Wake Up! Ballmer’s driving Microsoft off a cliff!

This is an exciting time of year for tech users – which is now all of us.  The biggest show is the battle between smartphone and tablet leader Apple – which has announced new products with the iPhone 5 and iPad Mini – and the now flailing, old industry leader Microsoft which is trying to re-ignite its sales with a new tablet, operating system and office productivity suite.

I’m reminded of an old joke.  Steve the trucker drives with his pal Alex.  Someone at the diner says “Steve, imagine you’re going 60 miles an hour when you start down a hill.  You keep gaining speed, nearing 90.  Then you realize your brakes are out.  Now, you see one quarter mile ahead a turn in the road, because there’s a barricade and beyond that a monster cliff.  What do you do?”

Steve smiles and says “Well, I wake up Alex.”

“What?  Why?” asks the questioner.

“Because Alex has never seen a wreck like the one we’re about to have.”

Microsoft has played “bet the company” on its Windows 8 launch, updated office suite and accompanied Surface tablet.  (More on why it didn’t have to do this later.)  Now Microsoft has to do something almost never done in business.  The company has to overcome a 3 year lateness to market and upend a multi-billion dollar revenue and brand leader.  It must overcome two very successful market pioneers, both of which have massive sales, high growth, very good margins, great cash flow and enormous war chests (Apple has over $100B cash.)

Just on the face of it, the daunting task sounds unlikely to succeed.

But there is far more reason to be skeptical.  Apple created these markets with new products about which people had few, if any conceptions.  But today customers have strong viewpoints on both what a smartphone and tablet should be like to use – and what they expect from Microsoft.  And these two viewpoints are almost diametrically opposed.

Yet Microsoft has tried bridging them in the new product – and in doing so guaranteed the products will do poorly.  By trying to please everyone Microsoft, like the Ford Edsel, is going to please almost no one:

  • Since the initial product viewing, almost all professional reviewers have said the Surface is neat, but not fantastically so.  It is different from iOS and Google’s Android products, but not superior.  It has generated very little enthusiasm.
  • Tests by average users have shown the products to be non-intuitive.  Especially when told they are Microsoft products.  So the Apple-based interface intuition doesn’t come through for easy use, nor does historical Microsoft experience.  Average users have been confused, and realize they now must learn a 3rd interface – the iOS or Android they have, the old Microsoft they have, and now this new thing.  It might as well be Linux for all its similarity to Microsoft.
  • For those who were excited about having native office products on a tablet, the products aren’t the same as before – in feel or function.  And the question becomes, if you really want the office suite do you really want a tablet or should you be using a laptop?  The very issue of trying to use Office on the Surface easily makes people rethink the question, and start to realize that they may have said they wanted this, but it really isn’t the big deal they thought it would be.  The tablet and laptop have different uses, and between Surface and Win8 they are seeing learning curve cost maybe isn’t worth it.
  • The new Win8 – especially on the tablet – does not support a lot of the “professional” applications written on older Windows versions.  Those developers now have to redevelop their code for a new platform – and many won’t work on the new tablet processors.
  • Many have been banking on Microsoft winning the “enterprise” market.  Selling to CIOs who want to preserve legacy code by offering a Microsoft solution.  But they run into two problems. (1) Users now have to learn this 3rd, new interface.  If they have a Galaxy tab or iPad they will have to carry another device, and learn how to use it.  Do not expect happy employees, or executives, who expressly desire avoiding both these ideas. (2) Not all those old applications (drivers, code, etc) will port to the new platform so easily.  This is not a “drop in” solution.  It will take IT time and money – while CEOs keep asking “why aren’t you doing this for my iPad?”

All of this adds up to a new product set that is very late to market, yet doesn’t offer anything really new.  By trying to defend and extend its Windows and Office history, Microsoft missed the market shift.  It has spent several billion dollars trying to come up with something that will excite people.  But instead of offering something new to change the market, it has given people something old in a new package.  Microsoft they pretty much missed the market altogether.

Everyone knows that PC sales are going to decline.  Unfortunately, this launch may well accelerate that decline.  Remember how slowly people were willing to switch to Vista?  How slowly they adopted Microsoft 7 and Office 2010?  There are still millions of users running XP – and even Office XP (Office Professional 2003.)  These new products may convince customers that the time and effort to “upgrade” simply means its time to switch.

