Paul Wallbank – Brilliant Communications

Category: consumer

  • Insanely profitable

    Insanely profitable

    Apple’s announcement that they will start paying dividends to shareholders changes a number of things in Apple’s business model and those of many other businesses.

    The sheer size of Apple’s cash reserves also illustrate how profitable the outsourced manufacturing model is as well the contradictary nature of special pleading by affluent corporations.

    Moving a cash mountain

    Not only is Apple’s business insanely profitable, but sales are growing exponentially. In the company’s conference call, CEO Tim Cook reported that 37 million iPhones sold last quarter and 55 million iPads sold in the last two years.

    Apple’s CFO Peter Oppenheimer pointed out the company’s cash reserves increased $31 billion in 2011 and 2012 is on track for a similar result in 2012, leaving them plenty of money for investment along with a “warchest for strategic opportunities”.

    Paying a dividend

    The reluctance to pay dividends has been a feature of the US corporate for the last few decades and Apple are certainly not alone in not distributing their profits to shareholders.

    Companies like Microsoft, Google and Oracle -even Yahoo! once upon a time – have been just as profitable as Apple and their efforts to shrink their cash mountains has had some perverse effect.

    Many of these companies have squandered suprpluses on poorly thoughtout and badly executed buyouts of smaller businesses, this urge to avoid returning money to owner has been one of the drivers of the Silicon Valley VC Greater Fool model.

    Another result of fat profits is the rise of flabby, overstaffed management ranks at some of these companies. Although this certainly isn’t the case at Apple where Steve Jobs ran a very lean machine.

    The retail model

    Unlike their major tech competitors Apple is a manufacturing and retail business as well. In 2012, 40 new stores are planned around the world.

    This vertical control of their markets, from the beginings of the supply chain  to “owning” the end customer is anathema to modern MBA thinking and probably the area that gives them the greatest competitive advantage over their hardware competitors.

    Justifying Mike Daisy

    In some ways this announcement justfies Mike Dasy’s discredited criticisms about Apple’s Chinese suppliers.

    The reason for manufacturing these goods in places like China, India or Vietnam is the vastly cheaper cost of doing business, not just in labour rates but in reduced environmental and safety standards.

    Plenty of brand name clothing, footware and fashion accessory companies make similar massive profits to Apple with their ten, twenty and sometimes hundred fold markups on their products.

    Repatriating profits

    One of the big changes of Apple repatriating money is that is undercuts the special pleading by these extremely profitable companies that they should have a US tax holiday so they can repatriate their riches.

    It’s now clear these companies can easily afford to pay the taxes of their home countries and it’s time they started to, along with returning dividends to their shareholders.

    Once again Apple have changed the way others do business, how these changes affect the way we invest and governments treat companies is going to be one of the most interesting developments over the next decade.

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  • Who will be the future Betamaxes?

    Who will be the future Betamaxes?

    This morning Paypal announced its PayPal Here service, a gizmo that turns a smartphone into a credit card reader.

    On reading PayPal’s media release in the pre-dawn, pre-coffee light I found myself grumpily muttering “which platforms?” as the announcement kept mentioning “smartphones” without saying whether it was for iPhone, Android or other devices.

    It turns out to be both Google Android and Apple iOS. It adds an interesting twist to the Point Of Sale market we’ve looked at recently.

    The omission of platforms like Windows Phone raises the question of which platforms are going to go the way of Betamax?

    Sony’s Betamax and JVC’s VHS systems were the dominant competitors in the video tape market in the early 1980s. They were totally incompatible with each other and users had to make a choice if they wanted to join one camp or the other when they went to buy a video recorder.

    On many measures Betamax was the better product but ultimately failed because VHS offered longer program times and Panasonic’s licensing out of their technology meant there were more cheaper models on the market.

    A few days ago Bloomberg Businessweek listed the Betamax device as one of the “technology’s failed promises”

    With a superficial comparison, Apple would seem to the Betamax while Google and possibly Microsoft are the VHS’s given their diverse range of manufacturers their systems run on and Apple’s refusal to license out iOS, which was one of the reasons for Sony’s failure.

    But it isn’t that simple.

