Interview: Michael Cusumano, professor MIT Sloan School of Management, on how hardware will soon be intrinsically worthless
Boutique devices like Apple's iPad may command high prices today - but tech hardware itself is on the way to becoming intrinsically worthless, according to MIT professor and tech industry guru Michael Cusumano.
The foundations have already been laid: laptops and high-end smartphones, for example, were once big ticket purchases. Today, however, these previously costly items are given away free with monthly mobile contracts.
It's a trend that will accelerate as time goes on: one day, the biggest profits will not lie in selling gadgets themselves but in controlling the services they allow us to access, Cusumano believes. In the future, tech hardware's primary purpose will be to hook people and organisations into signing up for lucrative network service contracts, making purchases from online application and content stores and using software as a service (SaaS) offerings.
"It's shifting the business model to the service side, and the product becomes a platform on which to deliver these services," he told silicon.com, a process he dubs "servitisation".
"Almost every software product and hardware systems company has been thinking this way."
As today's cutting-edge software and hardware becomes tomorrow's commodity tech - much in the same way touchscreens, GPS and large internal memory were once exclusively the province of high-end mobiles but now appear on cheaper and cheaper models - the trend towards servitisation allows companies to negate the financial hit that accompanies this technological devaluing.
"This [servitisation] is largely the way to counter the commoditisation that has been going on - people don't like to pay a lot of money for products anymore," Cusumano said.
Such commoditisation is also making its presence felt in the software industry, thanks to the mushrooming of free or low-cost web apps, such as Google Docs, able to carry out tasks that once would have required consumers to fork out hard cash for boxed software, such as Microsoft Office.
Like its hardware counterpart, the software industry will need to turn to delivering services over the internet to keep the balance books looking healthy.
"The big margins will be in automated services, which will have gross margins comparable to the old software product," Cusumano told silicon.com.
"Right now SaaS is only about four to five per cent of software product revenue - that will probably go up to about 10 to 20 per cent in the next five years," he said.
"Ten years from now it will probably be about a third or 50 per cent - it probably won't go too much beyond that."
SaaS revenues will top out, Cusumano believes, due to enterprise being unwilling to place critical systems and sensitive or valuable information on public cloud platforms.
Out of today's big hitters in the tech industry, Cusumano sees a number of winners and losers emerging from the shift to a service-orientated tech market.
Cusumano highlights Apple as the company leading the way in the servitisation of the technology product world, persuading its huge base of iPod, iPhone and iPad users to rack up more than two billion downloads from the Apple App Store since it launched in July 2008.
"Five years from now the most valuable part of Apple will be iTunes and the App Store," he said - an interesting development given...
...iTunes was conceived purely as a way of locking consumers into a cycle of buying Apple hardware, rather than as a money-making mechanism in itself.
"[The value will lie in Apple's] digital services and not the products, as everyone copies their products those will be commoditised and the prices will come down." Copy they have - iPad-style slates are everywhere, yet the App Store's popularity shows little sign of dimming.
Nipping at Apple's heels in this post-product world, Cusumano believes, will be Google, with its portfolio of web apps targeted at consumers and enterprise, its application store for the Google Android mobile platform and its Google App Engine service, where organisations can host their own apps on its tech infrastructure.
"Google is a close second, because other than internet search Google hasn't made a huge splash in the same way as Apple," Cusumano said.
"They get a lot of attention but their phones have not caught on in the same way that the iPhone has, and they have not yet released other kinds of devices like the iPad.
"They have Google Apps, App Engine and people writing apps on the Google platform but it doesn't have the momentum that the Apple App Store does."
Cusumano said Google is also at a disadvantage compared to competitors like Apple because of the ease with which consumers can switch away from Google's free-to-use, ad-supported web apps and search engine.
"If there's no penalty or switching cost for a user to using multiple platforms, then they will use multiple platforms," he said.
"If other companies or services start off with things that are not available on Google you are going to go elsewhere, which is bad for Google."
While seeing Apple and Google as trailblazers for servitisation, Cusumano isn't writing off Microsoft as too slow to expand beyond its traditional boxed software and move into offering web services.
"Most people would say that Microsoft is in the worst position because the software product market is slowly eroding," he said.
"Microsoft have got all the pieces but they don't look very strong in any of them, apart from the desktop, the enterprise server markets or mid-tier database [market].
"The golden age is over for Microsoft but they are not necessarily in a bad position. You can see the last 15 years of Microsoft as preparation for the day when they will have to deliver a lot of their product technology as an online service.
"They started MSN in 1995, they have Office Live, Windows Live and they have their own cloud platform Azure, which they are going to be tying a lot of products to.
"How popular Azure will be is not yet clear but it will...
...probably be pretty popular because their products are good and their development tools are very good.
"They know how to build software and know how to make tools and software available to outside developers.
"I think they are positioned really well: it's unfair to expect them to aggressively lead the charge in cloud computing because their business is in the traditional product.
"They will be one of a number of strong, influential companies competing in the software, computing and internet service business."
But there is a fourth company to consider - a wildcard that Cusumano believes will give all of the established tech players a run for their money in the new online service-orientated world: Facebook.
"The other 800-pound gorilla out there in the internet services space is Facebook," he said.
"Right now Facebook is more popular then Google as an entry point to the internet. Five years from now Facebook will be your everyday multi-purpose portal for living your life."
Facebook users already share more than 25 billion pieces of content via the social network each month, and in the near future Facebook will launch the Open Graph Facebook plug-in, which will allow it to more directly challenge Google's role as the gateway to the rest of the web.
As well as the strength of Facebook's user base - more than 400 million people worldwide - Cusumano said the social network will benefit from how easily it can incorporate services and features that its competitors offer into the site.
"The interesting thing about Facebook is that they have the capabilities to imitate almost anything interesting that happens on other platforms," he said.
"They can do microblogging, they can host videos and content like YouTube, they already have several thousand applications running within Facebook and they have enormous potential for attracting advertising."
Ultimately any tech company that wants to stay ahead of the competition and seize new business opportunities needs to start figuring out what new services it can offer to its customers, according to Cusumano.
"That's a common theme whether you are Cisco or EMC," he said. "Figuring out how to get different functionality out of your products through cloud, different kind of pricing mechanisms and the business models behind that."