Published on 11/28/2016 | Strategy
Business history is littered with once-successful companies that couldn’t see the market tsunami that was coming their way until it was too late to do anything but stand up and be walloped by a wave of change that obliterated their businesses.
Blockbuster Video is a classic example. Once a powerhouse in the video rental industry, its leaders lacked the foresight to invest heavily in the emerging video-on-demand market in time to stave off bankruptcy. And Netflix and similar streaming services weren’t even on the scene when Blockbuster and like competitors fell victim to the wave of change that took them under. Its arrival would have felt like being hit with back-to-back market tsunamis.
Nortel is another great example of a successful, globally-dominant technology company that just couldn’t move fast enough once the realization set in that IP networks and routing technology weren’t just for consumer applications. Its powerful DMS switches were quickly turned into outdated, cumbersome, costly technology by faster, more nimble competitors like Cisco.
However, in many cases when companies fail, it’s not because its leaders don’t recognize the threat; it’s because they are virtually powerless to respond to it in a timely fashion.
If you haven’t heard that term – cannibalizing one’s base – it’s likely because you never took Marketing 101. Put simply, it speaks to a case where a company has several product buckets, one of which accounts for the majority of its revenues. Take the case of Blockbuster. One product bucket, its cash cow, was video rentals (and dreaded late charges). A second, less lucrative bucket was video sales, and a third was concessions – popcorn and the like. And therein lay its dilemma.
When the cash cow came under attack, even if the executive team knew they were up against a market tsunami, they had no options. They couldn’t jump head-first into video-on-demand, even through acquisition, because in doing so they would have joined their online competitors in driving rapid, massive loss of revenues in their key product bucket. A new VOD revenue stream just couldn’t offset the cash-cow losses fast enough to avoid irreparable damage to the company. In essence, they would have put themselves out of business by addressing the very problem they were trying to solve. Cannibalizing their own base just wasn’t a viable option.
When Nortel’s cash cow was under attack, it tried the “buy our way out of trouble” approach when it acquired Bay Networks, a Cisco competitor. It was too little, too late. Nortel’s empire, which relied heavily on its digital switches, was being hit by multiple market tsunamis, leaving the company drowning in red ink, and eventually causing its demise.
The smart companies get ahead of the wave – ride it as it were – by working hard to slow the erosion of their cash-cow products, while simultaneously entering new markets designed to replace, and ultimately surpass the revenues being lost in their cash-cow segments. The telecom industry, a sector impacted more by the arrival of the Internet tsunami than any other, has done a masterful job in handling disruptive market change.
Look at the product profile of a telecom company 20 years ago, and look at that same company today. It’s a night and day comparison. Twenty years ago, the typical telco’s revenues were derived primarily from long distance, local service lines, dedicated and shared data networks, and other product portfolios like pay phones, and yellow pages. A company that elected to rely on those product buckets for survival in this century would have been placed in the dumpster alongside Blockbuster and Nortel many years ago.
Today’s successful telcos launched entirely new service offerings designed to drive new revenues for the business, and at the same time did their best to slow the inevitable erosion of their core offerings through gradual price drops, bundling and deeply-discounted long-term contracts on their cash-cow offerings. The strategy worked. Today, Mobile, Media, Content, Cloud and (high-speed, ubiquitous) Access to everything have emerged as the new telecom product buckets.
Out with the old, in with the new - in a well-planned, well-executed fashion that maintained telco profitability, and protected shareholder value.
The IoT market Tsunami is coming, and soon. And with it comes a guarantee that many businesses whose product will become obsolete with the arrival of IoT will go under. That’s a given. And what are the tell-tale signs of a company that could be in trouble? Here’s my view:
1. It has products that can be replaced by, enhanced by or are – according to industry pundits - migrating to IoT applications (e.g. IoT can’t replace a physical traffic light, but it can enhance it by allowing it to communicate with other IoT-connected devices, or to a Trust Centre.)
2. Its primary product bucket accounts for over 40% of its revenues, and its revenues in this bucket are in rapid decline by more than 5% annually.
