At IDC Directions 2006 last week, I talked about several disruptions that will drive major change in the Enterprise IT market over the next several years. To some, the most surprising of these is the shift coming in the role of small and medium businesses (SMBs) – from a backwater of IT adoption, to an epicenter of innovation, and an on-ramp for new, disruptive players into the market.
Catalyzing my thinking about SMBs has been the ongoing industry discussion about “The Long Tail” , an article written by Wired editor Chris Anderson about how the Web has opened up difficult-to-reach markets in the Media/Entertainment industry. Anderson observed that, before the Web, media companies’ primary model for making money was to focus on producing and selling “megahits” – the small number of songs, films, books and other products that deliver the highest sales volume (the blue region of the chart below). High costs have traditionally made producing, promoting and delivering the thousands and thousands of low-grossing, niche offerings (the pink region) financially unattractive, or even prohibitive.
But now, Anderson pointed out, by taking advantage of the Web’s low-cost marketing and delivery capabilities, companies are able to profitably mine the “long tail” – the previously elusive huge volume of low-volume opportunities. This fact has been hiding in plain sight, of course, for the past several years – with Amazon.com, Netflix, eBay, Apple’s iTunes Store, and others profiting by selling into the long tail. Anderson’s conclusion was that, by using the Web, “the future of entertainment is in the millions of niche markets at the shallow end of the bitstream”.
When I look at the chart above, it really makes me think about SMBs in the IT market. If you look at the average annual IT spending by enterprise size, below, you see a very similar curve. While hundreds of thousands of large enterprises spend an average of over $2 million per year on IT, millions of medium businesses spend a relatively paltry $140,000 per year, while tens of millions of small businesses spend an almost infinitesimally small $2,000 or so per year. That is a very long, and steeply pitched, tail indeed.
The chart above explains why the strategic focus for so many IT suppliers is first and foremost, on the “megahit” market of large accounts. With the very low average annual IT spending per SMB, it’s been very tough to profitably get IT to the long tail of SMBs. Even so, through brute force – with extensive and expensive channel structures – the IT industry has done an incredible job of actually pushing SMB adoption up to 49% of all IT spending (2005).
But most would agree, this is well below the SMB segment’s potential, considering that SMBs account for 60% or more of global GDP, and about 70% of total worldwide employment. And for those who have an eye on emerging markets, the potential is likely even higher, with SMBs accounting for 72% of employment in China, 73% in India, and over 80% in Latin America. If the IT industry – like the most innovative players in media, entertainment and retail – is able to effectively use the Web as a platform to fill that vacuum between reality and potential in SMB, it would add another $150B or more in annual, new IT market opportunity.
The challenge, of course, is that where there’s such a large vacuum between reality and potential, it will be certainly filled – and sooner rather than later. While traditional IT suppliers are trying to reassess their strategies and opportunities (e.g., see “SAP Jumps Into the SaaS Pool”, a new tribe of “long tail” vendors are steadily edging in. The totem, or the symbolic leader, of this group of suppliers is certainly Google. Google and this growing group of companies share three important traits: 1) they use the Web as a low-cost delivery platform, 2) they participating in huge, highly-productive innovation communities, and 3) they heavily using IT, but aren’t typically “selling IT” (they are selling business & consumer services) – all three traits present interesting challenges to traditional IT vendors.
In our view, the SMB market’s $150B long tail potential will make it an epicenter for a wide range of disruptions – and disrupters – that change the IT industry over the next several years. IT suppliers simply can’t afford to keep SMBs a strategic backwater; they need to move their SMB efforts to the front lines of their strategy, and use those efforts as a place to explore new, low-cost development, marketing and delivery methods. Traditional IT suppliers must be prepared to be among the disrupters who take advantage of the Web as a platform to capture the SMB long tail opportunity.