by Adam Hartung | Nov 18, 2015 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Web/Tech
Microsoft recently announced it was offering Windows 10 on xBox, thus unifying all its hardware products on a single operating system – PCs, mobile devices, gaming devices and 3D devices. This means that application developers can create solutions that can run on all devices, with extensions that can take advantage of inherent special capabilities of each device. Given the enormous base of PCs and xBox machines, plus sales of mobile devices, this is a great move that expands the Windows 10 platform.
Only it is probably too late to make much difference. PC sales continue falling – quickly. Q3 PC sales were down over 10% versus a year ago. Q2 saw an 11% decline vs year ago. The PC market has been steadily shrinking since 2012. In Q2 there were 68M PCs sold, and 66M iPhones. Hope springs eternal for a PC turnaround – but that would seem increasingly unrealistic.
The big market shift to mobile devices started back in 2007 when the iPhone began challenging Blackberry. By 2010 when the iPad launched, the shift was in full swing. And that’s when Microsoft’s current problems really began. Previous CEO Steve Ballmer went “all-in” on trying to defend and extend the PC platform with Windows 8 which began development in 2010. But by October, 2012 it was clear the design had so many trade-offs that it was destined to be an Edsel-like flop – a compromised product unable to please anyone.
By January, 2013 sales results were showing the abysmal failure of Windows 8 to slow the wholesale shift into mobile devices. Ballmer had played “bet the company” on Windows 8 and the returns were not good. It was the failure of Windows 8, and the ill-fated Surface tablet which became a notorious billion dollar write-off, that set the stage for the rapid demise of PCs.
And that demise is clear in the ecosystem. Microsoft has long depended on OEM manufacturers selling PCs as the driver of most sales. But now Lenovo, formerly the #1 PC manufacturer, is losing money – lots of money – putting its future in jeopardy. And Dell, one of the other top 3 manufacturers, recently pivoted from being a PC manufacturer into becoming a supplier of cloud storage by spending $67B to buy EMC. The other big PC manufacturer, HP, spun off its PC business so it could focus on non-PC growth markets.
And, worse, the entire OEM market is collapsing. For the largest 4 PC manufacturers sales last quarter were down 4.5%, while sales for the remaining smaller manufacturers dropped over 20%! With fewer and fewer sales, consolidation is wiping out many companies, and leaving those remaining in margin killing to-the-death competition.
Which means for Microsoft to grow it desperately needs Windows 10 to succeed on devices other than PCs. But here Microsoft struggles, because it long eschewed its “channel suppliers,” who create vertical market applications, as it relied on OEM box sales for revenue growth. Microsoft did little to spur app development, and rather wanted its developers to focus on installing standard PC units with minor tweaks to fit vertical needs.
Today Apple and Google have both built very large, profitable developer networks. Thus iOS offers 1.5M apps, and Google offers 1.6M. But Microsoft only has 500K apps largely because it entered the world of mobile too late, and without a commitment to success as it tried to defend and extend the PC. Worse, Microsoft has quietly delayed Project Astoria which was to offer tools for easily porting Android apps into the Windows 10 market.
Microsoft realized it needed more developers all the way back in 2013 when it began offering bonuses of $100,000 and more to developers who would write for Windows. But that had little success as developers were more keen to achieve long-term sales by building apps for all those iOS and Android devices now outselling PCs. Today the situation is only exacerbated.
By summer of 2014 it was clear that leadership in the developer world was clearly not Microsoft. Apple and IBM joined forces to build mobile enterprise apps on iOS, and eventually IBM shifted all its internal PCs from Windows to Macintosh. Lacking a strong installed base of Windows mobile devices, Microsoft was without the cavalry to mount a strong fight for building a developer community.
In January, 2015 Microsoft started its release of Windows 10 – the product to unify all devices in one O/S. But, largely, nobody cared. Windows 10 is lots better than Win8, it has a great virtual assistant called Cortana, and it now links all those Microsoft devices. But it is so incredibly late to market that there is little interest.
Although people keep talking about the huge installed base of PCs as some sort of valuable asset for Microsoft, it is clear that those are unlikely to be replaced by more PCs. And in other devices, Microsoft’s decisions made years ago to put all its investment into Windows 8 are now showing up in complete apathy for Windows 10 – and the new hybrid devices being launched.
