Michael Dell has put together a hedge fund, one of his largest suppliers and some debt money to take his company, Dell, Inc. private. There are large investors threatening to sue, claiming the price isn't high enough. While they are wrangling, small investors should consider this privatization manna from heaven, take the new, higher price and run to invest elsewhere – thankful you're getting more than the company is worth.
In the 1990s everybody thought Dell was an incredible company. With literally no innovation a young fellow built an enormously large, profitable company using other people's money, and technology. Dell jumped into the PC business as it was born. Suppliers were making the important bits, and looking for "partners" to build boxes. Dell realized he could let other people invest in microprocessor, memory, disk drive, operating system and application software development. All he had to do was put the pieces together.
Dell was the rare example of a company that was built on nothing more than execution. By marketing hard, selling hard, buying smart and building cheap Dell could produce a product for which demand was skyrocketing. Every year brought out new advancements from suppliers Dell could package up and sell as the latest, greatest model. All Dell had to do was stay focused on its "core" PC market, avoid distractions, and win at execution. Heck, everyone was going to make money building and selling PCs. How much you made boiled down to how hard you worked. It wasn't about strategy or innovation – just execution.
Dell's business worked for one simple reason. Everybody wanted PCs. More than one. And everybody wanted bigger, more powerful PCs as they came available. Market demand exploded as the PC became part of everything companies, and people, do. As long as demand was growing, Dell was growing. And with clever execution – primarily focused on speed (sell, build, deliver, get the cash before the supplier has to be paid) – Dell became a multi-billion dollar company, and its founder a billionaire with no college degree, and no claim to being a technology genius.
But, the market shifted. As this column has pointed out many times, demand for PCs went flat – never to return to previous growth rates. Users have moved to mobile devices such as smartphones and tablets, while corporate IT is transitioning from PC servers to cloud services. iPad sales now nearly match all of Dell's sales. Dell might well be the world's best PC maker, but when people don't want PCs that doesn't matter any more.
Market watchers knew this. That's why Dell's stock took a long ride from its lofty value on the rapids of growth to the recent distinctly low value as it slipped into the whirlpool of failure.
If you think adding debt to Dell will save it from the market shift, just look at how well that strategy worked for fixing Tribune Corporation. A Sam Zell led LBO took over the company claiming he had plans for a new future, as advertisers shifted away from newspapers. Bankruptcy came soon enough, employee pensions were wiped out, massive layoffs undertaken and 4 years of legal fighting followed to see if there was any plan that would keep the company afloat. Debt never fixes a failing company, and Dell knows that. Dell has no answer to changing market demand away from PCs.
Now the buzzards are circling. HP has been caught in a rush to destruction ever since CEO Fiorina decided to buy Compaq and gut the HP R&D in an effort to follow Dell's wild revenue ride. Only massive cost cutting by the following CEO Hurd kept HP alive, wiping out any remnants of innovation. Now HP has a dismal future. But it hopes that as the PC market shrinks the elimination of one competitor, Dell, will give newest CEO Whitman more time to somehow find something HP can do besides follow Dell into bankruptcy court.
Watching as its execution-oriented ecosystem manufacturers are struggling, supplier Microsoft is pulling out its wallet to try and extend the timeline. Plundering its $85B war chest, Microsoft keeps adding features, with acquisitions such as Skype, that consume cash while offering no returns – or even strong reasons for people to stop the transition to tablets.
Additionally it keeps putting up money for companies that it hopes will build end-user products on its software, such as its $500M investment in Barnes & Noble's Nook and now putting $2B into Dell. $85B is a lot of money, but how much more will Microsoft have to spend to keep HP alive – or money losing Acer – or Lenovo? A billion here, a billion there and pretty soon it adds up to a lot of money! Not counting losses in its own entertainmnet and on-line divisions. The transition to mobile devices is permanent and Microsoft has arrived at the game incredibly late – and with products that simply cannot obtain better than mixed reviews.
The lesson to learn is that management, and investors, take a big risk when they focus on execution. Without innovation, organizations become reliant on vendors who may, or may not, stay ahead of market transitions. When an organization fails to be an innovator, someone who creates its own game changers, and instead tries to succeed by being the best at execution eventually market shifts will kill it. It is not a question of if, but when.
