MSFT loss, Changing the Rules of Engagement
What’s the world coming to? Microsoft lost money in the software business last quarter, the first loss in a decades long string of positive earnings from the world’s biggest software company. Sheesh! Yes, there were extenuating circumstances that you can read about here, but the loss signals the breadth and depth of the impact that the tablet is having on the hardware market. The iPad tablet to be precise and its economy size, iOS sharing little brother, the iPhone. For a quick slide show on iPad’s penetration and adoption check out this presentation from Business Insider.
Last time I asked if hardware was becoming sexy again and why. The answers seem to be “Yes” and “Because tablets have reached a new price point that opens up more emerging global markets to computing.” Tablets and their near kin, smartphones, are defining a global computing platformfor the next decade and beyond promising first world information access to many people formerly left in the dust.
The writing was already on the wall when analyst firms IDC and Gartner recently documented a stall in the PC/laptop forward momentum. Lower PC sales means fewer operating system sales and all that goes with it. To be sure, tens of millions of units are still being sold this year along with operating systems and productivity software often bundled in. But growth has stalled as new customers in emerging markets are voting to type on Gorilla Glass over keyboards.
Every paradigm goes through a predictable lifecycle and the computer operating system dependent on hardware sales is another example, not an exception. Microsoft, Intel and others invested heavily in thin, ultra-light laptop machines as the next thing that would protect the franchise and compete with tablets, but they were still too expensive and ultimately not cool enough. If Microsoft expects to get its OS mojo back it will need to cajole its hardware partners into really being competitive with tablets.
Right now, everything is going the way of the tablet and Apple can almost do no wrong. Even when a European judge made a finding in favor of Samsung in a patent dispute with Apple recently, he declared the Samsung gear “not as cool” as Apple’s and therefore not infringing on Apple patents. That’s just amazing.
Windows 8 comes out later this year and Microsoft has introduced a tablet of its own, the Surface. The game is far form over but the latest brush with reality suggests Microsoft might have been prescient in going “all in” as Steve Ballmer said of the company’s approach to cloud computing some time ago. Microsoft is at some intermediate point in its journey from vendor of licensed software to ringmaster of a giant subscription economy. Like many companies in similar transitions, the going isn’t always smooth but if anyone can pull this off it ought to be the guys in Redmond.
When I’ve spent time with the Redmond gang over the last couple of years I’ve been impressed with how much they get it, not just at a high level but throughout the organization. All in, Azure, and retail stores suggest a company thinking its way through the changes. And analytics and social networks suggest they really get it. Maybe all in should be replaced by we get it or better, we get you, but not quite yet.
But on a cautionary note getting to the cloud or to tablets won’t be enough; this is a business model change that every company has to deal with and Microsoft has done more than many already. Now, Microsoft’s partners have to pick up the gauntlet and evangelize more than ever.
This week (on July 25) Zuora will release a Fireside Chat video discussion that I am participating in. It will be all about the cloud and subscriptions and I expect an important theme will be the attention that subscription companies need to pay not to selling but to service and ensuring customer happiness. And, oh, heck, while I am talking about myself I might as well mention that my new book is coming out around the same time — “The Subscription Economy — How Subscriptions Improve Business.”
While the changes in the industry might be painful for some, they also represent innovation and creative destruction which is the hallmark of a vibrant economy. The issue for us is not how to slow down change but how to embrace and leverage it. Once the election clears out I think Q4 could be an important turning point as winners and losers get back to the work of inventing the future and making money.
IPad, Mercantilism and the Chinese Plantation
“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”
This is not a post about CRM.
If you could apply Fitzgerald’s definition of a first-rate intelligence to a thing or group endeavor—always a dubious proposition—Exhibit A might be the New York Times. This week the Grey Lady published two contrasting pieces that demonstrate the conflicted nature of our economics and the ways we think about globalization.
First up is Thomas Friedman’s opinion piece about Apple and its manufacturing prowess, through Foxconn, in China. Friedman makes the point in “Average Is Over” that manufacturing has increasingly moved to China over the last decade because China is so attuned to the demands of global manufacturing that it can easily outcompete American companies with its flexibility to changing global circumstances.
Friedman’s example is instructive. In his piece he references how a factory in China was able to move from a standing start to manufacturing ten units per day of revised versions of the iPhone (with Corning Gorilla Glass replacing plastic for a harder and more scratch resistant surface) in a matter of hours. Friedman tells the story of how 8,000 workers were roused from their beds in company dormitories, given a biscuit and a cup of tea and sent to work in the middle of the night to accommodate Apple’s revised demand.
Friedman extols the Chinese for their work ethic and ability to provide the manufacturing flexibility that modern markets demand. But a second article in the Times “In China, Human Costs Are Built Into an iPad” discusses in fine detail the cost of that flexibility. In the article we see what it really means to be dragged from bed and fed that heroic biscuit. It documents 60 hour work weeks, forced overtime and working environments that are, some cases literally lethal.
