Technology's New Wave

While business-to-business sales soften, companies that target consumers directly are red hot

One of the most remarkable changes in recent business memory is the rise to dominance of consumers in technology markets. From DVDs to software, Internet services to electronics, it is consumers—not business—who rule the roost.

It wasn't always this way. A few years ago, companies like Seibel Systems and SAP were the standout performers, the ones, unable to do any wrong, whose stocks soared and then soared some more. “Smart” investors sniffed at silly startups that stooped to sell into consumer markets. You can't make any money selling to consumers, these companies were told, given the high costs, from distribution (setting up stores? yuck!) to support (one cranky call and you've lost money on low-margin consumer sales).

No longer, though. Instead of being scared away from selling to consumers, it is consumers that companies now hunger for. You see the same thing in every corner of technology: While business-centric technology dinosaurs are struggling, companies that sell to consumers, from Sony to Electronic Arts, and so on, are all thriving.

What changed? In part, companies over-bought PCs and software during the technology boom, much of which never worked the way its purchasers intended. Statistics vary, but more than half of all customer-relationship management (CRM) software sold was never actually put into full use. How's that for a return on your multimillion-dollar enterprise software investment?

The other part of the technology problem is that companies simply don't need as much technology as they once did. Put differently, they have an installed base of pretty much everything they want, from databases to accounting software, to CRM (sort of), to e-mail and anti-virus programs. Unseating an incumbent vendor is a lower growth business than selling into virgin territory, and it is also a crummy business with worse margins and longer selling cycles.

Selling to consumers, however, is like selling to business two decades ago. There is precious little installed base–no database, no accounting software, and a hodge-podge of hardware without network management tools–and so you don't need to convince people to throw out something before they can buy something marginally better. What's more, consumers are loading up on technology in general, with the average home going from one computer to multiple computers, a wireless network, game players, high-definition television, and on and on. It's a bonanza, and the conference circuit reflects that, with some of the most popular technology shows in the past two years being consumer-related. A host of glossy new consumer-centric tech publications have also been launched.

So what could screw things up in this sunny scenario where consumers matter most? Well, a recession would be unpleasant. Unlike companies, consumer spending on discretionary products like technology oscillates considerably, depending on general economic conditions. Where a business can't simply stop supporting its technology infrastructure, homes do precisely that.

The other thing that could mess things up is vendor greed. There is nothing quite like seeing a rapidly growing market to convince companies to do things that run contrary to their own self-interest–and we're seeing some of that right now in next-generation DVD markets. Shades of VHS versus Beta: there is a format war brewing between greedy promoters of competing DVD standards called Blu-Ray and HD-DVD. The former offers more capacity, while the latter will be less expensive to manufacture and sell. Movie studios and technology companies are lining up behind one or the other, and the confusion threatens to mess up a large and until recently fast-growing area of consumer technology. Consumers may be very unhappy as their expensive new DVD players rapidly become useless.

Then again, it may not matter. One of the fascinating things about consumer technology purchasing, as opposed to business purchasing, is that even if there is an installed base it is very small. Having two or three PCs in your house doesn't leave you as wedded to a technology as having two or three thousand inside your company. Consumers are freer to play with technologies and mess about, to try something and see if it works–and then toss the vendor's ass out on the street if they're not playing straight.