Being the world's best PC maker is no better than being the world's best maker of white bread (Hostess) or the world's best maker of photographic film (Kodak) or the world's best 5 and dime retailer (Woolworth's) or the world's best manufacturer of bicycles (Schwinn) or cold rolled steel (Bethlehem Steel.) Being able to execute – even execute really, really well – is not a long-term viable strategy. Eventually, innovation will create market shifts that will kill you.
The web lit up yesterday when people started sharing a Fortune quote from Marissa Mayer, CEO of Yahoo, "We are literally moving the company from BlackBerrys to smartphones." Why was this a big deal? Because, in just a few words, Ms. Mayer pointed out that Research In Motion is no longer relevant. The company may have created the smartphone market, but now its products are so irrelevant that it isn't even considered a market participant.
Ouch. But, more importantly, this drove home that no matter how good RIM thinks Blackberry 10 may be, nobody cares. And when nobody cares, nobody buys. And if you weren't convinced RIM was headed for lousy returns and bankruptcy before, you certainly should be now.
But wait, this is certainly a good bit of the pot being derogatory toward the kettle. Because, other than the highly personalized news about Yahoo's new CEO, very few people care about Yahoo these days as well. After being thoroughly trounced in ad placement and search by Google, it is wholly unclear how Yahoo will create its own relevancy. It may likely be soon when a major advertiser says "When placing our major internet ad program we are focused on the split between Google and Facebook," demonstrating that nobody really cares about Yahoo anymore, either.
And how long will Yahoo survive?
The slip into irrelevancy is the inflection point into failure. Very few companies ever return. Once you are no longer relevant, customer quickly stop paying attention to practically anything you do. Even if you were once great, it doesn't take long before the slide into no-growth, cost cutting and lousy financial performance happens.
Consider:
Garmin once led the market for navigation devices. Now practically everyone uses their mobile phone for navigation. The big story is Apple's blunder with maps, while Google dominates the marketplace. You probably even forgot Garmin exists.
Radio Shack once was a consumer electronics powerhouse. They ran superbowl ads, and had major actresses parlaying with professional sports celebrities in major network ads. When was the last time you even thought about Radio Shack, much less visited a store?
Sears was once America's premier, #1 retailer. The place where everyone shopped for brands like Craftsman, DieHard and Kenmore. But when did you last go into a Sears? Or even consider going into one? Do you even know where one is located?
Kodak invented amateur photography. But when that market went digital nobody cared about film any more. Now Kodak is in bankruptcy. Do you care?
Motorola Razr phones dominated the last wave of traditional cell phones. As sales plummeted they flirted with bankruptcy, until Motorola split into 2 pieces and the money losing phone business became Google – and nobody even noticed.
When was the last time you thought about "building your body 12 ways" with Wonder bread? Right. Nobody else did either. Now Hostess is liquidating.
Being relevant is incredibly important, because markets shift quickly today. As they shift, either you are part of the trend going forward – or you are part of the "who cares" past. If you are the former, you are focused on new products that customers want to evaluate. If you are the latter, you can disappear a whole lot faster than anyone expected as customers simply ignore you.
So now take a look at a few other easy-to-spot companies losing relevancy:
HP headlines are dominated by write offs of its investments in services and software, causing people to doubt the viability of its CEO, Meg Whitman. Who wants to buy products from a company that would spend billions on Palm, business services and Autonomy ERP software only to decide they overspent and can never make any money on those investments? Once a great market leader, HP is rapidly becoming a company nobody cares about; except for what appears to be a bloody train wreck in the making. In tech – lose customesr and you have a short half-life.
Similarly Dell. A leader in supply chain management, what Dell product now excites you? As you think about the money you will spend this holiday, or in 2013, on tech products you're thinking about mobile devices — and where is Dell?
Best Buy was the big winner when Circuit City went bankrupt. But Best Guy didn't change, and now margins have cratered as people showroom Amazon while in their store to negotiate prices. How long can Best Buy survive when all TVs are the same, and price is all that matters? And you download all your music and movies?