Microsoft has fallen into a classic problem the Dean of innovation Clayton Christensen discusses.  Microsoft long ago overshot the user need for PCs and office automation tools.  But instead of focusing on developing new solutions – like Apple did by introducing greater mobility with its i products – Microsoft has diligently, for a decade, continued to dump money into overshooting the user needs for its basic products.  They can’t admit to themselves that very, very, very few people are looking for a new spreadsheet or word processing application update.  Or a new operating system for their laptop.

These new Microsoft products will NOT cause people to quit the trend to mobile devices.  They will not change the trend of corporate users supplying their own devices for work (there’s now even an IT acronym for this movement [BYOD,] and a Wikipedia page.) It will not find a ready, excited market of people wanting to learn yet another interface, especially to use old applications they thought they already new!

It did not have to be this way.

Years ago Microsoft started pouring money into xBox.  And although investors can complain about the historical cost, the xBox (and Kinect) are now market leaders in the family room.  Honestly, Microsoft already has – especially with new products released this week – what people are hoping they can soon buy from AppleTV or GoogleTV; products that are at best vaporware.

Long-term, there is yet another great battle to be fought.  What will be the role of monitors, scattered in homes and bars, and in train stations, lobbies and everywhere else?  Who will control the access to monitors which will be used for everything from entertainment (video/music,) to research and gaming.  The tablet and smartphones may well die, or mutate dramatically, as the ability to connect via monitors located nearly everywhere using —- xBox?

But, this week all discussion of the new xBox Live and music applications were overshadowed by the CEO’s determination to promote the dying product line around Windows8.

This was simply stupid.  Ballmer should be fired. 

The PC products should be managed for a cash hoarding transition into a smaller market.  Investments should be maximized into the new products that support the next market transition.  xBox and Kinect should be held up as game changers, and Microsoft should be repositioned as a leader in the family and conference room; an indespensible product line in an ever-more-connected world.

But that didn’t happen this week.  And the CEO keeps heading straight for the cliff.  Maybe when he takes the truck over the guard rail he’ll finally be replaced.  Investors can only wake up and watch – and hope it happens sooner, rather than later.

UPDATE 16 April, 2019 – Android TV is a new emerging tech that could have a big impact on the overall marketplace. Read more about Android TV here.

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.

 

Not All Earnings are Equal – Revenue Growth Matters! (Sell Microsoft)

Not All Earnings are Equal – Revenue Growth Matters! (Sell Microsoft)


For the first time in 20 years, Apple’s quarterly profit exceeded Microsoft’s (see BusinessWeek.comMicrosoft’s Net Falls Below Apple As iPad Eats Into Sales.) Thus, on the face of things, the companies should be roughly equally valued.  But they aren’t. This week Microsoft’s market capitalization is about $215B, while Apple’s is about $365B – about 70% higher.  The difference is, of course, growth – and how a lack of it changes management!

According to the Conference Board, growth stalls are deadly.

Growth Stall primary slide
When companies hit a growth stall, 93% of the time they are unable to maintain even a 2% growth rate. 75% fall into a no growth, or declining revenue environment, and 70% of them will lose at least half their market capitalization. That’s because the market has shifted, and the business is no longer selling what customers really want.

At Microsoft, we see a company that has been completely unable to deal with the market shift toward smartphones and tablets:

  • Consumer PC shipments dropped 8% last quarter
  • Netbook sales plunged 40%

Quite simply, when revenues stall earnings become meaningless. Even though Microsoft earnings were up, it wasn’t because they are selling what customers really want to buy. In stalled companies, executives cut costs in sales, marketing, new product development and outsource like crazy in order to prop up earnings.  They can outsource many functions.  And they go to the reservoir of accounting rules to restate depreciation and expenses, delaying expenses while working to accelerate revenue recognition.

Stalled company management will tout earnings growth, even though revenues are flat or declining.  But smart investors know this effort to “manufacture earnings” does not create long-term value.  They want “real” earnings created by selling products customers desire; that create incremental, new demand.  Success doesn’t come from wringing a few coins out of a declining market – but rather from being in markets where people prefer the new solutions.