AM Multigraphics and ABDick once had printing presses in every company in America, and much of the world. But when Xerox taught people how to “one click” print on a copier, the market for presses began to die. Many people thought the installed base would keep these press companies profitable forever. And it took 30 years for those machines to eventually disappear. But by 2000 both companies went bankrupt and the market disappeared.
Those who focus on Windows 10 and “universal windows apps” are correct in their assessment of product features, functions and benefits. But, it probably doesn’t matter. When Microsoft’s leadership missed the mobile market a decade ago it set the stage for a long-term demise. Now that Apple dominates the platform space with its phones and tablets, followed by a group of manufacturers selling Android devices, developers see that future sales rely on having apps for those products. And Windows 10 is not much more relevant than Blackberry.
by Adam Hartung | Feb 24, 2014 | Current Affairs, Defend & Extend, In the Rapids, Leadership, Transparency, Web/Tech
Facebook is acquiring WhatsApp, a company with at most $300M revenues, and 55 employees, for $19billion. That’s billion – with a “b.” An astonishing figure that is second only to HP’s acquisition of market leader Compaq, which had substantial revenues and profits, as tech acquisitions. $19B is 13 times Facebook’s (not WhatsApp’s) entire 2013 net income – and almost 2.5 times Facebook’s (again, not WhatsApp’s) 2013 gross revenues!
On the mere face of it this valuation should make the most dispassionate analyst swoon. In today’s world very established, successful companies sell for far, far lower valuations. Apple is valued at about 13 times earnings. Microsoft about 14 times earnings. Google 33 times. These are small fractions of the nearly infinite P/E placed on WhatsApp.
But there is a leadership lesson offered here by CEO Zuckerberg’s team that is well worth learning.
Irrelevancy can happen remarkably quickly. True in any industry, but especially in digital technology. Examples: Research-in-Motion/Blackberry. Motorola. Dell. HP all lost relevancy in months and are struggling. (For those who want non-tech examples think of Circuit City, Best Buy, Sears, JCPenney, Abercrombie and Fitch.) Each of these companies was an industry leader that lust its luster, most of its customers, a big chunk of its employees and much of its market valuation in months when the company missed a market shift.
Although leadership knew what it had historically done to sell products profitably, in a very short time market trends reduced the value of the company’s historical success formula leaving investors, as well as management, wondering how it was going to compete.
Facebook is not immune to changing market trends. Although it has been the benchmark for social media, it only achieved that goal after annihilating early leader MySpace. And although Facebook was built by youthful folks, trends away from using laptops and toward mobile devices have challenged the Facebook platform. Simultaneously, changing communication requirements have altered the use, and impact, of things like images, photos, charts and text. All of these have the potential impact of slowly (or not so slowly) eroding the value (which is noticably lofty) of Facebook.
Most leaders address these kinds of challenges by launching new products to leverage the trend. And Facebook did just that. Facebook not only worked on making the platform more mobile friendly, but developed its own platform apps for photos and texting and all kinds of new features.
But, and this is critical, external companies did a better job. Two years ago Instagram emerged as a leader in image sharing. And WhatsApp has developed a superior answer for messaging.
Historically leadership usually said “we need to find a way to beat these new guys.” They would make it hard to integrate new solutions with their dominant platform in an effort to block growth. They would spend huge amounts on marketing and branding to try overcoming the emerging leader. Often they filed intellectual property litigation in an effort to cause short-term business interuption and threaten viability. They might even try hiring the emerging company’s tech leader away to stop development.
All of these actions were efforts to defend & extend the early leader’s market position. Even though the market is shifting, and trends are developing externally from the company, leadership will tend to look inside for an answer. It will often ignore the trend, disparage the competition, keep promising improvements to its historical products and services and blanket the media with PR as to its stated superiority.
But, as that list (above) of companies that lost relevancy demonstrates, this rarely works. In a highly interconnected, fast-paced, globally competitive marketplace customers go where they want. Quickly. Often leaving the early leader with a management team (and Board of Directors) scratching its head and wondering how it lost so much market position, and value, so quickly.
Hand it to Mr. Zuckerberg’s team. Instead of ignoring trends in its effort to defend & extend its early lead, they reached out and brought the leader to them. $1B for Instagram was a big investment, especially so close to launching an IPO. But, it kept Facebook relevant in mobile platforms and imaging.
