Too Big to Fail and IT

Too Big to Fail and IT

People have their lives, their IP on IT systems like Google Docs or iTunes or Facebook, and many businesses rely on the software and support of companies like Microsoft.  Imagine what would happen to the American economy if Google or Microsoft failed.  Imagine if Facebook shut its doors and you lost all of the data that you have with them as well as access to all of the companies that have built on their ecosystem (using Facebook Connect for example).  You could argue that either of these scenarios would be damaging enough to the economy that they shouldn’t be allowed to happen in much the same way that a credit lock-up caused by a failure of several major banks was too catastrophic or the closing of GM would have been too catastrophic.  In the popular vernacular, there are a number of tech firms that are “Too Big to Fail.”

The problem with tech companies that are too big to fail is that all of those companies are constantly doing risky risky things that have the potential to bankrupt them.  Microsoft is betting the ranch on Windows 8 and its new cloudy features sometime in 2013.  Google recently bet the farm on Social.  Facebook isn’t even a public company yet and could easily make silly decisions.  I’ve argued before that Apple is one or two failed product launches from being in serious trouble.

The question is what, if anything, to do about this.  Technology is a risky business, we can’t just ask a company like Google to stop taking risks.  Also, one of the reasons that these companies got so big is that the industry benefits from having dominant players in certain areas.  So, if we can’t force tech companies to become smaller and we can’t force them to stop taking risks, do we just accept that someday a bailout for one of these companies may be necessary?  Anyone have a solution I’m missing?

  • John Hammer

    While I didn’t agree with the bailout of GM or the measures taken to save the giant banks, I do think I understand why they occurred.  

    GM is a manufacturing firm with a highly integrated supply chain.  The problem is that many of GM’s suppliers aren’t all that big and they provide supplies not only to GM, but to GM’s competitors.  If GM failed, those suppliers would have lost a major portion of their business and with that, many of those suppliers would have failed.  Not only would that have caused the loss of thousands of jobs at these suppliers, it would have caused problems for Ford, Toyota, BMW and other major car manufacturers, who would all have to look for new suppliers.  And in manufacturing, you can’t just quickly start building millions of new widgets.  Production lines would have to be expanded at surviving suppliers, something that would take months.  A failure of GM would have caused major disruptions for an entire global industry.The failure of large banks also would have caused major disruptions.  If Bank of America were to fail, not only would it put a major strain on the FDIC, it would put major holes in the portfolios of many other financial institutions because of the loans that banks frequently make to each other.  That would make these other institutions less willing or less able to provide loans to individuals trying to purchase homes and companies that are trying to expand their business.  The Too Big to Fail argument here is that the loss of BoA would have caused major disruptions in the Financial Industry, which is the economic lifeblood for every other industry in the world.The argument in favor of bailout out both banks and GM is that not bailing them out would have made a bad recession even worse.  Again, I don’t necessarily agree with ‘Too Big to Fail” argument, especially when it comes to banks.  I am only explaining it here because I am thinking through how the failure of an IT firm would impact the economy.IT is different.  There are literally thousands of vendors out there providing IT support services today, ranging from building web-sites, to outsourcing whole data centers (regardless of hardware vendor).What would happen if Facebook went under?  Well, I would argue, “Not Much”.  Unlike a major bank or General Motors, there aren’t many barriers for competitors to start a social web site.  You and I could find a couple of college kids and have a social web site up and running in a month or so.  The problem is that no one would probably join our site, meaning that we won’t get any revenue.  But, if Facebook failed, our site would suddenly have millions of potential new customers.  Yeah, all of that data I gave to FB would be gone, but hundreds of competing sites would be actively recruiting new customers to replace FB (If FB went under, maybe then somebody would use Google+).  Yeah the Facebook Connect would go away, but companies like the Washington Post used to allow anonymous commenting.  In a relatively short time, they could go back to anonymous commenting until a replacement for FB Connect would come up.  I don’t use FB for retail purchases, so I am not sure what kind of impact a shutdown of FB would cause in that space, but since most retailers still accept credit  cards or Paypal for purchases, I don’t think that would be a major issue for retail.  Retailers would simply move from FB to MySpace (or some other social site) and stay connected with customers that way.How about if Google or Microsoft went under?  Well, Google is primarily a search engine (well, now with a phone business).  There are thousands of little Googles out there, dying to get more search traffic.  And, there are at least two major phone manufacturers that would be thrilled if Google Android went away (Apple?  Blackberry?)  Yes, those places that use Google Docs or Gmail for corporate services would be in a bind, but I would assume most of these places would be able to get a replacement for either of these systems up and running quite quickly (and, in all honesty, e-mail is probably the LEAST important system in any corporation).  They might run into some issues in getting their data off of Googles servers, but I am sure that they would be able to retrieve it eventually.Microsoft would be a bit more interesting.  There are literally millions of Windows servers and PC’s running in the world.  I am sure an IBM, Oracle or HP would be more than willing to provide support on those servers & PC’s until a replacement OS could be implemented (paid support, of course) — or until one of those companies buys the Windows brand name and all of its developers.  The failure of Microsoft would result in more disruption than either Facebook or Google (for example, would security and patching of the Windows OS be impacted by a failure of Microsoft?).  However, I don’t know if even MS is “Too big to Fail”.  In short, I don’t think any IT firm is too big to failI (then again, I would say the same thing about Citbank, too).  While the collapse of some IT firms would cause some disruption, primarily firms that provide hardware and OS for hardware (Microsoft, Oracle, HP, IBM, to name a few), there are enough service providers who would be wiling to provide short term paid support until the disruption is mitigated. 

    • I think you’re probably right that a full bailout of any of these companies would not be necessary.  I think in the case of all of them it may be necessary for the government to require them to make the data accessible for their users though.  You’ll notice I didn’t even mention the search engine part of Google’s business as that would be easily replaced, it’s mainly the enterprise data portions of Google and the other companies that would cause a GM or Bank like ripple.

      • John Hammer

        The enterprise data portion of Google is indeed the item with the largest potential for disruption.  I don’t know enough about the contracts that Google signs with enterprises to know what would happen to that data.  For example, I recently found out the City of Pittsburgh has moved to Google Mail (from Exchange).  From a cost perspective, that makes great sense (City Taxpayers should be thanking the City for saving money).  

        However, how does the city ensure the e-mail that is being hosted on Google’s Servers is available in the event of an extreme event (Disaster or the Financial Collapse of Google)?    Does the city get a regular backup shipped to Grant Street from Google?  I know if I was in charge of the City IT department, I’d want to make sure that I would have a fairly recent copy of my data readily available.  I don’t know the answer, but I wonder if all of Google’s customers would request that type of backup.