by Adam Hartung | Feb 3, 2016 | Current Affairs, Leadership, Lifecycle, Web/Tech
The three highest valued publicly traded companies today (2/3/16) are Google/Alphabet, Apple and Microsoft. All 3 are tech companies, and they compete – although with different business models – in multiple markets. However, investor views as to their futures are wildly different. And that has everything to do with how the leadership teams of these 3 companies have explained their recent results, and described their futures.
Looking at the financial performance of these companies, it is impossible to understand the price/earnings multiple assigned to each. Apple clearly had better revenue and earnings performance in all but the most recent year. Yet, both Alphabet and Microsoft have price to earnings (P/E) multiples that are 3-4 times that of Apple.
Much was made this week about Alphabet’s valuation exceeding that of Apple’s. But the really big story is the difference in multiples. If Apple had a multiple even half that of Alphabet or Microsoft it’s value would be much, much higher.
But, as we can see, investors did the best over both 2 years and 5 years by investing in Microsoft. And Apple investors have fared the poorest of all 3 companies regardless of time frame. Looking at investment performance, one would think that the revenue and earnings performance of these companies would be the reverse of what’s seen in the first chart.
The missing piece, of course, is future expectations. In this column a few days ago, I pointed out that Apple has done a terrible job explaining its future. In that column I pointed out how Facebook and Amazon both had stratospheric P/E multiples because they were able to keep investors focused on their future growth story, even more than their historical financial performance.
Alphabet stole the show, and at least briefly the #1 valuation spot, from Apple by convincing investors they will see significant, profitable growth. Starting even before earnings announcements the company was making sure investors knew that revenues and profits would be up. But even more they touted the notion that Alphabet has a lot of growth in non-monetized assets. For example, vastly greater ad sales should be expected from YouTube and Google Maps, as well as app sales for Android phones through Google Play. And someday on the short horizon profits will emerge from Fiber transmission revenues, smart home revenues via Nest, and even auto market sales now that the company has logged over 1million driverless miles.
This messaging clearly worked, as Alphabet’s value shot up. Even though 99% of the company’s growth was in “core” products that have been around for a decade! Yes, ad revenue was up 15%, but most of that was actually on the company’s own web sites. And most was driven by further price erosion. The number of paid clicks were up 30%, but price/click was actually down yet another 15% – a negative price trend that has been happening for years. Eventually prices will erode enough that volume will not make up the difference – and what will investors do then? Rely on the “moonshot” projects which still have almost no revenue, and no proven market performance!
But, the best performer has been Microsoft. Investors know that PC sales have been eroding for years, that PC sales will continue eroding as users go mobile, and that PC’s are the core of Microsoft’s revenue. Investors also knows that Microsoft missed the move to mobile, and has practically no market share in the war between Apple’s iOS and Google’s Android. Further, investors have known forever that gaming (xBox,) search and entertainment products have always been a money-loser for Microsoft. Yet, Microsoft investors have done far better than Apple investors, and long-term better than Google investors!
Microsoft has done an absolutely terrific job of constantly trumpeting itself as a company with a huge installed base of users that it can leverage into the future. Even when investors don’t know how that eroding base will be leveraged, Microsoft continually makes the case that the base is there, that Microsoft is the “enterprise” brand and that those users will stay loyal to Microsoft products.
Forget that Windows 8 was a failure, that despite the billions spent on development Win8 never reached even 10% of the installed base and the company is even dropping support for the product. Forget that Windows 10 is a free upgrade (meaning no revenue.) Just believe in that installed base.
Microsoft trumpeted that its Surface tablet sales rose 22% in the last quarter! Yay! Of course there was no mention that in just the last 6 weeks of the quarter Apple’s newly released iPad Pro actually sold more units than all Surface tablets did for the entire quarter! Or that Microsoft’s tablet market share is barely registerable, not even close to a top 5 player, while Apple still maintains 25% share. And investors are so used to the Microsoft failure in mobile phones that the 49% further decline in sales was considered acceptable.
Instead Microsoft kept investors focused on improvements to Windows 10 (that’s the one you can upgrade to for free.) And they made sure investors knew that Office 365 revenue was up 70%, as 20million consumers now use the product. Of course, that is a cumulative 20million – compared to the 75million iPhones Apple sold in just one quarter. And Azure revenue was up 140% – to something that is almost a drop in the bucket that is AWS which is over 10 times the size of all its competitors combined.
To many, this author included, the “growth story” at Microsoft is more than a little implausible. Sales of its core products are declining, and the company has missed the wave to mobile. Developers are writing for iOS first and foremost, because it has the really important installed base for today and tomorrow. And they are working secondarily on Android, because it is in some flavor the rest of the market. Windows 10 is a very, very distant third and largely overlooked. xBox still loses money, and the new businesses are all relatively quite small. Yet, investors in Microsoft have been richly rewarded the last 5 years.
