Feb 142015

In 1977 NASA’s Voyager mission launched from Cape Canaveral to explore the outer solar system, included on the vessel in case it encountered other civilisations were a plaque and a golden record describing life on Earth.

The record was, is, “a 12-inch gold-plated copper disk containing sounds and images selected to portray the diversity of life and culture on Earth.” It containing images,  a variety of natural sounds, musical selections from different cultures and spoken greetings in fifty-five languages.

Most American households in 1977 could have listened to the sounds on Voyager’s golden disk but were the spaceship to return today it would be difficult to find the technology to read the record.

This is the concern of Google Fellow and internet pioneer Vint Cerf who told the American Association for the Advancement of Science’s annual meeting in San Jose this week we are “facing a forgotten century” as today’s technologies are superseded rendering documents unreadable.

A good example of ‘bit rot’ is the floppy disk – the icon used by most programs to illustrate saving files is long redundant and few organisations, let alone households, have the ability to read a floppy disk.

For corporations the problem of dealing with data stored on tape is an even greater problem as proprietary hardware and software from long vanished corporations becomes harder to find or engineer.

As the Internet of Things rolls out and data becomes more critical to business operations, the need for compatible and readable formats will become even more important for companies and historical information may well become a valuable asset.

With libraries, museums and government archives having digitised historic information, this issue of accessing data in superseded formats becomes even more pressing.

It may be that important documents need to be kept on paper – although there’s still the problem of paper deteriorating  – to make sure the 21st Century doesn’t become the digital dark ages and our golden records remain unread.

Feb 082015
Personal computer Dell manufacturer

Personal Computers cost one thousandth of what they did in 1980 reports Aki Ito in Bloomberg Business.

For the computer industry that’s been both a blessing and curse; cheap systems have allowed computers to become pervasive but at the same time the collapsing prices have destroyed the business models of those who built their companies upon the industry economics on 1980 or 2000.

Software has fallen a similar amount with computer programs now costing 7/1000ths of what they did 35 years ago. Again this has dramatically changed the structure of the industry with Google and Amazon taking over from Microsoft and Adobe.

While the computer industry is the starkest example of the collapse in prices due to technological change, it’s not the only sector being affected – almost every industry is under similar pressures as margins get stripped away.

Anywhere where middlemen are exploiting market inefficiencies are opportunities for new technologies to destroy the existing business models, Uber are a good example of this with the taxi industry.

With technological change accelerating in all industries, no business or its managers can assume they are safe from shifting marketplaces or new, unexpected competitors.


Jan 282015

The stunning quarterly results of Apple announced yesterday compared to Microsoft’s indifferent performance illustrate how the fortunes of two different business cultures have changed.

Apple yesterday announced a spectacular result for its quarter finishing at the end of last year with  revenues up 30%, profits by 38% and Earnings Per Share just short of fifty percent.

The announcement was an emphatic vindication for Tim Cook and his management team who made some big bets on the larger form factor iPhone 6 which paid off spectacularly with shipments growing 46% to 74.5 million and revenue reaching $51.2 billion, over two thirds of the company’s total sales.

One notable aspect of Apple’s success is the difference with Microsoft’s and this shows how different business cultures come in and out of fashion.

The Triumph of the MBA

For two decades Microsoft’s licensing business model was dominant and this confirmed the MBA view that companies should do everything they can to move design, research, manufacturing and distribution out of their operations – the virtual corporation where there was no inventory, few costs and even fewer risks was the ultimate aim of the modern manager at the turn of the century.

Microsoft encapsulated this philosophy with its licensing model, while the company made massive sales with huge margins – as it still does – all the business risks in the computer market were carried by resellers and equipment manufacturers. For many years the markets loved this.

Apple tinkered with the licensing model under John Sculley in the mid 1990s during Steve Jobs’ exile but was never really serious about giving away its hardware capabilities and in 2001 moved into retail with the opening of the first Apple Store.

Coupled with the App Store, Apple have come to control the entire customer journey from marketing, design, purchase and ongoing revenue after the product is bought.

King of the new Millennium

While the 1980s and 90s were the time of triumph for the Microsoft model, the 2000s have been good to Apple as shown by the revenue and profit figures.

Apple and Microsoft Revenues 2000-2014

Apple and Microsoft Revenues 2000-2014

Apple and Microsoft Profits 2000-2014

Apple and Microsoft Profits 2000-2014

The key inflection point in these charts is, of course, the iPhone’s release in 2007. Apple caught the wave of change as computer use switched from personal computers to smartphones and is now the dominant vendor.

For Microsoft the success of Apple is bittersweet; the company had a smartphone operating system in Windows CE but it was too early to the market and the devices vendors went to market with were, at best, substandard.

Microsoft’s failure with the smartphone was also echoed with tablet computers and exposed the licensing model’s reliance on vendors to supply and support decent products, even today Microsoft’s hardware partners struggle to release decent tablet systems.

Cloudy on the web

Another problem that exposed Microsoft’s weaknesses was the rise of the web where hardware and operating systems really did matter so much any more. Along with pushing out personal computer lifecycles it also had the consequence of allowing other systems into the marketplace, notably Linux and Google Android.