The article documents how poor ventilation led to fires and explosions in manufacturing facilities and death to some workers. It documents suicides too as workers jumped from their tall dormitory windows unable to cope with the demands of high production for $22 per day.
I think Friedman confused capitalism for what the Chinese practice aided and abetted by their government and by American business. Friedman envisions a plantation economy, not modern business. It is a form of mercantilism, not capitalism. It exploits workers and other resources in countries where the labor and safety laws are lax and environmental standards practically non-existent.
Take a look at this list of mercantilist characteristics from Wikipedia. How many do you recognize?
- Building a network of overseas colonies
- Forbidding colonies to trade with other nations
- Monopolizing markets with staple ports;
- Promote accumulation of gold and silver
- Forbidding trade to be carried in foreign ships;
- Export subsidies;
- Maximizing the use of domestic resources;
- Restricting domestic consumption with non-tariff barriers to trade.
Mercantilism requires two actors, the colony as well as the colonists, thus you have networks of colonies owned by the colonists and restricted domestic consumption in the colonies and this perfectly describes the relationship between Apple and other manufacturers and their Chinese partners.
Ironically while the business interests advocate a neo-mercantilism the U.S. government has had little success at getting the Chinese to open their markets to more capitalism, more foreign goods and to let their currency appreciate to more realistic levels. This might look like a disagreement between countries but it is actually an argument between American business and the federal government.
This relationship disenfranchises both the workers in one country and the citizen-consumers on the other. And this doesn’t even touch the issue of lost jobs moved overseas by the mercantilists chasing low labor costs and the ability to ignore health and safety laws.
A form of state sponsored desperation-growth drives Chinese mercantilism and a generation of its people ignore what’s happening in its factories in a vain effort to catapult the country from poverty to emergence and ultimately to first world status.
Friedman holds this up as some kind of aspirational goal for Americans. He seems to be saying that if only we could be a little more like the Chinese we could recapture our manufacturing base. But this amounts to prostituting ourselves, our country and its resources to a gratuitous mercantilist ideal.
Why not go in the other direction? The opposite of mercantilism is not suspension of trade but trade on a more level playing field, one where profits are not made through arbitraging safety and dignity. Real capitalism.
Companies like Apple have the upper hand. The conditions in their factories are sanctioned either explicitly or implicitly by them and will only persist as long as Apple applies benign neglect to the situation. Alone Apple determines what it will pay for components and labor so that it can meet price points in the Fast New World economy.
Other computer and consumer electronics makers use some of the same Chinese manufacturing partners to make their products. We like those products a lot and we especially like their low prices. But hidden behind those shiny new things and their low prices are 16 hour work days, no time off, regressive discipline and dangerous working conditions.
I like my consumer electronics but not with the hidden costs that are attached to every device. Those costs include an eroded and impoverished first world manufacturing base and despotic working conditions where those jobs end up.
In 1906 Upton Sinclair published The Jungle, a book about the lives of American immigrants. The book spent many of its pages portraying life in the corrupt meatpacking industry. From that book we derived the sage idea of liking the sausage but of studiously avoiding asking how the sausage was made.
In effect, we’ve been told not to try to hold Fitzgerald’s twin opposing ideas in mind. But the Times was able to do just that and to offer us a compelling and discomforting contrast. The larger question is whether or not any of us retain the ability to, as Fitzgerald suggests, function in the face of this information.
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.
Tablets, CRM and more
Tablet vendors at the recently concluded Consumer Electronics Show (CES) in Las Vegas had a coming out party. Driven by the wild success of the iPad, they introduced something like eighty — that’s 8-0h my goodness — tablet PCs to the world. Now, by itself that’s significant, especially for CRM, and something hard to miss even if you’re a proverbial blind horse. But let’s not stop there; to understand the significance for CRM we can analyze more information.
For instance, it was widely reported last year that for the first time social media out-competed email for our attention. Add to that the growing importance of video as a content medium and you can start to see a trend emerge.
One thing I conclude immediately is that we’re increasingly mobile, hence the need for a form factor that is easy enough to carry and big enough to do things with. But with this we are also becoming a bit more passive in our technology use. Passive? With all these devices and movement? Perhaps. And with social media’s impact picking up the volume of transmissions will likewise and the demand for better quality interactions will follow.
Tablets, or at least the iPad, which so many vendors are trying to emulate, were developed as receiving devices, things used to surf the Internet and increasingly that means watching video content. Granted you can use an array of screen-based and hardware oriented keyboards, but the primary use of these devices is to slurp information from the Web. There was a report last week, surfaced by my friends at The Enterprise Irregulars, that Apple was removing the only button from the iPad for a future revision of the device. That’s a direction keyboard enthusiasts should monitor. TV is a passive medium and it would appear that our computing is becoming more TV-like.
