How Amazon Whupped Facebook Last Week

It's been two very different stories for Amazon and Facebook this summer.  Amazon's market cap has risen about 20%, while Facebook lost about 50% of its market value
FB v AMZN 9.10.12

Chart source: Yahoo Finance

Why this has happened was somewhat encapsulated in each company's headlines last week.

Amazon announced it was releasing 2 new eReaders under the Paperwhite name requiring no external light source starting at $119.  Additionally, Kindles for $69 will be available this week.  These actions expand the market for eReaders, already dominated by Amazon, providing for additional growth and lowering a kaboom on the Barnes & Noble Nook which is partnered with Microsoft. 

Offering more functionality and lower prices gives Amazon an even larger lead in the ereader market while simultaneously expanding demand for digital reading giving Amazon more strength versus traditional publishers and the printed book market.  Despite a "nosebleed" high historical price/earnings multiple close to 300, investors, like customers, were charged up to see the opportunities for ongoing growth from new products.

On the other hand, Facebook spent last week explaining to investors a set of decisions being made to prop up the stock price.  The CEO promised not to sell any stock for several months, and explained that the company would not sell more stock to cover taxes on stock-based compensation – even though that was the original plan.  He even tried to promote the avoided transaction as some kind of stock buyback, although there was no stock buyback

Facebook was focused on financial machinations – which have nothing to do with growing the company's revenues or profits.  That the company avoided selling more stock at its deflated prices does help earnings per share, but what's more important is the fact that now $2B will be taken out of cash reserves to pay those taxes.  $2B which won't be spent on new product development, or other activities oriented toward growth. 

Although I am very bullish on Facebook, last week was not a good sign.  A young CEO is clearly feeling heat over the stock value, even though he has control of the company regardless of share price.  It gave the indication that he wanted to mollify investors rather than focus on producing better results – which is what Facebook has to do if it really wants to make investors happy.  Rather than doing what he always promised to do, which was make the world's best network offering users the best experience, his attention was diverted to issues that have absolutely no long-term value, and in the short term reduce resources for fulfilling the long-term mission.

Given the choice between

  1.  a company talking about how it plans to grow revenues and profits, and maintain market domination while outflanking the introduction of new Microsoft products, or
  2. a company apologetic about its IPO, fixated on its declining stock price and apparently diverting focus away from markets and solutions toward financial machinations

which would you choose?  Both may have gone up in value last week – but clearly Mr. Bezos showed he was leading his company, while Mr. Zuckerberg came off looking like he was floundering.

As you look at the announcements from your company, over the last year and anticipate going forward, what do you see?  Are there lots of announcements about new technology applications and product advancements that open new markets for growing revenue while warding off (and making outdated) competitors?  Or is more time spent talking about layoffs, cost cutting efforts, price adjustments to maintain market share, stock buybacks intended to prop up the value, stock (or company) splits, asset (or division) sales, expense reductions, reorganizations or adjustments intended to improve earnings per share? 

If its the former, congratulations! You're acting like Amazon.  You're talking about how you are whupping competitors and creating growth for investors, employees and suppliers.  But if it's the latter perhaps you understand why your equity value isn't rising, employees are disgruntled and suppliers are worried.

Neil Armstrong’s Legacy – More Important Now Than Ever

Neil Armstrong, the first man to step on the moon died last Saturday.  Overall, I was surprised at just how little attention this received.  The Republican convention, Hurrican Isaac and many other issues dominated the news, even though Neil Armstrong represents something that had far more impact on our lives than this hurricane, or anyone attending this convention.

Neil Armstrong represents the adventurous spirit of an innovator willing to lead from the front.  The advances in flight, and space travel, might have happened without him – or maybe not.  Neil Armstrong was willing to see what could be done, willing to experiment and take chances, without being overly concerned about failure.  Rather than worrying about what could go wrong, he was willing to see what could go right!

Most of us forget that it has been only 110 years since the Wright brothers made their 12 second, 120 foot flight at Kitty Hawk, North Carolina.  Before that, flight had been impossible.  Now, in such a short time, we have globalized travel.  My father, born in 1912, lived in a world with no planes – or much need for one.  I now live in Chicago largely because of O'Hare airport and its gateway (almost always in one leg) to any city.  Flight has transformed everything about life, and the world owes a lot to Neil Armstrong for that change.

Neil Armstrong became a pilot at 15 and spent a lifetime pushing the envelope of flight.  He not only flew planes, but he obtained an aeronautical engineering degree and used his experiences to help design better, more capable planes.  His history of try, fail, test, improve, try, succeed is an example for all leaders: 

  1. Firstly, know what you are talking about.  Have the right education, obtain data and apply good analysis to everything you do.  Don't operate just "from your gut," or on intuition, but rather know what you're talking about, and lead with knowledge.
  2. Second, don't be afraid to experiment, learn, improve and grow.  Don't rest on what people have done, and proven, before.  Don't accept limits just because that's how it was previously done.  Constantly build upon the past to reach new heights.  Just because it has not been done before does not mean it cannot be done.

Beyond his own leadership, Neil Armstrong is – for much of the world – the face of space travel.  The first man on the moon.  And that was only possible by being part of, and a leader in, NASA.  And we could desperately use NASA today.  It was, without a doubt, the most successful economic stimulus program in American history – even though politicians have been moving in the opposite direction for nearly 2 decades!

NASA offered Americans, and in fact the world, the opportunity to invest in science to see what could be done.  By setting wildly unrealistic goals the organization was forced to constantly innovate.  As a result NASA created and spun off more inventions creating more jobs than Eisenhower's interstate highway program and all other giant government programs combined. 

NASA's heyday was from the John Kennedy challenge of 1961 through the lunar landing in 1969.  Yet since 1976 alone there have been over 1,400 documented NASA inventions benefiting industry!!  Not only did NASA's experiments in flight aid physical globalization, but it was NASA that developed wireless (satellite based) long-distance communications – which now gives us nearly free global voice and data connectivity.  And the need to solve complex engineering problems pushed the computer race exponentially, giving us the digital technology now embedded in almost everything we do. 

Consider these other NASA innovations that have driven economic growth:

  • The microwave oven, and tasty, desirable frozen food used not only in homes but in countless restaurants
  • Water filtration for cities and even your refrigerator reducing disease and illness
  • High powered batteries – for everything from laptops to cordless tools to electric cars
  • Cordless phones, which led to cell phones
  • Ear thermometers (for those of us who remember using anal thermometers on sick babies this is a BIG deal)
  • Non-destructive testing of rockets and other devices led to what are now medical CAT scanners and MRI machines
  • Scratch resistant lenses now used in glasses, and invisible, easy to adjust braces at prices, adjusted for inflation, considered impossible 30 years ago
  • Superior coatings for cookware, paints and just about everything

As the American economy sputters, southern Europe looks to drag down economic growth across the continent, and growth slows in China the need for economic stimulus has never been greater.  But far too often politicians reach for outdated programs like highways, dams or other construction projects.  And monetary stimulus, in the form of lower interest rates and easier money, almost always goes into asset intensive projects like factories – at a time when capacity utilization remains far from any peak.  We keep spending, and making money cheap, but it doesn't matter.

We have transitioned from an industrial to an information economy.  Effective economic stimulus in 2012 cannot happen by creating labor-intensive, or asset-intensive, programs.  Rather it must create jobs built upon the kind of value-added work in today's economy – and that means knowledge-intensive work.  Exactly the kind of work created by NASA, and all the subsidiary businesses born of the NASA innovations.