Meanwhile, investors remain fearful of Apple. Too many recall the 1980s when Apple Macs were in a share war with Wintel (Microsoft Windows on Intel processors) PCs. Apple lost that war as business customers traded off the Macs ease of use for the lower purchase cost of Windows-based machines. Will Apple make the same mistake? Will iPad sales keep declining, as they have for 2 years now? Will the market shift to mobile favor lower-priced Android-based products? Will app purchases swing from iTunes to Google Play as people buy lower cost Android-based tablets? Have iPhone sales really peaked, and are they preparing to fall? What’s going to happen with Apple now? Will the huge Apple mobile share be eroded to nothing, causing Apple’s revenues, profits and share price to collapse?
This would be an interesting academic discussion were the stakes not so incredibly high. As I said in the opening paragraph, these are the 3 highest valued public companies in America. Small share price changes have huge impacts on the wealth of individual and institutional investors. It is rather quite important that companies tell their stories as good as possible (which Apple clearly has not, and Microsoft has done extremely well.) And likewise it is crucial that investors do their homework, to understand not only what companies say, but what they don’t say.
by Adam Hartung | Jul 28, 2014 | Current Affairs, Defend & Extend, In the Whirlpool, Web/Tech
Over the last couple of weeks big announcements from Apple, IBM and Microsoft have set the stage for what is likely to be Microsoft’s last stand to maintain any sense of personal technology leadership.
Custer Tries Holding Off An Unstoppable Native American Force
To many consumers the IBM and Apple partnership probably sounded semi-interesting. An app for airplane fuel management by commercial pilots is not something most people want. But what this announcement really amounted to was a full assault on regaining dominance in the channel of Value Added Resellers (VARs) and Value Added Dealers (VADs) that still sell computer “solutions” to thousands of businesses. Which is the last remaining historical Microsoft stronghold.
Think about all those businesses that use personal technology tools for things like retail point of purchase, inventory control, loan analysis in small banks, restaurant management, customer data collection, fluid control tracking, hotel check-in, truck routing and management, sales force management, production line control, project management — there is a never-ending list of business-to-business applications which drive the purchase of literally millions of devices and applications. Used by companies as small as a mom-and-pop store to as large as WalMart and JPMorganChase. And these solutions are bundled, sold, delivered and serviced by what is collectively called “the channel” for personal technology.
This “channel” emerged after Apple introduced the Apple II running VisiCalc, and businesses wanted hundreds of these machines. Later, bundling educational software with the Apple II created a near-monopoly for Apple channel partners who bundled solutions for school systems.
But, as the PC emerged this channel shifted. IBM pioneered the Microsoft-based PC, but IBM had long used a direct sales force. So its foray into personal computing did a very poor job of building a powerful sales channel. Even though the IBM PC was Time magazine’s “Man of the Year” in 1982, IBM lost its premier position largely because Microsoft took advantage of the channel opportunity to move well beyond IBM as a supplier.
Microsoft focused on building a very large network of developers creating an enormous variety of business-to-business applications on the Windows+Intel (Wintel) platform. Microsoft created training programs for developers to use its operating system and tools, while simultaneously cultivating manufacturers (such as Dell and Compaq) to build low cost machines to run the software. “Solution selling” was where VARs bundled what small businesses – and even many large businesses – needed by bringing together developer applications with manufacturer hardware.
It only took a few years for Microsoft to overtake Apple and IBM by dominating and growing the VAR channel. Apple did a poor job of creating a powerful developer network, preferring to develop everything users should want itself, so quickly it lacked a sufficient application base. IBM constantly tried to maintain its direct sales model (and upsell clients from PCs to more expensive hardware) rather than support the channel for developing applications or selling solutions based on PCs.
But, over the last several years Microsoft played “bet the company” on its launch of Windows 8. As mobile grew in hardware sales exponentially, and PC sales flattened (then declined,) Microsoft was tepid regarding any mobile offering. Under former CEO Steve Ballmer, Microsoft preferred creating an “all-in-one” solution via Win8 that it hoped would keep PC sales moving forward while slowly allowing its legions of Microsoft developers to build Win8 apps for mobile Surface devices — and what it further hoped would be other manufacturer’s tablets and phones running Win8.
This flopped. Horribly. Apple already had the “installed base” of users and mobile developers, working diligently to create new apps which could be released via its iTunes distribution platform. As a competitive offering, Google had several years previously launched the Android operating system, and companies such as HTC and Samsung had already begun building devices. Developers who wanted to move beyond Apple were already committed to Android. Microsoft was simply far too late to market with a Win8 product which gave developers and manufacturers little reason to invest.