I’ve spoken to a variety of marketing people recently about video and its surging importance to CRM and I’ve written about it here. The sense of these marketers is nearly universal that tablets are fine for watching videos and that means corporate videos.
Graphics packages — Harvard Graphics and PowerPoint — were thought by many to be the killer applications for the laptop because sales people could take them anywhere and deliver a more or less standard pitch.
Video will certainly become the killer application of the tablet and that will place more responsibility on the marketing group. Video eliminates much of the need for a presenter and makes the viewer responsible not only for attention but for presenting as well.
Thor Johnson tells me that business-to-business marketing is still by many accounts a PR and brochure business. But increasingly tools from Eloqua, Marketo and others are turning marketing from art to science. As marketers generate and analyze more customer data they become more astutely aware of real needs and they will have plenty of incentive to meet those needs through advanced communications, e.g. video.
Already companies like BrainShark are delivering to market the infrastructure required to develop high quality videos that play anywhere — from the smallest screens to the most advanced tablets as well as desktops.
The increased use of video will multiply the amount of data we push around the Web daily and drive demand for bigger networks with fatter pipes (or tubes if you are a member of the U.S. Senate). And just as tools like PowerPoint gave everyone the ability to develop presentations, we must expect that before long we will all become experts at developing and delivering live or recorded full motion video.
But increasing mobility might not pan out exactly the way many people see it. The presumption now is that mobility means more face time and that’s probably right though we’ll certainly need to pick our spots more carefully as the cost of transport rises. In such an environment mobility might become synonymous with remoteness, as in working at some locations not associated with your corporation.
The transportation issue, which I have bored you with before, could become a serious drain on the economy. It’s simple math, but if a gallon of regular goes from two-fifty to five bucks, your cost of transportation just took a sharp rise. Transportation comes out of the SG&A (sales, general and administrative) line and eats into your margin like a worm through an apple. At that point your choices all look iffy. You could drive something smaller to your customer appointment but the cost of switching is not small. Regardless, you can’t do much about the fuel economy of the jet that takes you to another city. The alternative of not going is only supportable if there is a credible alternative.
At that point, the benefits of mobile and video technology that right now look like a leap in efficiency that will flow directly to the bottom line, will become fixes that help you maintain your position, to tread water. Economists have a term for this, it’s called consuming the dividend. You could save the benefit, which is what happens when it really does hit the bottom line. Or you could plow the benefit back into the business and that’s what I see happening with video and mobile technologies. That’s why it’s so important to get on this bandwagon. Eighty new tablet introductions is more than a straw in the wind.
Apple and Microsoft in dead heat
Katie bar the door! A fresh headline from the venerable New York Times captures an important moment “New King of Technology: Apple Overtakes Microsoft”
Don’t get too excited, we’re dealing in Monopoly money here as the article makes clear:
“In intraday trading in the afternoon session, Apple shares rose 1.8 percent, which gave the company a value of $227.1 billion. Shares of Microsoft declined about 1 percent, giving the company a market capitalization of $226.3 billion.”
Still, the only company worth more in the known universe is Exxon Mobile valued by the market at $282 billion.
So, that’s a lot of money and a significant coup for a company (Apple) that once nearly bought the farm until Microsoft gave it life support in the form of a loan. Still the crossing is significant.
In recent years, Apple could do almost no wrong with product introductions like the iPod and recently the iPad and more importantly, the retailization of technology. I own Apple TV which is not a hit that I can tell though it is a very nice product. The glitch that I can see is that Apple TV doesn’t have a lower case “i” in front of it so blame product marketing.
I don’t know what you think but it seems like Microsoft hasn’t done much right since Gates went into philanthropy. The company isn’t exactly an idea or product generator like Apple and the products they do bring out seem inept. Many people bought Apple products in reaction to product quality issues with Windows. And while Apple went for hands-on selling in its stores, Microsoft left it all to the big partners that pride themselves on how efficient they are at specking out a system and mailing it to you. Where Apple updates your software automagically, Windows users have to find a web site and figure out what to get (full truth, my last experience with Windows was XP and I bought a bushel of macs rather than chance Vista).
But the two companies are not simply mirror images. Apple makes no software save its wonderful OS and some funky utilities and an office suite, and Microsoft makes very few hardware products. Perhaps software is inherently more difficult? Maybe. But, importantly, in a world where you’d think all the hardware niches are full, Apple manages to find and exploit new ones. In the same world where you’d think the sky is still the limit in software, Microsoft finds it necessary to push the same rock up a hill by periodically re-writing its OS and we get headlines about security breaches.
We could look at the parity in market value as a good thing, as Apple catching up, but we also have to say that Microsoft slowed down. Why?