Nobody seems to care about going to space any more.  And I must admit, it is not my dream.  But in one of his last efforts to help America grow Neil Armstrong told a Congressional committee "It would be as if 16th century Monarchs proclaimed we need not go to the New World, we have already been there." He was so right.  We have barely begun understanding the implications of growth created by exploring space.  Only our imaginations are limited, not the opportunity.

What Neil Armstrong told us all, and practiced with his actions, was to never stop setting crazy goals.  Even when the immediate benefit may be unclear.  The journey of discovery unleashes opportunities which create their own benefits – for society, and for our economy.  Losing Neil Armstrong is an enormous loss, because we need leaders like him now more than ever.

What Steve Jobs Would Tell Mark Zuckerberg

Mark Zuckerberg was Time magazine's Person of the Year in December, 2010.  He was given that honor because Facebook dominated the emerging social media marketplace, and social media had clearly begun changing how people do things.  Despite his young age, Mr. Zuckerberg had created a phenomenon demonstrated by the hundreds of million new Facebook users.

But things have turned pretty rough for the young Mr. Zuckerberg. 

  • Facebook was pretty much forced, legally, to go public because it had accumulated so many shareholders.  The stock hit the NASDAQ with much fanfare in May, 2012 – only to have gone pretty much straight down since.  It now trades at about 50% of IPO pricing, and is under constant pressure from analysts who say it may still be overpriced.
  • Facebook discovered perhaps 83million accounts were fake (about  9%) unleashing a torrent of discussion that perhaps the fake accounts was a much, much larger number.
  • User growth has fallen to some 35% – which is much slower than initial investors hoped.  Combined with concerns about fake accounts, there are people wondering if Facebook growth is stalling.
  • Facebook has not grown revenues commensurate with user growth, and people are screaming that despite its widespread use Facebook doesn't know how to "monetize" its base into revenues and profits.
  • Mobile use is growing much faster than laptop/PC use, and Facebook has not revealed any method to monetize its use on mobile devices – causing concerns that it has no plan to monetize all those users on smartphones and tablets and thus future revenues may decline.
  • Zynga, a major web games supplier, announced weak earnings and said its growth was slowing – which affects Facebook because people play Zinga games on Facebook.
  • GM, one of the 10 largest U.S. advertisers, publicly announced it was dropping Facebook advertising because executives believed it had insufficient return on investment. Investors now fret Facebook won't bring in major advertisers.
  • Google keeps plugging away at competitive product Google+. And while Facebook  disappointed investors with its earnings, much smaller competitor Linked-in announced revenues and earnings which exceeded expectations.  Investors now worry about competitors dicing up the market and minimalizing Facebook's future growth.

Wow, this is enough to make 50-something CEOs of low-growth, non-tech companies jump with joy at the upending of the hoody-wearing 28 year old Facebook CEO.  Zynga booted its Chief Operating Officer and has shaken up management, and not suprisingly, there are analysts now calling for Mr. Zuckerberg to step aside and install a new CEO.

Yet, Mr. Zuckerberg has been wildly successful.  Much more than almost anyone else in American business today.  He may well feel he needs no advice.  But…. what do you suppose Steve Jobs would tell him to do? 

Recall that Mr. Jobs was once the young head of Apple, only to be displaced by former Pepsi exec John Sculley — and run out of Apple.  As everyone now famously knows, after a string of Apple CEOs led the company to the brink of disaster Mr. Jobs agreed to return and completely turned around Apple making it the most successful tech company of the last decade.  Given what we've observed of Mr. Jobs career, and read in his biography, what advice might he give Mr. Zuckerberg? 

  • Don't give up your job.  Not even partly.  If you create a "shadow" or "co" CEO you'll be gone soon enough.  Lead, quit or make the Board fire you.  If you had the vision to take the company this far, why would you quit? 
  • Nothing is more important than product.  Make Facebook's the best in the world.  Nothing less will allow a tech company to survive, much less thrive.  Don't become so involved with financials and analysts that you lose sight of your #1 job, which is to make the very, very best social media product in the world.  Never stop improving and perfecting.  If your product isn't obviously superior to other solutions you haven't accomplished your #1 priority.
  • Be unique.  Make sure your products fulfill needs no one else fulfills – at least not well.  Meet unserved and underserved needs so that people talk about your product and what it does – not how much it costs.  Make sure that Facebook has devoted, diehard customers that believe your products meet their needs so well they would not consider your competition.
  • Don't ask customers what they want – give them what they need.  Understand the trends and create future scenarios so you are constantly striving to create a better future, not just improve on history.  Never look backward at what you've done, but instead always look forward at creating what noone else has ever done.  Push your staff to create solutions that meet user needs so well that you can tell customers why they need your product in ways they never before considered.  
  • Turn your product releases into a show.  Don't just run out new products willy-nilly, or on a random timeline.  Make sure you bundle products together and make a big show of each release so you can describe the upgrades, benefits and superiority of what you offer for customers.  People need to understand the trends you are meeting, and need to see the future scenario you are creating, and you have to tell them that story or they won't "get it."
  • Price for profit.  You run a business, not a hobby or not-for-profit society.  If you do the product right you shouldn't even be talking about price – so price to make ridiculous margins by industry standards.  At Apple, Next and Pixar the products were never the cheapest, but they accomplished what customers needed so well that we could price high enough to make margins that supported additional product development.  And you can't remain the best solution if you don't have enough margin to keep developing future products.
  • Don't expect products to sell themselves.  Be the #1 passionate spokesperson for the elegance and superiority of your products.  Never stop beating the drum for the unique capability and superiority of your product, in every meeting, all the time, never ending.  People like to "revert to the mean" so you have to keep telling them that isn't good enough – and you have something far superior that will greatly improve their success.
  • Never miss an opportunity to compare your products to competition and tell everyone why your products are far better.  Don't disparage the competition, but constantly reinforce that you are first, you are ahead of everyone else, you are far better — and the best is yet to come!  Competition is everywhere, and listen to the Andy Groves advice "only the paranoid survive."  You aren't satisfied with what the competition offers, and customers should not be satisfied either.  Every once in a while give people a small glimpse as to the radically different world you see in 3-5 years so they buy what you are selling in order to prepare for that future world.
  • Identify key customers that need your solution and SELL THEM.  Disney needed Pixar, so we made sure they knew it.  Identify the customers who can gain the most from doing business with you and SELL THEM.  Turn them into lead customers, obtain their testimonials and spread the word.  If GM isn't your target, who is?  Find them and sell them, then tell us all how you will build on those early accounts to eventually dominate the market – even displacing current solutions that are more popular.  If GM is your target then make the changes you need to make so you can SELL THEM.  Everyone wants to do business with a winner, so you must show you are a winner.
  • Identify 5 of your competition's biggest customers (at Google, Yahoo, Linked-in, etc.) and make them yours.  Demonstrate your solutions are superior with competitive wins.
  • Hire someone who can talk to the financial community for you – and do it incredibly well.  While you focus on future markets and solutions someone has to tell this story to the financial analysts in their lingo so they don't lose faith (and they are a sacrilegious lot who have no faith.)  Keep Facebook out of the forecasting game, but you MUST create and maintain good communication with analysts so you need someone who can tell the story not only with products and case studies but numbers.  Facebook is a disruptive innovation company, so someone has to explain why this will work.  You blew the IPO road show horribly by showing up at meetings in a hoodie – so now you need to make amends by hiring someone who will give them faith that you know what you're doing and can make it happen.

These are my ideas for what Steve Jobs would tell Mark Zuckerberg.  What are yours?  What do you think the #1 CEO of the last decade would say to the young, embattled CEO as he faces his first test under fire leading a public company?

