The shrinking of the tech sector threatens creativity and new thinking

By Christopher Lochhead, strategy advisor and former chief marketing officer, Mercury Interactive

Is Silicon Valley at risk of becoming Detroit 2.0 — a company town dominated by a handful of big, uninspired conglomerates?

Lochhead advocates a mix of innovation and consolidation

Consolidation is replacing innovation as the hot strategy. During his company's battle for PeopleSoft, Oracle CEO Larry Ellison declared that the software industry has entered  a "period of contraction and consolidation."  

Talk about a self-fulfilling prophesy: Oracle has gobbled up at least a dozen more companies since it closed the PeopleSoft deal in 2005, and a big purchase of Sun Microsystems is pending. And other companies widely are expected to follow Oracle's acquisitive ways.

Is consolidation good for the kind of technological creativity that traditionally has come out of Silicon Valley? More on that in a moment. First, a rundown on what's driving the urge to merge:

Slowing growth
In late 2008 research firm Gartner pegged the industry growth at an anemic 2.3%. As overall growth rates crater, the game for tech giants changes. The thinking in the C-suite goes from: “How do we capture market-share when business is growing?" To: “How do we gain wallet-share as the industry is shrinking?” 

Big portfolios trump hot products

Many mega tech companies today favor quantity over quality. Instead of marketing a single product or service as best-in-breed, these giants push their customers to save money by buying "bundles." This strategy can be good for a particular vendor, but it drives down overall tech spending.

 M&A equals outsourced innovation

Why take the risk of pioneering new technologies and business models when you can leave that up to entrepreneurs and venture capitalists? Let someone else take the arrows in the back. Bigger companies tend to behave more conservatively: Risk-adverse boards of directors want predictable earnings and no surprises. Innovation is risky. Innovation is unpredictable. So the titans let the startups innovate. Then, when smaller companies get to an interesting size and prove their metal, the big boys buy ’em. In this way a consolidation strategy is de-risked innovation.

The IPO window is nailed shut

Despite the recent success of SolarWinds and OpenTable, the IPO window for most startups remains closed. As a result, the most viable exit for smaller companies is to sell. (VCs need to generate returns and entrepreneurs want to get paid.)

Zombies are attractive acquisitions

There seems to be a never ending lineup of troubled technology companies to buy. These zombies tend to have bloated costs that can be cut quickly. Once purchased, the big tech buyer can fire a lot of people, gut sales, marketing, and r&d costs, then milk the maintenance revenue cow. This makes these acquisitions profitable fast. Oracle, by now a master at absorbing its purchases, has said it expects the purchase of Sun to add at least 15 cents (non-GAAP) to earnings in the first full year after closing.

So is the shift to consolidation good news? It depends on your perspective. The ability to successfully execute acquisitions is a meaningful competitive advantage. When done well, acquisitions are a savvy way to gain market share and drive earnings. Just look at how effectively Cisco and Oracle have used their M&A muscle to force competitors to tap out.

But focusing principally on consolidation leaves the big guys vulnerable to attacks from innovators. Apple has been crushing Microsoft, Motorola, and Nokia with their innovative product, marketing, and retailing strategies. 

And when consolidation comes as the expense of innovation, the results can be toxic. Consider all those start-ups that are getting acquired rather than getting a chance to flourish as independent companies: Could one of them been the next Apple or Google, companies that have continued to innovate in spite of their size?

Bottom line: Growth comes from innovation. And without innovation, the tech industry could end up with a few big companies playing a game of musical chairs on the titanic. This will be bad for the industry and bad for the country. Historically tech has been a key growth driver of the U.S. economy. Tech needs to be a growth industry again; that will only come from a healthy mix of innovation and consolidation.

Lochhead is a retired marketing executive turned strategy advisor and ski bum.

Anthropologist Genevieve Bell helps Intel understand what people around the world are doing with technology – and what they'll want to do next. Photo: Intel

While traveling in China, Genevieve Bell figured she'd have no trouble getting a cell phone. With cash, a passport and official documents from her employer, she went to a local shop where phone packages lined the walls, and asked for one.

I don't have any, the shopkeeper said.

She noted that she could see boxes of them all over the store.

They're bad phones, he said.

I'm only here three weeks, she confided; it can be a terrible phone. But he still wouldn't sell her one. "It was like a really bad Monty Python routine," she recalls.

The problem, it turns out, wasn't the phones — it was the phone numbers. Numbers carry symbolic significance in China (8 and 3 are good, 7 is awful) — and when this particular shopkeeper had run out of good numbers to match with phones earlier in the day, he stopped selling phones altogether. Come back tomorrow at 9 a.m., he said, and I'll sell you a phone with a suitable number.

The encounter illustrates how technology and culture blend in new ways in a global society powered by cell phones and PCs. It also serves as an example of why Intel (INTC), a company known for employing computer scientists, employs Bell, an anthropologist.

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We're live blogging from the Town Hall at Apple's (AAPL) Cupertino campus today as the company shows off new laptops. Refresh the page for updates.

