Why You Want to Own Facebook Rather Than Google

Why You Want to Own Facebook Rather Than Google

Last week saw another slew of quarterly earnings releases.  For long term investors, who hold stocks for years rather than months, these provide the opportunity to look at trends, then compare and contrast companies to determine what should be in their portfolio.  It is worthwhile to compare the trends supporting the valuations of market leaders Google and Facebook.

Facebook v GoogleGoogle once again reported higher sales and profits.  And that is a good thing. But, once again, the price of Google’s primary product declined. Revenues increased because volume gains exceeded the price decline, which indicates that the market for internet ads keeps growing. But this makes 15 straight quarters of price declines for Google.  Due to this long series of small declines, the average price of Google’s ads (cost per click) has declined 70%* since Q3 2011!

While this is a miraculous example of what economists call demand elasticity, one has to wonder how long growth will continue to outpace price degradation.  At some point the marginal growth in demand may not equal the marginal decline in pricing. Should that happen, revenues will start going down rather than up.

Part of what drives this price/growth effect has been the creation of programmatic ad buying, which allows Google to place more ads in more specific locations for advertisers via such automated products as AdMob, AdExchange and DoubleClick Bid Manager.  But such computerized ad buying relies on ever more content going onto the web, as well as ever more consumption by internet users.

Further, Google’s revenues are almost entirely search-based advertising, and Google dominates this category.  But this is largely a PC-related sale.  Today 67.5% of Google ad revenue is from PC searches, while only 32.5% is from mobile searches.  Due to this revenue skew, and the fact that people do more mobile interaction via apps, messaging apps and social media than browser, search ad growth has fallen considerably.  What was a 24% year over year growth rate in Q1 2012 has dropped to more like 15% for the last 8 quarters.

So while the market today is growing, and Google is making more money, it is possible to see that the growth is slowing.  And Google’s efforts to create mobile ad sales outside of search has largely failed, as witnessed by the  recent death of Google+ as competition for Twitter or Facebook. It is the market shift, to mobile, which creates the greatest threat to Google’s ability to grow; certainly at historical rates.

Simultaneously, Facebook’s announcements showed just how strongly it is continuing to dominate both social media and mobile, and thus generate higher revenues and profits with outstanding growth.  The #1 site for social media and messenger apps is Facebook, by quite a large margin.  But, Facebook’s 2014 acquisition of What’sApp is now #2.  WhatsApp has doubled its monthly active users (MAUs) just since the acquisition, and now reaches 800million. Growth is clearly accelerating, as this is from a standing start in 2011.

Facebook Messenger at #3, just behind WhatsApp.  And #5 is Instagram, another Facebook acquisition.  Altogether 4 of the top 5 sites, and the ones with greatest growth on mobile, are Facebook.  And they total over 3billion MAUs, growing at over 300million new MAUs/month.  Thus Facebook has already emerged as the dominant force, with the most users, in the fast-growing, accelerating, mobile and app sectors.  (Just as Google did in internet search a decade ago, beating out companies like Yahoo, Ask Jeeves, etc.)

Google is moving rapidly to monetize this user base.  From nothing in early 2012, Facebook’s mobile revenue is now $2.5B/quarter and represents 67% of global revenue (the inverse of Google’s revenues.)  Further, Facebook is now taking its own programmatic ad buying tool, Atlas, to advertisers in direct competition with Google.  Only Atlas places ads on both social media and internet browser pages – a one-two marketing punch Google has not yet cracked.

Google’s $17.3B Q1 2015 revenue is 30 times the revenue of Facebook.  There is no doubt Google is growing, and generating enormous profits.  But, for long-term investors, growth is slowing and there is reason to be concerned about the long term growth prospects of Google as the market shifts toward more social and more mobile.  Google has failed to build any substantial revenues outside of search, and has had some notable failures recently outside its core markets (Google + and Google Glass.)  Just how long Google will continue growing, and just how fast the market will shift is unclear.  Technology markets have shown the ability to shift a lot faster than many people expected, leaving some painful losers in their wake (Dell, HP, Sun Microsystems, Yahoo, etc.)

Meanwhile, Facebook is squarely positioned as the leader, without much competition, in the next wave of market growth.  Facebook is monetizing all things social and mobile at a rapid clip, and wisely using acquisitions to increase its strength.  As these markets continue on their well established trends it is hard to be anything other than significantly optimistic for Facebook long-term.