And making a nosebleed-creating $19B deal for WhatsApp focuses on maintaining relevancy as well. WhatsApp already processes almost as many messages as the entire telecom industry. It has 450million users with 70% active daily, which is already 60% the size of Facebook’s daily user community (550million.) By bringing these people into the Facebook corporate family it assures the company of continued relevancy as the market shifts. It doesn’t matter if these are the same people, or different people. The issue is that it keeps Facebook relevant, rather than losing relevance to a competitor.
How will this all be monetized into $19B? The second brilliant leadership call by Facebook is to not answer that question.
Facebook didn’t know how to monetize its early leadership in users, but management knew it had to find a way. Now the company has grown from almost no revenues in 2008 to almost $8B in just 5 years. (Does your company have a plan to add $8B/year of organic revenue growth by 2019?)
So just as Facebook had to find its revenue model (which it is still exploring,) Zuckerberg’s team allows the leadership of Instagram and WhatsApp to remain independent, operating in their own White Space, to grow their user base and learn how to monetize what is an extraordinarily large group of happy folks. When looking to grow in new markets, and you find a team with the skills to understand the trends, it is independence rather than integration that makes the most sense organizationally.
Thirdly, back to that valuation issue. $19B is a huge amount of money. Unless you don’t really spend $19B. Facebook has the blessed ability to print its own. Private money that it can use for such acquisitions. As long as Facebook has a very high market valuation it can make acquisitions with shares, rather than real money.
In the case of both Instagram and WhatsApp the acquisition is being made in a mix of cash, Facebook stock and restricted Facebook stock for employees. The latter two of these three items are not real money. They are simply pieces of paper giving claims to ownership of Facebook, which itself is valued at 22 times 2013 revenue and 116 times 2013 earnings. The price of those shares are all based on expectations; expectations which now require the performance of Instagram and WhatsApp to make happen.
By making acquisitions with Facebook shares the leadership team is able to link the newly acquired managers to the same overall goals as Facebook, while offering an extremely high price but without actually having to raise any money – or spend all that money.
All companies risk of becoming irrelevant. New technologies, customer behavior patterns, regulations, inventions and innovations constantly challenge old success formulas. Most leaders fall into a pattern of trying to defend & extend their old business in the face of market shifts, hastening the fall into irrelevancy. Or they try to acquire a new business, then integrate it into the old business which strips away the new business value and leads, inevitably, to irrelevancy.
The leaders of Facebook are giving us a lesson in an alternative approach. (1) Recognize the market shift. Accept it. If there is a better solution, rush toward it rather than ignoring it. (2) Bring it into the company, and leave it independent. Eschew integration and efforts to find “synergy.” (You never know, in 3 years the company may need to be renamed WhatsApp to reflect a new market paradigm.) (3) And as long as you can convince investors that you are maintaining your relevancy use your highly valued stock as currency to keep the company moving forward.
These are 3 great lessons for all leadership teams. And I continue to think Facebook is the one stock to own in 2014.
by Adam Hartung | Feb 11, 2012 | Current Affairs, In the Rapids, Innovation, Leadership, Television, Web/Tech
Buy Facebook. I don't care what the IPO price is.
Since Facebook informed us it was going public, and it's estimated IPO valuation was reported, debate has raged over whether the company could possibly be worth $75-$100B. Almost nobody writes that Facebook is undervalued, but many question whether it is overvalued.
If you are a trader, moving in and out of positions monthly and using options to leverage short-term price swings then this article is not for you. But, if you are an investor, someone who holds most stock purchases for a year or longer, then Facebook's IPO may be undervalued. The longer you can hold it, the more you'll likely make. Buy it in your IRA if possible, then let it build you a nice nest egg.
About 85% of Facebook's nearly $4B revenues, which almost doubled in 2011, are from advertising. So understanding advertising is critical to knowing why you want to buy, and hold, Facebook.
Facebook has 28% of the on-line display ad market, but only 5% of all on-line advertising. On-line advertising itself is generally predicted to grow at 16%/year. But there is a tremendous case to be made that the market will grow a whole lot faster, and Facebook's share will become a whole lot larger.
At the end of January Proctor & Gamble's stock took a hit as earnings missed expectations, and the CEO projected a tough year going forward. He announced 1,600 layoffs, many in marketing, as he admitted the ad budget was going to be "moderated" – code for cut. While advertising had grown at 24%/year sales were only growing at 6%. He then admitted that the "efficiency" of on-line advertising was demonstrating the ability to be much higher than traditional advertising. In other words, he is planning to cut traditional marketing and advertising, such as coupon printing and ads in newspapers and television, and spend more on-line.