The event has begun. Steve Jobs comes out (he looks pretty good), and says we're here to talk notebooks. He says we'll first go over the state of the Mac, and Tim Cook, Apple's Chief Operating Officer, comes out to do that.

Apple sold 2.5 million Macs last quarter, he says, and the Mac has been growing at 2-3x the market rate of growth.

Among the reasons he lists for the Mac doing well: Better computers, better software, compatibility, and Microsoft Vista (which hasn't lived up to expectations). Other reasons are marketing (those clever Mac vs. PC ads), and retail stores. The stores greet 400,000 visitors each day, and half of Mac buyers there are new to the Mac. Cook shows a picture of the new Apple Store in Sydney, Australia; and the Beijing store in China.

The Mac has outgrown the market for the last 14 of 15 quarters, he says, citing data from IDC. The Intel transition is the one quarter when Apple stumbled – he says it's because they weren't able to keep up with demand. He also notes that Macs make up 18 percent of PCs sold at U.S. retail, and 31 percent of PC revenues. Apple is back on top as the number-one supplier of laptops to education. He says that at major university, the Mac now has about 49 percent market share.

Jobs is back on stage to talk notebooks. First, he says, we'll talk about the ways laptops are built. He invited Jony Ive, Apple's design guru, to the stage to talk about it.

He puts a MacBook Pro on the screen to talk about design challenges.

One of the biggest challenges, he says, is to make a thin and light product robust, strong. The internal frame (with some magnesium) plays a bigger part than the aluminum skin, he says. He talks through the stiffening plates and structural frames that provide support, showing it all in on-screen images.

Apple has for years been looking at a better way of building a notebook, he says, and he thinks Apple has found it. The MacBook Air was the first example of the breakthrough that Apple thinks it has achieved. Rather than start with a thin piece of aluminum and add structures, Apple starts with a thick piece, and remove other traditional notebook structures. (This is getting pretty wonky, but the crowd is riveted because we know this is leading to the big reveal of the product at the end.)

With the MacBook Air, Apple starts with a solid slab of aluminum that weighs 2.5 pounds, and ends with a .25-pound machined part. (Apple recycles the leftovers.) "We've been working super-hard on trying to deisgn some new uni-body enclosures for some new notebooks."

Jobs is back to talk about new graphics. Nvidia came and talked to Apple a while back about a chipset for desktop computers, but Apple says it wanted a notebook version. It's the GeForce 9400M. It has 16 parallel graphic cores, with 54 gigaflops of performance, and it delivers up to 5 times faster graphics than the Intel integrated graphics Apple has been using. The new integrated graphics compares much more favorably to the high-end graphics in the MacBook Pro.

There's a new multi-touch glass trackpad that's 39 percent larger than what Apple's had before. There's no button now – the whole trackpad is the button. You can get multiple buttons through software, and there are now four-finger gestures. There are one-finger gestures to pan, two-finger gestures to pinch and rotate, three-finger gestures to flip through things, and four-finger gestures to use the Exposé feature.

Jobs says he's unveiling the new MacBook Pro. Instant-on LED display, all connectors on one side, black keys, and a black border around the screen.

The new structure saves Apple half the parts. He's so proud of it that he's assign one around. (I just got my hands on one. I haven't handled a lot of uni-body enclosures in my time, but this one seemed sturdy enough.) Besides the GeForce 9400M chipset, there's the 9600M GT. They offer 5 hours of battery life with integrated graphics, 4 hours with discreet. There's a slot-load optical drive on one side. On the other there's Ethernet, FireWire 800, USB 2, a Mini Display Port, a battery indicator on the side, and other ports. There will be an option for solid-state (flash) drives. There, of course, is 802.11n, and Bluetooth. It's .95 inches, the thinnest MacBook Pro ever.

The 15.4-inch starts at $1,999 with a 2.4 GHz Intel Core 2 Duo processor, the Nvidia goodies, and a 250-gigabyte hard drive. There's a higher-powered configuration for $2,499 that has a faster processor among other upgrades. The MacBook Pros are shipping today, and will arrive in stores tomorrow.

Jobs says Apple is just as proud of the things they left out of these products – specifically, toxic chemicals. They're Arsenic free, BFR free, Mercury free, PVC free, highly recyclable, and it has 37-percent smaller packaging.

The MacBook Air will also get an update with faster Nvidia graphics, a 120-GB hard drive, and an option for a 128-GB flash drive. It's $1,799. At $2,499 you get a faster processor and a solid-state drive. They'll be available in early November.

Moving on to displays, there's a new 24-inch model with LED backlighting. It has a new three-way connector that allows you to power a notebook. It has built-in webcam and mic, and a three-port USB hub. They'll be $899, available in November.

There's One More Thing – the MacBook.

Jobs says it's the best-selling MacBook ever. Apple's dropping the starting price to $999 from $1,099.

Also, people wanted a metal enclosure, faster graphics, and an LED backlit display.

