MSFT’s fortunes and the decline of the PC Hardware ecosystem

In the late 80s, IBM attempted to reassert control over the PC hardware platform with the introduction of the PS/2 and its proprietary MicroChannel architecture. The cloners fought back, customers voted with their feet, the PS/2 initiative failed, and the era of open PC hardware continued and flourished. This was hugely beneficial for MSFT as a thousand PC OEMs bloomed, PC-based innovation surged and costs dropped, and MSFT software rode the wave of market expansion.

And it was great for end users. Not only because it drove system costs down, but it also created a rich market of add-on products — everyone could mix and match hardware to create their optimal system, whether they cared about cost or performance or maintainability or upgradability or whatever. Corporations could spec out and build standard low cost machines, enthusiasts could build super-tweaked machines, verticals could build out specialty machines, all on the same open hardware platform.

In the last 15 years, though, the market has shifted dramatically towards the laptop form factor. This shift has been a relative disaster for MSFT. The industry has moved away from an open hardware chassis with mix-and-match components, to closed tightly-engineered all-in-one machines. This shift has played to Apple’s strengths in design and integration and has negated many of the benefits of the PC ecosystem. The PC industry is still struggling to figure out how to regain design and profit momentum — Intel’s Ultrabook effort being the latest scheme. But the Ultrabook is just a direct response to the MacBook, it does nothing to recapture the open hardware experience of the 90s.

The open hardware community still exists in various forms, but is no longer focused on the PC platform and is not much of an asset for MSFT. Enthusiasts still build PCs, mostly for gaming — Maximum PC for instance has a good guide to components, Newegg is the place to buy. But this isn’t mainstream any more. The “maker” community is vibrant but is focused on other platforms largely — Arduino, the Kickstarter community, etc. The vibe and energy around open hardware is great, but it is no longer tied to the PC experience and is no longer an asset for MSFT.

MSFT has always been great at chasing taillights and is hard at work supporting the Ultrabook, competing with the Apple stores at retail, pushing Windows Phone, etc. But chasing Apple’s taillights results in products that are more and more like Apple’s — fully integrated hardware/software/services, a captive retail experience. MSFT has to do all this, the mainstream of the market is here, but there is nothing distinctive about the resultant products and experience. The Ultrabook/Windows/Microsoft Store products may equal the Apple experience, and may offer users a few more choices of hardware brands (does anyone care?), but the experience won’t stand out. Necessary work but not sufficient to recapture thought leadership in the market — at the end of the day, MSFT will be able to claim parity but no more than that.

If I was in a leadership role at MSFT, I’d invest in strategies to recreate the open hardware platform dynamic around the Windows platform. It is not obvious how to do so with the laptop and tablet as the mainstream platform, but I would spend $100s of millions trying. MSFT clearly has the cash to spend on new frontiers and new adventures, a couple hundred million on an effort to change the basis of competition in the PC market seems like a wise bet, even if it fails.

How about putting a “maker’s corner” in every retail store with modified cases and modified machines, maybe even workshops? Get the energy of the PC gaming community into the store, let people see this energy. How can the laptop design be modified to support add on hardware — super high speed optical expansion busses, wireless high speed expansion busses, novel expansion chassis ideas? Sifteo cubes are kind of cool, can this idea be used to provide hardware extensions to laptops? Are there other ways to “snap on” hardware to extend the laptop or tablet, using bluetooth or induction or other mechanisms? Can MSFT seed the maker community with funds or tools? Can MSFT embrace Arduino somehow, or Kickstarter? Could the PC be the hub for thousands of Arduino-based sensors and actuators and gadgets? These ideas are all admittedly poorly thought out, and I am not sure any one idea is right, or if any will work. Rich astutely observes that the days of an open hardware platform may be behind us permanently, just as the glory days of car tuning and hotrodding are behind us.

But I would spend a lot of money chasing after any idea that would move away from closed all-in-one hardware designs, and I would experiment with many ways to reinject open hardware dynamics back into the PC/tablet market. Ultrabook is not this — it is a fine and adequate taillight chaser, but it won’t shift competitive balance back in MSFT’s favor.

This is not the only reason for MSFT’s stagnation in the last decade, there are many other aspects to consider, but the dwindling of the open hardware ecosystem has been a loss of MSFT. For another take on Apple’s success against MSFT in the last decade, check out Rich’s analysis — the observations about vertical vs horizontal integration ring true.

