Cover Story: The Info Tech 100
The Info Tech 100
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Technology on Tap
Say goodbye to geekware. From now on, you'll farm out your tech needs--and pay a monthly bill
It was a techie version of a heart transplant. When the doctors of Talbert Medical Group in Costa Mesa, Calif., spun their practice out from a bankrupt physician-management company last year, Chief Information Officer Al Herak faced a daunting task: to build the computing underpinnings for the new company in just three months. It would normally take at least a year. If he couldn't pull it off by the time the bankrupt outfit closed its doors on Aug. 1, Talbert's 110 doctors would be helpless--unable to schedule appointments or track records, potentially forcing their patients to look elsewhere for care.
If botched, this maneuver might have wrecked the partnership. Instead, Talbert is in the pink of health--on track to do $80 million in business this year. And Herak is a hero. He got the job done cheaper, faster, and better than he had ever thought possible. How? He turned to TriZetto Group Inc. in Newport Beach, Calif., a new breed of tech company that houses computing gear at its own facilities and dishes out software to customers such as Talbert over the Internet: no fuss, no muss--and fast. Herak doesn't have to spend upwards of $1 million on computer systems and then more every year to keep them running. Instead, he pays a monthly fee of some $100,000--the same way he pays a utility bill. "We're saving money, and if it goes down, I just make a phone call and say: `It's your stuff, you work it out,"' says Herak. "I love it."
There's a lot to love about what's shaping up to be the next big thing in computing--Technology on Tap. In the future, consumers and companies will have the option to bid goodbye to the complex and expensive world of computers and servers, networks and routers, megabytes and gigahertz. Such geekware is being repackaged as easy-to-use services paid for in monthly dollops, making the Internet as much a part of daily life as the phone. These new hassle-free services will be ready whenever you request them--whether it's an online accounting service to balance the quarterly books, a service to translate e-mail from the Chinese subsidiary into English, or a music download to create a mix for your evening commute.
For consumers, the vision is of a Web that oozes services for nearly every aspect of your life. Giants such as America Online, Microsoft, and AT&T have grand schemes to sell services that, say, automatically tap your bank account to transfer money for a buy order when your favorite stock takes a dip. At the end of each month, consumers will pay a technology bill--along with their phone and water bills--based on just how much they used the technology tap. And thanks to the spread of broadband connections to the home and wireless networks, you'll be able to link up wherever and whenever you want, through channels from cell phones to sleek kitchen-counter gadgets.WATERSHED. The impact on the high-tech industry could be even more profound than the introduction of the PC in 1981. Instead of selling computers to individuals and companies, computer makers will supply a vast network of data centers--similar to electric-utility power plants. Software will be delivered on demand over the Web, rather than in cereal-box-style packages that saddle the buyer with complex installations. And high-priced tech-consulting outfits could find themselves fighting for survival in a world where starting up a powerful e-business system may end up being nearly as easy as opening a bank account. "Every company better think about this if they want to be around in 10 years," says Edward Zander, president of Sun Microsystems Inc.
Already, the Technology on Tap revolution is jostling the ranks of high-tech winners and losers. Examine this year's Business Week list of the best-performing information technology companies. Players that envisioned this new style of computing and raced toward it are in the upper ranks: No. 1 Nokia Group is the leader in providing Web phones that are vital to a world where information is available at your fingertips. Software maker Oracle Corp. (No. 3), high-powered computer-server maker Sun (No. 11), and networking giant Cisco Systems Inc. (No. 25), dominate their markets, making products that are Net building blocks. Meanwhile, some stalwarts of the PC era have fallen back to earth. Chipmaker Intel Corp. didn't even break the top 200.
Huge rewards dangle before savvy companies that can master the new calculus. Investment in Net infrastructure technology is expected to vault from $150 billion in 1999 to $350 billion three years from now, according to Jupiter Communications. The market for business-to-business Net services is expected to grow from $7.9 billion in 1999 to $76 billion in 2003, says market researcher IDC. Indeed, retailers surveyed by Forrester Research expect 25% of all music and 40% of consumer software to be delivered electronically by 2004."DISORIENTING." By the time the shaking stops, the high-tech industry will emerge as a force capable of changing the very nature of business. Tomorrow's entrepreneurs may not create a full range of company departments, such as accounting, sales, and customer service. Instead, they may focus on their key strength--say, product design--and then contract out these other functions to Net-based specialists. Instead of taking eight months to get started, they might be able to do it in two or less. "A new company becomes a node on this huge Web and just grabs the services it needs," says Netscape Communications Corp. co-founder Marc Andreessen, whose new company, Loudcloud Inc., runs Web sites for a monthly fee. "This is going to sweep through the entire economy, and it's going to be entirely disorienting."
