Yesterday in Breakerville, David announced our second annual Rule Breaker Seminar, Quest for Rule Breakers 2001, scheduled for very early next year. If you haven't yet, we'd be most appreciative if you would take our 60-second survey. If you took last year's seminar, click here. If you did not, click here. We're looking for guidance on how best to serve our audience.
I highly recommend the rest of yesterday's column, covering the much-discussed question of who is to blame for the dot-com collapse. In my most unbiased opinion, David nails the correct answer. I would add only one comment: If you think that professional athletes make too much money, then stop supporting their business. We have that power. On to tonight's topic...
In preparation for the upcoming seminar, I've been thinking and writing about Rule Breaker criterion number two, the one that says we should be looking for public companies that enjoy a sustainable advantage gained through business momentum, patents, visionary leadership, and/or inept competition. To get my thoughts flowing, my "no I in team" Breaker teammate Brian Lund sent me a quote from fabled investor Warren Buffett. Writing in Fortune magazine last year, Buffett reminded us all that:
The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.
In our August search for Rule Breakers, I focused on an emerging, Internet-enabled, industry -- application service providers (ASPs). In particular, I looked at Enterprise ASPs, those that offer pre-configured, interconnected, ready-to-fly, best-of-breed e-business software applications to large corporations on a monthly rental basis. At the time I wrote these columns, I was convinced that the ASP concept would create undeniable cost-saving opportunities for large corporations, perhaps even on a scale revolutionary enough to merit Rule Breaker status. In short, I became enamored of their potential impact on society. I still am.
Reading Warren now, however, I wonder whether I dwelled too much on broad industry impact and not enough on specific company advantage.
Before I get carried away with looking for specific company advantages, though, there are still outstanding questions to explore regarding broad industry impact. It turns out that ASP customers aren't signing up as readily as Wall Street had hoped. Since August, the ASP industry has been hammered in the stock market, with leaders such as USinternetworking (Nasdaq: USIX), Corio (Nasdaq: CRIO), Breakaway Technologies (Nasdaq: BWAY), and Interliant (Nasdaq: INIT) down 40% to 80%, versus a 20% decline in the Nasdaq Composite Index.
Of course it's possible that the broad ASP industry will eventually fulfill its lofty promise and that we just arrived early to the revolution (like the heavily bearded guy that manages to incite no one, annoy everyone, and eventually just gets hurt and disappears). Perhaps the business proletariat just isn't quite ready to start chopping off heads. After all, such drastic actions -- regardless of their long-term benefit to mankind -- do tend to create some stressful scenarios in the short term. For the ASP industry, today's stressful, pre-revolutionary scenarios center on bandwidth (speed and reliability), data security, and software integration.
As Mr. Buffett so eloquently reminds us, there's more to the game than just picking the right hot industry. Even if the ASP model, in general, does overcome these short-term hurdles and deliver paradigm-busting change, there's no guarantee that any individual Rule Breaker investments will be unleashed.
OK, if you're still with me, please humor me for a moment and assume that the ASP concept will eventually take hold. Please don't take my word for it because, while I have my share of opinions, I don't know any better than you do whether it will. Moreover, the risk has never been higher, as most early ASP contenders are closer to going under now than they were in August.
For the moment, though, let's assume that the ASP model will take hold. What concrete, cost-saving improvements does it offer to its customers? If we find the most likely sources of cost savings, they may well lead us to the most enduring business model advantages, and then to specific companies in the industry.
The ultimate in sustainable, competitive advantage potential for ASPs?
To me, the ASP model, boiled down to its business essence, is just the logical, final-stage outcome of efficient forces in the market for software integration services.
Some ASP studies focus on the lower costs of renting versus owning software or speed-of-implementation advantages, but these strike me as secondary. More and more, the enterprise software game is all about integration of disparate systems both within and among companies. On this playing field, I don't see how individual corporate IT departments, long-term, have a prayer of beating the cost advantages that ASPs should enjoy. I can see security, bandwidth, data storage, and even individual application management becoming commodity services -- eventually -- but integration of multiple applications?
When it comes to staffing in-demand technical expertise, individual corporate IT departments can't possibly generate the human scale and flexibility necessary to compete cost-effectively with an ASP, especially an ASP that services hundreds of corporate clients. Moreover, individual corporations -- with core businesses outside the realm of software -- can't ever match the range of opportunity, growth, and attendant job satisfaction an ASP offers. With unsatisfied IT employees, they can't retain sufficient staff to go it alone. This is already a challenge for many companies.
On the other competitive front for ASPs, let's look at the software integration consultants, the big companies that send armies of young superstars from city to city, sometimes for years on end, to design, install, and ultimately salvage corporate software systems. Doesn't it make sense that most of these valuable intellectual properties will someday want to jump the hotel circuit and settle down? Doesn't it make sense that by staying put they can better provide long-term, life-cycle software support to a more stable roster of clients?
In a nutshell, then, when we hunt for Breakers in the realm of ASPs, it seems to me that we should be focused on integration services as the ultimate value and, thus, the ultimate sustainable competitive advantage.
My plan is to nail down this "ultimate advantage" for the ASP model as a first step, and then compare current ASPs across this dimension. The leap of faith is twofold. First, the ASP model has to shake current doubts and take off. Second, I'm assuming that the eventual Breaker in the field will distinguish itself by being the first to offer the "ultimate advantage" while the "inept competition" focuses on less-critical services.
At this point in the plan, though, I want to stop and get some help. What do you think? Do you have a different "ultimate advantage" for ASPs? Also, if we can gain a consensus on the "ultimate ASP advantage," will we then have a good yardstick for finding the Breaker candidate, or will we still need to nail the "sustainable" piece? Help us all out on the Rule Breaker Companies board. I'll take this feedback and focus on specific companies next time.
Till then,
Buster
