Jonathan Schwartz on Commoditisation

Sun President Jonathan Schwartz writes:

What do oil & gas, telecommunications, and financial services have in common?

They’re all commodities.

They’re also the industries that have yielded the world’s largest companies. Oil companies, Telcos, Banks. The Fortune 50 are littered with them. Why? Because commodities, by definition, are those products for which a universal and perpetual demand exists – the planet is your marketplace, and everyone is your customer. Commodities yield massive opportunities. If you’re prepared.

A whole host of folks like to believe the computing industry is commoditizing. I don’t buy it. Some technology products are certainly becoming interchangeable (why buy WebSphere when you can deploy the J2EE Reference Implementation for free?) – but what’s really commoditizing? Bandwidth. Not software, not hardware, bandwidth. It’s coming out of the wall in your house and office, just like a three prong outlet provides another commodity, electricity (and broadband, soon enough).

Having spent a great deal of time with some of the world’s largest commodity companies, I’ve taken note of three simple imperatives.
One, the largest companies serving commodity markets are all technology companies. Talk to a bank with a trading operation, and you’ll hear all about how better order execution or analytics give them a competitive edge. “Banking is a technology industry.” Oil and gas companies invest billions in R&D – for the same reason. And the telecommunications companies? That’s getting more obvious by the day. Technology is their most significant means of differentiation. It’s true for every company engaged in supplying a commodity marketplace. Don’t be deluded by the retail bonanza – in commodity markets, retailers have a much harder life than wholesalers.

Second, technology differentation is necessary, but not sufficient. Companies serving commodity markets must leverage their technology to drive business model differentation. Oil and gas companies leverage the derivatives markets to better serve customers (and stockholders) – and manage production and supply through those systems. Financial services companies, especially in their consumer businesses, use disruptive pricing – with offers of “free checking,” discount trading or other incentives to leverage consolidated product portfolios. And obviously, telecommunications companies are famous for innovative pricing, from free handsets, to call plans that make it more expensive to call outside your network (MCI’s Friends and Family was among the first). The point behind all of this – technology is a must have, but only insofar as it enables disruptive market moves.

Lastly, among the most interesting characteristic I’ve seen in companies that win in commodity markets – they’re intensely focused on standards.

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.