(This post replicated in part from John’s personal blog)

Stocks, bonds, commodities and apple

John told me that an smart analyst looks at stocks excluding apple. It is hard to imagine a company better executing on a drag race than apple. A remarkable achievement but illustrates a very traditional approach to losing.

Apple started out as just another PC company in the sense that there were dozens. It was distinctive in that it like the other systems back then ran in a drag race with its own hardware, processor, software and peripherals.

In the end apple lost to the weight of industry horizontal integration and scale. Intel could invest far more in processors then Motorola and then IBM. Tcp/ip networking had far more volume than AppleTalk. Same for FireWire vs USB. Mac OS vs all those Windows apps

The miracle was Steve took the company from a losing drag race to running a stealth add-on play. He ended up getting the economies of industry standard hardware and software by adopting pci bus, unix, USB, tcp/ip, etc. and most of all in allowing migration (eg rosetta to run old apps) but not being a slave to (eg discontinuing support in 3-5 years).

That let him win in important niches so converting to a stealth segment play. Notably education and graphics design.

But the real innovation at that point was the conversion back to a full drag race with the introduction of the iPod, MacBook, and iPhone. Each of these were best of breed products at rock bottom prices that won on innovation and vertical integration. From the retail stores to AppleCare to the iTunes store, the products were simply easier to use

And because they had manufacturing economies they were low cost leaders. So even at rock bottom prices, they generated enormous cash.

The amazing thing has been to see the companies with the money not invest their dollars but in a horiZontally integrated world, it is very hard to beat a vertically integrated company if it is nimble. There r simply too many organizational boundaries to be crossed. And most importantly the richest companies are hurt last so while they should be responding first, first their ecosystem dies and then they fight when they lose their most important allies, their partners.

So here we are with apple worth more than Microsoft, intel, Sony and Nokia combined. Wow.

What’s next? Well they have converted their drag race into a platform war. Now apple has development resources focused on iOS (underneath that is Unix) and they are converging OS X with iOS so they will have a single platform an software store as well as hundreds of millions of Apple store customers they touch directly.

And with their push into the home most likely following the iPhone model of close integration with wireline broadband providers and content, it looks like the horizontally integrated consumer electronics providers are next.

It is the ultimate model of one platform for phones, tablets, computers and soon televisions. Wow.

The best logos

Panamsat has to be the winner here. It is so great when a radical company does a drag race (in this case against a government consortium Intelsat) and actually wins. But maybe what that means that sometimes the playbook is meant to be broken. It’s a wonderful story, but the logo perhaps tells it all. What a corporate logo! Wikipedia covers it well, but Rene basically broke the satellite monopoly. Sometimes it might not be smart to go at a monopoly, but in this case, its a long story, but focusing on the work.

Valuations (aka as Facebook)

This isn’t exactly a marketing thing, but it is interesting today to see how different companies are valued and what is the logic of it all. Makes me stratch my head a little, but it can either make sense analytically as people have very different view of forward earnings and revenues. Basically, in the old days, the idea is that P/E is a forward valuation based on past earnings, so if you have a P/E of 10, it implies typically that the future growth will be 10%. This is called a PEG ration (P/E to Growth) and that is a PEG of 1.

Today, with companies going public that have negative earnings, you either do P/S (price to sales) or you do what is called a forward P/E (that is use the estimate for when the company is profitable. So for instance in the notational company with a 10% growth in earnings, that means a one year forward P/E would be 9 because it grows 10% in the future. Similarly a five year forward PEG assuming the company grows 10% a year (1.10^5 = 1.6x) would mean a P/E is 10/1.6x or 6.2x. 

So let’s look at some companies that are going or recently have gone public

Facebook. S-1 shipped today (the reason for this piece). The valuation is $80B in the private market on $4B revenue and $1.5B operating profit so probably $1B in net income which means $80B/$1B is a P/E of 80. They would expect $6B next year and $2.5B in operating profit so that is 66% growth. That actually makes the PEG ratio pretty reasonable at 80/66 = 1.2x

Groupon. This one is hard to value as it has negative earnings




Groupon playbook

Well Groupon has to be the storybook IPO of 2011 and it will probably be the biggest company on planet earth, sometimes what works for gigantic momentum plays (eg mega drag race) won’t work for anyone else.

