Will Steve Ballmer Be a Good LA Clippers Leader?

Will Steve Ballmer Be a Good LA Clippers Leader?

Anyone who reads my column knows I’ve been no fan of Steve Ballmer as CEO of Microsoft.  On multiple occasions I chastised him for bad decisions around investing corporate funds in products that are unlikely to succeed.  I even called him the worst CEO in America The Washington Post even had difficulty finding reputable folks to disagree with my argument.

Unfortunately, Microsoft suffered under Mr. Ballmer.  And Windows 8, as well as the Surface tablet, have come nowhere close to what was expected for their sales – and their ability to keep Microsoft relevant in a fast changing personal technology marketplace.  In almost all regards, Mr. Ballmer was simply a terrible leader, largely because he had no understanding of business/product lifecycles.

lifecycle slide  Microsoft was founded by Bill Gates, who did a remarkable job of taking a start-up company from the Wellspring of an idea into one of the fastest growing adolescents of any American company.

Under Mr. Gates leadership Microsoft single-handedly overtook the original PC innovator – Apple – and left it a niche company on the edge of bankruptcy in little over a decade.

Mr. Gates kept Microsoft’s growth constantly in the double digits by not only making superior operating system software, but by pushing the company into application software which dominated the desktop (MS Office.)  And when the internet came along he had the vision to be out front with Internet Explorer which crushed early innovator, and market maker, Netscape.

But then Mr. Gates turned the company over to Mr. Ballmer.  And Mr. Ballmer was a leader lacking vision, or innovation.  Instead of pushing Microsoft into new markets, as had Mr. Gates, he allowed the company to fixate on constant upgrades to the products which made it dominant – Windows and Office.  Instead of keeping Microsoft in the Rapids of growth, he offered up a leadership designed to simply keep the company from going backward.  He felt that Microsoft was a company that was “mature” and thus in need of ongoing enhancement, but not much in the way of real innovation.  He trusted the market to keep growing, indefinitely, if he merely kept improving the products handed him.

As a result Microsoft stagnated.  A “Reinvention Gap” developed as Vista, Windows 7, then Windows 8 and one after another Office updates did nothing to develop new customers, or new markets.  Microsoft was resting on its old laurels – monopolistic control over desktop/laptop markets – without doing anything to create new markets which would keep it on the old growth trajectory of the Gates era.

Things didn’t look too bad for several years because people kept buying traditional PCs.  And Ballmer famously laughed at products like Linux or Unix – and then later at entertainment devices, smart phones and tablets – as Microsoft launched, but then abandoned products like Zune, Windows CE phones and its own tablet.  Ballmer kept thinking that all the market wanted was a faster, cheaper PC.  Not anything really new.

And he was dead wrong.  The Reinvention Gap emerged to the public when Apple came along with the iPod, iTunes, iPhone and iPad.  These changed the game on Microsoft, and no longer was it good enough to simply have a better edition of an outdated technology.  As PC sales began declining it was clear that Ballmer’s leadership had left the company in the Swamp, fighting off alligators and swatting at mosquitos with no strategy for how it would regain relevance against all these new competitors.

So the Board pushed him out, and demoted Gates off the Chairman’s throne.  A big move, but likely too late.  Fewer than 7% of companies that wander into the Swamp avoid the Whirlpool of demise.  Think Univac, Wang, Lanier, DEC, Cray, Sun Microsystems (or Circuit City, Montgomery Wards, Sears.)  The new CEO, Satya Nadella, has a much, much more difficult job than almost anyone thinks.  Changing the trajectory of Microsoft now, after more than a decade creating the Reinvention Gap, is a task rarely accomplished.  So rare we make heros of leaders who do it (Steve Jobs, Lou Gerstner, Lee Iacocca.)

So what will happen at the Clippers?

Critically, owning an NBA team is nothing like competing in the real business world.  It is a closed marketplace.  New competitors are not allowed, unless the current owners decide to bring in a new team.  Your revenues are not just dependent upon you, but are even shared amongst the other teams.  In fact your revenues aren’t even that closely tied to winning and losing.  Season tickets are bought in advance, and with so many games away from home a team can do quite poorly and still generate revenue – and profit – for the owner.  And this season the Indiana Pacers demonstrated that even while losing, fans will come to games.  And the Philadelphia 76ers drew crowds to see if they would set a new record for the most consecutive games lost.

In America the major sports only modestly overlap, so you have a clear season to appeal to fans.  And even if you don’t make it into the playoffs, you still share in the profits from games played by other teams.  As a business, a team doesn’t need to win a championship to generate revenue – or make a profit.  In fact, the opposite can be true as Wayne Huizenga learned owning the Championship winning Florida Marlins baseball team.  He payed so much for the top players that he lost money, and ended up busting up the team and selling the franchise!

In short, owning a sports franchise doesn’t require the owner to understand lifecycles. You don’t have to understand much about business, or about business competition. You are protected from competitors, and as one of a select few in the club everyone actually works together – in a wholly uncompetitive way – to insure that everyone makes as much money as possible.  You don’t even have to know anything about managing people, because you hire coaches to deal with players, and PR folks to deal with fans and media.  And as said before whether or not you win games really doesn’t have much to do with how much money you make.

Most sports franchise owners are known more for their idiosyncrasies than their business acumen.  They can be loud and obnoxious all they want (with very few limits.)  And now that Mr. Ballmer has no investors to deal with – or for that matter vendors or cooperative parties in a complex ecosystem like personal technology – he doesn’t have to fret about understanding where markets are headed or how to compete in the future.

When it comes to acting like a person who knows little about business, but has a huge ego, fiery temper and loves to be obnoxious there is no better job than being a sports franchise owner.  Mr. Ballmer should fit right in.