* 1x .93 x .88 x .84 x .85 x .94 x .96 x .94 x .93 x .89 x .91 x .94 x .98 x .97 x .95 x .93 = .295

 

Why Microsoft Windows 10 Really Doesn’t Matter

Yesterday Microsoft conducted a pre-launch of Windows 10, demonstrating its features in an effort to excite developers and create some buzz before consumer launch later in 2015.

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By and large, nobody cared.  Were you aware of the event? Did you try to watch the live stream, offered via the Microsoft web site?  Were you eager to read what people thought of the product?  Did you look for reviews in the Wall Street Journal, USA Today and other general news outlets?

Windows10_1

Microsoft really blew it with Windows 8 – which is the second most maligned Windows product ever, exceeded only by
Vista.  But that wasn’t hard to predict, in June, 2012.  Even then it was clear that Windows 8, and Surface tablets, were designed to defend and extend the installed Windows base, and as such the design precluded the opportunity to change the market and pull mobile users to Microsoft.

And, unfortunately, that is how Windows 10 has been developed.  At the event’s start Microsoft played a tape driving home how it interviewed dozens and dozens of loyal Windows customers, asking them what they didn’t like about 8, and what they wanted in a Windows upgrade.  That set the tone for the new product.

Microsoft didn’t seek out what would convert all those mobile users already on iOS or Android to throw away their devices and buy a Microsoft product.  Microsoft didn’t ask its defected customers what it would take to bring them back, nor did it ask the over 50% of the market using Windows 7 or older products what it would take to get them to go to Windows mobile rather than an iPad or Galaxy tablet.  Nope.  Microsoft went to its installed base and asked them what they would like.

Imagine it’s 1975 and for two decades you have successfully made and sold small offset printing presses.  Every single company of any size has one in their basement.  But customers have started buying really simple, easy to use Xerox machines.  Fewer admins are sending even fewer jobs to the print shop in the basement, as they choose to simply run off a bunch of copies on the Xerox machine.  Of course these copies are more expensive than the print shop, and the quality isn’t as good, but the users find the new Xerox machines good enough, and they are simple and convenient.

What are you to do if you make printing presses?  You probably need to find out how you can get into a new product that actually appeals to the users who no longer use the print shop.  But, instead, those companies went to the print shop operators and asked them what they wanted in a new, small print machine.  And then the companies upgraded their presses and other traditional printing products based upon what that installed base recommended.  And it wasn’t long before their share of printing eroded to a niche of high-volume, and often color, jobs.  And the commercial print market went to Xerox.

That’s what Microsoft did with Windows 10.  It asked its installed base what it wanted in an operating system.  When the problem isn’t the installed base, its the substitute product that is killing the company.  Microsoft didn’t need input from its installed base of loyal users, it needed input from people who have quit using HP laptops in favor of iPads.

There are a lot of great new features in Windows 10.  But it really doesn’t matter.

The well spoken presenters from Microsoft laid out how Windows 10 would be great for anyone who wants to go to an entirely committed Windows environment.  To achieve Microsoft’s vision of the future every one of us will throw away our iOS and Android products and go to Windows on every single device.  Really.  There wasn’t one demonstration of how Windows would integrate with anything other than Windows.  And there appeared on intention of making the future an interoperable environment.  Microsoft’s view was we would use Windows on EVERYTHING.

Microsoft’s insular view is that all of us have been craving a way to put Windows on all our devices.  We’ve been sitting around using our laptops (or desktops) and saying “I can’t wait for Microsoft to come out with a solution so I can throw away my iPhone and iPad.  I can’t wait to tell everyone in my organization that now, finally, we have an operating system that IT likes so much that we want everyone in the company to get  rid of all other technologies and use Windows on their tablets and phones – because then they can integrate with the laptops (that most of us don’t use hardly at all any longer.)”

Microsoft even went out of its way to demonstrate how well Win10 works on 2-in-1 devices, which are supposed to be both a tablet and a laptop.  But, these “hybrid” devices really don’t make any sense.  Why would you want something that is both a laptop and a tablet?  Who wants a hybrid car when you can have a Tesla?  Who wants a vehicle that is both a pick-up and a car (once called the El Camino?) Microsoft thinks these are good devices, because Microsoft can’t accept that most of us already quit using our laptop and are happy enough with a tablet (or smartphone) alone!

