Clash of the technology titans by Jessi Hempel @FortuneMagazine January 13, 2010, 1:35 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons The biggest computing and networking companies in the world are getting bigger – and former partners are now fierce rivals. Is tech’s new strife good for customers? The largest technology companies in the world are at war. Sure, the executives who run Cisco, Hewlett-Packard, IBM, Oracle, and others appear to play nice: Cisco touts the “regular dialogue” between its CEO, John Chambers, and IBM’s chief executive, Sam Palmisano. Ann Livermore, an HP executive vice president, spoke at Oracle’s annual customer event in October and extolled the virtues of their partnership. And because large customers buy software, gear, and services from all the tech giants, their staffs must work together to get computers and networks up and running. Don’t be fooled by the handshakes and air kisses. Increasingly these titans are invading one another’s territories in a bid to grab as much of the $1.5 trillion in projected 2010 worldwide corporate tech spending as they possibly can — and it’s going to get bloody. Customers have cut their tech purchases, and when they do loosen their purse strings, they are buying software and services that help them run their systems more cheaply. To boost sales and profits in this low-growth environment, technology companies are bulking up by buying companies in entirely new businesses. The endgame? Each aims to steal business from rivals by promising customers one-stop shopping for most, if not all, of their computing and networking needs. Battling for each other’s turf Corporate software maker Oracle ORCL , under pressure from competitors that rent software and deliver it over the Internet rather than installing it on-site, is pushing into computer hardware with its planned $7.4 billion acquisition of Sun Microsystems JAVA . When the deal closes (it still faces regulatory hurdles), Oracle will find itself battling partners IBM IBM , Dell DELL , and HP HPQ , all of which also sell servers. HP, whose legacy personal computer and printer businesses aren’t growing the way they used to, spent $13.9 billion in 2008 to acquire EDS, a specialist in managing and integrating corporate systems. That happens to be IBM’s biggest business. HP also has announced plans to buy 3Com COMS , a maker of networking gear. (Take that, Cisco!) Cisco CSCO , in turn, has announced its own plans to enter the server market. (Take that, HP!) Dell is picking up Perot Systems for $4 billion to take on HP and IBM in services. IBM, meanwhile, has been quietly bulking up in software, hardware, and services: In the past six years it has spent $20 billion on 90 companies. “It’s the industrialization of IT,” says Pacific Crest Research’s Brent Bracelin. “In the new world that will come about in the next three to five years, you’ll buy the entire stack. Will you buy it from IBM, from Cisco? From HP? That’s what the battle is all about.” Fighting to dominate a new world order Tech mergers in the name of world domination aren’t new. (Remember Compaq’s purchase of DEC, or HP’s acquisition of Compaq?) But this wave is also being driven by a coming change in technology. “We’re at an inflection point,” says Forrester Research analyst Andrew Bartels. He describes a new generation of technology — call it smart computing — in which servers, computers, and networks come together to form a platform on which new applications are built. These new applications aren’t installed on machines in the workplace; instead they live in data centers and are delivered to users’ phones, laptops, and other devices via the Internet. Faced with the prospect of this new and complex generation of products and services, customers also are demanding more from their technology suppliers. They’re certainly asking for bigger discounts, but instead of merely buying gear and network connections, the largest corporate customers are hiring companies to run the whole shebang, freeing their in-house tech experts to work on other projects. Gerald Shields, CIO of Aflac AFL , is spending the same amount on technology as he did five years ago, but he’s putting more of the money toward efforts that support the insurer’s strategy, such as a new application that allows call center reps to pull customer data from several sources onto a single computer screen. The change has made calls 20 seconds shorter, on average, and last year saved the company $1.1 million. Jim Medeiros, who runs information technology for UPS, is paring his portfolio of tech suppliers. When he brings more business to a large vendor, he is often able to negotiate better deals. “For years, so many software contracts were predicated upon the idea that there is economic advantage in growth,” says Medeiros. “Now I want to spend less money with the vendors, so it’s a business reality: The only way to increase their contracts is to buy more from them.” (This kind of customer power could drive down the tech giants’ margins over time.) How this will affect customers For customers, the clash of the titans could result in even more cost savings as the big guys duke it out for their business by handing out deep discounts. They’ll have to endure some trash talk, of course: While waiting for the Oracle/Sun deal to close, competitors “warned” customers that Sun’s top talent was fleeing. HP rivals routinely slag the hyperefficient company for investing less than some of its peers in research and development as a percentage of sales. IBM doesn’t have a PC business anymore, leading competitors to ask their customers, How can it truly meet all your technology needs? A real worry for customers that buy from multiple tech companies: As competition intensifies, will they still be able to work together to make corporate systems hum? Customers also fret that a top-heavy tech industry could dampen innovation by making it harder for upstarts to get an audience with CIOs. “Sometimes the greatest innovation comes through the smaller companies,” says Kevin Grayling, a senior technology executive at Kraft. “With the larger companies doing more and putting advertising dollars behind products, it’s harder for the smaller ones to cut through.” Increasingly, though, it’s also harder for some larger companies to cut through. The sudden acquisition spree could be troublesome for tech companies like Dell, EMC EMC , and Cisco that haven’t been able to move into new businesses as fast. “If you can’t offer all the pieces together and make it simple for the customer, you’re going to be marginalized,” says Frank Gens, chief analyst at consultancy IDC. With plunging revenues, Dell is already suffering from this trend. Rather than trying to compete with the big guys, analysts say, Dell should strive to address small and medium-size businesses or target specific industries, such as the medical field, that need a suite of specialized services and equipment. Brian Gladden, Dell’s chief financial officer, disputes the notion that the computer maker’s market share is under threat from its consolidating brethren. He sees great potential in developing highly customized tech fixes for midsize companies, but he says, “We don’t feel we need to own all that technology to compete.” Even as a titanic triumvirate of HP, IBM, and Oracle emerges, distancing itself from traditional rivals, its executives still need to look over their shoulder. CIOs may not be spending more money these days, but they are starting to throw some business at a different kind of tech supplier. Small, young companies may find it hard to compete against the giants of corporate technology, but size isn’t an issue for these up-and-coming purveyors of tech services: They have lots of cash and plenty of smart engineers, and they know how to deliver things over the Internet. Their names are Amazon AMZN and Google GOOG .