Mobile phone sales increased 20% (according to IDC), and Apple achieved 14% market share – #3 – in USA (according to MediaPost.com) last quarter. And in this business, Apple is taking the lion’s share of the profits:

Apple share of phone profits 1Q 2011
Image provided by BusinessInsider.com

When companies are growing, investors like that they pump earnings (and cash) back into growth opportunities.  Investors benefit because their value compounds. In a stalled company investors would be better off if the company paid out all their earnings in dividends – so investors could invest in the growth markets.

But, of course, stalled companies like Microsoft and Research in Motion, don’t do that.  Because they spend their cash trying to defend the old business.  Trying to fight off the market shift.  At Microsoft, money is poured into trying to protect the PC business, even as the trend to new solutions is obvious. Microsoft spent 8 times as much on R&D in 2009 as Apple – and all investors received was updates to the old operating system and office automation products.  That generated almost no incremental demand.  While revenue is stalling, costs are rising.

At Gurufocus.com the argument is made “Microsoft Q3 2011: Priced for Failure“.  Author Alex Morris contends that because Microsoft is unlikely to fail this year, it is underpriced.  Actually, all we need to know is that Microsoft is unlikely to grow.  Its cost to defend the old business is too high in the face of market shifts, and the money being spent to defend Microsoft will not go to investors – will not yield a positive rate of return – so investors are smart to get out now!

Additionally, Microsoft’s cost to extend its business into other markets where it enters far too late is wildly unprofitable.  Take for example search and other on-line products: Microsoft online losses 3.2011
Chart source BusinessInsider.com

While much has been made of the ballyhooed relationship between Nokia and Microsoft to help the latter enter the smartphone and tablet businesses, it is really far too late.  Customer solutions are now in the market, and the early leaders – Apple and Google Android – are far, far in front.  The costs to “catch up” – like in on-line – are impossibly huge.  Especially since both Apple and Google are going to keep advancing their solutions and raising the competitive challenge.  What we’ll see are more huge losses, bleeding out the remaining cash from Microsoft as its “core” PC business continues declining.

Many analysts will examine a company’s earnings and make the case for a “value play” after growth slows.  Only, that’s a mythical bet.  When a leader misses a market shift, by investing too long trying to defend its historical business, the late-stage earnings often contain a goodly measure of “adjustments” and other machinations.  To the extent earnings do exist, they are wasted away in defensive efforts to pretend the market shift will not make the company obsolete.  Late investments to catch the market shift cost far too much, and are impossibly late to catch the leading new market players.  The company is well on its way to failure, even if on the surface it looks reasonably healthy.  It’s a sucker’s bet to buy these stocks.

Rarely do we see such a stark example as the shift Apple has created, and the defend & extend management that has completely obsessed Microsoft.  But it has happened several times.  Small printing press manufacturers went bankrupt as customers shifted to xerography, and Xerox waned as customers shifted on to desktop publishing.  Kodak declined as customers moved on to film-less digital photography.  CALMA and DEC disappeared as CAD/CAM customers shifted to PC-based Autocad.  Woolworths was crushed by discount retailers like KMart and WalMart.  B.Dalton and other booksellers disappeared in the market shift to Amazon.com.  And even mighty GM faltered and went bankrupt after decades of defend behavior, as customers shifted to different products from new competitors.

Not all earnings are equal.  A dollar of earnings in a growth company is worth a multiple.  Earnings in a declining company are, well, often worthless.  Those who see this early get out while they can – before the company collapses.

Update 5/10/11 – Regarding announced Skype acquisition by Microsoft

That Microsoft has apparently agreed to buy Skype does not change the above article.  It just proves Microsoft has a lot of cash, and can find places to spend it.  It doesn’t mean Microsoft is changing its business approach.

Skype provides PC-to-PC video conferencing.  In other words, a product that defends and extends the PC product.  Exactly what I predicted Microsoft would do. Spend money on outdated products and efforts to (hopefully) keep people buying PCs.

But smartphones and tablets will soon support video chat from the device; built in.  And these devices are already connected to networks – telecom and wifi – when sold.  The future for Skype does not look rosy.  To the contrary, we can expect Skype to become one of those features we recall, but don’t need, in about 24 to 36 months.  Why boot up a PC to do a video chat you can do right from your hand-held, always-on, device?

