Musings on Economic Storms and Industry Consolidation
“Bad economic times lead to industry consolidation/shake-out.” That is one economic rule that actually makes intuitive sense, like small craft are the first to sink in a hurricane, or the speed of light is the same to all observers (OK I admit I’m still working on the last one.) The last few months have seen three such events that affect the HPC industry: SGI and Rackable, Sun and Oracle, and SiCortex. Although these three events can all be lumped into the consolidation category, they each reflect different aspects of current economic and market conditions.
SGI and Rackable
The SGI to Rackable to SGI story was one about a company that could no longer weather the economic storm being rescued by another which was floating on a reserve of cash but saw a lot of rough water ahead. The hope for the new SGI is that the whole is greater than the sum of its parts, that is: that SGI’s technology and customer base when combined with Rackable’s management skills and supplier relationships will produce a strong long term player.
Oracle and Sun
Oracle’s rescue of Sun is a case of two companies being closely tied together by technology so that when one begins to sink the other must help bail it out to keep from being dragged down as well. In this case Oracles notes in a letter to customers that: “the Sun Solaris operating system is the leading platform for the Oracle database” and “Oracle Fusion Middleware is built on top of Sun’s Java language and software.” Thus Oracle would have been significantly exposed if Sun had disappeared or gone to a competitor. No wonder Oracle moved so quickly to buy Sun after IBM pulled back from the deal.
SiCortex and ?
SiCortex is a case of a sound startup company being caught at sea without enough fuel when the storm had closed down all of its ports. This is a good indication that we are weathering a category 5 storm in the financial sector — credit and investment dollars are currently so scarce that one of SiCortex’s VCs reportedly simply ran out of money. Barring a last minute rescue, there is nothing to do but abandon ship, hope the vessel grounds on a beach and does not break up on rocks, and start contacting salvage companies.
Technology Bottom Sound
One of the sad, brutal and necessary aspects of a consolidation is that a lot of excellent ideas and technology are ultimately lost in the storm, leaving the sea bed littered with their hulks. Technology shakeouts are sad because of the genius, effort and hopes that are lost with the technology. They are brutal because the decision on which technology survives is as dependent on business and market factors as it is on the quality of the product. It is necessary because there are generally more solutions than the market can support and eventually we have to choose some winners.
It’s Always Darkest Before a. the Dawn, b. It Goes Completely Black
Are we past the eye of the storm or is there still more bad news to come. Frankly, I don’t know. However, it is worth considering both scenarios. On the bright side, it is important to remember that market consolidation (i.e., mergers, acquisitions, business failures, etc.) is a normal part of the business landscape; it happens all the time. Economic storms cause these events to bunch up. Also, the HPC industry as a whole is relatively storm-worthy. Industries need to develop new products and improve existing ones even through bad times; similarly, government activities in national security and in some research areas cannot be put on hold; and academic sector research needs to continue. Finally, shakeouts tend to strengthen the surviving players by reducing competition for market share.
On the darker side, the most concerning issue is the lack of investment funds. One effect of shakeouts in an industry is that it releases resources (talent and funding) for the creation of new companies that can both bring new ideas to market and are themselves new customers for a variety of industries. However, as SiCortex illustrates, there are few if any resources currently available for new investments. In addition, we are in a banking sector driven recession, which is like having a series of major earthquake during the hurricane, all sectors of the economy are affected, so recovery depends on an across-the-board restart of spending and investment.
I do not know when the storm will end, or how long it will take to recover from its effects, but I am certain that there will be an HPC industry after the storm, and I suspect that it will be stronger than it was beforehand. I wish this was all as simple as the speed of light being the same to all observers.