As the Internet gets faster, more reliable, and more secure, even large companies will hand over many of their computing tasks to outsiders and focus on their core business skills. Today, U.S. companies spend $300 billion a year on information technology. But, says Boston Consulting Group Inc., only 33% of major software projects save money or boost sales. Some executives have seen the light. Daru Khanavala, chief technology officer for digital business at BP Amoco Corp., already has begun to outsource its e-mail and Web-site jobs. Now he's considering using multimedia fuel pumps that sell music and movies as well as gasoline, and farms out tech operations. "We're entering the next phase of the Net: externalization," says Khanavala. "Everything that can be done by someone else should be done by someone else."
Such a shift could deliver a macro-economic wallop. Dale W. Jorgenson, an economics professor at Harvard University, predicts that outsourcing information technology could increase the efficiency of tech investments by 20%. That's because Technology on Tap lets companies pay for just the computing they actually use. The result: big cost savings, productivity improvements, and a Net gain for the economy. "We're talking about big bucks," Jorgenson says--enough to lift the growth rate of gross domestic product by one-tenth of a percentage point each year for the next decade.
To be sure, the Technology-on-Tap world won't be built in a day--or even a decade. Basic computing technology must become far more dependable to make Ma Web as reliable as Ma Bell. And networking advances are required to clear the bottlenecks that slow down digital traffic. New security technologies are needed to prevent the kinds of "denial of service" attacks that closed down Yahoo! (No. 94) and other Internet sites in January. Better processes must be in place so sites can switch to back-up systems whenever any glitches occur.
It's by no means assured that all of these obstacles will be overcome. And even if they are, new ones will emerge. Indeed, making the technology tap work will be far more difficult than creating the phone network or the power grid. Each of those utilities delivers one kind of commodity. But the Internet is an uber-utility for all kinds of services. The technology tap will be a patchwork of hundreds or thousands of companies, each contributing its own special expertise. Indeed, some pundits worry that the outsourcing trend could go too far. "The real advantage of technology is how you use it to change your business model, and you can't outsource that," says Erik Brynjolfson, director of the Center for E-Business at Massachusetts Institute of Technology. "If this makes CEOs think: `Great, I can forget about technology,' that's a recipe for disaster."
For the hundreds of established tech companies and thousands of new ones banking on this shift, these obstacles are like a red flag waved in front of a bull. They're dead set on building a Tech Tap world--and making a mint in the process. Roughly 400 so-called application service providers (ASPs) have been created in the past four years, offering "apps-on-tap" that run the gamut from corporate computing to the jazziest consumer services. Major League Baseball, for example, recently signed a deal to have ASP startup Seasonticket.com host its All-Star balloting process on a Web site where fans can not only vote for their favorite players but also view stats and video clips to boot.CENTER STAGE. While evangelists such as Oracle Corp. CEO Lawrence J. Ellison and Sun Microsystems' Scott G. McNealy have been crying in the wilderness about the "services-driven network" for years, suddenly it's hard to hear them in the crowd of Johnny-come-latelies. PC-era powerhouses such as Compaq, Hewlett-Packard (No. 98), Intel, and Dell (No. 24) insist they're now Net infrastructure companies. Even Microsoft Corp. (No. 75), the main beneficiary of the PC-centric world, is making its Office suite of productivity programs available through ASP partners, rather than just on CDs. This fall, Microsoft partners such as USinternetworking Inc. will be offering Office to small companies for just $20 per month per user.
Why is all this happening now? Because a vast highway system, under rapid construction, will make it possible to deliver all this digital traffic quickly and reliably. Internet backbone speeds are doubling roughly every nine months, prompting companies from AT&T to startups such as MetroMedia Fiber Network to spend billions on high-speed Netways. And by 2003, millions of homes will have replaced their poky dial-up modems with fast cable or phone connections. That will make it possible for service companies to deliver byte-hogging items such as music videos.
A rich ecosystem of Net-infrastructure companies is filling in the gaps. Businesses such as Akamai, Digital Island, and Inktomi are building server-filled data centers in a town near you to make sure a stock quote or weather report is right at hand. Networking companies from Cisco to Yipes Communications are developing technology to bypass bottlenecks on phone networks, speeding data straight to the Net spinal cord. Other companies have come up with tools for managing systems so that when a piece of equipment fails, work can be instantaneously rerouted.