Microsoft presenters repeatedly reminded us that Windows is evolving.  Which completely ignores the fact that the market has been disrupted.  It has moved from laptops to mobile devices.  Yes, Windows has a huge installed base on machines that we use less and less.  But Windows 10 pretends that there does not exist today an equally huge, and far more relevant, installed base of mobile devices that already has millions of apps people use every single day over and over.  Microsoft pretended as if there is no world other than Windows, and that a more robuts Windows is something people can’t wait to use!  We all can’t wait to go back to a exclusive Microsoft world, using Windows, Office, the new Spartan browser – and creating documents, spreadsheets and even presentations using Office, with those hundreds of complex features (anyone know how to make a pivot table?) on our phones!

Just like those printing press manufacturers were sure people really wanted documents printed on presses, and couldn’t wait to unplug those Xerox machines and return to the old way of doing things.  They just needed presses to have more features, more capabilities, more speed!

The best thing in Windows 10 is Cortana, which is a really cool, intelligent digital assistant.  But, rather than making Cortana a tool developers can buy to integrate into their iOS or Android app the only way a developer can use Cortana is if they go into this exclusive Windows-only world.  That’s a significant request.

Microsoft made this mistake before.  Kinect was a great tool.  But the only way to use it, initially, was on an xBox – and still is limited to Windows.  Despite its many superb features, Kinect didn’t develop anywhere near its potential.  Cortana now suffers from the same problem.  Rather than offering the tool so it can find its best use and markets, Microsoft requires developers and consumers buy into the Windows-exclusive world if you want to use Cortana.

Microsoft hasn’t yet figured out that it lost relevance years ago when it missed the move to mobile, and then launched Windows 8 and Surface to markets that didn’t really want those products.  Now the market has gone mobile, and the leader isn’t Microsoft.  Microsoft has to find a way to be relevant to the millions of people using alternative products, and the Windows 10 vision, which excludes all those competing devices, simply isn’t it.

There was lots of neat geeky stuff shown.  Surface tablets using Windows 10 with an xBox app can now do real gaming, which looks pretty cool and helps move Microsoft forward in mobile gaming.  That may be a product that sets Sony’s Playstation and Nintendo’s Wii on their heels.  But that’s gaming, and historically not where Microsoft makes any money (nor for that matter does Sony or Nintendo.)

There is a new interactive whiteboard that integrates Skype and Windows tablets for digital enhancement of brainstorming meetings.  But it is unclear how a company uses it when most employees already have iPhones or Samsung S5s or Notes.  And for the totally geeky there was a demo of a holographic headset.  But when it comes to disruptive products like this success requires finding really interesting applications that otherwise cannot be completed, and then the initial customers who have a really desperate need for that application who will become devoted users.

Launching such disruptive products has long been the bane of Microsoft’s existence.  Microsoft thinks in mass market terms, and selling to its base.  Not developing breakthrough applications and finding niche markets to launch new uses.  Nor has Microsoft created a developer community aligned with that kind of work.  They have long been taught to simply continue to do things that defend and extend the traditional base of product uses and customers.

The really big miss for this meeting was understanding developer needs.  Today developers have an enormous base of iOS and Android users to whom they can sell their products.  Windows has less than 3% share in mobile devices.  What developer would commit their resources to developing products for Windows 10, which has an installed base only in laptops and desktops?  In other words, yesterday’s technology base?  Especially when to obtain the biggest benefits of Windows 10 that developer has to find end use customers (companies or consumers) willing to commit 100% to Windows everywhere – even including their televisions, thermostats and other devices in our ever smarter buildings?

Windows 10 has a lot of cool features.  But Microsoft made a big miss by listening to the wrong people.  By assuming its installed base couldn’t wait for a Microsoft-exclusive solution, and by behaving as if the installed base of mobile devices either didn’t exist or didn’t matter, the company showed its hubris (once again.)  If all it took to succeed were great products, the market would never have shifted from Macintosh computers to Windows machines in the 1990s.  Microsoft simply doesn’t realize that it lacks the relevance to pull of its grand vision, and as such Windows 10 has almost no chance of stopping the Apple/Google/Samsung juggernaut.