The Skype acquisition is a predictable Defend & Extend management move.  It gives the illusion of excitement and growth, when it’s really “so much ado about nothing.”  And now there are $8.5B fewer dollars to pay investors to invest in REAL growth opportunities in growth markets.  The ongoing wasting of cash resources in an effort to defend & extend, when the market trends are in another direction.

Nokia’s Microsoft Blunder is Apple’s Win


Summary:

  • Nokia agreed to develop smartphones with Microsoft software
  • But Microsoft’s product is without users, developers or apps
  • Apple and Google Android dominate developers, app base and users
  • Apple and Google Android have extensive distribution, and customer acceptance
  • Microsoft brings Nokia very little
  • Nokia hopes it can succeed simply by ramming Microsoft product through distribution.  This will be no more successful than its efforts with Symbian
  • Apple is the winner, because Nokia didn’t select Google Android

For First Time Ever, Smartphones Outsell PCs in Q4 of 2010” headlined BGR.com.   This is a big deal, as it creates something of an inflection point – possibly what some would call a “tipping point” – in the digital technology market.  For over 2 years some of us, using IDC data such as reported in ReadWriteWeb, have been predicting that PCs are on the way to extinction – much like mainframes and mini-computers went.  Smartphone sales last quarter jumped 87.2% year-over-year to about 101M units.  Meanwhile PC sales, a market manufacturers hoped would recover as “enterprises” resumed buying post-recession, grew only 5.5% in the like period, to 92.1M units.  No doubt the installed base of the latter product is multiples of the former, but we can see that increasingly people are ready to use the newer, alternative technology.

This week Mediapost.com reported “Tablet Sales to Hit 242M by 2015.” Both NPD Group and iSuppli are projecting a 10-fold increase wtihin 5 years in the volume of these new devices, which is sure to devastate PC sales. Between smartphones and tablets, as well as the rapid development of cloud-based apps and data storage solutions, it’s becoming quite clear that the life-span of PC technology has its limits.  Soon we’ll be able to do more, cheaper, better and faster with these new products than we ever could on a PC.

This is really bad news for Microsoft.  Apple and Google dominate both these mobile markets.  As Microsoft has fought to defend its PC business by re-investing in Vista, then Windows 7 and Office 2010, the market has been shifting away from the PC platform entirely.  It’s common now to hear about corporations considering iPads and other tablets for field workers.  And it’s impossible to walk through an airport, or sit in a meeting these days without seeing people use their smartphones and tablets, purchased individually at retail, while leaving their PCs at the office.  Most corporate Blackberry users now have either an Apple or Android smartphone or tablet as they eschew their RIM product for anything other than required corporate uses.

Nokia has largely missed the smartphone market, choosing, like Microsoft, to continue investing in defending its traditional business.  Long the largest cell phone supplier, Nokia did not develop the application base or developer network for Symbian (it’s proprietary smartphone technology) as it kept pumping out older devices.  Nokia is reminiscent of the Ed Zander led Motorola disaster, where the company kept pumping out Razr phones until demand collapsed, nearly killing the company.

So the Board replaced the Nokia CEO. As discussed in Forbes on 5 October, 2010 in “HP and Nokia’s Bad CEO Selections” Nokia put in place a Microsoft executive.  Given that Microsoft had missed the smartphone market entirely, as well as the tablet market, moving the Microsoft Defend & Extend way of thinking into Nokia didn’t look like it would bring much help for the equally locked-in Nokia. Exchanging one defensive management approach for another doesn’t create an offense – or new products.

It wasn’t much of a surprise last week when the 5-month tenured CEO, Stephen Elop, announced he thought Nokia’s business was in horrible shape via an internal email as reported in the Wall Street Journal, “Nokia, Microsoft Talk Cellphones.” Rather quickly, a deal was struck in which Nokia would not only pick up the Microsoft mobile operating system, but would use their products to promote other extremely poorly performing Microsoft products. “Nokia to Adopt Microsoft Bing, Adcenter” was another headline at MediaPost.com.  Bing and adCenter were very late to market, and even with adoption by early market leader Yahoo! have been unable to make much inroad into the search and on-line ad placement markets dominated by Google.

