They stayed too long at the (holiday) party – The Oracle and Best Buy Hangover


It’s a wise person who knows never to be the last person at a business holiday party.  Things never go well for those who stay too late. 

Yet, far too many businesses stay way, way too long at their market party, focusing on the same strategy when they should have moved into new competition a whole lot earlier.

This week Oracle missed earnings estimates, and the stock fell some 14%, from $30 to under $26.  For the year, Oracle is down about a third, from it’s high of $37.  The question any investor needs to ask is the one headlined by ZDnet.comOracle Earnings: An Aberration or Trend?

Oracle is very, very poorly positioned for future earnings growth.  Like most big software companies, including Microsoft and SAP, Oracle built its business on the formula of large data centers running large “enterprise applications” supporting lots of independent corporate PC users. 

And it was clear fully a year (or 2) ago that market simply isn’t growing.  Organizations are rapidly shifting away from hard to use, one-size-fits-all (at very high cost) enterprise software applications.  Users are moving away from PCs to mobile devices, and refusing to use clunky enterprise interfaces.  Worse, software is moving away from data centers in client-server configurations tied to PCs.  Instead, companies small and large are rapidly shifting to software-as-service (SAS) environments where the company can pay “by the use” for software maintained in the “cloud.”  These solutions are scalable, cheaper to buy, cheaper to implement, vastly more flexible and operate on mobile devices a whole lot better.  If you’ve ever used Salesforce.com you’ve experienced the benefit compared to more clunky enterprise Customer Resource Management (CRM) applications.

Oracle missed this trend.  Despite all the dozens of acquisitions Oracle has made – such as buying Unix hardware provider Sun Microsystems, it largely missed the shift to cloud architectures.  It has remained far, far too long at its party, enjoying the profit-laden punch, and hoping the market would never shift.  As the customer base shrank to fewer, and ever larger, big corporations Oracle did not prepare for changes in its business the next day.  Oracle has stayed too long, and its ability to compete in new markets against more flexible solution providers such as IFS with better user interface capabilities looks really weak. 

Somehow, Best Buy fell into the same trap.  In early December the country’s largest “big box” retailer announced lower earnings after cutting prices to shore up revenues.  As a result the stock dropped 20%, from about $28 to $22 – continuing a pretty much downhill slide all year of nearly 40% from its high of $36.

Best Buy felt like it was doing great after Circuit City failed.  Circuit City had been a darling of the infamous “Good to Great” text.  But Circuit City demonstrated that in a market dominated by a long-term trend away from fixed stores and toward on-line purchases, every retailer is bound to struggle. 

When Circuit City failed in 2008 investors worried that a weak economy would tank Best Buy as well.  But as all that Circuit City capacity disappeared, Best Buy was a short-term winner.

Unfortunately, Best Buy leadership confused short-term sales re-allocation with long-term trends.  They, along with a lot of other locked-in brick-and-mortar retailers, felt that things would quickly “return to normal” and Circuit City was the company caught out in the cold when the music stopped.  Best Buy chose to stay at its party too long – hoping the dancing would never stop.  Its leaders chose to ignore the long-term trend away from traditional retail toward on-line shopping.  No wonder BusinessInsider.com headlined a famed investor “Marc Andreessen: Retailers Should Be Scared About 2012.”

What’s surprising is how many people in business think the party will simply never end.  That everyone can keep drinking and dancing and rolling in the profits.  Even when the trends are obvious.

This 2011 holiday season, every business team should be asking itself “are we staying at the party too long?  What trends are affecting our business – and likely to bring this party to a crashing end?  What are we doing to prepare for a tough competition tomorrow.” 

If you don’t, it’s far too easy you could end up on the downhill slide, with one heck of a horrible hangover – like Oracle and Best Buy – in 2012.

 

Microsoft’s Dismal Future

"Microsoft's Dismal Future" is the title of my most recent column on Forbes.com In it I compare Microsoft with such formerly great, but now struggling, companies as Xerox and Kodak.  Looking at all the Lock-in at Microsoft, Balmer's complete unwillingness to Disrupt traditional Lock-ins, and the total lack of White Space for new market projects – Microsoft is a very likely candidate to follow Silicon Graphics. Sun Microsystems, DEC and a host of other formerly great technology companies into the history books.  And it could well happen in less than a decade.  Don't forget, in 2000 Sun was worth $200billion – and now the company no longer exists!

If I gave you $1,000 and told you keeping it required you invest it all in Microsoft or Apple, which would you pick?  For followers of this blog, there can be only one answer – it has to be Apple.  While Microsoft has a great past, it has not been using White Space to exploit technology developments in new markets.  All go-to-market projects have been around Defending & Extending the traditional PC market.  With products like Vista, OS 7 and now Office 10.  But reality is that all of us are using PCs a lot less these days.  Increasingly we use smart mobile devices to get out work done – eschewing even the laptop – much less the desktop machine.  Increasingly we are happy with PDF files and HTML text – not needing elaborate Excel Spreadsheets, or Word documents or flashy Powerpoint files.

Meanwhile Apple is a major participant in the new markets being developed!  It's iPhone is a leader in smartphones, where its mere 5% market share has allowed the company to sell 2 billion downloaded applications in the first 18 months!  And although digital music is becoming the norm as CDs disappear, iTunes maintains a very healthy 70% market share of digital music downloads.  And Apple is moving forward into digital publishing with the iPad launch, as well as hundreds of new applications for low-cost but highly functional tablets (a market Microsoft pioneered but exited.)

Many people invest by looking in the rear view mirror.  But Microsoft increasingly looks like a "has been" story.  Looking out the windshield, it's hard to place Microsoft on the future horizon.  Give the Forbes article a read and let me know what you think!