Why Tesla is Right, and GM and Ford are Not

The news is not good for U.S. auto companies.  Automakers are resorting to fairly radical promotional programs to spur sales.  Chevrolet is offering a 60-day money back guarantee.  And Chrysler is offering 90 day delayed financing.  Incentives designed to make you want to buy a car, when you really don't want to buy a car.  At least, not the cars they are selling.

On the other hand, the barely known, small and far from mainstream Tesla motors gave one of its new Model S cars to Wall Street Journal reviewer Dan Neil, and he gave it a glowing testimonial.  He went so far as to compare this 4-door all electric sedan's performance with the Lamborghini and Ford GT supercars.  And its design with the Jaguar.  And he spent several paragraphs on its comfort, quiet, seating and storage – much more aligned with a Mercedes S series.

There are no manufacturer incentives currently offered on the Tesla Model S.

What's so different about Tesla and GM or Ford?  Well, everything.  Tesla is a classic case of a disruptive innovator, and GM/Ford are classic examples of old-guard competitors locked into sustaining innovation.  While the former is changing the market – like, say Amazon is doing in retail – the latter keeps laughing at them – like, say Wal-Mart, Best Buy, Circuit City and Barnes & Noble have been laughing at Amazon.

Tesla did not set out to be a car company, making a slightly better car.  Or a cheaper car.  Or an alternative car.  Instead it set out to make a superior car. 

Its initial approach was a car that offered remarkable 0-60 speed performance, top end speed around 150mph and superior handling.  Additionally it looked great in a 2-door European style roadster package. Simply, a wildly better sports car.  Oh, and to make this happen they chose to make it all-electric, as well. 

It was easy for Detroit automakers to scoff at this effort – and they did.  In 2009, while Detroit was reeling and cutting costs – as GM killed off Pontiac, Hummer, Saab and Saturn – the famous Bob Lutz of GM laughed at Tesla and said it really wasn't a car company.  Tesla would never really matter because as it grew up it would never compete effectively. According to Mr. Lutz, nobody really wanted an electric car, because it didn't go far enough, it cost too much and the speed/range trade-off made them impractical.  Especially at the price Tesla was selling them. 

Meanwhile, in 2009 Tesla sold 100% of its production.  And opened its second dealership. As manufacturing plants, and dealerships, for the big brands were being closed around the world.

Like all disruptive innovators, Tesla did not make a car for the "mass market."  Tesla made a great car, that used a different technology, and met different needs.  It was designed for people who wanted a great looking roadster, that handled really well, had really good fuel economy and was quiet.  All conditions the electric Tesla met in spades.  It wasn't for everyone, but it wasn't designed to be.  It was meant to demonstrate a really good car could be made without the traditional trade-offs people like Mr. Lutz said were impossible to overcome.

Now Tesla has a car that is much more aligned with what most people buy.  A sedan.  But it's nothing like any gasoline (or diesel) powered sedan you could buy.  It is much faster, it handles much better, is much roomier, is far quieter, offers an interface more like your tablet and is network connected.  It has a range of distance options, from 160 to 300 miles, depending up on buyer preferences and affordability.  In short, it is nothing like anything from any traditional car maker – in USA, Japan or Korea. 

Again, it is easy for GM to scoff.  After all, at $97,000 (for the top-end model) it is a lot more expensive than a gasoline powered Malibu. Or Ford Taurus. 

But, it's a fraction of the price of a supercar Ferrari – or even a Porsche Panamera, Mercedes S550, Audi A8, BMW 7 Series, or Jaguar XF or XJ -  which are the cars most closely matching size, roominess and performance. 

And, it's only about twice as expensive as a loaded Chevy Volt – but with a LOT more advantages.  The Model S starts at just over $57,000, which isn't that much more expensive than a $40,000 Volt.

In short, Tesla is demonstrating it CAN change the game in automobiles.  While not everybody is ready to spend $100k on a car, and not everyone wants an electric car, Tesla is showing that it can meet unmet needs, emerging needs and expand into more traditional markets with a superior solution for those looking for a new solution.  The way, say, Apple did in smartphones compared to RIM.

Why didn't, and can't, GM or Ford do this?

Simply put, they aren't even trying. They are so locked-in to their traditional ideas about what a car should be that they reject the very premise of Tesla.  Their assumptions keep them from really trying to do what Tesla has done – and will keep improving – while they keep trying to make the kind of cars, according to all the old specs, they have always done.

Rather than build an electric car, traditionalists denounce the technology.  Toyota pioneered the idea of extending a gas car into electric with hybrids – the Prius – which has both a gasoline and an electric engine. 

Hmm, no wonder that's more expensive than a similar sized (and performing) gasoline (or diesel) car.   And, like most "hybrid" ideas it ends up being a compromise on all accounts.  It isn't fast, it doesn't handle particularly well, it isn't all that stylish, or roomy.  And there's a debate as to whether the hybrid even recovers its price premium in less than, say, 4 years.  And that is all dependent upon gasoline prices.

Ford's approach was so clearly to defend and extend its traditional business that its hybrid line didn't even have its own name!  Ford took the existing cars, and reformatted them as hybrids, with the Focus Hybrid, Escape Hybrid and Fusion Hybrid.  How is any customer supposed to be excited about a new concept when it is clearly displayed as a trade-off; "gasoline or hybrid, you choose."  Hard to have faith in that as a technological leap forward.

And GM gave the market Volt.  Although billed as an electric car, it still has a gasoline engine.  And again, it has all the traditional trade-offs.  High initial price, poor 0-60 performance, poor high-end speed performance, doesn't handle all that well, isn't very stylish and isn't too roomy.  The car Tesla-hating Bob Lutz put his personal stamp on.  It does achieve high mpg – compared to a gasoline car – if that is your one and only criteria. 

Investors are starting to "get it."

There was lots of excitement about auto stocks as 2010 ended.  People thought the recession was ending, and auto sales were improving.  GM went public at $34/share and rose to about $39.  Ford, which cratered to $6/share in July, 2010 tripled to $19 as 2011 started. 

But since then, investor enthusiasm has clearly dropped, realizing things haven't changed much in Detroit – if at all.  GM and Ford are both down about 50% – roughly $20/share for GM and $9.50/share for Ford.

Meanwhile, in July of 2010 Tesla was about $16/share and has slowly doubled to about $31.50. Why?  Because it isn't trying to be Ford, or GM, Toyota, Honda or any other car company.  It is emerging as a disruptive alternative that could change customer perspective on what they should expect from their personal transportation. 

Like Apple changed perspectives on cell phones.  And Amazon did about retail shopping. 

Tesla set out to make a better car.  It is electric, because the company believes that's how to make a better car.  And it is changing the metrics people use when evaluating cars. 

Meanwhile, it is practically being unchallenged as the existing competitors – all of which are multiples bigger in revenue, employees, dealers and market cap of Tesla – keep trying to defend their existing business while seeking a low-cost, simple way to extend their product lines.  They largely ignore Tesla's Roadster and Model S because those cars don't fit their historical success formula of how you win in automobile competition. 

The exact behavior of disruptors, and sustainers likely to fail, as described in The Innovator's Dilemma (Clayton Christensen, HBS Press.)

Choosing to be ignorant is likely to prove very expensive for the shareholders and employees of the traditional auto companies. Why would anybody would ever buy shares in GM or Ford?  One went bankrupt, and the other barely avoided it.  Like airlines, neither has any idea of how their industry, or their companies, will create long-term growth, or increase shareholder value.  For them innovation is defined today like it was in 1960 – by adding "fins" to the old technology.  And fins went out of style in the 1960s – about when the value of these companies peaked.