Mr Elop went with what he knew, selecting Microsoft.  I guess he’s the new “chief decider” at Nokia.  His decision caused a break out of optimism amongst long-suffering Microsoft investors and customers who’ve gotten very little from the giant PC near-monopolist the last decade.  Mediapost told us “Study: Surge of Support for Windows Phone 7” as developers who long ignored the product entirely were starting to consider writing apps for the device.  After all this time, new hope beats within the breast of those still stuck on Microsoft.

But if ever there was a case of too little, and way, way too late, this has to be it.  Two companies long known for weak product innovation, and success driven by market domination and distribution control strategies, are partnering to take on the two most innovative companies in digital technology as they create entirely new markets with new technologies. 

RIM, the smartphone market originator, has seen its fortunes disintegrate as Blackberry sales fell below iPhones – even with over 10,000 apps.  Today Microsoft has virtually NO apps, and NO developer base as it just now enters this market, “Google Searches for Mobile App Experts” (Wall Street Journal) as its effort continues to expand its 100,000+ apps base as it chases the 350,000+ apps already existing for the iPhone.  Where Microsoft and Nokia hope to build an app base, and a user base, Apple and Google already have both, which theyt are aggressively growing. 

Exactly what going to happen to slow Apple and Google’s growth in order to allow Microsoft + Nokia to catch up?  In what fairy tale will the early hare take a nap so the awakened tortoise will be allowed to somehow, miraculously get back into the race?

Being late to market is never good.  Look at how Sony, and everyone else, were late to digitally downloaded music. iPad and iTunes not only took off but continue to hold well over 50% of the market almost a decade later.   Over the same decade Apple has held onto 2/3 of the download video market, while Microsoft’s Zune has struggled to capture less than 1/4 of Apple’s share (about 18% according to WinRumors.com). 

Apple (and Google) aren’t going to slow down the pace of innovation to give Microsoft and Nokia a chance to catch up.  Today (15 Feb., 2010) ITProPortal.com breaks news “Apple iPhone 5 to have 4 Inch Screen,” an upgrade designed to bring yet more users to its mobile device platform – away from PCs and competitive smarphones.  The same article discusses how Google Android manufacturers are bringing out 4.3 inch screens in their effort to keep growing.

So, amidst the “big announcement” of Microsoft and Nokia agreeing to work together on a new platform, where’s the product announcement?  Where’s the app base?  And exactly what is the strategy to be competitive in 2012 and 2015?  Does anyone really think throwing money at this will create the products (hardware and software) fast enough to let either catch up with existing leaders?  Does anyone think Microsoft products dependent upon Nokia’s distribution can save either’s mobile business – while Apple has just expanded to Verizon for distribution?  And Google is already on almost all networks?  And where is Microsoft or Nokia in the tablet business, which is closely associated with smartphone market for obvious issues of mobility and use of cloud-based computing architectures?

The good news here is for Apple fans.  Nokia clearly should have chosen Android.  This would give the laggard a chance of leveraging the base of technology at Google – including advances being made to the Chrome operating system and its advantages for the cloud.  No matter what the price, it’s the only chance Nokia has.  With this decision the most likely outcome is big investments by both Microsoft and Nokia to play catch-up, but limited success.  Results will not likely cover investment rates, leading Nokia to a Motorola-like outcome.  And Microsoft will remain a bit player in the fastest growing digital markets. Both have billions of dollars to throw away in this desperate effort.  But the outcome is almost certain.  It’s doubtful between the two of them they can buy enough developers, network agreements and users to succeed against the 2 growth leaders and the desperately defensive RIM.

Like I said last month in this blog “Buy Apple, Sell Microsoft.”  It’s still the easiest money-making trade of 2011.  Now thankfully reinforced by the former Microsoft exec running Nokia.

Start Early! Waiting is Expensive – Amazon v. Microsoft


Summary:

  • We like to think we can compete effectively by waiting on others to show us the market direction
  • You cannot make high rates of return with a “fast follower” strategy
  • Companies that constantly take innovations to market grow longer, and make higher rates of return
  • White Space allows you to learn, grow and be smart about when to get out while costs are low

“I want to be a fast follower.  Let somebody else carry the cost of learning what the market wants and what solutions work.  I plan to come in fast behind the leader and make more money by avoiding the investment.”  Have you ever heard someone talk this way?  It sounds so appealing.  Only problem is – it very rarely works!  Fast followers might gain share sometimes, but universally they have terrible margins.  Their sales come at an enormous investment cost.

