Feb 092015
Google Apps Logo Ring hires

“All the pieces are now in place,” President of Google At Work, Amit Singh, tells Business Insider in an interview about how the company’s enterprise offerings are competing in the marketplace and, perhaps most critically, undermining Microsoft’s Office products.

While Singh may be confident about Google’s products, the company’s earnings from its cloud services are trivial compared to its competition.

‘Other’ categories

Google don’t break out their income from their apps services, instead lumping it into ‘other’ revenues which also includes Google Play, Apps Engine and all their other non-search products. In the last quarter that was $1.9 billion, barely 10% of the organisation’s entire income.

Microsoft also obscure their office software earnings having split its products into the Devices and Consumer licensing division and Commercial Licensing however the last quarter Office’s income was reported it was a seven billion dollar a quarter business.

While Microsoft’s income from the various forms of Office will have shrunk in the shift onto the cloud, it’s still safe to say it still dwarfs Google’s income from Apps.

Google’s ‘other’ category is also a general bucket of products that is competing against Microsoft Office, Amazon Web Services and Apple iTunes – with a combined total of 17 billion dollars, ten times Google’s quarterly income.

Slim pickings

Another problem for Google are the margins in its cloud services, as Microsoft have found the profits from online products are very slim compared to those from boxed software or advertising. For Google to continue its impressive profits, it’s going to have to find something more lucrative than cloud office software.

These slimmer margins also have another effect on the business model as Singh would know well from this days of working at Oracle.

Oracle, like many of the 1980s and 90s software companies, boasted extraordinary margins. This allowed them to pay huge commissions to salespeople, engineers and executives. A single enterprise sale for an Oracle, IBM or SAP salesdroid could pay for a decade of private school fees or a very nice yacht.

At Google and its partners the idea of being able to pay off the mortgage with the commissions from a single corporate deal raises a hollow laugh; there simply isn’t the money to pay for armies of hungry salesfolk.

Those thin margins also mean a change to Google and Microsoft’s business models. Shareholders expecting big profits from cloud services may need to be looking elsewhere.

Jan 302015
management and executive training, workshops and keynotes for technology

Once every workplace had a tea lady; usually a happy friendly woman who cheefully dispensed tea, buscuits and office gossip around an organisation.

During the 1980s the company tea lady vanished as companies cut costs and changing workplaces made the role redundant, is it now the turn of the CIO to go the way of the tea lady?

Yesterday research company company Frost and Sullivan hosted in a lunch in Sydney outlining their views on the growth of cloud computing based upon their 2014 State Of The Cloud report.

The report itself had few surprises with a forecast of the cloud market growing 30% each year over the next five years, a statistic that won’t surprise many watching how users are moving away from desktop applications.

Shifting procurement

One of the key trends though is how cloud services change the procurement process and lock IT managers and Chief Information Officers out of decision making. As the report says;

Half of all organisations feel that the decision making process is shifting from that of the CIO and IT department to the individual business unit for implementation or updates of cloud applications such as HR, payroll, collaboration and conferencing.

While the report puts a positive spin on what it describes as the “evolving role of IT within organisations”, Mark Dougan – Frost & Sullivan’s Managing Director for Australia and New Zealand – mentioned that often the decision to adopt a cloud service were made by executive management and then the CIO was told to implement the technology.

This illustrates how CIOs’ already tenuous grip on being a senior management role has slipped. With the rise of cloud services, it’s become easier for executives to make choices without considering the technological consequences.

Probably the business that best illustrates this shift has been Salesforce where many corporations find they have dozens of subscriptions being charged to sales managers’ credit cards, much to the chagrin of company accountants and IT managers.  Salesforce and similar businesses have driven the trend so far that many consulting firms predict marketing departments will control more technology spending than IT managers in the near future.

That shift predates the coining of the word ‘cloud’, the term “port 80 and a credit card” was used to describe the Salesforce model of sales people signing up to what was then described as Software As A Service (SaaS) earlier in the century.

Does IT matter?