They have billions of capital so can buy large high pressure sales forces. That gives them an incredible advantage like the army of timeshare condo salesman or if you have ever watched Tinmen, aluminum siding people.

In this case I’ve heard time and time again how well their sales tactics work. We just took a massage from a new business owner here in Hawaii. They have two sales reps here and she was promised a huge repeat installed base. Instead they doubled the number of groupons from 450 to 900 and doubled the term to 18 months on her. They now hold over $100k of her money and will pay her on 60 day terms and sounds like they will keep it all if redemptions don’t happen.

It’s brilliant because they get all the money upfront. As a small startup she feels she has no choice but to honor it. She is working basically 24-7 for no profit for groupon for the next year. And the rep is no where to be seen.

And let’s face it the customers haven’t turned out to be long term but very demanding price sensitive folks who won’t repeat. not something to build your business on.

What can we learn from this. Well for Groupon it’s an extraordinary opportunity with so many new businesses forming all the time and extremely profitable. But it sure won’t work for everybody…

Startups and Drag Races

I get to go hear the presentations of both large and very small companies just about every Monday in my day job.

I’m always struck by the number of folks with less than six months of cash left who are running a drag race against competitors who have a billion dollar in cash.

While it is true that most of these companies have a better mousetrap. As the Russians used to say, “Quantity has a quality all it’s own.”. Or if you are a true aficionado of the Cold War there is this famous cartoon of two Russian generals sitting in a Paris cafe saying, “so who did win the air war over Europe?”

The point of course is that the fancy aerobatics don’t matter hen you ate staring down 20,000 tanks headed your way.

We may have our own opinions about Groupon and so forth, but let’s face it, they a billion dollars in cash so they have won this round. Trying to beat them now is just much harder. In the same way that a decade ago Amazon went public raised lots of money and this let it survive that great valley of Ecommerce death (anyone remember to be the leader.

So what is a startup to do? Well three pieces of advice

1. Think stealth play. Is there a segment that is protected? Taking that hyper local example. Are there places we’re you are not competing coupon for coupon.

2. Profitability. If you can spend as much money as the other guys, where in your customer base are there profits. Even if you have 10 customers, it’s often interesting to do a by customer cost analysis. I’m amazed how many companies could shrink 10% in revenues and double profits. Thats because customers are different. The substrategies here are typically selling another product to an existing customer (very cheap, like burglar alarm companies selling fire extinguishers too), cutting unprofitable customers (you know who you are) or lower costs on introduction (why go coast to coast before you make a city profitable ten use those profits to fund the next one)

3 Double your share by delighting. If you have small share, the easiest way isn’t to convince people they ate wrong selecting the market leader (the default choice of probably 80% of decision makers) but to find anther customer who look like someone who already loves you. The big guys ironically usually don’t need to worry about customer satisfaction because they are the default choice but as a small player you have no choice but to delight usually.

Finally just one more word. This is a good case where you can’t compare yourself with the leader or their strategy. I once saw a slide showing that if a $10m startup was valued the same way as the market leader, it would already be worth $500m. That’s not the point. Kind of like the corner coffee shop wishing it was Starbucks. It just isn’t. Not will leader strategies usually work for small players. That’s like me thinking I just adopt a Olympic weight lifters training strategy to get in shape. Sadly it’s not the same body I’m trying to get in shape.

Anyway enough said, the drag race isn’t for everyone. It’s the easiest to do but the least likely in most cases to work. Think stealth!

The CEO Playbook

John and I were just talking about what we had learned after ten years worth of board meetings and innumerable discussions (maybe even confrontations with CEOs) from literally three continents. Seems to us that like marketing, there are play books everywhere. One of the most important one we’ve learned about in that time are the three different “plays” which CEOs seem to run. Sometimes I think they are more persona than they are plays, nonetheless, they are very distinct.

With the very sad passing of Steve Jobs, we’ve spent so many hours talking about his legacy and perhaps in that we see how CEOs can sometimes be Bill Gates, sometimes be Steve Jobs and sometimes be Jack Welch. The magic is in being able to switch in a way that makes sense to the reset of team. So here are the three personas we see:

Be Strategic!

We’ve debated long and hard but it does seem as if the most important job as CEO has is making sure their company is in the right market and in the right situation to achieve a durable position. Because if you don’t have a good base, what else really matters?