Those who enter new markets early actually gain a lot, for little cost.  Take for example Amazon.com’s early entry into electronic publishing with Kindle.  Entering early gave Amazon a huge advantage.  Amazon may have appeared to be floundering, potentially “wasting” resources, but it was learning how the technology of e-Ink worked, how costs could be driven down and what users demanded in a solution.  Every quarter Amazon was learning how to find new uses for the Kindle, making it more viable, finding new customers, encouraging repeat purchases and growing.  Now Mediapost.com headlines “Review: New Kindle Kicks (Even Apple’s) B*tt.”

Now there are a raft of “fast followers” trying to catch the Kindle in the eReader market.  But the Kindle is far lighter, easier to use, with greater functionality and available at one of the market’s lowest prices.  While the cost of entry was low, Amazon learned immensely.  That knowledge is not repeatable by companies trying to now play “catch up” without spending multiples of what Amazon spent.  Amazon is so far in front of other eReaders that it’s competition is the vastly more sophisticated (and expensive) mobile devices from Apple (iPhone and iPad).  By entering early, Amazon has lower cost, and considerably more/better market knowledge, than later entrants.

We see this very clearly in Microsoft’s smart phone approach.  Microsoft got far behind in smart phones, losing over 2/3 its market share, as it focused on Windows 7 and Office 2010 the last 3 years while Resarch in Motion (RIM) Apple and Google pioneered the market.  Now the 3 leaders have millions of units in the market, low price point establishment, and between them somewhere between 400,000 and 500,000 mobile apps available. 

As reported in Mediapost.comMicrosoft Gets Serious with Windows 7 Phone” entering now is VERY expensive for Microsoft.  Microsoft spent almost $1billion on Kin, which it dropped after only a few months because the product was seriously unable to compete.  So now Microsoft is expecting to spend $500million on launch costs for a Windows 7 mobile operating system.  But it faces a daunting challenge, what with 350,000 or so iPhone apps in existence, and Google giving Android away for free (as well as sporting some 100,000 apps itself). 

The cost of entry, ignoring Microsoft’s technology development cost, to get the mindshare of developers for app development (so Windows 7 mobile doesn’t slip into the Palm or Blackberry problem of too few apps to be interesting) as well as minds of potential buyers will more likely cost well over $1B – just for communications!!  Microsoft now has to take share away from the market leaders – a very expensive proposition!  Like XBox marketing, these exorbitant marketing costs could well go on for several years.  XBox has had only 1 quarter near break-even, all others showing massive losses.  The same is almost guaranteed for the Windows 7 phone.  And it’s entering so late that it may never, even with all that money being spent, catch the two leaders!  Who are the new users that will come along, and what is Microsoft uniquely offering?  It’s expensive to buy mind and market share.

Clearly Apple and Android entered the smart phone market at vastly lower cost, and have developed what are already profitable businesses.  Microsoft will lose money, possibly for years, and may still fail – largely because it focused on its core products and chose to undertake a “fast follower” strategy in the high growth smart phone business.

We like to believe things that reinforce our behaviors.  We like to think that tortoises can outrun hares.  But that only happens when hares make foolish decisions.  Rarely in business are the early entrants foolish.  Most learn – a lot – at low cost.  They figure out where the early customers are with unmet needs, and how to fulfill those needs.  They learn how to identify ways to grow the business, manage costs and earn a profit.  And they learn at a much lower cost than late followers.  They capture mind and market share, and work hard to grow the business with new customers keeping them profitable and maintaining share.

We want to think that innovators bear a high risk.  But it’s simply not true.  Innovators take advantage of market learning to create revenues and profits at lower cost.  Companies that keep White Space projects flourishing, entering new markets generating growth, earn higher rates of return longer than any other strategy.  Just look at Cisco, Nike, Virgin, J&J and GE (until very recently).  The smart money gets into the game early, developing a winning approach — or getting out before the costs get too high!