In 2003, writer Nicholas Carr predicted IT as a discipline would cease to matter within most organisations as technology became ubiquitous and taken for granted, just as electric power and railways did in the nineteenth and twentieth centuries.

The electricity and railway industries remain huge employers and are essential to modern business but most for most companies the products are taken for granted – few companies have a Chief Electricity Officer sitting on their executive team despite power being an essential service.

For those IT managers hoping for a senior c-level position or even a seat on the board, the move to the cloud is terrible news. Rather than getting the corner office, the CIO could be heading the way of the tea lady.

Jan 272015

This morning Microsoft announced its quarterly results and, once again, they confirmed the company’s move into the cloud, a transition that means the company has to deal with reduced margins in once immensely profitable markets.

While Microsoft’s earnings beat analyst estimates, the stock still dropped on out of hours trading on the US markets. The reason being margins showed a slight decline and the impending release of Windows 10, which will be free for customers upgrading, portends a further fall in income.

The fading of Windows is best shown in the results for the company’s Devices and Consumer licensing division which covers licensing of the operating system and is the second biggest contributor to Microsoft’s revenues and profits. The segment’s takings are slowly declining although surprisingly the division’s margins are standing up.

Microsoft division performance 2014-15

Microsoft division performance 2014-15

Windows’ decline shows the post XP recovery Microsoft was hoping for the division has failed to materialise beyond a bump last quarter, as the company explained in its media release;

Windows OEM Pro revenue declined 13%; revenue was impacted by the business PC market and Pro mix returning to pre-Windows XP end of support levels and by new lower-priced licenses for devices sold to academic customers

With company making various versions of Windows 8 and 10 free, it’s hard to see the division doing anything but accelerating its decline as fewer people actually pay for the operating system.

Fading margins

Also illustrating Windows’ falling fortunes is how the Computer and Gaming Hardware division’s revenue threatens to overtake the Devices and Consumer Licensing group’s contribution. The problem for Microsoft with this that the manufacture of Xboxes and Surface tablets only boasts a profit margin of 12% against consumer licensing’s 93%.

Last week at its preview of Windows 10 Microsoft showcased its HoloLens virtual reality technology, while impressive it’s unlikely to boast margins any better than Xbox consoles or Surface tablets. At best it will be a trivial contribution to the company’s bottom line.

Microsoft Margins by operating segment

Percentage margins Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15
Devices and Consumer Licensing 87% 90% 87% 92% 93% 93%
Computing and Gaming Hardware 15% 9% 14% 1% 20% 12%
Phone Hardware n/a n/a n/a 3% 18% 14%
Devices and Consumer Other 21% 21% 21% 17% 17% 23%
Commercial Licensing 92% 92% 91% 92% 92% 93%
Commercial Other 17% 23% 25% 31% 33% 35%

Dwarfing both divisions in both revenue and profit is the Commercial Licensing segment which also boasts fat margins of 93% and accounts for nearly half the money coming into the organisation. Commercial Licensing remains static and provides the bedrock for the company’s cashflow.

The big growth area remains the cloud with the Other Commercial division, which includes most of the online and professional services growing steadily. While showing growth, this part of the business boasts a relatively low margin of 33% so any market moves from Enterprise licensing to the cloud will have a sharp effect on the company’s bottom line.

Mobile black holes

Of all Microsoft’s divisions, the problem remains the Phone Hardware segment with low margins, declining sales and a shrinking market share. Reports released overnight indicate that over a third of Lumia devices sold are not being activated which may indicate distribution channels are having to deal with unsold stock.

Compounding Microsoft’s poor position in the phone marketplace is the resurgence of Apple’s iPhone, particularly in the Chinese market where Microsoft is failing dismally. Global market share figures are indicating Apple may soon overtake Samsung as the world’s largest smartphone vendor while Android systems are coming to dominate the global marketplace.

Tomorrow Apple will announce their results and we’ll see how the two companies are travelling, the contrasts will almost certainly be striking. For Microsoft, even if they do manage a shift to mobility and the cloud, they are unlikely to repeat Apple’s success in reinventing themselves.

