Wednesday, November 21, 2007

We'll see more acquisitions that meld telcos with IT vendors

News from London that Deutsche Telekom may make a bid to buy IT services giant EDS. This is only the opening volley in a forthcoming period of acquisitions that meld telcos with IT vendors.

I recently suggested that BEA Systems, as it spurns Oracle's initial bid, may also be a good fit for a large teleco such as AT&T. Much of the same logic I applied to a BEA-telco mashup works for a Deutsche Telekom and EDS marriage.

The fact is that IT vendors -- be they code/systems providers or systems integrators (or both) -- are becoming more like service providers. We see evidence of this with IBM's recent Blue Cloud announcement, the go-to-market match-up between Red Hat and Amazon, and also the way that many new startups are entering the field -- as services -- such as Paglo this week. (Look for a separate blog on Paglo soon.)

The fact also remains that telcos and mobile services providers are increasingly becoming IT providers, either directly or as integrators or aggregators of IT functions that they then deliver to their customers -- both B2B and B2C. Enterprises will enjoy efficiencies in buying business services from a single entity when that organization can combine the IT, network, integration, communications services, outsourcing and software. Who or what best combines these features for the best business-cost benefit, is the $100 billion question.

The value-add to enterprises on IT increasingly comes from the integration, services provisioning and services ecology partnerships, not from the code base or hardware differentiation. Virtualization, open source, and SaaS will hasten this irreversible course. And when everything is a TCP/IP-driven function or asset, why not merge, mash, and package it all up with bright red bow and lock it into a big multi-year services contract?

And, of course, we're now also on the downward slope of a massive IT supplier consolidation era (most notably among software vendors). Some even call it the end of best-of-breed. I'm not sure it's the end of best-of-breed, there will always be standalone functions and/or applications and services that come to markets to meet new needs.

As Peter Zotto, CEO of IONA Technologies, recently told me:
As 'middleware' vendor consolidation continues, big propriety stacks will get bigger, more expensive and more complex-and the speed of innovation will decline. This is the exact opposite of the potential of SOA. "Anti-stack" vendors, like IONA, that deliver industry-standard middleware technology for performance-demanding SOA environments are
already benefiting customers looking for lower-cost and easier-to-deploy software. This is just the beginning of a new innovation cycle kick-started by industry consolidation. (Disclosure, IONA has been a sponsor of my BriefingsDirect podcasts.)
But clearly the larger vendors -- Oracle, IBM, SAP, HP, Microsoft, et al -- have gotten even larger via consolidation, and are closer to providing a full set of IT offerings, with varying degrees of actual deep and meaningful integration. As they become more like service providers these bulked-up vendors actually drive ecologies of ISVs and providers, and -- just like a telco -- manage the customers on one end, and the supply chain participants on the other.

So when you associate and explore the consequences of these trends, it points to more types of mergers along the lines of Deutsche Telekom and EDS, or even BEA and AT&T.

The telcos had better not wait too long as the are buying or being bought. They will eventually be competing with a class of consolidated vendor/suppliers that have traditionally moved more quickly and better than the telcos in their best days. There will only be a handful of these behemoths bestriding the globe (until and if decentralization again appears?).

Indeed, if the telecos wait too long, or make the wrong acquisitions, they might lose that customer relationship altogether. And where would they be then, especially as new networks based on new wireless technologies appear?

One aside: Watch how Cisco Systems moves on this. I predict some interesting mergers involving Cisco and large network/services providers in 2008.