Microsoft Win8 Tablet Is Not a Game Changer

While there is an appropriately high interest in the Win8 Tablet announcement from Microsoft today, there is no way it is going to be a game changer.  Simply because it was never intended to be.

Game changers meet newly emerging, unmet needs, in new ways.  People are usually happy enough, until they see the new product/solution and realize "hey, this helps me do something I couldn't do before" or "this helps me solve my problem a lot better."  Game changers aren't a simple improvement, they allow customers to do something radically different.  And although at first they may well appear to not work too well, or appear too expensive, they meet needs so uniquely, and better, that they cause people to change their behavior.

Motorola invented the smart phone.  But Motorola thought it was too expensive to be a cell phone, and not powerful enough to be a PC.  Believing it didn't fit existing markets well, Motorola shelved the product.

Apple realized people wanted to be mobile.  Cell phones did talk and text OK – and RIM had pretty good email.  But it was limited use.  Laptops had great use, but were too big, heavy and cumbersome to be really mobile.  So Apple figured out how to add apps to the phone, and use cloud services support, in order to make the smart phone fill some pretty useful needs – like navigation, being a flashlight, picking up tweets – and a few hundred thousand other things – like doctors checking x-rays or MRI results.  Not as good as a PC, and somewhat on the expensive side for the device and the AT&T connection, but a whole lot more convenient.  And that was a game changer.

From the beginning, Windows 8 has been – by design – intended to defend and extend the Windows product line. Rather than designed to resolve unmet needs, or do things nobody else could do, or dramatically improve productivity over all other possible solutions, Windows 8 was designed to simply extend Windows so (hopefully) people would not shift to the game changer technology offered by Apple and later Google. 

The problem with trying to extend old products into new markets is it rarely works.  Take for example Windows 7.  It was designed to replace Windows Vista, which was quite unpopular as an upgrade from Windows XP.  By most accounts, Windows 7 is a lot better.  But, it didn't offer users anything that that made them excited to buy Windows 7.  It didn't solve any unmet needs, or offer any radically better solutions.  It was just Windows better and faster (some just said "fixed.")

Nothing wrong with that, except Windows 7 did not address the most critical issue in the personal technology marketplace.  Windows 7 did not stop the transition from using PCs to using mobile devices.  As a result, while sales of app-enabled smartphones and tablets exploded, sales of PCs stalled:

PC shipments stalled 6-2012
Chart reproduced with permission of Business Insider Intelligence 6/12/12 courtesy of Alex Cocotas

People are moving to the mobility provided by apps, cloud services and the really easy to use interface on modern mobile devices.  Market leading cell phone maker, Nokia, decided it needed to enter smartphones, and did so by wholesale committing to Windows7.  But now the CEO, Mr. Elop (formerly a Microsoft executive,) is admitting Windows phones simply don't sell well.  Nobody cares about Microsoft, or Windows, now that the game has changed to mobility – and Windows 7 simply doesn't offer the solutions that Apple and Android does.  Not even Nokia's massive brand image, distribution or ad spending can help when a product is late, and doesn't greatly exceed the market leader's performance.  Just last week Nokia announced it was laying off another 10,000 employees.

Reviews of Win8 have been mixed.  And that should not be surprising.  Microsoft has made the mistake of trying to make Win8 something nobody really wants.  On the one hand it has a new interface called Metro that is supposed to be more iOS/Android "like" by using tiles, touch screen, etc.  But it's not a breakthrough, just an effort to be like the existing competition.  Maybe a little better, but everyone believes the leaders will be better still with new updates soon.  By definition, that is not game changing.

Simultaneously, with Win8 users can find their way into a more historical Windows inteface.  But this is not obvious, or intuitive.  And it has some pretty "clunky" features for those who like Windows.  So it's not a "great" Windows solution that would attract developers today focused on other platforms.

Win8 tries to be the old, and the new, without being great at either, and without offering anything that solves new problems, or creates breakthroughs in simplicity or performance.

Do you know the story about the Ford Edsel?

By focusing on playing catch up, and trying to defend & extend the Windows history, Microsoft missed what was most important about mobility – and that is the thousands of apps.  The product line is years late to market, short on apps, short on app developers and short on giving anyone a reason to really create apps for Win8.

Some think it is good if Microsoft makes its own tablet – like it has done with xBox.  But that really doesn't matter.  What matters is whether Microsoft gives users and developers something that causes them to really, really want a new platform that is late and doesn't have the app base, or the app store, or the interfaces to social media or all the other great thinks they already have come to expect and like about their tablet (or smartphone.) 

When iOS came out it was new, unique and had people flocking to buy it.  Developers could only be mobile by joining with Apple, and users could only be mobile by buying Apple.  That made it a game changer by leading the trend toward mobility. 

Google soon joined the competition, built a very large, respectable following by chasing Apple and offering manufacturers an option for competing with Apple. 

But Microsoft's new entry gives nobody a reason to develop for, or buy, a Win8 tablet – regardless of who manufactures it.  Microsoft does not deliver a huge, untapped market.  Microsoft doesn't solve some large, unmet need.  Microsoft doesn't promise to change the game to some new, major trend that would drive early adopters to change platforms and bring along the rest of the market. 

And making a deal so a dying company, on the edge of bankruptcy – Barnes & Noble – uses your technology is not a "big win."  Amazon is killing Barnes & Noble, and Microsoft Windows 8 won't change that.  No more than the Nook is going to take out Kindle, Kindle Fire, Galaxy Tab or the iPad.  Microsoft can throw away $300million trying to convince people Win8 has value, but spending investor money on a dying businesses as a PR ploy is just stupid.

Microsoft is playing catch up.  Catch up with the user interface.  Catch up with the format.  Catch up with the device size and portability.  Catch up with the usability (apps).  Just catch up. 

Microsoft's problem is that it did not accept the PC market was going to stall back in 2008 or 2009.  When it should have seen that mobility was a game changing trend, and required retooling the Microsoft solution suite.  Microsoft dabbled with music mobility with Zune, but quickly dropped the effort as it refocused on its "core" Windows.  Microsoft dabbled with mobile phones across different solutions including Kin – which it dropped along with Microsoft Mobility.  Back again to focusing on operating systems.  By maintaining its focus on Windows Microsoft hoped it could stop the trend, and refused to accept the market shift that was destined to stall its sales.

Microsoft stock has been flat for a decade.  It's recent value improvement as Win8 approaches launch indicates that hope beats eternally in some investors' breasts for a return of Microsoft software dominance.  But those days are long past.  PC sales have stalled, and Windows is a product headed toward obsolescence as competitors make ever better, more powerful mobile platforms and ecosystems.  If you haven't sold Microsoft yet, this may well be your last chance above $30.  Ever.

Buy Facebook Now – Catch a lucky break!

On May 18 Facebook went public with an opening price of $38/share.  Now, after just 2 weeks, it's more like $28.  Ouch – a 25%+ drop in such a short time makes nobody happy.  Except buyers.  And if you are interested in capturing a high rate of return with little risk, this is your lucky break!

The values of publicly traded companies change, often dramatically, based upon changes in performance and investor expectations about the future.  Trying to profit off fast price changes is the world of traders – and the vast majority of them lose fortunes rather than create them.  Knowing how to ignore whipsaw events, and invest in good companies when they are out of favor is important to long-term wealth creation. 

Investors make money by understanding product markets and the companies supplying them, then investing in companies that build upon trends to create revenue growth with high rates of return over several years.  In the forgettable 1999 movie "Blast from the Past" (Brendan Fraser, Christopher Walken, Sissy Spacek) a family moves into its nuclear blast shelter in 1960 during a panic, and doesn't come out for 35 years.  Fortunately, the father had bought shares of AT&T and other companies aligned with 1960 trends, and the family discovers upon re-emergence it is quite wealthy. 

