Steve Ballmer
There is a very good article in the current issue of Vanity Fair (with Alec Baldwin on the cover) about Microsoft. In “How Microsoft Lost Its Mojo” Kurt Eichenwald recounts the failures and bad decisions of the company’s “lost decade” a time overseen by current CEO Steve Ballmer.
If you are in this business you can probably recall at least some of the major inflection points related to missed opportunities and in-fighting that cost the company its market leading position. I thought it was just me, but Eichenwald even compared Microsoft to Detroit auto makers and their past glory. For good measure he ends with a long quote from Steve Jobs’ biography about the difference between having a sales or ops guy running the show and having a product guy in charge. Sad. Worth reading.
According to the article, Microsoft’s stock has barely budged over the last ten years while other tech companies flew by — Google, Facebook and of course Apple. In one recent quarter iPhone alone made more money than all of Microsoft.
The article quotes Ballmer saying he wants to remain at Microsoft till 2018 but I don’t think the company can wait that long. The article also implies that Ballmer might be a smart pick to break the company up and to take the legacy products into the sunset while more product oriented people try to salvage the core of innovation, if it still exists.
Fun fact: According to Wikipedia, “Ballmer was the second person after Roberto Goizueta to become a billionaire in U.S. dollars based on stock options received as an employee of a corporation in which he was neither a founder nor a relative of a founder.”
Ten years of stagnation can’t be sitting well with Wall Street. What will it take to orchestrate a palace coup?
Part 2 in the Apple Series
This is not about CRM. It is the last in a series on globalization and labor arbitrage.
There’s been a predictable response to the revelations about Apple’s labor relations in China. Pundits have trotted out that old chestnut that it’s not Apple’s fault but the free market—you and me—who crave cheap and insanely great products etc., etc. But really it has nothing to do with consumer demands and everything to do with mercantilism and globalization.
Capitalism routinely attempts to source the lowest cost materials and labor for two reasons. First low costs make it possible to have high margins. Second, the inevitable commoditization that is also part of capitalism erodes high margins on the journey from branded product to commodity.
Apple’s latest earnings show the company made more than a billion dollars in profit per week during the most recent quarter. That’s profit not revenue. But those profits come mostly from the newer iProducts not the computers that the company built its reputation on. To be clear, profit is good, good, good but only if it is gained fairly and not by taking advantage of the powerless.
Today you can buy a computer with the latest Windows operating system and get most if not all of the features that made the Mac special a few years ago—at a lower cost. That’s commoditization in action. Commoditization is a good thing because it forces us all to continuously innovate to develop new products and services that can demand top dollar. We all know this.
The working conditions-related labor problems we see between Apple and Foxconn are both historic and unique to globalization. In previous eras of globalization, notably the eighteenth and nineteenth centuries, globalization and labor arbitrage were mostly, but not exclusively limited to raw materials and agricultural products.
Sugar, cotton, rubber and spices production were all centralized in tropical or sub-tropical regions where national sovereignty was extended at the point of a bayonet and slavery was common. Where slavery was impossible such as in the cotton-processing regions of New England or the British Midlands, starvation wages, child labor, poor sanitation and high infant mortality were the norm. By comparison today’s Chinese sweat shops with their dormitories, cafeterias and company-supplied healthcare are paradise. Just ignore the forced overtime, unsafe conditions, low wages, and dictatorial management.
Factories and the significant investments required to situate one were once a barrier to entry for cutthroat competition from low cost labor countries. Every factory needs supplies of water, energy and a shipping infrastructure to facilitate the supply chain. But once the host country covers these significant costs the ability to situate and take advantage of low labor costs becomes practical and even an imperative.
But the argument that consumers demand the low prices that drive low wages is something of a canard. First, we were all leading our lives before the introduction of iProducts and other gadgets and while these gizmos have added to productivity and enjoyment, few people were walking around saying “If I only had a device that.…” If they had more of them would either have filed patents or begun careers writing science-fiction. No. The devices are in demand because they are both novel and because they satisfy an economic need. But neither of those conditions sets price or wages or anything else.