Wal-Mart has built a huge on-line business. Did you know that? Do you care? Regardless of Wal-mart's on-line efforts, the company is known for cheap looking stores with cheap merchandise and customers that can't maintain credit cards. When you look at trends in retailing, is Wal-Mart ever the leader – in anything – anymore? If not, Wal-mart becomes a "default" store location when all you care about is price, and you can't wait for an on-line delivery. Unless you decide to go to the even cheaper Dollar General or Aldi.
And, the best for last, is Microsoft. Steve Ballmer announced that Microsoft phone sales quadrupled! Only, at 4 million units last quarter that is about 10% of Apple or Android. Truth is, despite 3 years of development, a huge amount of pre-release PR and ad spending, nobody much cares about Win8, Surface or new Microsoft-based mobile phones. People want an iPhone or Samsung product.
After its "lost decade" when Microsoft simply missed every major technology shift, people now don't really care about Microsoft. Yes, it has a few stores – but they dwarfed in number and customers by the Apple stores. Yes, the shifting tiles and touch screen PCs are new – but nobody real talks about them; other than to say they take a lot of new training. When it comes to "game changers" that are pushing trends, nobody is putting Microsoft in that category.
So the bad news about a $6 billion write-down of aQuantive adds to the sense of "the gang that can't shoot straight" after the string of failures like Zune, Vista and early Microsoft phones and tablets. Not to mention the lack of interest in Skype, while Internet Explorer falls to #2 in browser market share behind Chrome.
When a company is seen as never able to take the lead amidst changing
trends, investors see accquisitions like $1.2B for Yammer as a likely future write down. Customers lose interest and simply spend money elsewhere.
As investors we often hear about companies that were once great brands, but selling at low multiples, and therefore "value plays." But the truth is these are death traps that wipe out returns. Why? These companies have lost relevancy, and that puts them one short step from failure.
As company managers, where are you investing? Are you struggling to be relevant as other competitors – maybe "fringe" companies that use "voodoo solutions" you don't consider "enterprise ready" or understand – are obtaining a lot more interest and media excitment? You can work all you want to defend & extend your past glory, but as markets shift it is amazingly easy to lose relevancy. And it's a very, very tough job to play catch- up.
Just look at the money being spent trying at RIM, Microsoft, HP, Dell, Yahoo…………
This is an exciting time of year for tech users – which is now all of us. The biggest show is the battle between smartphone and tablet leader Apple – which has announced new products with the iPhone 5 and iPad Mini – and the now flailing, old industry leader Microsoft which is trying to re-ignite its sales with a new tablet, operating system and office productivity suite.
I’m reminded of an old joke. Steve the trucker drives with his pal Alex. Someone at the diner says “Steve, imagine you’re going 60 miles an hour when you start down a hill. You keep gaining speed, nearing 90. Then you realize your brakes are out. Now, you see one quarter mile ahead a turn in the road, because there’s a barricade and beyond that a monster cliff. What do you do?”
Steve smiles and says “Well, I wake up Alex.”
“What? Why?” asks the questioner.
“Because Alex has never seen a wreck like the one we’re about to have.”
Microsoft has played “bet the company” on its Windows 8 launch, updated office suite and accompanied Surface tablet. (More on why it didn’t have to do this later.) Now Microsoft has to do something almost never done in business. The company has to overcome a 3 year lateness to market and upend a multi-billion dollar revenue and brand leader. It must overcome two very successful market pioneers, both of which have massive sales, high growth, very good margins, great cash flow and enormous war chests (Apple has over $100B cash.)
Just on the face of it, the daunting task sounds unlikely to succeed.
But there is far more reason to be skeptical. Apple created these markets with new products about which people had few, if any conceptions. But today customers have strong viewpoints on both what a smartphone and tablet should be like to use – and what they expect from Microsoft. And these two viewpoints are almost diametrically opposed.
Since the initial product viewing, almost all professional reviewers have said the Surface is neat, but not fantastically so. It is different from iOS and Google’s Android products, but not superior. It has generated very little enthusiasm.
