Paul Wallbank – Brilliant Communications

Category: Innovation

  • Breaking out of the gilded cage – Microsoft’s challenge with Windows

    Breaking out of the gilded cage – Microsoft’s challenge with Windows

    Update: With the announcement that Steve Ballmer will be stepping down as Microsoft CEO, the future direction of the company now becomes the biggest challenge for his replacement.

    Over the last three weeks the news for the personal computer industry has not been good. How does Microsoft, the business that leads the sector, move on from the product which has been its mainstay?

    Three stories in the last three weeks have shown how dire the situation is for personal computers, Windows and Microsoft.

    Consulting firm IDC’s report that global PC sales had dropped a stunning 14% was a clear signal the PC era is ending.

    A Gartner report two weeks ago warned that Microsoft faces a slide into irrelevance as Android device sales dwarf Windows’ numbers and Apple sales catch up with PCs.

    Industry commentators Asymco made similar observations about the state of the PC industry noting that Apple takes 45% of all profits from an industry that is in decline.

    In the past Microsoft has responded quickly to industry threats, one of the great management feats of the 20th Century was Bill Gates’ turning the company around to meet the challenges of Netscape and the newly popular internet.

    So how can Microsoft meet the challenges of today’s much more competitive world, while protecting their impressive revenues and profits?

    Replace the management

    Steve Ballmer was employee number 30 at Microsoft having been hired in 1980. Since his appointment as CEO in 2000 the company’s stock price has wallowed.

    Regardless of Ballmer’s performance, 13 years is a long tenure for a CEO in an industry that has radically changed in the last decade. A new perspective in the executive suite may well help the company leverage its strengths and weaknesses.

    Microsoft’s management problems shouldn’t just be blamed on Ballmer however, a stunning Vanity Fair profile of the company last year blamed human resources policies, specifically ‘stack ranking’ employees, for poor performance.

    Overhauling the company’s notoriously siloed management would give Microsoft much more flexibility in meeting the cloud and mobile challenges to its business.

    Ditch Windows

    At the core of Microsoft’s success is the Windows operating system which in 2012 delivered a quarter of the company’s revenue but has reported no growth for two years in a stagnating PC market.

    It is still a cash rich business though and as a stand alone entity, the operating system division could still be an attractive private equity investment.

    The story of Michael Dell’s attempt to take his company private is instructive as investment companies fight for a stake in a business with a turnover is less than Microsoft’s Windows division and far less profits.

    Double down on Windows

    The counter view to floating the Windows division is to double down and concentrate on the company’s core business. While the PC industry is fading, the need for embedded systems in machines is growing.

    Microsoft though hasn’t executed well with non-PC operating systems – the continued failure of tablet versions of Windows XP is a good example – so it may mean a new management team to guide the company down this path.

    Claim the cloud

    The biggest cash generator for Microsoft is their business division that includes their Office and Dynamics products. These are most at risk by the market’s move to cloud services.

    Paradoxically, Microsoft has a track record on the cloud products having acquired Hotmail in 1997, developed the Azure platform and taking steps to move its business products across to Office 365.

    Microsoft’s experience with Hotmail is instructive of the company’s uncertainty with cloud services having renamed the product constantly. Currently its incarnation as Outlook.com indicates further integration with Office 365.

    With a focused management, Microsoft may well be able to compete against both Google and Amazon on the cloud by leveraging its traditional market strengths and its army of evangelists, developers and support partners.

    Buy Nokia

    So far the alliance with Nokia has been underwhelming with Windows Phones being met with market indifference.  A purchase of the struggling mobile phone giant would give Microsoft more depth in understanding the mobile marketplace.

    A more interesting aspect of Microsoft buying the mobile vendor would be the acquisition of Nokia’s mapping technology. This would give Microsoft an advantage over Apple and give them an opportunity to compete with Google in the still developing mobile and local markets.

    For Microsoft, sticking with the status quo is tempting – a business with seventy-three billion dollars income and $17 billion in profits still makes it one of the world’s most impressive businesses.

    The risk though is all of the company’s major revenue streams are being challenged by mobile and cloud service and Microsoft have to adapt to a world very different to the one they grew in.

    As Gartner have pointed out, the company risks becoming irrelevant in an era of mobile devices accessing cloud services.

    The Challenge for Microsoft’s management and board is to find the spark that keeps the company relevant in a marketplace where the company is no longer the dominant player.

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  • Moving to a subscription economy

    Moving to a subscription economy

    One of the biggest changes in business is the move to subscription based services rather than selling one-off, lump sum products. This is affecting industries ranging from the motor industry to software.

    Business Spectator has a good interview with Tien Zhou of Zuora on the subscription economy and how it’s changing the business world.

    We’re pretty passionate in our belief that every company will be a subscription business in the next five, 10, 20 years. That’s certainly what we’re seeing with digital companies, whether they are technology firms (software, hardware), media and publishing firms, or telecom companies. The ideas of content and access are starting to blend together and we are seeing more and more commerce companies dip their feet as well. So we’re really see this as an across the board phenomenon.

    Probably the industry most focused on the subscription model right now are newspapers – subscribers have always been an important revenue stream for the print media and the loss of their advertising rivers of gold means they are looking at ways to get more money from readers.

    As Tien Zhou points out, businesses moving to subscription services is an across the board phenomenon.