With OS X, Android and Linux systems no longer hampered with the compatibility issues that irritated non-Windows users in the 1990s the market was open to adopting those systems. While the PC market has remained quite loyal to Windows, although the Apple Macs are showing serious growth as well, Microsoft’s system has barely any marketshare in other device segments except servers which are also declining as business increasingly move to cloud services.

Apple have shown in the computing and smartphone business that controlling the hardware products is as important as supplying the software, a lesson that Microsoft now acknowledges with its restructure into a ‘Devices and Services’ company under former CEO Steve Ballmer.

The problem for Microsoft is its margins for hardware are a fraction of its own licensing operations and weak compared to Apple’s returns. Microsoft makes 14% profit on its phone operations while the iPhone is estimated to deliver over 60%.

Under current CEO Satya Nadella Microsoft is focusing on cloud services which also aren’t as profitable as its legacy operations but see it competing with companies like Amazon and Google who don’t boast the profits from their online operations that Apple makes from its hardware.

Microsoft aside, the lesson Apple gives the technology is pertinent for its competitors in the smartphone space as well; companies like Samsung, LG and the army of Chinese handset vendors are going to find their markets tough unless they can take control of their software development and distribution channels – relying on Google for Android and telcos to get their phones to customers leaves them exposed in similar ways to Microsoft’s partners in the last decade.

In the battle between business models, Apple is the current winner and shows throwing all of your business operations over the fence to partners and licensees is a risky strategy. How those lessons are applied in other sectors will test the limits of both management philosophies.

Photo of Steve Jobs and Bill Gates by Joi Ito through Flickr

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.

Nov 172014

Has Apple Pay legitimised mobile payments? It appears so, reports the New York Times. Since the launch of Apple’s payments service, Google and other mobile payment providers are claiming usage has doubled with customers exploring the systems.

If this is true, it’s similar to how Apple legitimised the USB port in 1998 with the release of the iMac.

Prior to the iMac the USB port was a bit of an oddity, on most PCs the sockets sat unused and the few devices available on Windows computers worked reliably, as Bill Gates himself found out during a live demonstration at the 1998 Comdex show.

Unlike Apple Pay, the move to USB on Macs wasn’t welcome and it was a high stakes decision by Steve Jobs given that Apple’s existence was still precarious and its user base was still made up of largely of true believers who had been through years in the wilderness with the company.

Those users also had many thousands of dollars invested in Apple Device Bus (ADB) devices, all of which became redundant with the move to USB. Many customers at the time swore this was the last straw and they would move to Windows PCs.

Apple’s users didn’t carry out their threats and stayed with the company whose move to USB turned out to be a winner for the entire computer industry.

For Apple USB’s success meant their customers were no longer locked into a proprietary technology, for manufacturers they were able to start moving off archaic serial and parallel ports while for Microsoft the shift meant a better range of more reliable devices — although their operating systems struggled with USB until the release of the far more stable Windows XP.

It appears in this respect Apple Pay is repeating history in giving a boost to a technology that has been struggling to find traction in the market place.

The difference this time is that the payments industry is a far bigger market with far more implications for the broader economy than the computer peripherals segment.

If Apple raise the boat on payment systems, there are some incumbent businesses who are going to find themselves in a very different marketplace in five years time.

Oct 162014
using an iPad and the cloud for a point of sale cash register

Ahead of tomorrow’s announcements by Apple, the strategic leaks are happening fast on both the next version of the iPad and Google’s Nexus appearing in the media today.

The problem for tablet manufacturers is that sales have stagnated in recent times with the products no longer flying off the shelves.

Part of the reason for this is customers are happy with their existing products; a three year old tablet will do most of things a brand new one will do so there’s little reason for upgrading.

For vendors like Apple and Google it’s further proof that the PC industry model of three year upgrades is firmly dead, the sector will need something more than planned obsolescence to drive growth.

Sep 282014

On Tuesday Microsoft are expected to announce their new Windows 9 operating system at a media event in San Francisco.

If the rumours are true, then the new system will be launched almost exactly two years after Windows 8 was released amid hopes that it would stem the PC industry’s decline.

Windows 8 didn’t deliver with most people being frustrated with the system’s inconsistent interface that tried to be unified desktop, laptop and tablet operating system which managed to be unsatisfactory on all of them.

As a consequence, users avoided Windows 8 like the plague with industry analysts Netmarketshare claiming most of Microsoft’s customers are buying systems kitted out with Windows 7 or just sticking with decade old Windows XP systems.

Courtesy of Netmarketshare http://www.netmarketshare.com

Courtesy of Netmarketshare http://www.netmarketshare.com

Making matters worse for Microsoft is the decline in personal computer sales in general with IDC estimating global shipments of both portable and desktop system will drop 3.8% in 2014.

These declines are already well established in the trends being seen in Microsoft’s business with the company’s Windows division showing an accelerating decline in profit margins.

Microsoft Windows division financial performance

Microsoft Windows division financial performance ($ million)

Should that decline continue with Windows 9, it may well be that Microsoft will have to consider the future of product.

As it is, the market may be deciding for them as users increasingly switch to tablets and smartphones. We may also see a wave of cheap Chinese made laptops running versions of Google Chrome or other Linux based systems also threatening the existing PC sales base.

Either way, a lot rides on what Microsoft announces in San Francisco this week. It could be the end of an era that defined the mass adoption of computers.