Tests by average users have shown the products to be non-intuitive. Especially when told they are Microsoft products. So the Apple-based interface intuition doesn’t come through for easy use, nor does historical Microsoft experience. Average users have been confused, and realize they now must learn a 3rd interface – the iOS or Android they have, the old Microsoft they have, and now this new thing. It might as well be Linux for all its similarity to Microsoft.
For those who were excited about having native office products on a tablet, the products aren’t the same as before – in feel or function. And the question becomes, if you really want the office suite do you really want a tablet or should you be using a laptop? The very issue of trying to use Office on the Surface easily makes people rethink the question, and start to realize that they may have said they wanted this, but it really isn’t the big deal they thought it would be. The tablet and laptop have different uses, and between Surface and Win8 they are seeing learning curve cost maybe isn’t worth it.
The new Win8 – especially on the tablet – does not support a lot of the “professional” applications written on older Windows versions. Those developers now have to redevelop their code for a new platform – and many won’t work on the new tablet processors.
Many have been banking on Microsoft winning the “enterprise” market. Selling to CIOs who want to preserve legacy code by offering a Microsoft solution. But they run into two problems. (1) Users now have to learn this 3rd, new interface. If they have a Galaxy tab or iPad they will have to carry another device, and learn how to use it. Do not expect happy employees, or executives, who expressly desire avoiding both these ideas. (2) Not all those old applications (drivers, code, etc) will port to the new platform so easily. This is not a “drop in” solution. It will take IT time and money – while CEOs keep asking “why aren’t you doing this for my iPad?”
All of this adds up to a new product set that is very late to market, yet doesn’t offer anything really new. By trying to defend and extend its Windows and Office history, Microsoft missed the market shift. It has spent several billion dollars trying to come up with something that will excite people. But instead of offering something new to change the market, it has given people something old in a new package. Microsoft they pretty much missed the market altogether.
Everyone knows that PC sales are going to decline. Unfortunately, this launch may well accelerate that decline. Remember how slowly people were willing to switch to Vista? How slowly they adopted Microsoft 7 and Office 2010? There are still millions of users running XP – and even Office XP (Office Professional 2003.) These new products may convince customers that the time and effort to “upgrade” simply means its time to switch.
Microsoft has fallen into a classic problem the Dean of innovation Clayton Christensen discusses. Microsoft long ago overshot the user need for PCs and office automation tools. But instead of focusing on developing new solutions – like Apple did by introducing greater mobility with its i products – Microsoft has diligently, for a decade, continued to dump money into overshooting the user needs for its basic products. They can’t admit to themselves that very, very, very few people are looking for a new spreadsheet or word processing application update. Or a new operating system for their laptop.
These new Microsoft products will NOT cause people to quit the trend to mobile devices. They will not change the trend of corporate users supplying their own devices for work (there’s now even an IT acronym for this movement [BYOD,] and a Wikipedia page.) It will not find a ready, excited market of people wanting to learn yet another interface, especially to use old applications they thought they already new!
Long-term, there is yet another great battle to be fought. What will be the role of monitors, scattered in homes and bars, and in train stations, lobbies and everywhere else? Who will control the access to monitors which will be used for everything from entertainment (video/music,) to research and gaming. The tablet and smartphones may well die, or mutate dramatically, as the ability to connect via monitors located nearly everywhere using —- xBox?
But, this week all discussion of the new xBox Live and music applications were overshadowed by the CEO’s determination to promote the dying product line around Windows8.
This was simply stupid. Ballmer should be fired.
The PC products should be managed for a cash hoarding transition into a smaller market. Investments should be maximized into the new products that support the next market transition. xBox and Kinect should be held up as game changers, and Microsoft should be repositioned as a leader in the family and conference room; an indespensible product line in an ever-more-connected world.
But that didn’t happen this week. And the CEO keeps heading straight for the cliff. Maybe when he takes the truck over the guard rail he’ll finally be replaced. Investors can only wake up and watch – and hope it happens sooner, rather than later.
UPDATE 16 April, 2019 – Android TV is a new emerging tech that could have a big impact on the overall marketplace. Read more about Android TV here.