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Five Worst CEOs Revisited – How Many Jobs Did They Create this Labor Day?

Five Worst CEOs Revisited – How Many Jobs Did They Create this Labor Day?

It’s Labor Day, and a time when we naturally think about our jobs.

When it comes to jobs creation, no role is more critical than the CEO.  No company will enter into a growth phase, selling more product and expanding employment, unless the CEO agrees.  Likewise, no company will shrink, incurring job losses due to layoffs and mass firings, unless the CEO agrees.  Both decisions lay at the foot of the CEO, and it is his/her skill that determines whether a company adds jobs, or deletes them.

Ed Lampert, CEO Sears

Over 2 years ago (5 May, 2012) I published “The 5 CEOs Who Should Be Fired.”  Not surprisingly, since then employment at all 5 of these companies has lagged economic growth, and in all but one case employment has shrunk.  Yet, 3 of these CEOs remain in their jobs – despite lackluster (and in some cases dismal) performance. And all 5 companies are facing significant struggles, if not imminent failure.

#5 – John Chambers at Cisco

In 2012 it was clear that the market shift to public networks and cloud computing was forever changing the use of network equipment which had made Cisco a modern growth story under long-term CEO Chambers.  Yet, since that time there has been no clear improvement in Cisco’s fortunes.  Despite 2 controversial reorganizations, and 3 rounds of layoffs, Cisco is no better positioned today to grow than it was before.

Increasingly, CEO Chambers’ actions reorganizations and layoffs look like so many machinations to preserve the company’s legacy rather than a clear vision of where the company will grow next.  Employee morale has declined, sales growth has lagged and although the stock has rebounded from 2012 lows, it is still at least 10% short of 2010 highs – even as the S&P hits record highs.  While his tenure began with a tremendous growth story, today Cisco is at the doorstep of losing relevancy as excitement turns to cloud service providers like Amazon.  And the decline in jobs at Cisco is just one sign of the need for new leadership.

#4 Jeff Immelt at General Electric

When CEO Immelt took over for Jack Welch he had some tough shoes to fill.  Jack Welch’s tenure marked an explosion in value creation for the last remaining original Dow Jones Industrials component company.  Revenues had grown every year, usually in double digits; profits soared, employment grew tremendously and both suppliers and investors gained as the company grew.

But that all stalled under Immelt.  GE has failed to develop even one large new market, or position itself as the kind of leading company it was under Welch.  Revenues exceeded $150B in 2009 and 2010, yet have declined since.  In 2013 revenues dropped to $142B from $145B in 2012.  To maintain revenues the company has been forced to continue selling businesses and downsizing employees every year.  Total employment in 2014 is now less than in 2012.

Yet, Mr. Immelt continues to keep his job, even though the stock has been a laggard.  From the near $60 it peaked at his arrival, the stock faltered.  It regained to $40 in 2007, only to plunge to under $10 as the CEO’s over-reliance on financial services nearly bankrupted the once great manufacturing company in the banking crash of 2009.  As the company ponders selling its long-standing trademark appliance business, the stock is still less than half its 2007 value, and under 1/3 its all time high.  Where are the jobs?  Not GE.

#3 Mike Duke at Wal-Mart

Mr. Duke has left Wal-Mart, but not in great shape.  Since 2012 the company has been rocked by scandals, as it came to light the company was most likely bribing government officials in Mexico.  Meanwhile, it has failed to defend its work practices at the National Labor Relations Board, and remains embattled regarding alleged discrimination of female employees.  The company’s employment practices are regularly the target of unions and those supporting a higher minimum wage.

The company has had 6 consecutive quarters of declining traffic, as sales per store continue to lag – demonstrating leadership’s inability to excite people to shop in their stores as growth shifts to dollar stores.  The stock was $70 in 2012, and is now only $75.60, even though the S&P 500 is up about 50%.  So far smaller format city stores have not generated much attention, and the company remains far behind leader Amazon in on-line sales.  WalMart increasingly looks like a giant trapped in its historical house, which is rapidly delapidating.

One big question to ask is who wants to work for WalMart?  In 2013 the company threatened to close all its D.C. stores if the city council put through a higher minimum wage.  Yet, since then major cities (San Francisco, Chicago, Los Angeles, Seattle, etc.) have either passed, or in the process of passing, local legislation increasing the minimum wage to anywhere from $12.50-$15.00/hour.  But there seems no response from WalMart on how it will create profits as its costs rise.

