Summary:
- We like to think of "mature" businesses as good
- AT&T was a "mature" business, yet it failed
- "Maturity" leads to inward focus, and an unwillingness to adjust to market shifts
- Microsoft is trying to reposition itself as a "mature" company
- Despite its historical strengths, Microsoft has astonishing parallels to AT&T
- Growth is less risky than "maturity" for investors, employees and customers
Why doesn't your business grow like Apple or Google? Is it because you think of your business, or the marketplace you serve, as "mature?" Quite a euphanism, maturity. It sounds so good. How could being "mature" be bad? As children we strive to be "mature." The leader is usually the most "mature" person in the group. Those who like good art have "mature" taste. Surely, we should want to be "mature." And we should want our businesses to reach "maturity" and have "mature" leaders who don't take unnecessary risks. Once "mature" the business should be safe for investors, employees, suppliers and customers.
That was probably what the folks at AT&T thought. When judge Greene broke up AT&T in 1984 the company had a near monopoly on long-distance. AT&T was a "mature" company in a "mature" telephone industry. It appeared as though all AT&T had to do was keep serving its customers, making regular improvements to its offering, to perpetually maintain its revenue, jobs and profitability. A very "mature" company, AT&T's "mature" management knew everything there was to know about long distance – about everything related to communications. And due to its previous ownership of Bell Labs and Western Union, it had deep knowledge about emerging technologies and manufacturing costs allowing AT*T to make "mature" decisions about investing in future markets and products. This "mature" company would be able to pay out dividends forever! It seemed ridiculous to think that AT&T would go anywhere but up!
Unfortunately, things didn't work out so well. The "mature" AT&T saw its market share attacked by upstarts MCI and Sprint. As a few "early adopters" switched services – largely residential and other very small customers – AT&T was unworried. It still had most of the market and fat profits. As these relatively insignificant small users switched, AT&T reinforced its world's largest billing system as an incomparable strength, and reminded everyone that its "enterprise" (corporate) offerings were still #1 (anybody remember AT&T long distance cards issued by your employer for use at pay phones?).
But unfortunately, what looked like an unassailable market position in 1984 was eventually diminished dramatically as not only homeowners but corporations started shifting to new offerings from competitors. New pricing plans, "bundled" products and ease of use encouraged people to try a new provider. And that AT&T had become hard to work with, full of rules and procedures that were impossible for the customer to comprehend, further encouraged people to try an alternative. Customers simply got fed up with rigid service, outdated products and high prices.
Unexpectedly, for AT&T, new markets started to grow much faster and become more profitable than long distance voice. Data services started using a lot more capacity, and even residential customers started wanting to log onto the internet. Even though AT&T had been the leader (and onetime monopolist – did you know broadcast television was distributed over an AT&T network?) with these services, this "mature" company continued to focus on its traditional voice business – and was woefully late to offer commercial or residential customers new products. Not only were dial-up offerings delayed, but higher speed ISDN and DSL services went almost entirely to competitors.
And, much to the chagrin of AT&T leaders, customers started using their mobile phones a lot more. Initially viewed as expensive toys, AT&T did not believe that the infrastructure would be built quickly, nor be robust enough, to support a large base of cellular phone users. Further, AT&T anticipated pricing would keep most people from using these new products. Not to mention the fact that these new phones simply weren't very good – as compared to land-line services according to the metrics used by AT&T. The connection quality was wildly inferior to traditional long distance, and frequently calls were completely dropped! So AT&T was slow to enter this market, half-hearted in its effort, and failed to make any profits.
Along the way a lot of other "non-core" business efforts failed. There was the acquisition of Paradyne, an early leader in modems, that did not evolve with fast changing technology. New products made Paradyne's early products obsolete and the division disappeared. And the acquisition of computer maker NCR failed horribly after AT&T attempted to "improve" management and "synergize" it with the AT&T customer base and offerings.
AT&T had piles and piles of cash from its early monopoly. But most of that money was spent trying to defend the long distance business. That didn't work. Then there was money lost by wheelbarrow loads trying to enter the data and mobile businesses too late, and with little new to offer. And of course the money spent on acquisitions that AT&T really didn't know how to manage was all down the proverbial drain.
Despite its early monopoly, high cash flow, technology understanding, access to almost every customer and piles of cash, AT&T failed. Today the company named AT&T is a renamed original regional Bell operatiing company (RBOC) created in the 1984 break-up — Southwestern Bell. This classically "mature" company, a stock originally considered "safe" for investing in the "widow's and orphan's fund" used up its money and became obsolete. "Mature" was a misnomer used to allow AT&T to hide within itself; to focus on its past, instead of its future. By being satisfied with saying it was "mature" and competing in "mature" markets, AT&T allowed itself to ignore important market shifts. In just 25 years the company that ushered in mass communications, that had an incredibly important history, disappeared.
I was struck today when a Reuters story appeared with the headline "Sleepy in Seattle: Microsoft Learns to Mature." There's that magic word – "mature." While the article lays out concerns with Microsoft, there were still analysts quoted as saying that investors didn't need to worry about Microsoft's future. Investors simply need to change their thinking. Instead of a "growth" company, they should start thinking of Microsoft as a "mature" company. It sounds so reassuring. After all:
- Microsoft has a near monopoly in its historical business
- Microsoft has a huge R&D budget, and is familiar with all the technologies
- Microsoft has piles and piles of cash
- Microsoft has huge margins in its traditional business – in fact profits in operating systems and office automation exceed 100% of the total because it loses billions of dollars in other things like Bing, MSN and its incredibly expensive foray into gaming systems (xBox)
- Markets won't shift any time soon – say to this new "cloud computing" – and Microsoft will surely have products when they are needed if there is a market shift
- While home users may buy these new smartphones, tablets and some Macs, enterprise customers will keep using the technology they've long purchased
- Microsoft is smart to move slowly into new markets, it shouldn't cannibalize its existing business by encouraging customers to change platforms. Going slow and being late is a good thing for profits
- Although Microsoft has been late to smartphones and tablets, with all their money and size surely when they do get to market they will beat these upstarts Apple and Google, et. al.
Sure made me think about AT&T. And the fact that Apple is now worth more than Microsoft. Made me wonder just how comfortable investors should be with a "mature" Microsoft. Made me wonder how much investors, employees and customers should trust a "mature" CEO Ballmer.
Looking at the last 10 years, it seems like there's a lot more risk in "mature" companies than in "growth" ones. We can be almost certain that Apple and Google, which have produced huge returns for investors, will grow for the next 3 years, improving cash flow and profitability just by remaining in existing new markets. But of course both have ample new products pioneering yet more new markets. And companies like NetApp look pretty safe, building a fast-growing base of customers who are already switching to cloud computing – and producing healthy cash flow in the emerging marketplace.
Meanwhile, the track record for "mature" companies would leave something to be desired. One could compare Amazon to Circuit City or Sears. Or just list some names: AT&T, General Motors, Chrysler, Xerox, Kodak, AIG, Citibank, Dell, EDS, Sun Microsystems. Of course each of these is unique, with its own story. Yet….