The Big Switch: The New Tech Investment Wave

Nicholas Carr, famous for his article IT Doesn’t Matter has written an interesting new book, The Big Switch. I haven’t finished it yet, but so far it’s an excellent read. That computing is switching from in-house to utility, much as electrical power generation went from in-house to utility, is an incredibly powerful premise. But the title might well also refer to an underlying fundamental switch in Tech investing: from traditional client-server to cloud-based. What Carr refers to as the move to the World Wide Computer is driving nearly every aspect of today’s IT investments and providing an incredible new wave for entrepreneurial innovation.

Eighteen months ago, Software as Service (SaaS) IT investments were an emerging trend. Now, they’re mainstream. Many investors were just starting to look at the space as consumer started to become over-crowded. Including SaaS in your pitch was a differentiator, but it no longer is. Just about every Tech investment has at least a component if not a majority of its offering that is delivered as a utility

Even appliance companies are moving into the cloud; security and anti-spam companies have managed offerings that customers use over the Internet. Salesforce.com is of course the most prominent Business to Business (B2B) example – few predicted five years ago that critical enterprise data would be stored outside the firewall, but it is.

But the real leading indicator of the switch to a service based model was and continues to be consumer Internet companies. Their users spend hours a day communicating with each other over these services. Much as they use the telephone as a voice communications utility, they use social networks as their online communications hub, and they have similar expectations around ease of use, reliability and responsiveness. Not only could they not get this functionality from a traditional desktop application, but the use of the system – as a communications hub, would not be possible in traditional form.

Of course, Google is today’s example of a consumer utility; not only the search service itself but the huge data centers underlying the software. Looking back a few years, Hotmail was one of the earliest consumer Internet utilities, with hundreds of millions of users. Just as occurred with electric power generation, even large services delivered as online utilities are now looking to shift some of their computing infrastructure to a utility provider such as Amazon S3, among others. Numerous early stage startups are also leveraging this form of utility because it is so easy to adopt.

An interesting hybrid is also emerging. Today’s consumers are bringing their personal online applications to work with them. Users of wiki’s start out as consumers but grow into business users. As they do, they bring their wiki’s with them to work. A few months ago, one wiki company received an interesting request from an enterprise customer asking if they could come by the office to inspect the company’s computer systems. All of the company’s production servers are, naturally, off-site.

Will there be one massive World Wide Computer that grows into an artificial intelligence system? It’s hard to say. But one thing is for sure. Large outcomes in IT venture investing have historically come in waves: numerous companies became successful riding the mainframe wave, the PC wave, and the Internet wave. Even a recession won’t stop another wave of companies from becoming highly successful riding the utility computing wave. The big switch in tech investing is on.