#2 Ed Lampert at Sears

Nine straight quarterly losses.  That about says it all for struggling Sears.  Since the 5/2012 column the CEO has shuttered several stores, and sales continue dropping at those that remain open.  Industry pundits now call Sears irrelevant, and the question is looming whether it will follow Radio Shack into oblivion soon.

CEO Lampert has singlehandedly destroyed the Sears brand, as well as that of its namesake products such as Kenmore and Diehard.  He has laid off thousands of employees as he consolidated stores, yet he has been unable to capture any value from the unused real estate.  Meanwhile, the leadership team has been the quintessential example of “a revolving door at headquarters.”  From about $50/share 5/2012 (well off the peak of $190 in 2007,) the stock has dropped to the mid-$30s which is about where it was in its first year of Lampert leadership (2004.)

Without a doubt, Mr. Lampert has overtaken the reigns as the worst CEO of a large, publicly traded corporation in America (now that Steve Ballmer has resigned – see next item.)

#1 Steve Ballmer at Microsoft

In 2013 Steve Ballmer resigned as CEO of Microsoft.  After being replaced, within a year he resigned as a Board member.  Both events triggered analyst enthusiasm, and the stock rose.

However, Mr. Ballmer left Microsoft in far worse condition after his decade of leadership.  Microsoft missed the market shift to mobile, over-investing in Windows 8 to shore up PC sales and buying Nokia at a premium to try and catch the market.  Unfortunately Windows 8 has not been a success, especially in mobile where it has less than 5% shareSurface tablets were written down, and now console sales are declining as gamers go mobile.

As a result the new CEO has been forced to make layoffs in all divisions – most substantially in the mobile handset (formerly Nokia) business – since I positioned Mr. Ballmer as America’s worst CEO in 2012.  Job growth appears highly unlikely at Microsoft.

CEOs – From Makers to Takers

Forbes colleague Steve Denning has written an excellent column on the transformation of CEOs from those who make businesses, to those who take from businesses.  Far too many CEOs focus on personal net worth building, making enormous compensation regardless of company performance.  Money is spent on inflated pay, stock buybacks and managing short-term earnings to maximize bonuses.  Too often immediate cost savings, such as from outsourcing, drive bad long-term decisions.

CEOs are the ones who determine how our collective national resources are invested.  The private economy, which they control, is vastly larger than any spending by the government. Harvard professor William Lazonick details how between 2003 and 2012 CEOs gave back 54% of all earnings in share buybacks (to drive up stock prices short term) and handed out another 37% in dividends.  Investors may have gained, but it’s hard to create jobs (and for a nation to prosper) when only 9% of all earnings for a decade go into building new businesses!

There are great CEOs out there.  Steve Jobs and his replacement Tim Cook increased revenues and employment dramatically at Apple.  Jeff Bezos made Amazon into an enviable growth machine, producing revenues and jobs.  These leaders are focused on doing what it takes to grow their companies, and as a result the jobs in America.

It’s just too bad the 5 fellows profiled above have done more to destroy value than create it.

Motorola’s Road to Irrelevancy – Focusing on Its Core

Motorola’s Road to Irrelevancy – Focusing on Its Core

Remember the RAZR phone?  Whatever happened to that company?

Motorola has a great tradition.  Motorola pioneered the development of wireless communications, and was once a leader in all things radio – as well as made TVs.  In an earlier era Motorola was the company that provided 2-way radios (and walkie-talkies for those old enough to remember them) not only for the military, police and fire departments,  but connected taxies to dispatchers, and businesses from electricians to plumbers to their “home office.”

Motorola was the company that developed not only the thing in a customer’s hand, but the base stations in offices and even the towers (and equipment on those towers) to allow for wireless communication to work.  Motorola even invented mobile telephony, developing the cellular infrastructure as well as the mobile devices.  And, for many years, Motorola was the market share leader in cellular phones, first with analog phones and later with digital phones like the RAZR.

Dynatac phone

But that was the former Motorola, not the renamed Motorola Solutions of today.  The last few years most news about Motorola has been about layoffs, downsizings, cost reductions, real estate sales, seeking tenants for underused buildings and now looking for a real estate partner to help the company find a use for its dramatically under-utilized corporate headquarters campus in suburban Chicago.

