Eretz Yisrael Time

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Wednesday, May 10, 2006
I don’t know if anyone is paying attention to the trend lately, but all the SMB (small medium business) companies are being gobbled up by the big boys, and lately, an especially unusual number of them in Israel particularly.

What’s happening is that the big boys want to rule the entire market, so they buy up all the SMBs that are nicely positioned in their respective small niches that the big boys aren’t in.

The mindless Israeli newspapers of course like it because it shows the “success” of the Israeli SMB company - they were so well positioned that they got themselves bought out.

But what’s left are just a handful of overweight giants that rule the entire market, eradicate any real competition, and simply push out everyone else that might be in their way. (Some people call it consolidation - and it happens in politics too).

Obviously if you are an SMB that gets bought by a giant, it’s good for the investors, and sometimes for some of the senior staff, but if you are still an independent SMB, suddenly you find your small little niche you carved out for yourself is being trampled on by a 900 lb. gorilla (I just watched King Kong, I rooted for Kong).

And if you worked for one of those SMBs that got bought, more than likely you will be looking for a job within the year (2 years if you were in R&D – as it takes longer for you to assimilate your product into the giant's product line, making yourself irrelevant).

The funny thing is how bad this is for the client too.

Suddenly the client unexpectedly finds out they are left with only 2 or 3 potential vendors, and they find their choices are between bad service and worse, and overly complex, nonintegrated products or simply irrelevant ones that they must force their business to fit around, and they of course dare not go to one of the small companies (with better products and services) as those probably won’t survive the onslaught.

The clients don’t all feel the pain right away, but eventually they all do.

And then it hits the customers.

Service becomes bad, choices become limited, and prices go up.

So what happens?

At some point the pain reaches a point that is too high, too far, too much, too bad.

I recently asked one of the big boys who was happily describing his bloated software system to me, and he says at some point you take it ‘back down to the metal’. You strip out all the bloatware and start again from scratch (and what does that cost, and who pays for it?).

And what about the SMB purple hearts?

There are only a few options. Many leave their chosen field for lack of work, that’s for sure. Look how many people in Israel don’t work in their profession. Look how many can't even find a job.

But a few, the innovators, which the big boys can never really be, don’t fall back on something else, rather they spring forward.

Some hunker down and take the big boy’s solution down to the metal, so when the market is fed up, they’re there, and ready to move in - but that takes time.

Some offer the missing services that the big boy’s will never offer well, but honestly, that’s too much like getting the table scraps after the meal.

But even better, and often enough, these guys find the next big thing.

You see, in Israel we are suffocated by a few families that own everything, a government that takes everything, and a few global companies that are buying up everything else in sight.

Competition is killed, and we the consumers suffer.

But I think that is one of the reasons why there are so many startups, and “successful” one too, in Israel.

With the traditional and the mainstream markets being stomped out for the little guy, it leaves no room for anything except for innovation, creativity, and thinking outside the box.

I admit no one wants to be forced to reinvent themselves all the time, but the ability to realize that someone ‘has moved the cheese’ and be willing to seek out ‘new cheese’ is why Israel continues to be a leader in innovative business ideas, even while the government and big business try to suffocate everyone else around them. (Of course, most of these ideas tend to be implemented overseas where they aren't stifled).

I suspect that is also probably why many Israelis tend to do well in the States where competition is not crushed and markets are truly free. They come with an 'innovation skill set' that is more developed. Not that the US doesn’t have similar issues, but not only is the US pond bigger, making it more difficult to own it all, the government is less overwhelming, and a handful of families don’t own everything.

It’s a cycle, and a lot of people get run over by this cycle.

On the other hand, a lot of other people find a new path, and that makes them stronger (and brings us new consumer markets to spend money on).

This new cycle is upon us. Are you ready?


Ben Bayit said...

Often these takeovers don't work out. The big company usually has a competing in-house product and the people there want to protect their turf. IBM is notorious for buying SMB companies only to jettison those products years later after failing to make new sales. But they justify this b/c of the maintenance revenue during the period of time they owned it. Then they sell it off (Yael Technologies is an Israeli company that delights in buying washed up products from "big boys" just to keep the maintenance revenue steam). And the cycle starts again when nimbler players come up with something better.

JoeSettler said...

Living off the software license revenue stream is actually very good money and an excellent business model for SMBs, less so, in my opinion, for the big boys.

But the big boys prefer to buy these companies just as they are becoming competition, after all, “if you can’t fight ‘em, buy ‘em”.

So very often, instead of maintaining what was creative and therefore what was actually competition, they cannibalize some of the parts but throw a lot away in the end (besides the people).

On the other hands, some of the companies simply keep the products “as-is” and just add it to their basket of products. Some even update it to the best of their ability until they buy something else better.

But this isn’t just true for the software market. It’s just happens to be more obvious and common.

JoeSettler said...

Conformity and a deficiency in exceptionality is a result of globalization. Yet for many (myself included), the goal of their enterprises is to create an empire.

Certainly the goal of at least one enterprise of mine is to sell it lock, stock and barrel to one of the big boys.

Part of business/life is recognizing current market forces and taking advantage of them while you can and alternatively before you get stomped out because you present a real threat (perhaps the results are the same, but at least there’s more profit the first way).

This isn’t the last millennia where you expected to work for a company for life, but unfortunately on the other hand, it’s gone to the other extreme, where even a year can be a long time to expect loyalty from either employer or employee.

I also admit I enjoy going to the mall and superstores for shopping (another example of the globalization mentality), but for the more unique items one must still look off the beaten path.

In Israel, one of the effects of the attitude of globalization is that more and more people are forced to work on Shabbat. Treppenwitz has an interesting post on the subject.

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