Is the Party Over? The Flattening S-Curve of IT Innovation

OK, maybe it’s just the recession. But many people who have worked in IT for some time seem to feel a sense of disappointment these days. Somehow, the IT industry — including the Internet sector — doesn’t feel as interesting as it used to. Not as dynamic. Not as fascinating. Is this just a negative perception shaped by the current crisis, or is it possible that there’s more behind it?

Like most waves of innovation, the adoption of IT seems to follow an S-curve. The early computers had only very few users, mainly big corporations. IT adoption really exploded with the PC, gained speed with user-friendly GUIs and hit its maximum velocity when the World Wide Web was invented. Now it might be slowing down.

A very simplified graphical representation of long-term IT innovation could maybe look like this:

There are many signs that the IT sector is losing steam. A few examples:

1. PCs haven’t changed much in a decade. Sure, my current machine is much faster than the high-end Compaq workstation I was using in 1999, but I don’t do anything fundamentally different with it. Most of the innovation happened in the decade before that. In 1989, very few people edited photos, accessed global data networks or were even using a mouse.

What’s more, the innovation in operating systems and basic PC applications has stalled. Users don’t see a good reason to upgrade from Windows XP to Vista, for example. Innovation in PCs is now merely incremental. The market has found its “dominant design” and doesn’t seem to be willing to change much about it — except prices, which are falling dramatically. My new $300 Asus netbook basically has the same capabilities as my $3000 subnotebook five years ago.

2. The enterprise software market is consolidating. Enterprise software companies are increasingly living off their maintenance fees and service revenues from their installed base. There’s less and less new license revenue because big-ticket IT projects are largely a thing of the past. Corporations are very reluctant to repeat the costly mistakes of the late 90s, when huge ERP and CRM projects were all the rage. The prototypical software company of this new era is Oracle, which is following a strategy of aggressive consolidation of smaller rivals.

3. SaaS is not taking off as expected. The new generation of web-based “Software as a Service” (SaaS) products like Salesforce.com is great and potentially disruptive, but most of these companies are still far away from real profitability (let alone huge margins like those achieved by the leading enterprise software players). Even though subscription-based SaaS has been around for well over a decade, the business model doesn’t seem to hold up very well. What a contrast to the early days of Microsoft or Oracle, both of which were profitable almost from day one.

4. Web 2.0 has all the hype of a real bubble with none of the money. OK, so Facebook now has more than 200 million users. That’s great, but unfortunately, revenues are not growing at the same speed, and profits are still elusive. Youtube is apparently losing hundreds of millions of dollars a year, and Twitter has not even started to look for a business model.

Web 2.0 is a huge success in terms of user adoption (although it’s really only a shift of existing web users to newer sites — actually a small step), but commercially, it’s a huge disappointment so far. Maybe it’s all a question of time, maybe things will look better after the recession. But perhaps the bleak reality is that these sites simply don’t add enough value for users (and advertisers) to justify the commercial success of Web 1.0 giants like Google or Amazon.

Of course, there are some bright spots: The mobile web is finally taking off, thanks to Apple’s iPhone, the BlackBerry and other new smartphones. Media consumption — newspapers, video, now even books — is shifting into the digital realm, hopefully pulling advertising spending with it eventually. And on the horizon, there’s the promise of the Semantic Web (although it has been on the horizon for a long time without getting much closer…).

But overall, the wild days of IT innovation seem to be largely over for now. Things have been slowing down considerably for several years, and that’s not just because the economy is in trouble. It’s a typical pattern for fundamental innovations (like railroads, the telephone, the automobile) that there’s a phase of rapid evolution and dramatic changes that can last several decades. But once the technology has reached a certain level of maturity and most of the infrastructure is in place, growth and the speed of innovation slow down a lot. All the signs suggest that this is currently happening to the IT industry.

Obviously, it would be a huge mistake to think that there will be no further major innovation in IT. Just remember all the quotes by famous people that were wrong about the magnitude of future technological change (although many of these quotes are actually incorrect). However, unless a technology enters a second major wave of innovation — like digital and mobile telephony — the big changes are few and far between.

Assuming that this theory is right and IT is now really becoming a mature market: What are the best entrepreneurial opportunities under these new circumstances? This will be the topic of my next blog post. Watch this space.