3. Assuming point one above is in play, the company has yet to re-structure to create focus on IoT applications.
4. If it has restructured to address the IoT threat/opportunity, revenues aren’t growing at a pace fast enough to replace the revenues lost in its primary product portfolio, and/or the path to achieve the required growth is not abundantly evident.
5. Its key products, positioned in the context of IoT, are lacking adequate security or, worse than that, have already been breached (and nothing has since changed).
Now hold these thoughts, as I’ll be back to them shortly.
I’ve spent a lot of time analyzing the IoT market opportunity, and I’ve concluded that the heartbeat of IoT - the key ingredient that the world must rely on to fully realize the massive financial and operational potential that IoT affords us - is the microchip. It’s that tiny device whose power has increased so dramatically over the years, enabling remarkable and in some ways unfathomable change to our world. The “chip” (and the industry’s constant quest to align with Moore’s Law) has forever changed our world. And I believe that it’s about to do it again.
Here’s why.
The projected 50 billion+ devices that will be part of the IoT ecosystem will have a few things in common. They will have microchips inside, and they will be communication-enabled, meaning they will be able to ”talk” to each other directly, through a common Trust Centre, or through IoT platforms. So IoT looms as both a massive opportunity for semiconductor companies, and also a massive threat.
The question becomes, which of the leading semiconductors are ready for IoT?
How do they stack up against the 5 questions posed above?
I did some research on all the big chip players, and here’s what I learned. Without naming names (and since an annual report or financial reporting can only tell us so much), some of these multi-billion dollar companies look like they are in serious trouble. One just reported its 2015 YE results, and showed YR/YR revenues down by 5%, net income down 15% and provided a Business Outlook Summary that suggested revenues would be down 15-27% next year, with chip shipments off by 9-17%. And guess what? There are no indications that the company has restructured to address the opportunity with IoT.
Its share price? Off 30% in the last year.
Can you say Blockbuster Semiconductors?
Others in the top ten fared better but still showed declining revenues 2015/2014, and didn’t include a single reference to IoT in their annual reports.
Some clearly see what is going on, and while revenues in their cash cow portfolios are down as much as 8% annually, they have invested heavily in IoT, have re-structured to ensure it is a key pillar of the business going forward, and have a nice head start on their competitors in the race to achieve dominant IoT market share.
Still, this hardly means the race for market dominance is over. It’s just beginning, and it’s not too late for any of the big players to get into the game.
Let me back up a bit. The absolute biggest hindrance to rapid IoT growth is lack of reliable, security, and the associated standards. And this isn’t just my opinion. It’s the view of the some of the world’s premiere IoT market analysts like Freescale’s John Dixon, whose recent story entitled Who Will Step Up To Secure The Internet Of Things? stated, “…leading technology companies still haven’t fully committed themselves to finding solutions for securing IoT applications. If today’s titans of technology won’t step up to secure the IoT, that vital endeavor may fall to the multitude of startup companies that are fueling much of the industry’s current growth…”
And how does the security problem get resolved?
By the heartbeat of IoT, of course – the chip.
Or at least by integrating existing security technology (specifically, IBE 3.0) with what makes every chip as unique as a person’s fingerprint – PUF (Physical Unclonable Function).
Designed to ensure that chips could not be duplicated by outside parties, PUF has become a mainstay of the microprocessor manufacturing process, but it’s never really been something that could be commercialized on its own – until now. (The “how?” of accomplishing this is articulated in my article PUF – the Magic [IoT] Dragon.
My prediction?
And the Award goes to…
I believe that the first semiconductor company that can truly solve the privacy, security and identity issues that threaten the IoT market growth will not only survive, but will dominate the IoT landscape, and deflect the IoT market tsunami to the point where many of its competitors will drown trying to catch up.
And along the way, those who lead the semiconductor pack will cause collateral damage – lots of it.
The companies that stick with the old in addressing the IoT market (i.e. relying on broken or breached security protocols such as PKI and ECC) or rely on others to bring their IoT solution to market (e.g. partner with platform providers who are also using dated security technology) will be the first to suffer. Let the battle begin.
This article was originally posted on LinkedIn.