Now Microsoft is in a very weak position. Despite much fanfare at launch, Microsoft was forced to take a nearly $1B write-off on its unsellable Surface devices. In an effort to gain a position in mobile, Microsoft previously bought phone maker Nokia, but it was simply far too late and without a good plan for how to change the Apple juggernaut.
Apple is now the dominant player in mobile, with the most users, developers and the most apps. Apple has upended the former Microsoft channel leadership position, as solution sellers are now offering Apple solutions to their mobile-hungry business customers. The merger with IBM brings even greater skill, and huge resources, to augmenting the base of business apps running on iOS and its devices (presently and in the future.) It provides encouragement to the VARs that a future stream of great products will be coming for them to sell to small, medium and even large businesses.
Caught in a situation of diminishing resources, after betting the company’s future on Windows 8 development and launch, and then seeing PC sales falter, Microsoft has now been forced to announce it is laying off 18,000 employees. Representing 14% of total staff, this is Microsoft’s largest reduction ever. Costs for the downsizing will be a massive loss of $1.1-$1.6B – just one year (almost to the day) after the huge Surface write-off.
Recognizing its extraordinarily weak market position, and that it’s acquisition of Nokia did little to build strength with developers while putting it at odds with manufacturers of other mobile devices, the company is taking some 12,000 jobs out of its Nokia division – ostensibly the acquisition made at a cost of $7.2B to blunt iPhone sales. Every other division is also suffering headcount reductions as Microsoft is forced to “circle the wagons” in an effort to find some way to “hold its ground” with historical business customers.
Today Apple is very strong in the developer community, already has a distribution capability with iTunes to which it is adding mobile payments, and is building a strong channel of VARs seeking mobile solutions. The IBM partnership strengthens this position, adds to Apple’s iOS developers, guarantees a string of new solutions for business customers and positions iOS as the platform of choice for VARs and VADs who will use iBeacon and other devices to help businesses become more capable by utilizing mobile/cloud technology.
Meanwhile, Microsoft is looking like the 7th Cavalry at the Little Bighorn. Microsoft is surrounded by competitors augmenting iOS and Android (and serious cloud service suppliers like Amazon,) resources are depleting as sales of “core” products stagnate and decline and write-offs mount, and watching as its “supply line” developer channel abandons Windows 8 for the competitive alternatives.
CEO Nadella keeps saying that that cloud solutions are Microsoft’s future, but how it will effectively compete at this late date is as unclear as the email announcement on layoffs Nokia’s head Stephen Elop sent to employees. Keeping its channel, long the source of market success for Microsoft, from leaving is Microsoft’s last stand. Unfortunately, Nadella’s challenge puts him in a position that looks a lot like General Custer.
by Adam Hartung | Mar 20, 2012 | Current Affairs, Defend & Extend, In the Rapids, In the Swamp, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
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.
by Adam Hartung | Feb 29, 2012 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Innovation, Leadership, Web/Tech
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.
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 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!
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.
by Adam Hartung | Jun 16, 2011 | Defend & Extend, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
Dell is a dog. From $25/share a decade ago the company rose to around $40/share around 2005, only to collapse. The stock now trades around $15, rising from recent lows of about $10. The company’s value is only $30B, only half revenues of $61B, instead of the revenue multiple obtained by most growth stocks. But then, revenues have been flat for the last 4 years — so maybe it’s time to say Dell isn’t a growth stock any longer.
And that would be correct.
In the 1990s Dell was a darling. The company could do no wrong as its revenues and valuation soared. Founder and CEO Michael Dell was a highly desired speaker at fees of $100,000+. Michael Dell was quick to tell people his success formula, which was pretty simple:
- Do no R&D. Outsource product development to key vendors (Intel and Microsoft). Focus on price and cost. Be operationally excellent! Be the best, most focused manufacturer/assembler.
- Genericize the product. Make it easy to buy, thus cheap and easy to sell.
- Sell direct rather than through distributors so you lower sales cost.
- Use supply chain practices to drive down parts cost and inventory, making it possible to compete on price and collect your funds before paying vendors.
In short, focus on operational excellence to be really fast and cheap. Faster and cheaper than anyone else.
And this success formula worked!! As long as folks wanted personal computers, Dell was the game to beat. And the company reaped the reward of PC market growth, expanding as the PC – especially the Wintel PC – market exploded.
Dell’s problems today aren’t the result of bad management. Dell has been focused, diligent, hard working and very cost conscientuous. Dell made no horrible decisions, and made no serious mistakes in its strategy or tactics. Although for a while it was vilified for weaker support from outsourced vendors in India (again, a tactic used in all parts of Dell’s strategy) that was rectified. Largely for 2 decades Dell has continued to perform better and better at its internal metrics – its success formula.
