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Summary:

As startups race to become the next big thing, they often downplay the successes and sales of those they hope to replace. But large companies spend billions on old technology because they don’t have the resources to try something new.

Year end is always time for either year in review style articles or predictions for the upcoming year. Instead, as the clock inexorably marches on, I wanted to give a shout out to some old school technology. While it’s my job as a venture capitalist to spend time thinking about new disruptive technologies, it is fascinating to think about the venerable older technologies that are still enterprise workhorses and the tremendous amount of inertia start-ups must overcome to displace them.

I got thinking about this because I was recently on a panel where someone pointed out that a large portion of server revenue is in alternative Instruction Set Architectures (ISAs) i.e. anything non-x86 such as Power, IA-64/Itamium, SPARC, etc. This seemed like an interesting factoid so I looked into the data, which is indeed shocking. Although non-x86 serves, which I categorized as Everything Else in the chart below account for 1.8 percent of the volume of units, they are over 28 percent of the revenue in 2012!

benikisachart

In fairness, much part of this is due to the much higher average selling price of Everything Else servers like mainframes and SPARC, and of course in those business lines, the percentage of both units and revenue is decrease rapidly, but why are people still buying those machines? No one sets out today to build an application on Itanium yet $3 billion was spent last year on the systems.

But the answer isn’t that surprising when you understand big companies. Someone built an application that works fine and is sitting in the corner. The guy who wrote the application left the company seven years ago, the documentation sucks, and people are afraid to touch it. So the care and feeding of these applications drives this revenue.

But I just don’t want to pick on servers and chips vendors here. There are plenty of anecdotal and hopefully humorous data points from up and down the stack I can offer:

  • A major financial institution that still has a few VAX machines running in the basement. That’s a 35-year-old architecture.
  • A major media company that still has servers running Windows NT 3.5 This version of the operating system was released in 1994.
  • A global financial firm running Internet Explorer 6. Yup, that’s circa 2001 technology.

These companies are dramatic example to prove a point about inertia. Over a beer, ask anyone working in technology at a large company and you are likely to hear the same types of stories. Inertia in the enterprise is high, otherwise these technologies would be long gone. Further, in an environment with flat-to-moderately-growing IT budgets, it’s a zero sum game. Budget for your new widget is taking food off someone else’s table. There are no overnight successes in the enterprise. Splunk, which went public in April, was founded in 2003; Palo Alto Networks, which went public in July, was formed in 2007; and even Nicira, which burst into the public’s mind in 2012 after selling to VMware for $1.26 billion, had been working away since 2007.

Sometimes the money isn’t in the bleeding edge. When you step out of the Silicon Valley echo chamber and the industry conferences with all the smartest speakers you quickly realize that most enterprises don’t see technology as providing them with competitive advantage. This is a debatable point in the long run but in the short term they have a business problem they are trying to solve and want to do so for the least amount of money possible. They are short on IT staff and more than willing to let the big vendors tell them what they need. Your OpenStack-Bigdata-NoSQL-Cloud-Openflow-distributed-real-time-anltyics-quantum-flux capacitor may be cool, and buzz word compliant but may fall on deaf ears in the mass markets.

But don’t despair, there are leading edge end-users out there who are willing to take a chance as early adopters of compelling new start-up technology. Plus, these are not just the big web companies and Wall Street banks. Sometimes you will find them in the most unusual places and it’s my New year’s resolution to spend more time with these folks in the coming year.

  1. Enterprise IT teams have so many burning projects to deal with that these app migration plans just keep getting pushed back. In the IT Infrastructure, we are seeing that virtualization is doing its bit to help. Some of our clients have successfully virtualized old NT systems(as you mentioned in the post). So small changes are paving the way :).

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  2. Michael Southern Monday, December 24, 2012

    Alex, as you find these companies, shout them out! I’ve manhandled all sorts of technology since 1983 and I’m looking for employment opportunities lol http://www.linkedin.com/in/mikesouthern

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  3. Inertia, somewhat kind of mankind nature, has been influencing the whole business world. To adopt start-up technology or not is not just a simple decision, which there expectedly exists complicated factors behind. That is why we call new technologies are disruptive!

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  4. Ron Clark, M.D., FACEP Monday, December 24, 2012

    Alex: Very good summary of the inertia of the old tech and the challenges for emerging new tech. My company QUICK, http://www.quickappcompany.com, is a new tech biomedical mobile application company. Your observation that “large companies spend billions on old technology because they don’t have the resources to try something new” is true, but interestingly, small companies who want to catapult to billion dollar large company status see limited resources as a motivation, and not a limitation, to innovate new products and concepts that make old tech products look dusty.

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  5. Alex, this was an excellent article, thanks for reminding the world about inertia and just how difficult it is to overcome in some contexts (especially GigaOm readers which get inundated day-in day-out with “cloud-this” and “NoSQL-that” type of stuff! In 1998 I was a subcontractor to a small consulting firm that was hired to do what was, at that time, cutting edge work by using Java with CORBA to do dig into a big pharma’s VAX mainframe to pull out sales data and present it to their mobile sales people in the field via the worldwide web. That was a huge deal at that time (the reason the company took the risk on Java I’m quite sure is because Sun was massively behind it and a lot of big companies trusted Sun due to their reputation with SPARC machines etc.). Big companies with a lot of risk at stake are much much less likely to trust ad-hoc code in Github that may look popular today but could end up dying in the vine (if the code owners / maintainers eventually abandon it). So Marc Andreessen can cackle all he wants about how “software is eating the world” and why his VC firm has invested in GitHub for example, but its not as if its eating the entire world all in one bite!

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  6. Yes, enterprise spends money on ‘old technology’ from the the vendors they bought it from when it was ‘new technology’. Suggesting a startup should try to capture incumbent revenue in a diminishing-growth area is “odd”.

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  7. Spend on “everything else” is decreasing which is in line with what you’d expect and shows where the real growth in cloud services will be – new projects. Old projects “just work” so there is no business reason to change that. But new projects have a lot of choices, which is where cloud providers are going to step in.

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