dollar Challenge. They address the violent shifts in IT in more detail and from a CIO perspective. IT priorities are shifting on a massive scale and tech vendors are under increasing pressure to adapt to customer demands. The tables have turned.

The traditional leading enterprise tech companies -from Cisco (CSCO) to Microsoft (MSFT) and VMware (VMW)- have for years counted on fairly steady growth with enviable margins, even during periods of economic weakness.  That is changing, as the recent CIO survey conducted by JP Morgan indicates.

Cloud, digitalization and mobile are changing the game by accelerating the pace of change, and tech vendors tied to legacy premise hardware will likely face years of unprecedented margin and growth pressures. Some will likely not survive in their current form while others will make the shift.

Contrast the rising fortunes of cloud leader Amazon Web Services, which is generating amazing growth and profitability: Why Amazon Web Services Is Key to Amazon’s Profitability. The cloud is clearly massively disruptive and profitable at Amazon, even when compared to its core retail business.

That’s a signal to every tech CEO to have a significant cloud play. Yet competing in the brutal infrastructure as a service market (IaaS) with AWS has already generated casualties among well-funded tech leaders, including those with massive talent pools.  The next great battle will likely be fought in the cloud automation and orchestration space, which has already seen an uptick in M&A activities. See for example, Two Recent M&A Moves worth Watching and the recent purchases of ElasticBox and Arkin.

Taken within the context of the chasm of disruption, Gelsinger’s comments are spot on.  He’s advising an uncertain industry that change is coming and that VMware is focused on capitalizing on that change. More CEOs are likely to come on board with a similar message in coming months.  And we’ll likely see an unprecedented level of M&A around software, cloud, digitalization, mobile and security. The chasm will require software not more specialized hardware.

Companies to watch: Cisco, Dell, IBM, HP, Oracle and VMware.


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