Creating investment wealth means acting like them, buying shares in companies building on trends so you can hold shares for years without much worry.

If ever there was a company aligned with trends, it is Facebook.  The company did not create 900million users in 8 years by being lucky.  Facebook is the ultimate information era company.  Facebook is not a fad – any more than television or telephones were fads in 1960.  Just like they provided fundamental new ways of acquiring and disseminating information Facebook is the newest, most efficient and effective way for connecting and communicating in 2012.

When television appeared the mass population said "why?" There was radio, which was cheap, and older users said TV reduced the use of imagination.  And television was not available many hours per day.  But it didn't take long for CBS and its brethren to prove it could attract eyeballs, and soon Proctor & Gamble started paying for programming so it could promote its soaps (remember "soap operas?") Soon other companies developed programs strictly so they could promote their products. The "Ted Mack Amateur Hour" was sponsored by Geritol, and viewers were reminded of that over and over for 30 minutes every week.  Eventually the TV ad model changed, but the lesson is clear -  when you can attract eyeballs it has value and there will be businesses creative enough to take advantage.

Now television watching is declining.  Instead, people are spending more time on the internet – including via mobile devices.  And the location attracting the most people, and by far for the most minutes per day, is Facebook.  Facebook's access to so many people, so often, creates an audience many businesses and non-profits want to tap. 

Further, in the networked world Facebook not only has eyeballs, it delivers up to those eyeballs some 9 million apps, and knows what everyone wants, where they come from and where they go next.  Beyond the industrial-era business of selling ads (like Google,) Facebook's information business has significant value for anyone trying to promote or sell a solution.  Facebook is a repository of information about people, and their behavior, never before seen, understood or developed for use.

Around the IPO, General Motors decided to drop its  Facebook advertising.  That freaked some investors.  Cries arose that social media is somehow broken, and unable to develop a business model. 

Let's keep in mind who we're talking about here – GM.  Not the most innovative, forward thinking company, to put it mildly.  GM, like a lot of other plodding, but big spending, large companies has approached social media like it is just television on the web – and would prefer to simply put up a television ad on a Facebook like link.  Whoa! That would be akin to a 1960s TV ad that was simply the text from a newspaper ad.  Nobody would read it, and it simply wouldn't work. 

Television required a new kind of communication to reach customers – and social media does as well.  TV required the ad be entertaining, with movement, product use demonstrations, and video plus audio to go with the words.  Connecting with users was harder, but the message (and connection) could be far more robust.  And that is what advertisers are being forced to learn about Facebook/Social.  It has new requirements, but once understood companies can be remarkably successful at connecting with potential customers – far more than the traditional one-way approach of historical advertising.

Paid promotion on Facebook is just the tip of the iceberg – a one-way approach to advertising sure to create short-term revenue but not terribly robust.  Beyond that, social media changes everything. Retail, for example, is fast shifting from pushing inventory to being all about understanding the customer and offering them what they need in an anticipatory way (think Amazon rather than Best Buy.)  And nowhere can you better understand customer needs than by social media participation.  By being an information company, rather than an industrial company, FB is remarkably well positioned to create growth – for everybody that figures out how to use this remarkable platform.

As Facebook's shares kept falling this week, more attention was paid to whether traditional advertisers would buy FB.  And much was made about whether the "metrics" were there to justify social media investments.  This micro-management approach clearly misses the main point.  People are already on Facebook, their numbers are growing, their uses are growing, their time on the site is growing, and the benefits of using Facebook are growing.  Trying to measure Facebook use the way you would measure a print ad – or even a Google Adword buy – is simply using the wrong tool.

When P&G first started producing television "soaps" their competition sat back and said "look at what television advertising costs, compared to print and compared to pushing products into the local stores.  What is the return for each of those television shows?  Can it be justified? I think it is smarter to keep doing what we've done while P&G throws money at ads you can't measure."  By moving beyond the historically myopic view of trying to find returns at the micro level P&G quickly became (at the time) the world's largest consumer goods company.  Early TV advertisers followed the trend, knowing their participation would create returns far in excess of doing more of the old thing. And that is the direction of social media.

There was a lot of anticipatory excitement for the Facebook IPO.  Lots of people wanted shares, and couldn't buy them in advance.  The public, and the Morgan Stanley investment bankers, clearly thought the shares would go up.  Oops.  But that's a lucky thing for investors. Especially small investors, usually unable to participate in a "hot" IPO.  Now anybody can buy FB shares at a 25% discount to the offering price – a better deal than the institutional buyers that usually get the "sweet" deal little guys never see. 

If you are an employee, short term you might be unhappy.  But if you are an investor, be happy that worries about Greece, the Euro's future, domestic politics, a lousy jobs report and simple myths like  "sell in May and go away" have been a drag on equities this month – and diminished interest in Facebook. 

Buy FB shares, then forget about them for a while.  What you care about isn't the value of FB shares in 4 days, 4 weeks or 4 months – you care about 4 years.  If you missed the chance to buy Microsoft in 1986, or Amazon in 1997, or Apple in 2000, or Google in 2004 then don't miss this one.  There will be volatility, but the trends are all in your favor.

Sell Google – Lot of Heat, Not Much Light

With revenues up 39% last quarter, it's far too soon to declare the death of Google.  Even in techville, where things happen quickly, the multi-year string of double-digit higher revenues insures survival – at least for a while. 

However, there are a lot of problems at Google which indicate it is not a good long-term hold for investors.  For traders there is probably money to be made, as this long-term chart indicates:

Google long term chart 5-3.12
Source: Yahoo Finance May 3, 2012

While there has been enormous volatility, Google has yet to return to its 2007 highs and struggles to climb out of the low $600/share price range.  And there's good reason, because Google management has done more to circle the wagons in self-defense than it has done to create new product markets.

What was the last exciting product you can think of from Google?  Something that was truly new, innovative and being developed into a market changer?  Most likely, whatever you named is something that has recently been killed, or receiving precious little management attention.  For a company that prided itself on innovation – even reportedly giving all employees 20% of their time to do whatever they wanted – we see management actions that are decidedly not about promoting innovation into the market, or making sustainable efforts to create new markets:

  • killed Google Powermeter, a project that could have redefined how we buy and use electricity
  • killed Google Wave, a product that offered considerable group productivity improvement
  • killed Google Flu Vaccine Finder offering new insights for health care from data analysis
  • killed Google Related which could have helped all of us search beyond keywords
  • killed Google synch for Blackberry as it focuses on selling Android
  • killed Google Talk mobile app
  • killed the OnePass Google payment platform for publishers
  • killed Google Labs – once its innovation engine
  • and there are rumors it is going to kill Google Finance

All of these had opportunities to redefine markets.  So what did Google do with these redeployed resources:

  • Bought Motorola for $12.5billion, which it hopes to take toe-to-toe with Apple's market leading iPhone, and possibly the iPad.  And in the process has aggravated all the companies who licensed Android and developed products which will now compete with Google's own products.  Like the #1 global handset manufacturer Samsung.  And which offers no clear advantage to the Apple products, but is being offered at a lower price.
  • Google+, which has become an internal obsession – and according to employees consumes far more resources than anyone outside Google knows.  Google+ is a product going toe-to-toe with Facebook, only with no clear advantages. Despite all the investment, Google continues refusing to publish any statistics indicating that Google+ is growing substantially, or producing any profits, in its catch-up competition with Facebook.