    In the smartphone wars, it’s difficult to compare them to VCRs as the video tape companies never controlled content and advertising the way smartphone systems do – although Sony did buy Columbia Studios at the peak of the Japanese economic miracle in 1987.

    This control of content is what makes the stakes so high in the smartphone and tablet operating systems war. A developer or business that dedicates their resources to one platform could find themselves stranded if that platform fails or changes their terms of services to the developer’s detriment.

    Another assumption is there is only room for one or two smartphone systems; it could turn out the market is quite happy with two, three or a dozen different systems and incompatibilities can be overcome with standards like HTML5.

    In a funny way, it could turn out to be Android becomes the Smartphone Betamax due to having too diverse a range of manufacturers.

    One of the first questions that jumps out when someone announces a new Android app is “which version?” The range of Android versions on the market is confusing customers and not every app will run on each version.

    More importantly for financial apps like PayPal Here and Google Wallet, smartphone updates include critical security patches so many of the older phones that miss out on updates pose a risk to the users.

    In the financial world confidence is everything and if customers aren’t confident their money is safe or will be promptly refunded in the event of fraud they won’t use the service.

    Whether this uncertainty will eventually deal Google out of the game or present an opportunity for Microsoft and other companies is going to be one of the big questions of the mobile payments market.

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  • Milking the dead cow

    Milking the dead cow

    Many big Australian businesses seem untouchable as they dominate their markets to degree almost unknown in most other developed countries. As the story of Sensis shows, Australia’s big duopolies may not be as strong as they appear.

    The last few months have been tough for Sensis; revenues last year fell nearly 25%, the once strong business was folded into the latest incarnation of Telstra Digital Media and now the CEO Bruce Akhurst has departed after seven years.

    What could have been a dynamic business is now shriveling away, what went wrong?

    Milking the revenue cow

    Bruce did a good job of keeping revenue coming in during a period that the then owners, the Federal government, wanted to maximise the book value of Telstra before its sale.

    Year upon year Sensis could be relied upon to squeeze more money out of the businesses advertising in it.

    Management were focused on extracting revenue from the existing client base rather than responding to the obvious threat from online search.

    Expensive distractions

    When senior management decided to respond to the online world, they were sucked into unnecessary and expensive distractions; the most notable being the 2005 launch of Sensis Search where the then Telstra CEO – the disastrous Sol Trujillo – famously sneered “Google Schmoogle”.

    Three years and hundreds of millions of dollars later, Sensis admitted defeat. By then the small business advertisers who were the life blood of the directory market had woken up to the reality their customers weren’t using the Yellow Pages anymore. Sensis had missed the boat.

    Clunky processes

    Whenever I spoke to small businesses about Sensis through the 2000s there was the same complaint, “I don’t have time to deal with their sales people, just let me tick a box on a web page or send a fax!”

    Purchasing space was difficult for customers, their 1950s Willy Loman sales model should have been automated in the 1990s and never was.

    Instead Sensis was locked into a high cost sales model and added friction for advertisers which they shouldn’t need, not only were they expensive but they actually made it difficult for their customers to place orders.

    Should Sensis have been sold?

    At its peak in 2005, Sensis was valued at between 8 and 10 billion dollars as a stand alone company.

    Many, including myself, believe that breaking Sensis away would have been the best result given Telstra were at the time focused on protecting their fixed line copper wire monopoly and the directories business was not getting the management attention or capital investment it needed.

    History shows though that we might be wrong.

    Commander Communications was spun off from Telstra in 2000 and like Sensis had inherited an almost monopoly position in the small business communications market.

    By 2007 Commander was out of business thanks to a combination of incompetence, management greed and an inability to recognise the changing communications marketplace.

    The Australian disease

    Commander’s biggest problem was it saw its customers as cash cows, just as Sensis did. This exposes a much deeper problem in Australian industry and management culture.

    Over the last thirty years Australian government policies have seen duopolies develop in almost every key sector of the economy.

    All of these duopolies share the same “customer as a milk cow” philosophy which, along with the rampaging Australian dollar, has dragged Australia into being a high cost economy.

    The banking industry, while not a duopoly for the moment, is an even more debilitating example of the cash cow syndrome where small business has been crippled by excessive interest rates and fees – particularly since the 2008 crisis.