Gladiators get killed. Dump Wal-Mart; Buy Amazon


Wal-Mart has had 9 consecutive quarters of declining same-store sales (Reuters.)  Now that’s a serious growth stall, which should worry all investors.  Unfortunately, the odds are almost non-existent that the company will reverse its situation, and like Montgomery Wards, KMart and Sears is already well on the way to retail oblivion.  Faster than most people think.

After 4 decades of defending and extending its success formula, Wal-Mart is in a gladiator war against a slew of competitors.  Not just Target, that is almost as low price and has better merchandise.  Wal-Mart’s monolithic strategy has been an easy to identify bulls-eye, taking a lot of shots.  Dollar General and Family Dollar have gone after the really low-priced shopper for general merchandise.  Aldi beats Wal-Mart hands-down in groceries.  Category killers like PetSmart and Best Buy offer wider merchandise selection and comparable (or lower) prices.  And companies like Kohl’s and J.C. Penney offer more fashionable goods at just slightly higher prices.  On all fronts, traditional retailers are chiseling away at Wal-Mart’s #1 position – and at its margins!

Yet, the company has eschewed all opportunities to shift with the market.  It’s primary growth projects are designed to do more of the same, such as opening smaller stores with the same strategy in the northeast (Boston.com).  Or trying to lure customers into existing stores by showing low-price deals in nearby stores on Facebook (Chicago Tribune) – sort of a Facebook as local newspaper approach to advertising. None of these extensions of the old strategy makes Wal-Mart more competitive – as shown by the last 9 quarters.

On top of this, the retail market is shifting pretty dramatically.  The big trend isn’t the growth of discount retailing, which Wal-Mart rode to its great success.  Now the trend is toward on-line shopping.  MediaPost.com reports results from a Kanter Retail survey of shoppers the accelerating trend:

  • In 2010, preparing for the holiday shopping season, 60% of shoppers planned going to Wal-Mart, 45% to Target, 40% on-line
  • Today, 52% plan to go to Wal-Mart, 40% to Target and 45% on-line.

This trend has been emerging for over a decade.  The “retail revolution” was reported on at the Harvard Business School website, where the case was made that traditional brick-and-mortar retail is considerably overbuilt.  And that problem is worsening as the trend on-line keeps shrinking the traditional market.  Several retailers are expected to fail.  Entire categories of stores.  As an executive from retailer REI told me recently, that chain increasingly struggles with customers using its outlets to look at merchandise, fit themselves with ideal sizes and equipment, then buying on-line where pricing is lower, options more plentiful and returns easier!

While Wal-Mart is huge, and won’t die overnight, as sure as the dinosaurs failed when the earth’s weather shifted, Wal-Mart cannot grow or increase investor returns in an intensely competitive and shifting retail environment.

The winners will be on-line retailers, who like David versus Goliath use techology to change the competition.  And the clear winner at this, so far, is the one who’s identified trends and invested heavily to bring customers what they want while changing the battlefield.  Increasingly it is obvious that Amazon has the leadership and organizational structure to follow trends creating growth:

  • Amazon moved fairly quickly from a retailer of out-of-inventory books into best-sellers, rapidly dominating book sales bankrupting thousands of independents and retailers like B.Dalton and Borders.
  • Amazon expanded into general merchandise, offering thousands of products to expand its revenues to site visitors.
  • Amazon developed an on-line storefront easily usable by any retailer, allowing Amazon to expand its offerings by millions of line items without increasing inventory (and allowing many small retailers to move onto the on-line trend.)
  • Amazon created an easy-to-use application for authors so they could self-publish books for print-on-demand and sell via Amazon when no other retailer would take their product.
  • Amazon recognized the mobile movement early and developed a mobile interface rather than relying on its web interface for on-line customers, improving usability and expanding sales.
  • Amazon built on the mobility trend when its suppliers, publishers, didn’t respond by creating Kindle – which has revolutionized book sales.
  • Amazon recently launched an inexpensive, easy to use tablet (Kindle Fire) allowing customers to purchase products from Amazon while mobile. MediaPost.com called it the “Wal-Mart Slayer

 Each of these actions were directly related to identifying trends and offering new solutions.  Because it did not try to remain tightly focused on its original success formula, Amazon has grown terrifically, even in the recent slow/no growth economy.  Just look at sales of Kindle books:

Kindle sales SAI 9.28.11
Source: BusinessInsider.com

Unlike Wal-Mart customers, Amazon’s keep growing at double digit rates.  In Q3 unique visitors rose 19% versus 2010, and September had a 26% increase.  Kindle Fire sales were 100,000 first day, and 250,000 first 5 days, compared to  80,000 per day unit sales for iPad2.  Kindle Fire sales are expected to reach 15million over the next 24 months, expanding the Amazon reach and easily accessible customers.

While GroupOn is the big leader in daily coupon deals, and Living Social is #2, Amazon is #3 and growing at triple digit rates as it explores this new marketplace with its embedded user base.  Despite only a few month’s experience, Amazon is bigger than Google Offers, and is growing at least 20% faster. 

After 1980 investors used to say that General Motors might not be run well, but it would never go broke.  It was considered a safe investment.  In hindsight we know management burned through company resources trying to unsuccessfully defend its old business model.  Wal-Mart is an identical story, only it won’t have 3 decades of slow decline.  The gladiators are whacking away at it every month, while the real winner is simply changing competition in a way that is rapidly making Wal-Mart obsolete. 

Given that gladiators, at best, end up bloody – and most often dead – investing in one is not a good approach to wealth creation.  However, investing in those who find ways to compete indirectly, and change the battlefield (like Apple,) make enormous returns for investors.  Amazon today is a really good opportunity.