Why Internet Companies Don’t Buy From The Enterprise Kings

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Internet companies represent the world’s fastest-growing markets and they cover the global economy. Every market imaginable is affected by Internet companies. They are cloud-centric by nature and come in various forms. They are SaaS companies but also have emerged as departments in big companies that derive their primary value as Internet providers.

And these companies are not on the enterprise sales radar screen. Instead, enterprise companies are trying to soak every dollar possible out of IT. That’s their domain. But what the enterprise is selling is not the kind of technology an Internet company is likely to buy. Internet companies  are in the market to shave latency and deliver services faster. They are built to be as lean as possible. Capital spending makes little sense. And without capital spending, the enterprise vendors have nothing really to sell to a cloud-centric company.

It’s still a lucrative market for enterprise companies. Frank Scavo, president of Computer Economics said to me in an email interview that, contrary to popular belief, their annual study showed that 61 percent of IT organizations in the U.S. and Canada are increasing their IT budgets this year, and only 22 percent are cutting budgets. At the median, IT budgets are rising 2.3 percent this year, a slight improvement from 2.2 percent in 2012 and 2 percent in 2011. It is a much better situation than in 2009 and 2010, when IT budgets were flat at the median.

He said the level of increase is not as much as it was prior to the 2008 recession. After the 2001 recession, IT operational budgets were increasing in the 4 percent to 5 percent range each year, and during the dot-com boom, IT budget increases reached the double digits.

Corporate IT spending is no longer something special, Scavo said:

It generally follows general economic conditions. So the double-digit growth in IT budgets in the 1990s reflects the booming economy of that decade, and the strong growth in IT spending in the early part of this century reflects the relatively strong economic conditions of that time. The anemic growth in IT spending over the past three years reflects the weakness of the current economic recovery. So, if CIOs want more money to spend on innovation, they’re going to need to find it by optimizing their spending on ongoing support.

Now, as far as spending on data center hardware goes, that line item has been falling as a percentage of the total IT budget, from about 13% in 2006 to about 9% today. Our research shows that this is largely due to the increase in data center virtualization, which allows IT organizations to increase utilization and thereby realize cost savings. It may also be due to the rise in cloud computing, but cloud computing spending is still a relatively small part of most IT budgets today.  Cloud spending may increasingly displace data center spending in the future, but we are still in the early stages of that transition.

Enterprise companies are now becoming legacy providers. Their revenues will roll with the economy. That makes for an entirely different selling proposition. They need to sell to an existing base of customers who they support through periodic updates in the software. In turn, it is meaning fewer enterprise providers. There are just so may companies that can service the IT market. As that competition gets tighter, vendors are moving on each other’s turf, offering competitive technologies traditionally offered by long-time partners.

When they do try to innovate, it’s often a bastardized version of what modern service providers are offering. The “private” or “hybrid” clouds do have a future. But they are there for supporting existing customers and not as much as meeting the high demands of Internet companies.

A Different Mindset

Selling to Internet companies is not as much about servers and software, really. Loggly CEO Charlie Oppenheimer says it’s about a mindset, an understanding that it’s more about being cloud-centric. Loggly consolidates log data from servers, storage boxes, network switches and other sources. It pulls that data into one place to see what is happening. That’s the kind of service a cloud-centric operation requires to keep running optimally at any time of day.

The enterprise software providers have a different mindset. They sell solutions to companies that do not get their value from the Internet. Hospitals, banks, large retailers or newspapers fit into this category. These are companies that are physically entrenched and run large data centers.

The Cloud

Internet companies depend on using distributed infrastructures. Netflix streaming service uses Amazon Web Services for a number of reasons. Adrian Cockcroft, Netflix cloud architect, said in a keynote address at the Gluecon conference last spring that they offer cloud-native apps built on open infrastructure. According to the Launch Any blog, they do this for a variety of reasons: time-to-market, code features in days instead of months, hardware in minutes instead of weeks, incident response in seconds instead of hours. The focus is on continual integration to shorten sales cycles, as well as reducing the time to process as opposed to reducing costs. This means developers build faster and create higher margins for services.

For enterprise providers, the focus is not on speed but uptime. A premium is placed on systems integration that often requires custom solutions. Apps for the most part are not cloud-native but designed for physical servers. These physical servers require big storage boxes, networking gear and lots of cable. An Internet company would go out of business if they had to depend on that kind of infrastructure.

High Volume, Transactional Sales

SaaS companies like Loggly are built on the principle of low-friction services and high-velocity transactions over the web. Developers try the service and buy it online. The freemium model is built on this principle of getting as many people as possible to try the service and hook them in. The service for sale speaks for itself with no need for  interaction with the vendor.

These companies are data-driven organizations that course-correct fast to keep from wasting time and burning development cycles. Bipul Sinha, a partner at Lightspeed Venture Partners, said to me last week that increasingly the time to scale is fast but the time to decline is even faster. The winners have to innovate in shorter cycles.

Enterprise companies for the most part do not sell on-demand services with automated, transactional sales. They sell servers, or proprietary databases that an Internet company is less likely to purchase, especially if they emerged in the AWS era.

Developers Come First

Developers come first in companies that sell to the Internet market. Developers are the makers, the ones who build the services. Sales people are far less important. Some are needed for larger, enterprise deals, but for the most part they have a secondary role.

Enterprise companies put a premium on its sales culture, not developers. The customer is an IT professional keeping the system maintained and optimized for cost. The mindset is entirely different.

Open-Source Culture

Without open source, the self-serve world of IT and development would just not be possible. Back-end systems get plugged in, ready to use. For example, the ability to add data analytics is getting easier thanks to open-source projects such as Hadoop. GitHub allows developers to collaborate on code. Its principles have their roots in Git, which Linus Torvalds created for developers to submit new code updates. Internet companies depend on open source to run their services. NoSQL databases, back-ends for mobile apps and DevOps tools are critical to running cloud-centric operations.

Enterprise companies with proprietary software do not provide the capability for the user to see the code or change it in any manner. Collaboration is minimal between developers. Waiting for an expensive customer service person is just not an option for the Internet company selling services online.

Design

Design has changed the experience for today’s Internet services companies. Under Steve Jobs, Apple developed from the end-product backwards. Prototypes were developed to envision what the iPhone or any other product would look like. That philosophy also drives consumer Internet methods for developing services. Data-driven companies need visualizations to see insights in new ways to make decisions about what is happening and why. SaaS providers use visualizations to show different aspects of how customers are running their infrastructure, monitoring mobile applications and other use cases.

Historically, enterprise companies have built stacks on databases installed on servers and up from there. User interfaces get bolted on. In the end, it’s an interface that has become famous for its poor usability. Internet companies depend on great design to get their work done, making it difficult if not impossible to sell to Internet companies.

The enterprise companies of today are consolidating. SaaS providers are mushrooming across the market. The cloud-centric companies will continue to shift the balance of power. Enterprise companies may innovate to some extent but mostly through acquisition of innovative, startup providers.