The Internet lit up last week with news of Intel's purchase of McAfee. Every analyst (and his dog) has chimed in on what it means, from "Anti Virus on a chip", to just "a national security disaster". I think it has a subtler implication that bodes well for developing nations. - In the ongoing competition between hardware and software, hardware just flinched.
Watching Intel spend almost a years worth of profit on McAfee made me think of Professor Clayton Christensen (of "The Innovators Dilemma" fame) and his "Law of Conservation of Modularity / Law of conservation of Attractive Profits").
(If you have not yet read the book, you can catch a good overview of the content from his talk titled "Capturing the Upside".)
Professor Christensen regularly cites his conversations with Intel's Andy Grove, and it is clear that Intel took cues on strategic direction from him in the past. (First, some background)
The Law of Conservation of Modularity:
Professor Christensen holds that early on in a technology cycle, a huge premium is placed on the technology/development cycle, since this is the problem that needs solving (and so requires the most skill). Essentially, the other players in the market settle for smaller profits while the dominant players in the "hard to solve" space consume the lions share of the profit.
He then holds, that at a point, that particular difficult problem gets solved, and by following the same growth trajectory, the market becomes over-served, and higher profits flow to other players in the chain who become greater deciders of value.
In other words:
(It's hard for me to consider the topic of a market getting over-served, without considering for a moment that my parents really don't need the multi-core processing beasts churned out by intel these days).
The fact that Intel drinks the Professor Christensen kool-aid is clue #1, and the fact that they have historically shown themselves to be willing to make huge transformations when necessary is clue #2. (Intel were "memory guys" till they shifted focus to processors). It seems as good a time as any to shout "technology inflection point".
There is a recurring theme in technology of the battle for dominance between hardware and software. The early years of computing were dominated by hardware guys (mainframes and minis), till hardware was commoditized (thanks to pc's and Microsoft) and then hardware made a huge comeback. Smartphones, storage appliances and consumer devices like the iPod had pundits proclaiming that the last round belonged to hardware and the future was in silicon.
But, the wheel (almost) always turns.
Cloud computing makes hardware purchases seem less attractive and money that was spent on hardware will be spent on SLA's for software agreements. Netbooks have been great for consumers, but the market has been a race to the bottom for the hardware players. Increasingly, outstanding consumer devices (like the iPhone) are becoming heavily dominated by the software experience. (Companies like Apple choosing to use their own processor, cant make processor manufacturers (like Intel) feel too warm and fuzzy either.)
And so ?
One of the memorable lines from "Capturing the Upside", is the quote from Hockey Hall of Fame'er Wayne Gretzky who is famously reported to have said: "I don't skate to where the puck is, i skate to where the puck is going to be". One of the biggest players in the hardware game is making huge investments in software and services, i think an indication of where they think "the puck is going to be".
The implications for developing economies is clear. If hardware becomes commodotized (or abstracted away), the lions share of the profit will shift to software.
It takes a huge capital investment to compete successfully in the hardware game (which largely precludes developing nations from taking part), software has a lower barrier to entry. What the developing nations need to do however, is invest in the skills needed to capitalize on this. We need to make sure that we don't simply go from buying foreign hardware to buying foreign software instead.