In an economy where for the vast majority real earning power has not expanded in decades (and has actually declined) low prices are what maintains purchasing power. So we have the condition where even a new device enters the market well down the price commoditization curve.
Low purchasing power has driven the low price points for these manufactured products. But in order to satisfy the low cost/low purchasing power conundrum, you need to produce in an even lower price culture and that’s mercantilism. And actually as we saw in the last decade, even low prices were not enough to satisfy demand as millions of people took money out of their homes (negative savings) to support lifestyles centered around demand for cheap goods.
This is the beginning of a deflationary spiral, which is unsustainable. Labor conditions and wages will improve in China and in some areas this is already happening. But once that happens producers will go shopping for new low cost places to manufacture. One of the issues revealed but not addressed in the current flap over Chinese manufacturing is that, in part to maintain low costs, even primary manufacturers are beginning to outsource to other manufacturers further inland.
But the contracts that an Apple or an HP has with, say, a Foxconn are not transitive, they don’t necessarily affect Foxconn’s suppliers who are then free to ignore any agreements regarding labor and environmental conditions made with Foxconn. That goes for quality control too.
Away from national laws governing labor and other relevant concerns, companies are free to do whatever they can get away with in the host country, which turns out to be a lot. The purchasing country suffers from this arrangement also through job elimination and with it a decline in the quality of middle class life.
As in the eighteenth and nineteenth centuries the real winners were not the masses who got cheap sugar, nutmeg or cotton garments and they certainly were not the subjugated people who worked in conditions of slavery. Today we get cheap iProducts but grand fortunes are being made by the tiny fraction of those who take advantage of globalization.
The solution is better government and better regulation to ensure fair competition but the globalists have us convinced that all regulation is bad and no government can do anything right. Not everyone believes this of course. Zuccotti Park was no accident.
Gates, Jobs and Tinkering
Malcolm Gladwell published an illuminating article on the late Steve Jobs in this week’s New Yorker and I recommend it highly. If you are looking for something that delves into the dirty laundry of Job’s tempestuous personality there’s some of that but it’s hardly the focus of the piece. Nevertheless, Gladwell, with a knack for drilling into a subject and finding something other than the usual stuff, comes out with observations that explain Jobs and help to position him in the pantheon of technology giants.
Much has been made of Job’s second act and of how he seemingly rose from defeat after being booted out of Apple—his triumphant return and the string of “i” devices that turned Apple into a consumer electronics giant and the second most valuable company on the stock ticker (after Exxon). But what’s behind this is, you could say, regular market dynamics. The same dynamics that elevated Jobs in the new century were the ones that contributed to his undoing earlier.
We’ve all been exposed to ideas about market dynamics by Geoffrey Moore, Clay Christensen and others. Early markets are bare bones affairs and capturing market share is paramount for young companies making the market. Later the survivors can go back to flesh out their creations with subsequent versions and vendors who think they can do the fleshing out early rarely survive to do so.
In the computer industry the flesh came in the form of the GUI, networking, databases and such things that added value to the basic invention. The analogy might be summarized as first we feed everyone then we can invent cuisine. Gladwell asserts that Jobs’ genius was in tinkering with original inventions and making them better and he gives many examples. But he does not stop there; Gladwell compares Jobs to other tinkerers from other ages, notably the people who perfected the steam engine making it a useful tool for the industrial age.
In that comparison, Gladwell effectively makes the point that Steve Jobs was simply too early to the cuisine aspect of the high-tech revolution. He sought to make stylish boots when too many were still shoeless. If true, and this explanation feels right to me at least, it explains much of Jobs’ success in his second coming to Apple. By the very late 1990s the industry had filled out and customers were in need of the finer points of technology that would do more than the mundane record keeping and making the devices actually fun to use was finally the order of the day.
Ironically, Apple had spent much of the prior decade trying to make itself relevant to masses that only wanted utility and through a series of bad business moves had brought itself to the brink of extinction. It was a turning point for the industry and perhaps by pure luck, or the luck of Steve Jobs, it maneuvered itself through a keyhole coming out the other side as the industry icon.