In both markets, mobile phones and social media, Google has acted very unlike the Google of 2000 that innovated its way to the top of web revenues, and profits. Instead of developing new markets, Google has chosen to undertaking 2 Goliath battles with enormously successful market leaders, but without any real advantage.

Google has actually proven, since peaking in 2007, that its leadership is remarkably old-fashioned, in the worst kind of way.  Instead of focusing on developing new markets and opportunities, management keeps focusing on defending and extending its traditional search business – and has proven completely inept at developing any new revenue streams.  Google bought both YouTube and Blogger, which have enormous user bases and attract incredible volumes of page views – but has yet to figure out how to monetize either, after several years.

For its new market innovations, rather than setting up teams dedicated to turning its innovations into profitable revenue growth engines Google leadership keeps making binary decisions.  Messrs. Page and Brin either decide the product and market aren't self-developing, and kill the products, or simply ignore the business opportunity and lets it drift.  Much like Microsoft – which has remained focused on Windows and Office while letting its Zune, mobile and other products drift into oblivion – or lose huge amounts of money like Bing and for years XBox.

I personalized that last comment onto the Google founders intentionally.  The biggest news out of Google lately has been a pure financial machination done for purely political reasons.  Announcing a stock dividend that effectively creates a 2-for-1 split, only creating a new class of non-voting "C" stock to make sure the founders never lose voting control.  This was adding belt to suspenders, because the founders already own the Class B stock giving them 66% voting control.  The purpose was purely to make sure nobody every tries to buy, or otherwise take over Google, because the founders will always have enough votes to make such an action impossible.

The founders explained this as necessary so they could retain control and make "big bets."  If "big bets" means dumping billions into also-ran products as late entrants, then they have good reason to fear losing company control.  Making big bets isn't how you win in the information technology industry.  You win by creating new markets, with new solutions, before the competition does it. 

Apple's huge wins in iPod, iTouch, iTunes, iPhone and iPad weren't "big bets."  The Apple R&D budget is 1/8 Microsoft's.  It's not big bets that win, its developing innovation, putting it into the market, shepharding it through a series of learning cycles to make it better and better and meeting previously unmet – often unidentified – needs.  And that's not what the enormous investments in mobile handsets and Google+ are about.

Although this stock split has no real impact on Google today, it is a signal.  A signal of a leadership team more obsessed with their own control than doing good for investors.  It is clearly a diversion from creating new products, and opening new markets.  But it was the centerpiece of communication at the last earnings call.  And that is a avery bad signal for investors.  A signal that the leaders see things likely to become much worse, with cash going out and revenue struggling, before too long.  So they are acting now to protect themselves.

Meanwhile, even as revenues grew 39% last quarter, there are signs of problems in Google's "core" market leadership is so fixated on defending.  As this chart shows, while volume of paid ads is going up, the price is now going down. Google price per click 4-2012

Source: Silicon Alley Insider

Prices go down when your product loses value.  You have to chase revenue.  Remember Proctor & Gamble's "Basics" product line launch?  Chasing revenue by cutting price.  In the short-term it can be helpful, but long-term it is not in your best interest.  Google isn't just cutting price on its incremental sales, but on all sales.  Increasingly advertisers are becoming savvy about what they can expect from search ads, and what they can expect from other venues – like Facebook – and the prices are reflecting expectations.  In a recent Strata survey the top 2 focus for ad executives were "social" (69%) and "display" (71%) – categories where Facebook leads – and both are ahead of "search."

At Facebook, we know the user base is around 800million.  We also know it's now the #1 site on the internet – more hits than Google.  And Facebook has much longer average user times on site.  All things attractive to advertisers.  Facebook is acquiring Instagram, which positions it much stronger on mobile devices, thus growing its market.  And while Google was talking about share splits, Facebook recently announced it was making Facebook email integrated into the Facebook platform much easier to use (which is a threat to Gmail) and it was adding a new analytics suite to help advertisers understand ad performance – like they are accustomed to at Google.  All of which increases Facebook's competitiveness with Google, as customers shift increasingly to social platforms.

As said at the top of this article, Google won't be gone soon.  But all signs point to a rough road for investors.  The company is ditching its game changing products and dumping enormous sums into me-too efforts trying to catch well healed and well managed market leaders.  The company has not created an ability to take new innovations to market, and remains stuck defending and extending its existing business lines.  And the top leaders just signaled that they weren't comfortable they could lead the company successfully, so they implemented new programs to make sure nobody could challenge their leadership. 

There are big fires burning at Google.  Unfortunately, burning those resources is producing a lot of heat – but not much light on a successful future.  It's time to sell Google.

Don’t leave ObamaCare to the Attorneys!

No businessperson thinks the way to solve a business problem is via the courts.  And no issue is larger for American business than health care.  Despite all the hoopla over the Supreme Court reviews this week, this is a lousy way for America to address an extremely critical area.

The growth of America's economy, and its global competitiveness, has a lot riding on health care costs. Looking at the table, below, it is clear that the U.S. is doing a lousy job at managing what is the fastest growing cost in business (data summarized from 24/7 Wall Street.)

Healthcare costs 2011
While America is spending about $8,000 per person, the next 9 countries (in per person cost) all are grouped in roughly the $4,000-$5,000 cost — so America is 67-100% more costly than competitors.  This affects everything America sells – from tractors to software services – forcing higher prices, or lower margins.  And lower margins means less resources for investing in growth!

American health care is limiting the countries overall economic growth capability by consuming dramatically more resources than our competitors.  Where American spends 17.4% of GDP (gross domestic product) on health care, our competitors are generally spending only 11-12% of their resources.  This means America is "taxing" itself an extra 50% for the same services as our competitive countries.  And without demonstrably superior results.  That is money which Americans would gain more benefit if spent on infrastructure, R&D, new product development or even global selling!

Americans seem to be fixated on the past.  How they used to obtain health care services 50 years ago, and the role of insurance 50 years ago.  Looking forward, health care is nothing like it was in 1960.  The days of "Dr. Welby, MD" serving a patient's needs are long gone.  Now it takes teams of physicians, technicians, nurses, diagnosticians, laboratory analysts and buildings full of equipment to care for patients.  And that means America needs a medical delivery system that allows the best use of these resources efficiently and effectively if its citizens are going to be healthier, and move into the life expectancies of competitive countries.

Unfortunately, America seems unwilling to look at its competitors to learn from what they do in order to be more effective.  It would seem obvious that policy makers and those delivering health care could all look at the processes in these other 9 countries and ask "what are they doing, how do they do it, and across all 9 what can we see are the best practices?" 

By studying the competition we could easily learn not only what is being done better, but how we could improve on those practices to be a world leader (which, clearly, we now are not.)  Yet, for the most part those involved in the debate seem adamant to ignore the competition – as if they don't matter.  Even though the cost of such blindness is enormous.

Instead, way too much time is spent asking customers what they want.  But customers have no idea what health care costs.  Either they have insurance, and don't care what specific delivery costs, or they faint dead away when they see the bill for almost any procedure.  People just know that health care can be really good, and they want it.  To them, the cost is somebody else's problem. That offers no insight for creating an effective yet simultaneously efficient system.

America needs to quit thinking it can gradually evolve toward something better.  As Clayton Christensen points out in his book "The Innovator's Prescription: A Disruptive Solution for Health Care" America could implement health care very differently.  And, as each year passes America's competitiveness falls further behind – pushing the country closer and closer to no choice but being disruptive in health care implementation.  That, or losing its vaunted position as market leader!