Altogether, the next generation of technology is inspiring the biggest frenzy of investment and innovation since the early days of the personal computer. Back then, the constant advances in computer technology led to the creation of ever-more-powerful programs, creating a "virtuous circle" of growth, as more and more companies and people found a reason to join the PC revolution. Now multiply that by bazillions. While the PC industry has grown into a $240 billion business in some 19 years, analysts think the Net--with its potential to reach every person on earth--will drive $1.5 trillion in e-commerce by 2003, says IDC analyst Traci Gere.
What does it mean for consumers? As the Web gets upgraded from a sometimes slow-as-molasses network, analysts predict it will evolve into a versatile faucet, gushing anything that can be digitized--music, e-books, interactive TV, rich online shopping experiences, and far more. Not only will there be new digital services but they will be far more convenient to use.
The coming era of always-on Web access will offer "personal information networks" that provide people the services they want. Carmakers such as General Motors Corp. and Ford Motor Co. plan to let drivers order music right off the Net as they drive, or have e-mail read to them--so they can dictate replies. Health-care companies could offer patients worldwide heart monitoring over wireless links and automatically call an ambulance in case of trouble."NO TIME." The Schmaier household of Hillsborough, Calif., offers a taste of the future. With high-speed Net links and always-on flat-screen PCs in every room, checking the weather or a movie schedule is a snap. "As crazy as life is today, there's no time to boot up!" says David, Schmaier, a vice-president at software maker Siebel Systems.
Now, tech companies are laying the groundwork to deliver this kind of Net lifestyle to the masses. Nokia, for instance, has just introduced a Home Gateway device that provides high-speed data and voice communications to a wide variety of gizmos at home and on the road. It means people can have the convenience of one phone number, one e-mail address, and one voice-mail box, instead of separate numbers and addresses for each phone or computing device, as they often do now. AOL (No. 78) has struck deals to put e-mail and other services on cell phones, pagers, and such, and later this year will begin selling countertop Web appliances plugged into its services. "We have an opportunity to transform the lives of hundreds of millions of people in core things like media, entertainment, information, commerce, and communications," says AOL Chairman Stephen M. Case. "The big beneficiaries of the next wave will be companies that are providing services to consumers."
Case would get an argument from the business-to-business crowd. Most of the Technology-on-Tap action so far has been on the business side, as companies look to cut costs and get their e-business projects going faster. ASPs such as USinternetworking, Breakaway Solutions, and Corio specialize in delivering popular programs such as PeopleSoft's human resources package and SAP's manufacturing-planning software.
The truly hot tickets may well be the many business e-services being developed. For example, vJungle.com Inc. in Redmond, Wash., offers small businesses a hosted Web site, e-mail, online expense reports, and even accounting help. On the other end of the spectrum, Synopsys Inc. in Mountain View, Calif., has just unveiled a Web portal that lets engineers from other companies design new chips on Synopsys' servers for a fee. That arrangement spares them having to shell out big bucks for superfast computers and pricey software.
For both new technology companies and well-established ones, Web hosting is a huge target. Basic Web hosting, in which companies rent space and a network connection--starting at $10--to run their Web sites, is expected to jump from $1.8 billion today to $18.9 billion in 2004, according to IDC. And as companies graduate from merely providing product information to taking orders and forging e-connections with suppliers, new companies called "netsourcers" are appearing. Rather than providing computers and networking gear for companies to run their e-businesses, netsourcers run the operations for them. Market-researcher Yankee Group Research Inc. expects this industry to explode from $5 billion in 1999 to $46 billion in 2003.
The ultimate goal for netsourcers is total dependability. Take Intira in Pleasanton, Calif. The two-year-old company's netsourcing operation aims to deliver always-on reliability as much as 99.95% of the time. That's just four hours of unscheduled downtime a year. To achieve it, Intira has gone to extremes, designing its data centers to withstand an earthquake of 8.0 on the Richter scale. Security experts stand ready to deal with hacker intrusions, and the company has installed bulletproof walls and fingerprint readers in case someone tries a more traditional break-in. Customers pay extra for the guarantee--roughly 60% more than those willing to settle for 99.9% uptime. "There's some cost, but that extra 0.5% means the customer is better served--and that means more revenue," says Fred K. Johnson, CIO of FTD.com, an Intira customer.BIG BUCKS. One of the main reasons companies go this route is the shortage of technical talent. There are expected to be 850,000 unfilled tech jobs this year, according to the Information Technology Assn. And just try to hire a top-notch e-business specialist. Salaries are well into six figures, compared with $50,000 before the Net boom. Web-hosting companies are throwing in options that can bring a specialist's total pay and perk package to $1 million. Take Stephen W. Chapery. Before joining Sitesmith, a company that operates e-businesses over the Net on a contract basis, the Silicon Valley engineer received 114 offers after posting his resume at an online job site. He even rebuffed two recruiters from the cloak-and-dagger National Security Agency who showed up at his door.