P&G spends about $10B/year on advertising. 2.5x the Facebook revenue. Now, imagine if P&G moves 10% – or 25% – of its advertising from television (which is now a $250B market) on-line. That is $1-$2.5B per year, from just one company! Such a "marginal" move, by just one company, adds 1-3% to the total on-line market. Now, magnify that across Unilever, Danon, Kimberly-Clark, Colgate, Avon, Coke, Pepsi …… the 200 or 300 largest advertisers and it becomes a REALLY BIG number.
The trend is clear. People spend less time watching TV and reading newspapers. We all interact with information and entertainment more and more on computers and mobile devices. Ad declines have already killed newspapers, and television is on the precipice of following its print brethren. The market shift toward advertising on-line will continue, and the trend is bound to accelerate.
Last year P&G launched an on-line marketing program for Old Spice. The CEO singled out the 1.8 billion free impressions that received on-line. When the CEO of one of the world's largest advertisers takes note, and says he's going to move that way, you can bet everyone is going to head that direction. Especially as they recognize the poor "efficiency" of traditional media spending.
And don't forget the thousands of small businesses that have much smaller budgets. Most of them rarely, or never, could afford traditional media. On-line is not only more effective, but far cheaper. Especially as mobile devices makes local marketing even more targeted and effective. So as big companies shift to on-line we can expect small to medium sized businesses to shift as well, and new advertisers are being created which will expand the market even further. This trend could lead to a much faster organic market growth rate beyond 16% – perhaps 25% or even more!
Which brings us back to Facebook, which will be the primary beneficiary of this market shift.
Facebook is rapidly catching up with Google in the referral business. 850 million users is important, because it shows the ability Facebook has to bring people on-line, keep them on-line and then refer them somewhere. The kind of thing that made Google famous, big and valuable with search a decade ago. In fact, people spend much more time on Facebook than they do Google. When advertisers want to reach their audience they go where the people are (and are being referred) and that is Facebook. Nobody else is even close.
The good thing about having a big user base, and one that shares information, is the ability to gather data. Just like Google kept all those billions of searches to analyze and share data, increasingly Facebook is able to do the same. Facebook will be able to tell advertisers how people interact, how they move between pages, what keeps them on a page and what leads to buying behavior. Facebook uses this data to help users be more effective, just like Google does to help us do great searches. But in the future Facebook can package and sell this data to advertisers, helping them be more effective, and they can use it for selling, and placing, ads.
Facebook usage is dominant in social media, but becoming more dominant in all internet use. Like how Windows became the dominant platform for PC users, Facebook is well on its way to being the platform for how we use the web. Email will be less necessary as we communicate across Facebook with those we really want to know. Information on topics of interest will stream to us through Facebook because we select them, or our friends refer them. Solving problems will use referrals more, and searching less. The platform will help us be much more efficient at using the internet, and that reinforces more usage and more users. All the while attracting more advertisers.
The big losers will be traditional media. We may watch sports live, but increasingly we'll be unwilling to watch streaming TV as the networks trained boomers. Companies like NBC will suffer just as newspaper giants such as Tribune Corp., New York Times and Dow Jones. Ad agencies will have a very tough time, as ad budgets drop their placement fees will decline concomittantly. Lavish spending on big budget ads will also decline.
Anyone in on-line advertising is likely to be a winner initially. Linked-in, Twitter, Pinterest and Google will all benefit from the market shift. But the biggest winner of all will be Facebook.
What if the on-line ad market grows 25%/year (think not possible? look at how fast the smartphone and tablet markets have grown while PC sales have stagnated last 2 years as that market shifted. And don't forget that incremental amount could easily happen just by the top 50 CPG companies moving 10% of their budget!)? That adds $20-$25B incrementally. If Facebook's share shifts from 5% to 10% that would add $2-2.5B to Facebook first year; more than 50%!
Blow those numbers up just a bit more. Say double on-line advertising and give Facebook 20% share as people drop email and traditional search for Facebook – plus mobile device use continues escalating. Facebook revenues could double up, or more, for several years as trends obsolete newspapers, magazines, televisions, radios, PCs and traditional thoughts about advertising.
If you missed out on AT&T in the 1950s, IBM in the 1960s, Microsoft in 1980, or Apple in 2000, don't miss this one. Forget about all those spreadsheets and short-term analyst forecasts and buy the trend. Buy Facebook.