The new top-tier MacBook, above the white MacBook, will have the aluminum uni-body enclosure that the MacBook Pro has. It will of course have the Nvidia graphics.

The new MacBook with metal enclosure will start at $1,299. An upgraded version will start at $1,599. The base-level white MacBook with the plastic enclosure will start at $999.

Now he's ordered the lights down, and he's showing a video with Jony Ive talking about the design of the new MacBook. It's basically going through the same features he just discussed, with some nice production values.

The video will be on the web today.

Now they're doing a Q&A.

Three caveats, Jobs says.

One, no questions about last quarter, because they announce next week.

Now he flashes "110/70" onto the screen. "This is all we're going to talk about on Steve's health today, if you want to see this number go higher, try asking more questions," he says.

Third, they won't talk about the overall economy.

First question on the Nvidia chip: Does Apple have exclusivity? Jobs doesn't clearly answer it, but the upshot seems to be no. He doesn't expect others to have the same solution soon.

Second is a question about HDMI vs. Display Port. And Blu-ray. Why no Blu-ray yet?

"Blu-ray is just, it's a bag of hurt," Jobs says. The licensing of the technology is a pain, and costs too much, he says.

Gene Munster asks whether there will be cannibalization of the MacBook Pro from the new aluminum MacBook. Jobs says there may be some, but he doubts there will be much – pros like to get top-flight performance.

There's a question about how much smaller the new MacBooks are.

There's a question on whether the new MacBook manufacturing process saves costs. Tim Cook is coy on the answer, but seems to imply there will be cost advantages. Jobs is a little clearer, saying these things tend to be move expensive in the beginning, and costs come down over time.

Another question on the glossy screens: Jobs says Apple's going to go with straight glass (glossy), because most people prefer it.

There's a question about whether Apple will come out with a netbook. (These are low-cost, lightweight, underpowered laptops.) Jobs' answer: "That's a nascent market that's just getting started, and we'll see how it goes."

Question on whether Apple designed the motherboards in-house: Yes.

Do touch screens make sense on laptops? "We've certainly experimented with it, as you might imagine," Jobs says, "and so far it hasn't made a lot of sense to us."

The Q&A, and the event, have ended.

Apple's lineup of MacBooks is getting an update on October 14. Photo: Apple

You've probably heard the story of two guys walking in the woods who accidentally startle a hungry bear. As the bear turns to them, one laces up his running shoes. "Why bother? " his friend says. "There's no way we can outrun that bear." With a wink, the man replies, "I don't have to outrun the bear. I just have to outrun you."

Ahead of what's almost certain to be a dismal holiday season, this story takes on special meaning for Apple (AAPL). The bear market is poised to maul PC sales during the most important time of year, when about half of all annual sales happen. Investors clearly expect things to get ugly -– before Monday's market rally, they had slashed Apple's market value to half its year-ago level on fears that the credit crisis will ruin Apple's Christmas.

But here's the thing investors may be missing: Apple doesn't have to outrun a bear market. It just has to outrun PC makers like Hewlett-Packard (HPQ) and Dell (DELL). And with a new line of laptops set to debut Tuesday, CEO Steve Jobs will argue that he's already lacing up his running shoes.

Can Apple really rescue its holiday season? The idea may not be as far-fetched as it sounds. Even in bad years, consumers still buy computers; they just buy fewer of them. In the horrible fourth quarter of 2000, for example, consumer PC sales dropped 3 percent – painful, but not disastrous. Now, as then, the key for PC makers will be figuring out what features people really want, and offering them at a decent price. Back in 2000, Compaq had a strong holiday season because it correctly guessed that consumers would want CD burners built into their PCs. This year, consumers seem likely to be excited about laptops that are thin and lightweight yet affordable.

If thin and beautiful is in, that's good news for Apple. Rumor has it that, thanks to new manufacturing methods, the latest crop of MacBook laptops will sport a smoother look practically unmarred by screws and seams. And analysts expect Apple will lower prices in a nod to tough economic times – entry-level MacBooks will cost as little as $800 or $900, nearly 20 percent less than the current prices.

The laptop price cuts are great, as long as Apple doesn't take them too far. Part of the reason Apple has done so well lately is that it makes so much profit on every PC it sells – something like 25 cents on the dollar (competitors selling Microsoft (MSFT) Windows-based machines get less than half that). How does Apple do it? Apple doesn't sell discount computers. Instead, Apple's starter laptops are really mid-tier, weighing a trim 5 pounds and coming with goodies like Intel (INTC) Core 2 Duo processors and built-in webcams. When Apple tries to compete on price … well, things tend not to go so well. The Mac mini, the stripped-down $600 desktop computer, isn't exactly a top seller.

"For Apple, it's probably not a time to panic," says Steve Baker, analyst at retail tracking firm NPD. "I certainly don't see a reason that they need a very low-end notebook."

So, it's an open question whether the new designs will give Steve Jobs enough of an edge to avoid the bear, and outrun HP and Dell. But regardless, he shouldn't cut its laptop prices too far -– because Apple doesn't run well in cheap shoes.