The technology industry had historically comprised three sectors: hardware, software and services, and storage and peripherals. In 2008, revenue generated by these three segments was $411 billion, $2,239 billion, and $160 billion, respectively. In total, the value of the industry was roughly $2.8 trillion, or about one-fifth of U.S. GDP. The computer hardware market consisted of personal computers (PCs) (roughly half of sales), servers, mainframes, and workstations (Exhibit 48.1). Although customer loyalty was relatively low, brand awareness was high, which somewhat restricted new entry into the market. Business customers were typically tied to specific hardware manufacturers through long-term contracts, which led to significant switching costs. Individuals were less fettered and had minimal switching costs, but only represented a small percentage of the market. Computer hardware was a necessity for individuals and businesses alike, making demand strong and consistent. With weak rivalry among players, the market had enjoyed a healthy 4.8% growth over the previous few years and was expected to grow at the same pace until 2013. The software and services segment was the largest part of the IT industry. The industry was peppered with thousands of competitors large and small, young and mature, fun and serious. It offered a wide array of products ranging from heavyweight software, such as Microsoft Windows, to small applications; services also ran the gamut, ranging from large-scale consulting products to small projects, such as website development and design for local businesses. Some competitors had a large Internet presence (e.g., Google or YouTube), whereas other niche players operated small tools, such as online surveys (Exhibit 48.2). Only the heavyweights enjoyed some customer loyalty. Major software and services providersMicrosoft, IBM, HP, and Oraclehad stable and rather predictable revenues and notable market share (Exhibit 48.3). This software and services segment outpaced the hardware and storage and peripherals segments, growing at 12.2% annually between 2004 and 2008, and it was expected to maintain a healthy annual growth rate of 10.4% until 2013.7 The smallest segmentcomputer storage and peripheralsincluded data storage components, computer processors, and other peripherals (e.g., printers). The market was dominated by storage devices, such as hard drives. Combined, HP, Toshiba, and IBM commanded about half of the market. Historic sales growth rates of storage and peripherals mirrored that of the computer hardware segment. In the 1990s, the IT industry resembled a tiered cake, with one or two heavyweights controlling each tier. These tiers were essentially technology swim lanes with little competition from other firms. For example, Cisco controlled the networking hardware market; Sun and HP were known for manufacturing servers. The business software segment belonged to SAP, while Oracle led in databases. IBM, a longtime hardware company, had moved into consulting and services. Everyone knew that HP laptops ran Windows operating systems but used Toshiba hard drives. Commercial clients bought Sun servers and ran Oracle database management software. There was relatively little overlap between these rival giants. At the dawn of the new millennium, the industry started to change. Lines between segments were becoming blurred; former allies encroached on each others turf, and customers were forced to deal with fewer suppliers. The success of Apples concept of a one-stop shop for consumers to acquire hardware, software, and even peripherals with a tightly controlled distribution channel forced large technology companies to reconsider their strategic approaches to business development. The maturing tech industry has set giant companies on a collision course, as once-disparate technologies take on new capabilities in a convergence of computers, software and networking. Companies such as Apple and Dell moved away from PC manufacturing to other consumer devices, such as mobile phones, printers, and cameras. By the end of 2008, Apple, a long-standing competitor in the PC segment, derived only one-third of its total revenue from computers and laptops. But simple deviation from historical products was a drop in the bucket. Battles were breaking out all across the industry. In 2009, Cisco, a manufacturer of networking hardware, announced it would start building its own servers, thus stepping into the territory of its longtime ally HP, which dominated the server market. HP itself took aggressive steps to compete with IBM in the technological outsourcing segment by acquiring Electronic Data Systems in 2008. Microsoft attempted to take over Yahoo, thereby eyeing Googles domain. Dell was rumored to be in the final stages of developing a data-center management software that [would] compete with existing offerings by HP, IBM and others. Oracle was on a long-term shopping spree expanding from database management software to an array of products. (See Exhibit 48.4 for company descriptions and Exhibit 48.5 for sales growth.) In the past, when big tech companies crossed over into others businesses, they often dismissed it as coopetition, meaning they planned to compete in some areas and cooperate in others. With healthy growth of the technology industry and consumer hunger for new gadgets, there was plenty of revenue to go around. But the financial crisis, beginning in 2007, changed the landscape. The looming recession shrunk sales all across the industry and forced technology companies to explore every opportunity for extra revenue.

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