Is the "individual mandate" legal?  That seems to be arguable.  But, it is disruptive.  It seems the debate centers more on whether Americans are willing to be disruptive, to do something different, than whether they want to solve the problem.  Across a range of possibilities, anything that disrupts the ways of the past seems to be argued to death.  That isn't going to solve this big, and growing, problem.  Americans must become willing to accept some radical change.

The simple approach would be to look at programs in Oregon, Massachusetts and all the states to see what has worked, and what hasn't worked as well.  Instead of judging them in advance, they could be studied to learn.  Then America could take on a series of experiments.  In isolated locations.  Early adopter types could "opt in" on new alternative approaches to payment, and delivery, and see if it makes them happy.  And more stories could be promulgated about how alternatives have worked, and why, helping everyone in the country remove their fear of change by seeing the benefits achieved by early leaders.

Health care delivery, and its cost, in America is a big deal.  Just like the oil price shocks in the 1970s roiled cost structures and threatened the economy, unmanagable health care delivery and cost threatens the country's economic future.  American's surely don't expect a handful of lawyers in black robes to solve the problem.

America needs to learn from its competition, be willing to disrupt past processes and try new approaches that forge a solution which not only delivers better than anyone else (a place where America does seem to still lead) but costs less.  If America could be the first on the moon, first to create the PC and first to connect everyone on smartphones this is a problem which can be solved – but not by attorneys or courts!

The Good, Bad and Ugly – Apple, Google and Dell

The Good – Apple

Apple's latest news to start paying a big dividend, and buying back shares, is a boon for investors.  And it signals the company's future strength.  Often dividends and share buybacks indicate a company has run out of growth projects, so it desires to manipulate the stock price as it slowly pays out the company's assets.  But, in Apple's (rare) case the company is making so much profit from existing businesses that they are running out of places to invest it – thus returning to shareholders!

With a $100B cash hoard, Apple anticipates generating at least another $150B of free cash flow, over and above needs for ongoing operations and future growth projects, the next 3 years.  With so much cash flowing the company is going to return money to investors so they can invest in other growth projects beyond those Apple is developing.  Exactly what investors want! 

I've called Apple the lowest risk, highest return stock for investors (the stock to own if you can only own one stock) for several years.  And Apple has not disappointed.  At $600/share the stock is up some 75% over the last year (from about $350,) and up 600% over the last 5 years (from about $100.)  And now the company is going to return investors $10.60/year, currently 1.8% – or about 4 times your money market yield, or about 75% of what you'd get for a 10 year Treasury bond. Yet investors still have a tremendous growth in capital opportunity, because Apple is still priced at only 14x this year's projected earnings, and 12 times next year's projected earnings!

Apple keeps winning.  It's leadership in smart phones continues, as the market converts from traditional cell phones to smart phones.  And its lead in tablets remains secure as it sells 3 million units of the iPad 3 over the weekend.  In every area, for several years, Apple has outperformed expectations as it leads the market shift away from traditional PCs and servers to mobile devices and using the "cloud." 

The Bad – Google

Google was once THE company to emulate.  At the end of 2008 its stock peaked at nearly $750/share, as everyone thought Google would accomplish nothing short of world domination (OK, a bit extreme) via its clear leadership in search and the way it dominated internet usage.  But that is no longer the case, as Google is being eclipsed by upstarts such as Facebook and Groupon.

What happened?  Even though it had a vaunted policy of allowing employees to spend 20% of their time on anything they desired, Google never capitalized on the great innovations created.  Products like Google Wave and Google Powermeter were created, launched – and then subsequently left without sponsors, management attention, resources or even much interest.  Just as recently happened with GoogleTV.

They floundered, despite identifying very good solutions for pretty impressive market needs, largely because management chose to spend almost all its attention, and resources, defending and extending its on-line ad sales created around search. 

  • YouTube is a big user environment, and one of the most popular sites on the web.  But Google still hasn't really figured out how to generate revenue, or profit, from the site.  Despite all the user activity it produces a meager $1.6B annual revenue – and nearly no profit.
  • Android may have share rivaling Apple in smartphones, but it is nowhere in tablets and thus lags significantly in the ovarall market with share only about half iOS.  Worse, Android smartphones are not nearly as profitable as iPhones, and now Google has made an enormous, multi-billion investment in Motorola to enter this business – and compete with its existing smartphone manufacturers (customers.)  To date Android has been a product designed to defend Google's historical search business as people go mobile – and it has produced practically no revenue, or profit.
  • Chrome browsers came on the scene and quickly grew share beyond Firefox.  But, again, Google has not really developed the product to reach a dominant position.  While it has good reviews, there has been no major effort to make it a profitable product.  Possibly Google fears fighting IE will create a "money pit" like Bing has become for Microsoft in search?
  • Chromebooks were a flop as Google failed to invest in robust solutions allowing users to link printers, MP3 players, etc. – or utilize a wide suite of thin cloud-based apps.  Great idea, that works well, they are a potential alternative to PCs, and some tablet applications, but Google has not invested to make the product commercially viable.
  • Google tried to buy GroupOn to enter the "local" ad marketplace, but backed out as the price accelerated.  While investors may be happy Google didn't overpay, the company missed a significant opportunity as it then faltered on creating a desirable competitive product.  Now Google is losing the race to capture local market ads that once went to newspapers.

While Google chose to innovate, but not invest in market development, it missed several market opportunities.  And in the meantime Google allowed Facebook to sneak up and overtake its "domination" position. 

Facebook has led people to switch from using the internet as a giant library, navigated by search, to a social medium where referrals, discussions and links are driving more behavior.  The result has advertisers shifting their money toward where "eyeballs" are spending most of their time, and placing a big threat on Google's ability to maintain its historical growth.

Thus Google is now dumping billions into Google+, which is a very risky proposition.  Late to market, and with no clear advantage, it is extremely unclear if Google+ has any hope of catching Facebook.  Or even creating a platform with enough use to bring in a solid, and growing, advertiser base. 

The result is that today, despite the innovation, the well-known (and often good) products, and even all the users to its sites Google has the most concentrated revenue base among large technology companies.  95% of its revenues still come from ad dollars – mostly search.  And with that base under attack on all fronts, it's little wonder analysts and investors have become skeptical.  Google WAS a great company – but it's decisions since 2008 to lock-in on defending and extending its "core" search business has made the company extremely vulnerable to market shifts. A bad thing in fast moving tech markets.

Google investors haven't fared well either.  The company has never paid a dividend, and with its big investments (past and future planned) in search and handsets it won't for many years (if ever.)  At $635/share the stock is still down over 15% from its 2008 high.  Albeit the stock is up about 8.5% the last 12 months, it has been extremely volatile, and long term investors that bought 5 years ago, before the high, have made only about 7%/year (compounded.)

Google looks very much like a company that has fallen victim to its old success formula, and is far too late adjusting to market shifts.  Worse, its investments appear to be a company spending huge sums to defend its historical business, taking on massive gladiator battles against Apple and Facebook – two companies far ahead in their markets and with enormous leads and war chests. 

The Ugly – Dell

Go back to the 1990s and Dell looked like the company that could do no wrong.  It went head-to-head with competitors to be the leader in selling, assembling and delivering WinTel (Windows + Intel) PCs.  Michael Dell was a modern day hero to other leaders hoping to match the company's ability to focus on core markets, minimize investments in anything else, and be a world-class supply chain manager.  Dell had no technology or market innovation, but it was the best at beating down cost – and lowering prices for customers.  Dell clearly won the race to the bottom.