Dell’s fall from grace was due to the market shifting. Firstly, competitors figured out how to do what Dell did pretty much as good as Dell did it. No operationally oriented strategy is immune from copy-cats, and Dell discovered other companies could do pretty much what they did. It becomes a dog-eat-dog world quickly when your discussions are all “price, delivery, service” and you can’t offer something truly unique. It may not be obvious when markets are growing, and there’s plenty of business for everyone, but oh how quickly it shows up in declining margins when growth slows.
Secondly, and more importantly, the market shifted away from Dell’s primary products. PC sales are now flat to declining, depending on marketplace, as customers shift from Wintel platforms to smartphones and tablets. Despite big acquisitions in data storage and services (to the tune of $5B the last couple of years) Dell still has 70% of its revenues in PCs (55% hardware, 15% software and services.) Most of that money was spent attempting to shore up the Dell success formula by extending its core offerings to core customers. Now all future forecasts show the market will continue to move away from PCs and toward new platforms, making it impossible to create organic growth, and pinching margins in all sectors.
So, were Dell’s executives dumb, incompetent, lethargic or some combination of all 3? Actually, none of those things – as CNNMoney.com points out in “Dell’s Dilemma“. They were simply stuck. Stuck with their own best practices, doing what they do really well, and continuing to do more of it. Unable to move forward, because most attention was focused on defending and extending the old core.
Nobody knows the Dell core better than Michael Dell. His return spells only less likelihood of success for Dell. As opportunities emerged in smartphones and other markets he found it simply easier, faster, cheaper and more consistent to wait on those markets while defending the core PC business. Key vendors Intel and Microsoft, critical to historical success, were not offering new solutions for these markets, or promoting sales in them. Key customers, the IT departments in government and corporate accounts, weren’t clamoring for these new products. They wanted more PCs that were better, faster and cheaper. Dell was looking for the divine light of perfect future understanding to change the company investments – and when it didn’t emerge he kept right on plunking money into the business headed for decline.
Inside consultants (Bain and Co. is well known to be the primary strategists and tacticians at Dell) and employee experts had never-ending opportunities to improve the Dell systems, in their efforts to defend the Dell sales against other PC competitors and seek out additional expansion opportunities in targeted offshore or niche markets. Suppliers wanted Dell to keep building and promoting PCs. And customers locked-in to old platforms were just experimenting with new solutions – far from adopting anything new in the volumes that would match historical PC sales. “If just the economy comes around, I’m sure sales will return” it’s easy to imagine everyone at Dell saying.
Now Dell is in declining products, with an outdated strategy chasing a larger competitor as margins continue to remain squeezed. Nobody wants to exit this business quickly, so prices are under ever greater pressure – especially since Android tablets are cheaper than laptops already – and smartphones can be had for free from the right wireless supplier.
It’s too late for Dell. The time to act was 5 years ago. Then Dell could have set up a team to explore the market for new solutions. Dell could have been the first to offer an Android phone or tablet – the company has plenty of smart folks who could experiment and figure it out. They could have championed the Zune, and created a download store for the product to compete with iPods and iTunes (the Zune is no longer supported by Microsoft.) But there were no resources, and no permission given to try changing the success formula.
As Chromebooks are launched (“The First Google Chromebooks are On Sale Now, Here’s Everything You Need to Know” BusinessInsider.com) Dell could have been the market leader, instead of Acer and Samsung. There’s even a chance that Dell might have blunted the huge market lead Apple created since 2005 if management had just created a team with the opportunity to really discover what people would do with these new solutions. There was a time a “strategic partnership” between Dell and Google could have been a big threat to Apple. But no longer.
Apple, which put its resources into pioneering new markets the last decade has seen its value explode many-fold. It’s value is over 10x Dell. Apple has enough cash to buy Dell outright. But why would it? Dell has become a niche player – and due to its lock-in to historical best practices and its old success formula has no opportunities to grow.
All companies risk becoming marginalized. Focusing on your core products, core technology vendors and core customers leads to blindness about the possibility of market shifts. You can work yourself to death, be focused and diligent, and remain dedicated to constant improvement — even excellence! But when markets shift it’s easy to become obsolete, and fall into margin killing price wars as growth stagnates. Just look at Dell. From darling to dog in just 10 years.
If you still own DELL, the recent price rise makes this a great time to SELL. Dell has no new products, and no idea how to move into new markets. It’s commitment to its core is a death knell. And without white space to do anything new, it can/t (and won’t) transform itself into a winner.
