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Secrets of the Web services crystal ball

When a new technology approach heralds broad market changes, people tend to think that the most important effect of those changes is market creation rather than transformation...

Guest Commentary
Secrets of the Web services crystal ball
by Jason Bloomberg, Senior Analyst, ZapThink, LLC

True story: in early 2000, at the very summit of dot.com insanity, I worked at an eCommerce incubator that had the hubris to believe that it could change the world by incubating startups trying to sell underwear and ceramic figurines online. This was the New Economy, after all, and the old rules about business no longer applied. We were staking out new markets in unclaimed territory -- new markets made possible by the awesome power of the World Wide Web. Cut to the cold, hard reality of the present, and clear hindsight makes it obvious that the Web wasn't a market at all; it was a channel. Selling underwear online was really just selling underwear, only now you had one more way of interacting with customers. But did the new technology herald a new market or obsolete any existing ones? Hardly.

Now, lest we err on the side of caution, the Web actually did create new markets -- eBay and Yahoo! are evidence of that. But the truly new markets and the companies that came to dominate them number in the single digits. The real business success story of the Web lies in how this new technology came to transform existing markets. eCommerce, online banking and stock trading, and all the companies that use the Web in the course of their day-to-day business are evidence of that.

There is an important lesson to be learned here. When a new technology approach heralds broad market changes, people tend to think that the most important effect of those changes is market creation, while in reality, market transformation is far more significant. In fact, many people are making the same mistake with respect to markets related to Web services and Service Oriented Architecture (SOA). Such people, of course, may be doomed to repeat history, unless they can learn the lessons of the dot.com bubble.

Where are the Web services and SOA markets?
Here's the hard truth: there are no permanent Web services or SOA "markets." Web services are interfaces to software, not software itself. SOA is architecture, which means the organization of software and other resources, not those resources themselves. The markets for Web services and SOA products and services we do have are transitional -- that is, arbitrary categories brought to life to add definition to markets in transformation. Once companies figure out what Web services and SOAs are really for, such temporary markets will evaporate as quickly as the online underwear pure-play.

Nevertheless, it goes without saying that Web services and SOAs offer enormous market opportunities. The vast majority of those opportunities, however, are the result of market transformation, rather than market creation. The market changes Web services have already created are a clear example of this trend. After all, virtually all software vendors are Web service-enabling their software. From the smallest desktop app to the most complex enterprise business application, they're all speaking Web services now, or soon will be. Web services, after all, are a better way of getting to something else, rather than functionality you'd buy all by themselves.

The transitional nature of the current Service Orientation (SO) markets -- markets for products that help companies build, run, and manage SOAs -- is just as real, although less obvious. Three of today's most active SO markets, SO Security, SO Management, and SO Integration, are a case in point. Innovation and investment are pouring into these areas, even though the opportunities for most "pure-play" players in these markets are necessarily short-lived.

A peek into the Web services crystal ball
So, just where are the big opportunities in Web services and SOAs? Where should investors and entrepreneurs place their bets? Just what does ZapThink's crystal ball say, anyway?

Most industry analysis crystal balls work on the principle of extrapolation. If a market has been experiencing, say, an 8% compound annual growth rate for the last few years, then other things being equal (balancing the forces of increasing technology adoption and downward pricing pressure), it will continue to experience such a rate for the next few years. Drop the numbers in Excel, drag a few years into the future, and voila! You have your market sizing predictions.Unfortunately, extrapolation only works for established markets. ZapThink's crystal ball can't afford to work that way, because we're talking about emerging transitional markets, as well as existing market transformation. Here, then, is a peek into ZapThink's crystal ball.

For each of the SO markets mentioned above, we divide those markets into new entrants and incumbents. New entrants are the pure-play vendors who are capitalizing on the transitional market, while incumbents are existing vendors who are in the process of adding Web services and SO capabilities to their existing products. For example, the Web Services Management market is a transitional market populated by new entrants, while the Systems Management market is the corresponding incumbent market.

ZapThink predicts that the growth of each of the transitional markets that the new entrants participate in will peak quickly (usually in one to three years), and will only reach a fraction of the size of the incumbent markets. After all, such transitional markets depend on customers' lack of understanding of new products and approaches and the immaturity of the products the incumbents offer.

The incumbent markets tend to lag behind the early spike in activity that the transitional markets exhibit, partly because large companies are slower to innovate than startups, but mostly because incumbent vendors have existing customers they must continue to support. Nevertheless, incumbent markets are where the real opportunity is. Once all the big systems management players fully service-enable their products, for instance, they will dominate the smaller players in the Web services management space.

Where to place your bets
So, is there any point to being a startup? Is ZapThink predicting that the big guys will squash all the little guys? Well, of course not. The IT marketplace will continue to remain very competitive, as it has always been. Here is ZapThink's advice on these market trends:

  • Successful pure-plays are the exception. ZapThink expects only a very small number of new entrant vendors to survive. But those that survive will be successful.
  • Being an innovator ahead of the incumbents always represents an opportunity. Small companies can innovate more quickly and efficiently as a rule than big companies, and the big companies know this.
  • Ride the wave of change: startups should start building now what customers will want in a few years. Make the right prediction and get the timing right, and there will be opportunities in the future only glimpsed today. After all, Web services and SOAs are transforming the world of IT, and the ride has only just begun.
The ZapThink Take
Industry analyst crystal balls actually come with instructions: "predict substantial growth, and be sure to use really big numbers." After all, everybody wants really big numbers, and isn't it the job of an industry analyst to provide them? Well, yes and no. It would be wonderful if markets came into existence and grew at a steady clip until they were huge, but that's not the way markets really work. In reality, the boundaries that separate one market from another continually blur as marketeers seek to differentiate their products, yet associate them with competitors who offer similar solutions. This ever-changing nature of markets is especially true when they are emerging.

At ZapThink, therefore, we wrote our own instructions: "Apply the lessons of the past to the broader growth patterns of markets, as new markets emerge and interact with the incumbent markets that existed before." Following those instructions yields more complex predictions than a simple large dollar figure, but they are more likely to be insightful and valuable to our audience.

Copyright 2004. Originally published by ZapThink LLC, reprinted with permission. ZapThink LLC provides quality, high-value, focused research, analysis, and insight on emerging technologies that will have a high impact on the way business will be run in the future. To register for a free e-mail subscription to ZapFlash, click here.

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