But the market for PCs matured.  And Dell has found itself one of the last bachelors at the dance, with few prospects.  Dell has no products in leading growth markets, like smartphones or tablets.  Nor even other mobile products like music or video.  And it has no software products, or technology innovation. Today, Dell is locked in gladiator battles with companies that can match its cost, and price, and make similarly slim (to nonexistent) margins in the generic business called PCs (like HP and Lenovo.)

Dell has announced it intends to challenge Apple with a tablet launch later in 2012.  This is dependent upon Microsoft having Windows 8 ready to go by October, in time for the holidays.  And dependent upon the hope that a swarm of developers will emerge to build the app base for things that already exist on the iPad and Android tablets.  The advantage of this product is as yet undefined, so the market is yet undefined.  The HOPE is that somehow, for some reason, there is a waiting world of people that have delayed purchase waiting on a Windows device – and will find the new Dell product superior to a $299 Apple 2 already available and with that 500,000 app store.

Clearly, Dell has waited way, way too long to deal with changing its business.  As its PC business flattens (and soon shrinks) Dell still has no smartphone products, and is remarkably late to the tablet business.  And it offers no clear advantage over whatever other products come from Windows 8 licensees.  Dell is in a brutal world of ever lower prices, shrinking markets and devastating competition from far better innovators creating much higher, and growing, profits (Apple and Amazon.)

For investors, the ride from a fast moving boat in the rapids into the swamp of no growth – and soon the whirlpool of decline – has been dismal.  Dell has never paid a dividend, has no free cash flow to start paying one now, and clearly no market growth from which to pay one in the future.  Dell's shares, at $17, are about the same as a year ago, and down about 20% over the last 5 years. 

Leaders in all businesses have a lot to learn from looking at the Good, Bad and Ugly.  The company that has invested in innovation, and then invested in taking that innovation to market in order to meet emerging needs has done extremely well.  By focusing on needs, rather than business optimization, Apple has been able to shift with markets – and even enhance the market shift to position itself for rapid, profitable growth.

Meanwhile, companies that have focused on their core markets and products are doing nowhere near as well.  They have missed market shifts, and watched their fortunes decline precipitously.  They were once very profitable, but despite intense focus on defending their historical strengths profits have struggled to grow as customers moved to alternative solutions.  By spending insufficient time looking outward, at markets and shifts, and too much time inward, on defending and extending past successes, they now face future jeopardy.

Microsoft’s Crazy Windows 8 Bet – How you can invest smarter

This week people are having their first look at Windows 8 via the Barcelona, Spain Mobile World Congress.  This better be the most exciting Microsoft product since Windows was created, or Microsoft is going to fail. 

Why? Because Microsoft made the fatal mistake of "focusing on its core" and "investing in what it knew" – time worn "best practices" that are proving disastrous! 

Everyone knows that Microsoft has returned almost nothing to shareholders the last decade.  Simultaneously, all the "partner" companies that were in the "PC" (the Windows + Intel, or Wintel, platform) "ecosystem" have done poorly.  Look beyond Microsoft at returns to shareholders for Intel, Dell (which recently blew its earings) and Hewlett Packard (HP – which says it will need 5 years to turn around the company.)  All have been forced to trim headcount and undertake deep cost cutting as revenues have stagnated since 2000, at times falling, and margins have been decimated. 

This happened despite deep investments in their "core" PC business.  In 2009 Microsoft spent almost $9B on PC R&D; over 14% of revenues.  In the last few years Microsoft has launched Vista, Windows 7, Office 2009 and Office 2010 all in its effort to defend and extend PC sales.  Likewise all the PC manufacturers have spent considerably on new, smaller, more powerful and even cheaper PC laptop and desktop models.

Unfortunately, these investments in their core expertise and markets have not excited users, nor created much growth.

On the other hand, Apple spent all of the last decade investing in what it didn't know much about in 2000.  Rather than investing in its "core" Macintosh business, Apple invested in the trend toward mobility, being an early leader with 3 platforms – the iPod, iPhone and iPad.  All product categories far removed from its "core" and what it new well.  But, all targeted at the trend toward enhanced mobility.

Don't forget, Microsoft launched the Zune and the Windows CE phones in the last decade.  But, because these were not "core" products in "core" markets Microsoft, and its partners, did not invest much in these markets.  Microsoft even brought to market tablets, but leadership felt they were inferior to the PC, so investments were maintained in traditional PC products.  The Zune, Windows phone and early Windows tablets all died because Microsoft and its partner companies stuck to investing their most important, and best known, PC business.

Where are we now?  Sales of PC's are stagnating, and going to decline.  While sales of mobile devices are skyrocketing.

Tablet sales projections 2012-2015
Source: Business Insider 2/14/12

Today tablet sales are about 50% of the ~300M unit PC sales.  But they are growing so fast they will catch up by 2014, and be larger by 2015.  And, that depends on PC sales maintaining.  Look around your next meeting, commuter flight or coffee shop experience and see how many tablets are being used compared to laptops.  Think about that ratio a year ago, and then make your own assessment as to how many new PCs people will buy, versus tablets.  Can you imagine the PC market actually shrinking?  Like, say, the traditional cell phone business is doing?

By focusing on Windows, and specifically each generation leading to Windows 8, Microsoft took a crazy bet.  It bet it could improve windows to keep the PC relevant, in the face of the evident trend toward mobility and ease of use. Instead of investing in new technologies, new products and new markets – things it didn't know much about – Microsoft chose to invest in what it new, and hoped it could control the trend. 

People didn't want a PC to be mobile, they wanted mobility.  Apple invested in the trend, making the MP3 player a winner with its iPod ease of use and iTunes market.  Then it made smartphones, which were largely an email device, incredibly popular by innovating the app marketplace which gave people the mobility they really desired.  Recognizing that people didn't really want a PC, they wanted mobility, Apple pioneered the tablet marketplace with its iPad and large app market. The result was an explosion in revenue by investing outside its core, in technologies and markets about which it initially knew nothing.

Apple revenue by segment july 2011

Apple would not have grown had it focused its investment on its "core" Mac business.  In the last year alone Apple sold more iOS devices than it sold Macs in its entire 28 year history!

IOS devices vs Mac sales 2.12
Source: Business Insider 2/17/2012

Today, the iPhone business itself is bigger than all of Microsoft. The iPad business is bigger than the desktop PC business, and if included in the larger market for personal computing represents 17% of the PC market.  And, of course, Apple is now worth almost twice the value of Microsoft.

We hear, all the time, to invest in what we know.  But it turns out that is NOT the best strategy.  Trends develop, and markets shift.  By constantly investing in what we know we become farther and farther removed from trends.  In the end, like Microsoft, we make massive investments trying to defend and extend our past products when we would be much, much smarter to invest in new technologies and markets that are on the trend, even if we don't know much, if anything, about them.

The odds are now stacked against Microsoft.  Apple has a huge lead in product sales, market position and apps.  It's closest challenger is Google's Android, which is attracting many of the former Microsoft partners (such as LG's recent defection) as they strive to catch up. Company's such as Nokia are struggling as the technology leadership, and market position, has shifted away from Microsoft as mobility changed the market.

Microsoft's technology sales used to be based upon convincing IT departments to use its platform.  But today users largely buy mobile devices with their own money, and eschew the recommendations of the IT department. Just look at how users drove the demise of Research In Motion's Blackberry.  IT needs to provide users with tools they like, and use platforms which are easy and low-cost to leverage with big app bases.  That favors Apple and Android, not Microsoft with its far, far too late entry.

You can be smarter than Microsoft.  Don't take the crazy bet of always doubling down on what you know.  Put your focus on the marketplace, and identify shifts.  It's cheaper, and smarter, to bet early on trends than constantly trying to fight the trend by investing – usually at an ever higher amount – in what you know.