This analysis takes nothing away from Jobs, the guy in the hot seat and the one who needed to make hundreds of right calls to ensure that today we have stylish, elegant and highly functional tablets, phones, personal music players and more.
Jobs has often been compared to Bill Gates and Walter Isaacson chronicles the long relationship between the two men in his biography of Jobs. But they are not exactly opposites. Not even Gates can be seen as an original inventor of technology and sometimes both men can be seen tinkering with and improving someone else’s ideas. For example, Gates actually bought the DOS operating system from someone else and Windows was the stepchild of the Macintosh operating system which we all know was inspired by Xerox’s GUI. Office is the amalgamation through tinkering of applications from Lotus, Word Perfect (and before that Wang) and Harvard Graphics.
But of the two men, Gates and the company he started are creatures of the last century while Jobs is really of this one. I recently watched Jobs’ commencement speech at Stanford from 2005 on YouTube in which he quipped that Windows stole everything from the Macintosh. But the difference between Microsoft emulating and tinkering with an idea and Apple doing the same is that the Apple version improves while the Microsoft version is more of a copy.
Last week I was in Microsoft’s flagship store in Belleview, Washington. It was not hard to see the Apple inspirations in every element of the store from the layout to the products and services offered though the Microsoft employees I met all seemed to believe that their company had practically invented the store concept, no matter I guess. The store is a good idea as were Windows, music players, application ecosystems, marketplaces, handheld devices with big screens and tablets and much more. Knowing something of the relationship between Gates and Jobs and thinking of Job’s place in history as a tinkerer, perhaps it is fitting to recall that imitation is the sincerest form of flattery.
I want an iPad (almost)
I am an Apple enthusiast but once in a while I need to hit them about the head and shoulders with an old tire tool. You know?
I was in the Apple Store last weekend paying the Apple tax, buying my wife an iPhone. It was time. The phone she was using had a battery that wouldn’t hold a charge. Still it was an effort to get her into the store. But once there…What to do? Buy a battery or upgrade?
Think, think, think pooh bear.
We bought an iPhone. While she was spending the better part of a half hour picking out a case I messed with the iPads.
Now the iPad is a nice, nice, nice piece of gear and everyone can and ought to covet one. But in a practical mood you have to look at the thing and ask why.
It doesn’t have a gosh darn USB port. Not one!
It also lacks a true keyboard, which I reluctantly understand, more or less.
But it’s also a 3G device, which simply doesn’t cut it these days.
Does it even have a microphone? I dunno.
The 3G bit is probably the most severe limitation in my humble….I can live with some of the other constraints, I think in my most charitable moments, but then the analyst in me gets busy.
Look, iPad is a content consumption device and that might be fine for most of the people on the planet who can plunk down the hundreds of bucks it takes to bring one home. I can’t. I am a content creator and I like that about me and I need a device that ***understands*** that. You know?
iPad strikes me as the next form factor, and maybe the right form factor, in personal digital assistants but for it to work in my life I need output AND input. Steve are you listening?
Meanwhile the MacBook Air series is here and that’s more my speed, I guess. Still there is the appeal of the form factor.
Demand Side Economics
Recently I wrote a couple of posts about Apple’s plan to charge vendors 30% of the transaction price for anything sold through the Apple Store (aka App Store). For many things like software and songs I think this makes a lot of sense. If you consider that the SG&A line of a company’s balance sheet is typically forty to fifty percent and that many of the companies that sell through the App Store have little or no marketing or sales functions, thirty percent sounds very good indeed. In fact, with a price of a few bucks, most of the applications on the App Store would not see the light of day if their developers had to market and sell through more conventional channels. The same is true with songs selling for ninety-nine cents.
But the post was about what happens if content providers like newspapers have to work under the same rules. Unlike a song or software, a newspaper gets rewritten daily — you only sell so many before you need to reload and the overhead associated with active development of a daily product is high. But also, a newspaper brings with it a recognized brand and a readership.