Jan 232015
strong passwords are important for online security

“There is a big problem with trust today,” says cable operator Liberty Global’s Micheal T. Fries.

He was sitting on a fascinating panel at the World Economic Forum this week with Yahoo! CEO Marissa Mayer, Salesforce founder Marc Benioff and World Wide Web creator Tim Berners-Lee looks at the issue of trust in the tech world.

In a world where everyone wants access to our data, it’s a pertinent and timely discussion from people at the front line of where these issues of ethics and privacy are being dealt with.

Dec 162014

Earlier this year Decoding The New Economy interviewed SurveyMonkey’s  CEO Dave Goldberg on his vision for the business and how the company’s services are helping people understand the context of the data pouring into their organisations.

Yesterday SurveyMonkey announced it had raised 250 million dollars through an equity round that values the business at $1.3 billion, an amount only a little more than what the company has raised since being founded in 1999.

The additional funds are earmarked for privately held SurveyMonkey to acquire more companies and “provide meaningful liquidity to our employees and investors” with participants in the new funding round including CEO Goldberg and Google Ventures increasing their existing stakes.

In his interview with Decoding The New Economy last February, Goldberg described how he sees mobile technologies changing both SurveyMonkey and business in general along with the challenge for companies in understanding the data pouring into business.

It’s not hard to image many of the acquisitions SurveyMonkey makes with its latest fundraising will be in the mobile and analytics sectors.

Dec 092014

“Productivity is our life blood,” says John Case, Microsoft’s Corporate VP for the company’s Office product line. “It’s part of the company that we say is our mission.”

Case was speaking at a media briefing ahead of Microsoft’s launch of their Australian Cloud Solution Provider program for resellers with the company making the case for integrators and IT support businesses to sell the Microsoft Cloud Services.

For Microsoft this is part of the evolution from the 1990s “PC on every desk” strategy to a mobile and cloud first service.

This shift doesn’t come without pain for Microsoft and it’s resellers, the cloud is a fiendishly competitive space with Amazon regularly dropping prices and Google steadily eating into the productivity suite market.

Making matters worse for Microsoft are that Google are moving into their hosted server space with the announcement that Google’s Cloud Platform now supports Microsoft Server.

Case though is sanguine though about the threats from Google, particularly the increased commissions being paid to resellers which will only put more pressure on Microsoft as resellers consider the options.

Probably the toughest part of the shift for Microsoft are the reduced margins – although for resellers the change is far more wrenching as the profits from cloud services are far lower than installing servers.

For Microsoft the key to success in the cloud depends upon the confidence of customers; security and trust are going to make and break all cloud services, something that Case acknowledges.

Ultimately though Case sees Microsoft’s network of resellers and partners as being the company’s best defense against Google and the shift to the cloud. Whether that network is strong enough to overcome a structural shift in the market place remains to be seen.

Productivity may be the lifeblood of Microsoft’s business but as margins erode, it may be that that market is not longer lucrative enough to sustain a $400 billion dollar business. Microsoft’s fight for survival is on in the cloud.

Dec 082014

Earlier today I was at a media briefing with Microsoft describing their move to cloud services. Among the various case studies were two principals from IT support companies describing how the online products were good for their businesses.

The truth is there is little good news for the industry — the IT support industry in the US has shrunk 1.2% each year for the past half decade and the prognosis is things aren’t going to get any better.

It’s been two major factors that have hurt the sector; the first was the end of the PC upgrade cycle upon which many support businesses based their models while the shift to the cloud has reduced the need for inhouse servers.

While many companies, like the two profiled today, have switched to reselling cloud products they are finding the margins on both the products and the associated services are nothing like those of the old PC and server business.

Overall it’s a tough place to be and the companies that do survive will be nowhere near as profitable as their equivalents two decades ago. It’s one of those businesses that’s doomed to decline.

All of us need to think if our industry could be like the PC repair business. If margins are collapsing due to technological change, then you need to get out.