How did Motorola Solutions become a mere shell of its former self?

Unfortunately, several years ago Motorola was a victim of disruptive innovation, and leadership reacted by deciding to “focus” on its “core” markets.  Focus and core are two words often used by leadership when they don’t know what to do next.  Too often investment analysts like the sound of these two words, and trumpet management’s decision – knowing that the code implies cost reductions to prop up profits.

But smart investors know that the real implication of “focusing on our core” is the company will soon lose relevancy as markets advance.  This will lead to significant sales declines, margin compression, draconian actions to create short-term P&L benefits and eventually the company will disappear.

Motorola’s market decline started when Blackberry used its server software to help corporations more securely use mobile devices for instant communications.  The mobile phone transitioned from a consumer device to a business device, and Blackberry quickly grabbed market share as Motorola focused on trying to defend RAZR sales with price reductions while extending the RAZR platform with new gimmicks like additional colors for cases, and adding an MP3 player (called the ROKR.)  The Blackberry was a game changer for mobile phones, and Motorola missed this disruptive innovation as it focused on trying to make sustaining improvements in its historical products.

Of course, it did not take long before Apple brought out the iPhone and with all those thousands of apps changed the game on Blackberry.  This left Motorola completely out of the market, and the company abandoned its old platform hoping it could use Google’s Android to get back in the game.  But, unfortunately, Motorola brought nothing really new to users and its market share dropped to nearly nothing.

The mobile phone business quickly overtook much of the old Motorola 2-way radio business.  No electrician or plumber, or any other business person, needed the old-fashioned radios upon which Motorola built its original business.  Even police officers used mobile phones for much of their communication, making the demand for those old-style devices rarer with each passing quarter.

But rather than develop a new game changer that would make it once again competitive, Motorola decided to split the company into 2 parts.  One would be the very old, and diminishing, radio business still sold to government agencies and niche business applications.  This business was profitable, if shrinking. The reason was so that leadership could “focus” on this historical “core” market.  Even if it was rapidly becoming obsolete.

The mobile phone business was put out on its own, and lacking anything more than an historical patent portfolio, with no relevant market position, it racked up quarter after quarter of losses.  Lacking any innovation to change the market, and desperate to get rid of the losses, in 2011 Motorola sold the mobile phone business – formerly the industry creator and dominant supplier – to Google.  Again, the claim was this would allow leadership to even better “focus” on its historical “core” markets.

But the money from the Google sale was invested in trying to defend that old market, which is clearly headed for obsolescence.  Profit pressures intensify every quarter as sales are harder to find when people have alternative solutions available from ever improving mobile technology.

As the historical market continued to weaken, and leadership learned it had under-invested in innovation while overspending to try to defend aging solutions, Motorola again cut the business substantially by selling a chunk of its assets – called its “enterprise business” – to a much smaller Zebra Technologies.  The ostensible benefit was it would now allow Motorola leadership to even further “focus” on its ever smaller “core” business in government and niche market sales of aging radio technology.

But, of course, this ongoing “focus” on its “core” has failed to produce any revenue growth.  So the company has been forced to undertake wave after wave of layoffs.  As buildings empty they go for lease, or sale.  And nobody cares, any longer, about Motorola.  There are no news articles about new products, or new innovations, or new markets.  Motorola has lost all market relevancy as its leaders used “focus” on its “core” business to decimate the company’s R&D, product development, sales and employment.

Retrenchment to focus on a core market is not a strategy which can benefit shareholders, customers, employees or the community in which a business operates.  It is an admission that the leaders missed a major market shift, and have no idea how to respond.  It is the language adopted by leaders that lack any vision of how to grow, lack any innovation, and are quickly going to reduce the company to insignificance.  It is the first step on the road to irrelevancy.

Straight from Dr. Christensen’s “Innovator’s Dilemma” we now have another brand name to add to the list of those which were once great and meaningful, but now are relegated to Wikipedia historical memorabilia – victims of their inability to react to disruptive innovations while trying to sustain aging market positions – Motorola, Sears, Montgomery Wards, Circuit City, Sony, Compaq, DEC, American Motors, Coleman, Piper, Sara Lee………..

 

Microsoft’s Last Stand

Microsoft’s Last Stand

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

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.