Amazon: Killing IBM's Buffalo

There was a time when IBM was an august and prestigious company.

Today, Big Blue can't plug the holes amongst her top performers:

Big Blue last week filed a lawsuit against Jeff S. Smith (pictured), the former chief information officer of its cloud computing business, alleging that he has breached a noncompete agreement that stipulates he must wait one year before joining a direct competitor. In addition, the lawsuit accuses the executive of misappropriation of trade secrets and breach of fiduciary duty(Silicon Angle, 08 '17).

Anecdotally, some other top researchers within high-profile departments, such as Watson, have also indicated the desire or intention to leave for competing firms.

However, everyone knows IBM is in trouble. This isn't new.

The better question is: why?

Amazon Killed IBM's Customers

Enterprise software requires enterprises as clients: the thesis is that by investing in or subscribing in some technology-based service, the given enterprise, itself, achieves a higher ROE/ROIC.

Fine: this was a lay-up during the 80's and 90's, where menial jobs were automated. Enterprise software still had a compelling value to legacy firms, up until the early 2000's.

However, that changed, once Amazon began its explosive growth, redounding throughout the bricks & mortar economy (and to the chagrin of the CRE landlords!)

Core of the Issue: Global Vs Local Maximium

There is a very fundamental reason why Amazon has destroyed the Enterprise Software market, and it is actually determined by a very basic question.

Which is better?

  • Greedy
  • Best

Every single characteristically legacy enterprise is subordinated to the Greedy Search for profits: while there may exist a Best solution, they prove unwilling or unable to focus on the Best outcome, instead sticking to "sure things".

On the other side, your characteristically novel enterprises, such as Tesla or Amazon, are precisely the opposite: they seek global maxima. It is for this reason that their valuations do not comport with those legacy companies that seek to harvest short-term profits and foresake long-term gains, while the novel enterprises push for the paradigm shift.

An anecdotal example of this in Tesla was Musk insisting on using his own API for his assembly-line robots, which caused huge delays for his production line. However, this comports exactly with his vision of the global maximum, not the local.

This is part of the reason why one may say that Tesla and Amazon are becoming peers: the market is pushing a massive valuation upon Tesla so that Tesla may, in fact, execute its Globally-Maximizing vision, just as Amazon did before it.

The Legacy Modus Operandi Is Bezos' Opportunity

Jeff Bezos' (and Musk's) thesis is precisely this: to target the "sure-thing" margins of his competitors. This means making long-term bets and investments.

The failure of competitors to defeat Amazon has been covered ad-nauseum.

What is more interesting is, in the post-Amazon monopoly world, what value do Enterprise Software vendors offer, and what characterizes Enterprise Software clients?

Record Enterprise Sales???

Despite my pessism, you could retort, "What about Microsoft's huge success?"

My response would be very simple: "How are those companies doing today, and how will they be doing 5 years from now?"

When you invest in someone else's process, and not your own, you basically mortgage your firm's future and cross your fingers, hoping no one more clever or motivated catches you in the interim.

For many of these Enterprise Software clients, it is simply the Politically Correct thing to do: waste money on software and enterprise solutions, rather than fix deep, fundamental problems within the company.

Enterprise Software: Keeps Losers Losing

Just as no one hires McKinsey unless he needs to fire a bunch of people, no one invests a lot of money in enterprise software and services if his management and process is truly that good.

Large investments in enterprise software or, God forbid, consulting services, merely signal a company that does not yet realize it is already dead.

IBM did recently release news, finely tuned, regarding some deals it executed in the blockchain, and the market yawned. That IBM helps Wal-Mart use blockchain to lose less money on spoiled fruit does not matter to the market, because the market (and Bezos) both know that the Global Maximum, which is the vision of our tech-oligarchs, is beyond the reach of any IBM Enterprise client.

Tesla: Morphing into Amazon... or a Trap?

The questions about Tesla's valuation were very similar to those raised against Amazon during its ascendence.

The real question the skeptics must ask themselves is, "Does Tesla have a true Global Maximum in mind, and can Tesla execute it?"

From inspection of both sentiment and "valuation", it is clear that Tesla is getting treated more and more like another Global Maximizer, such as Amazon, and that provided Tesla executes properly, it will maintain its massive valuation... the massive valuation precisely required for any Global Maximum venture!