Having spent a small amount of time with Bill Gates in the early days of Microsoft, I think we can say that being in the right part of the industry with the right marketing play is absolutely critical. In that world, it was far better to be supplying a critical component that everyone needs rather than say being a reseller. It is why Microsoft has endured, but sadly Egghead Software didn’t. Retailers just didn’t have a comparative advantage compared to an enduring software asset.

Those are days when listening is very important and it is incredible to us how the biggest insights normally don’t come form the SVPs or the Board, but from someone way down in the organization. Bill’s real gift back then was knowing how to see past the hierarchy to the insight. It is why a lowly program manager could write a single memo and Microsoft went from being a proprietary networking company to embedding TCP/IP and the rest of the Internet stack into Windows. It is why Microsoft started a game group based on proprietary hardware and software running completely counter to its horizontal software started on PCs. (Thanks J!)

This is a tough job, but recognizing when the playing field is wrong and moving quickly is perhaps the first and most important job of a great CEO. And interestingly, the job is really to first write the think memo saying things are broken and here are the goals and then to cast a broad swath and really listen as far down in the organization as necessary for the answer.

Insanely Great Products

I’m using a MacBook Air connected with my iPhone 4G using Safari. What a change from 10 years ago! When I see the single button on the front of the iPhone, I think of all those Nokia, Samsung and Motorola phones I’ve had over the years, with buttons everywhere and confusing interfaces (why do you start a cell phone by pressing the red, End-Call key anyway).

If there is one person who personifies the maniacal obsession with getting every detail right, it has to be Steve Jobs. This is a really different kind of persona. Great products are designed by committee, they are designed in the right ecosystem (see the note above about strategy). They don’t come from think memos or big round tables, they come out of a few minds. The question is how do you find that person.

Actually, the sad part to me is that sometimes it just doesn’t seem that hard. The main point is to simplify the job, because the more multi-purpose the device, the harder it is to make it work. The original iPod is great example. The complexity of the iPad compared with say the purposefulness of the Nook Touch is perhaps another. It is just easier to design a great reader (30 day battery life, 7 inch e-ink) than to create a general purpose tablet that does everything.

As an interesting aside is that the greatness of the iPhone only happened because of the big strategic decisions that Steve Jobs made. That is, it is based on Unix (that’s what iOS is at the core), it is based on standard hardware (ARM core) and it works with every networking technology under the sun (3G, CDMA, Wifi, Bluetooth). Contrast that with the original Mac as an example when Apple took pride in its own standards (Appletalk, Motorola MC68000, AppleBus, etc.).

In the end though, the great advantage a founder has like Steve or Jeff Bezos is that they can say, “Because I’m the CEO, and I think it can be done.” as he said when  he chose to override engineers who thought the iMac wasn’t feasible, as quoted in TIME magazine (24 October 2005).

But in the end, maybe the one thing to remember for a CEO is, “always pick one button over two.”

Letting the Team Succeed

Maybe it is after you are in the right place and the product is actually going to be decent. Then it is a question of how do you get people to want to work and to be a team. As Steve Jobs said one of his greatest worries was that Apple would be like Disney without Walt. So ironically, while the Product person above sounds like an incredible dictator, the question is how to get the best.

Maybe Jack Welch is that icon with all to famous work to make GE a high function organization. His rules like a good person who fails should get another chance while a person who doesn’t share your values should leave even if they are a success, are good examples of how team management works.

This works perhaps because the strategy is right and general product direction is right, but how to get the team to do the right job as a mini-company where every division manager is their own CEO.

That’s the lesson in the end, we are talking about CEOs, but really we are talking about every leader in an organization. There are times when every boss has to be a Bill Gates and change the rules of the game. When they have to be like Steve Jobs and just insist on simplicity and finally when all that is working be Jack Welch and get their subordinates to do the same.

Blooks and Blogs

I can’t believe it has been five years since The Marketing Playbook got published by Penguin. Quite a long ride for us. The more interesting thing is to see how much the book publishing business has changed. Now you don’t necessarily need a publisher, you can self-publish on Kindle. Now blogs commonly become books (blooks which are a cute name :0). For everything from Julie to Julia to 101 Things to do with your ex-wife’s dress.

Maybe that’s the future for everything but as barriers to entry fall and technology changes, that’s when the market really does evolve.