In that situation, it’s not clear that a service like the App Store delivers much more than a different kind of distribution infrastructure and the post questioned the fairness of a one size fits all pricing model. You might argue that a paper with digital distribution loses its printing and transportation overhead so Apple’s offer is a good deal. But no publisher is going to simply flip a switch to the digital world and those legacy costs will be with publishers for a long time. Essentially, the publishers can’t afford to do both. It’s a classic “innovator’s dilemma.”
The post concluded that Apple’s billing system might have something to do with this apparent rigidity. A transaction-based system that works for songs and software appears ill-suited to a relationship like a subscription because it does not have to deal with the rigors of a relationship. For instance, a billing system for subscription services needs to be very flexible and capable of making all sorts of changes to the purchased service, daily if needed.
The post got several comments including the one below, which was surprising.
“How do you know Apple’s current billing system won’t do exactly what you describe? Perhaps Apple doesn’t want to do this.
Why should they? They are a powerhouse in this market, and if companies don’t want to distribute through iTunes, they can hit the road.
70% of something is better than 100% of nothing.
The surprise was the “hit the road” attitude of the writer. Today, competition is so fierce that a hit-the-road attitude seems not only wrong but like an antique from the robber baron era. With a solution (and an attitude) like that it’s just a matter of time before other solutions, with more generous terms or, perhaps, one specialized for publishers, hit the market.
Our simple question is, what could make a company like Apple behave in such an apparently self-destructive way? The post said that the billing system’s inadequacies might be the problem but, on second thought, that seems like giving too much “benefit of the doubt” given the number of emerging companies with billing solutions out in the market. A company like Apple could always buy one of those companies. It’s more likely this is a form of un-strategic overreach stemming from not knowing or understanding the customer.
Knowing the customer, or customer intimacy, has become a strategic necessity as one sector after another reverts to the mean after many years of rapid growth driven by high demand for new products and product categories. Instead of pioneering completely new product categories, many companies today are innovating around established products and bringing out the next version. Typically, they do this by adding features and functionality to existing products, replacing an expensive component with a less expensive one or fusing several components into one at lower cost, and by providing an experiential element to their offerings.
But I must stress that those approaches work for PRODUCTS. Subscriptions are different. If product differentiation thrives on features and functions, subscriptions thrive on experiences. In this example, Apple is set up to provide low cost products, much like the brick and mortar retail giant Walmart. But Apple is poorly suited to mediate third party experiences — notice I said third party experiences.
Apple is a master of orchestrating your experience with an iPhone or iPad or the shopping experience in its stores. But it hasn’t learned the fine art of making itself invisible in transactions where it is only supplying basic infrastructure. Its third party billing policies — encoded in a billing system — don’t help matters.
Beyond the billing issue is a more substantial economic issue as basic as supply and demand. The Apple approach looks like a supply side, build it and they will come model but we’ve crossed over into a demand side era. If you’ve noticed over the last couple of years with credit tight and the consumer tapped out, demand isn’t what it used to be.
The highly leveraged balance sheets of individuals, corporations and governments mean that, absent a return of John Maynard Keynes from the grave, demand will remain slack for a prolonged period. Increasing or maintaining supply without doing something about price is like pushing on a proverbial string in this situation.
If you look at the newspaper industry today you will notice that readership is declining for two fundamental reasons. Younger people don’t read papers as much as older people do and there are many more older people. As Baby boomers give up the daily habit or (yikes!) begin to give up the ghost, there are fewer people demanding papers.
Most papers have already cut their coverage, laid off newsroom staff and wrangled pay cuts from their unions. These actions have not been enough as advertising sales have declined and many have cheapened their products by printing fewer pages and covering less news.
Back to Apple.
Charging a high price for using its infrastructure for a third party subscription transaction is not going to excite publishers or make lots of money for Apple. Publishers (and SaaS software companies) will go elsewhere. There is a fundamental difference between selling products and selling subscriptions. For all of Apple’s hip twenty-first century marketing and customer service prowess, its approach to subscriptions says loud and clear that it is still a twentieth century manufacturer and supply side fan.