    Sensis’ demise is systemic of a culture that fixates on extracting maximum revenue from customers; concepts like innovation, R&D or adapting to market trends don’t have a role in this mentality.

    Milking cows is a fine business, but sometimes you have to think about the health of the herd.

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  • Channel blues

    Channel blues

    “We do the pre-sales work then they come along and steal the customers. It’s wrong, just wrong” growled the sales manager of an IT integrator while talking about one of the leading cloud computing services.

    The business model of systems integrators is to be a company’s, or home’s, trusted advisor on IT and make money from charging for their services and the profit in selling software and equipment.

    In the last few years that model has become tough – the collapsing price of hardware has made the profits on selling systems leaner while the increased life of systems has meant the big lucrative upgrades have become scarcer.

    At the same time services have become less lucrative as more participants have entered the market, many using offshored cheap labour to provide remote support. It hasn’t helped that computers have become vastly more reliable, particularly since Microsoft have largely solved Windows’ gaping security holes.

    The icing on the cake has been the end of boxed software and corporate licenses. These were extremely profitable for the systems integrator – a big sale of Microsoft Office or Oracle licenses to a government department could see an IT salesperson pay for a holiday home or cover the kids’ school and college fees.

    Cloud computing has largely been the driver of all of these factors’ decline and now it is really hurting those integrators and their salesfolk who were used to a very profitable existence.

    While that’s good news for computer consumers – and even better news for hapless shareholder and taxpayers who’ve been largely dudded by big IT sales pitches to gullible directors and ministers – it does beg the question of how customers now get advice and support.

    Largely cloud based services rely upon customer self service and many of the providers would struggle to include user support in their list of core competencies.

    There’s a business model there for systems integrators, but it’s difficult to see how many those used to fat profits in the past can, or will, adapt to the new environment.

    An interesting side effect of this change is how it affects companies like Microsoft where their channel partners – largely those big and small systems integrators – are one of the most important distribution networks for their products and probably their best defense against competitors like Google and Apple. That strength is being steadily eroded.

    It’s tempting to think that change affects just “old” industries like retail, publishing or car manufacturing; in reality it affects all sectors and sometimes the most modern might be hurt more than the established players.

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  • Reputation’s long tail

    Reputation’s long tail

    When you decide customer support is an unnecessary cost, you make a statement that defines your position in the market place. Dell are reaping the consequences of this now.

    Micheal Dell, CEO and founder of Dell Computers, hopes to grab some of the tablet computer market from Apple with the release of Microsoft Windows 8.

    It’s a big goal – Apple have owned the tablet computer market since launching the iPad.

    Dell, along with most of the other PC manufacturers, squandered the decade’s head start they had in tablet computers with poorly designed and overpriced tablet PCs which were based around a clunky version of Microsoft Windows using styluses.

    Part of the problem was Windows itself; the operating system was designed for desktop users and to make it work on tablet computers it required a clunky workaround. Being designed for smart phones and tables mean Windows 8 may overcome previous limitations.

    But Dell have a problem; they are perceived as a low price, low quality supplier and have a competitor in Apple that has locked in the supply chain for the product.

    So Dell will struggle to beat Apple on price while customers believe the Dell system is inferior.

    Even more difficult for Dell is their support reputation, a quick look at the comments to the Bloomberg story illustrates the problem.

    Of the the sixteen reader comments, admittedly not a scientific sample, three business owners claim they will never buy Dell again after customer support issues.

    This is the critical mistake Dell’s management made in the 2000s – in order to cut costs so they could be profitable at lower price points they trashed their support.

    Eventually this culminated in the Dell Hell debacle where Jeff Jarvis’ experience summed up the frustrations of thousands of Dell’s disillusioned customers.

    Apple on the other hand chose not to go down the rabbit hole of cheap and nasty systems. Today they can offer free, and skilled, support in their genius bars as their fat margins allow them to provide constructive and helpful assistance to their customers.

    Now Dell has the reputation for at best indifferent after sales service which means they are locked into competing on price and ever declining margins.

    It’s not a good place to be for Dell but that’s what you get for treating your customers like an unnecessary nuisance while fixating on headline prices.

    We often talk about the Internet’s long tail; our online reputations could be the longest tail of all.

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