With top techies so scarce and with technology getting more complex every day, it's no wonder companies are willing to pay others to serve them up the geeky stuff they need. In a recent poll by Jupiter Communications, 57% of companies said they expected to use apps-on-tap in the future, up from 22% today. And hosting companies such as Exodus and USI, which grew up selling to dot-coms, say they now get half of their sales from big corporations, up from 25% just a year ago.
So which companies will benefit most from the Tech Tap? The clearest winners will be providers of underlying Web technologies: networking chips and systems, fiber optics components, server computers, and such. Already, a slew of them are ranked high on the IT 100, including Analog Devices (No. 10), which makes chips for wireless devices; Amdocs (No. 12), which sells billing systems for telecom companies and ASPs; and JDS Uniphase (No. 23), which sells parts to the makers of optical networking equipment.
After that, it's anybody's guess. Having spent decades establishing their brands with consumers and businesses, companies from every major tech sector--computing, software, consulting, and telecommunications--are aiming to colonize the services market. Oracle's Ellison, for example, wants to become an ASP rather than rely on others to distribute its various database and corporate programs. "Who is going to get blamed if Joe Blow ASP doesn't deliver good service?" worries Ellison. "We are."
Trouble is, no one company or even industry has all the necessary skills to be the water company of computing's next era. Pioneering ASPs and hosting companies have dominated the early days, but they lack the track record and financial might most large corporate customers will demand. PC companies such as Dell and Compaq have a legacy of crash-prone products and less-than-stellar service. Telecommunications companies know how to offer reliable service but have failed time and again at selling information technology. "This opportunity is a combination of a variety of established businesses," says Pascal Aguirre, a vice-president at tech consultants Renaissance Strategy Partners. "Everyone has their strengths, but no one has leadership across the board."
Some industries have downright dicey prospects, particularly the makers of corporate software. For years, they've racked up huge profits by charging customers hefty up-front licensing fees for hopelessly complex software--enabling them to charge even more for consulting services. That jig may be up. Besides having to rewrite much of their code to be served up over the Net, lump-sum licensing fees for hopelessly complex software--enabling them to charge even more for consulting services. That jig may be up. Besides having to rewrite much of their code to be served up over the Net, lump-sum licensing revenues could give way to smaller monthly fees. Admits PeopleSoft Inc. CEO Craig A. Conway: "If I was starting a company today, I'd go with the subscription model. While it may be great for PeopleSoft two or three years down the road, no one would buy the stock in the meantime."
The changes are nearly as jarring for computer makers. They're busy remaking themselves to win market share in the rapidly growing Web-hosting market--selling powerful servers to companies that operate huge data centers. Most have announced packages offering favorable financing and price breaks to ASPs that commit to using their gear. Within a few weeks of each other in March, Compaq earmarked $1.15 billion to invest in service providers, with IBM promising $500,000 and HP some $1.5 billion.UNCERTAIN. All are branching out from timeworn product categories. Dell, Compaq, and IBM have unveiled "server appliances" that are designed to handle specific jobs for hosting companies--at far lower prices than traditional servers (page 94). And with the market for desktop PCs maturing quickly, most are eyeing information appliances for the home. IBM has announced an Internet device that partners such as Bell Atlantic Corp. and Merrill Lynch & Co. will rent to consumers for $20 to $50 a month, and Gateway will sell a device tuned especially for AOL's online service.
Given the challenges of making all this work--and the uncertainty about which business models will win--there's still far to go before it becomes clear who will dominate. Says Breakaway CEO Gordon Brooks: "This is like the first chapter of the story of the Wild West, and we're still trying to figure out who the main characters are."
For all the uncertainties, Technology on Tap will clearly result in far more hardware and software being used by far more people in far more ways. And while the transitional period will undoubtedly be marked by constant frustrations, too many tech companies have too much to gain--and lose--to hold back. Now it's up to customers to decide if they'll follow Talbert Medical's Al Herak into the new world of computing--or swim against the tide.By Peter BurrowsReturn to top