    Yesterday I mentioned the Google Maps connected treadmill, that is a subscription model where the treadmill seller gets money from the initial purchase, but also a revenue stream from the services attached to it.

    The same business model applies to connected motor cars or the social media enabled jet engine. The aim is to replace lump sum purchases with lifetime subscriptions.

    Getting customers onto lifetime subscriptions has been one of Microsoft’s aims for the past decade as the company realised that software users, particularly those using Microsoft Office, hung onto their CDs for years and increasingly decades.

    Perversely it took Google and Apple to show Microsoft how to wean customers onto subscription services.

    That Microsoft Office is a good example of the evolution of subscription software, or Software-as-a-Service (SaaS), isn’t an accident. The enterprise computing sector is currently the most profoundly affected as companies like Google and Salesforce threaten high cost incumbents.

    A good example of the changing economics of software is the supermarket chain Woolworths moving onto Google Docs.

    With 26,000 seats, the reseller can expect to make $260,000 a year in commissions based on Google’s standard terms of $10 per seat per year.

    That total sum is less than the commission a salesperson would have earned for a similar sized IBM, Oracle or Microsoft installation.

    A whole generation of IT salespeople who’ve grown fat and comfortable on their generous commissions now find their incomes being dramatically reduced.

    Similar things are happening in industries like call centres with Zendesk, point of sale systems and event ticketing with Eventbrite – incumbents are finding their incomes steadily being eroded away by online services.

    At the same time agricultural and mining equipment suppliers are introducing big data services for their customers where the information gathered by the sensors built into modern tractors and bulldozers are providing valuable intelligence about the crop and ore being gathered.

    The subscription business model is nothing new, King Camp Gillette perfected the strategy with the safety razor at the beginning of the Twentieth Century. The razors were cheap but the blades were where the money was.

    Microsoft and the rest of the software industry tried to introduce subscriptions in the late 1990s with Software as a Service, but failed because the internet wasn’t mature enough to support the model. Today it is.

    Like many things in today’s economy, the subscription model is going to change a lot of markets. It’s a great opportunity for disruptive businesses.

    Subscription envelope image courtesy of jaylopez through sxc.hu

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  • Hurtling into the post PC era

    Hurtling into the post PC era

    Consulting firm IDC quarterly report on PC shipment figures this quarter shows a stunning 14% drop of global computer sales. On those numbers, the PC era is definately over.

    Across the board the figures are horrible with double digit declines across the board. Market leader HP reported PC sales had fallen by nearly a quarter yet they retained their market lead as all of their competitors reported similar falls.

    What’s also notable is the PC industry’s ultrabook attempt to wean consumers off cheap nebooks has backfired terrible, as the analysts note;

    Fading Mini Notebook shipments have taken a big chunk out of the low-end market while tablets and smartphones continue to divert consumer spending.

    Instead of buying higher priced ultabooks, consumers have abandoned portable PCs altogether and gone to smartphones or tablet computers.

    The PC manufacturers must be rueing how they let the tablet computer market slip through their fingers during the 2000s.

    Failing to ship decent tablet computers is symptomatic of a bigger problem for the PC manufacturers – their inability to innovate.

    The PC industry is struggling to identify innovations that differentiate PCs from other products and inspire consumers to buy, and instead is meeting significant resistance to changes perceived as cumbersome or costly.

    As IDC point out, even if they do introduce new products, consumers are wary that any “innovation” is going to be cumbersome. Basically the PC manufacturers have lost their customers’ trust.

    How this affects Dell’s proposed buy out remains to be seen; it’s hard to see how investors would not be concerns at a 10% fall in sales, although Dell was one of the better performers.

    For Microsoft, this news should further accelerate their moving products and customers to their cloud and enterprise products. For their Windows division it looks like there are tough times ahead.

    The decline of the PC market is itself a study in product and innovation cycles. It could well be that the personal computer is going the way of the fax machine.

    For some businesses that will be tragedy, but the market – and the opportunities – move on.

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  • Tasmania and the travelling circus

    Tasmania and the travelling circus

    “We bring in almost everything,” says V8 Supercars director Mark Perry as he guided journalists around Launceston’s Symonds Plains racing track.

    Everything Mark showed us – a fleet of trucks, communications equipment, hospitality tents and the racing teams themselves would be packed up on Sunday night, shipped to Melbourne and flown to New Zealand for the next race.

    The V8 Supercar management are very proud of their work, and they should be given the massive task they have, but it exposes a weakness in the Tasmanian economy in that almost all the high value employment and equipment has to be flown in.

    Quiet times in downtown Launceston

    Arriving into Launceston on the Friday before the races, it’s interesting how little hype there is around the event. In Sydney, San Francisco or Cannes there would be banners and flags around the city welcoming visitors, in Launceston there’s almost nothing despite the race meeting being one of the state’s biggest events.

    It was also surprising how there were no downtown events to complement the main attraction.

    Almost every major sporting event from the Olympic Games and FIFA World Cup to the AFL Grand Final and Australian Open has some inner city satellite venues with big screens for the locals who can’t make it to the stadium.

    Having those satellite events adds to the buzz and hype in the host city. Something that downtown Launceston needs at 7pm on a Friday night.

    That lack of support by the community is notable, particularly in light of the $600,000 per year the cash strapped Tasmanian government pays in subsidies for the V8 Supercars.

    I’m against government support for events like these, but if that money is going to spent it may as well be spent properly to maximise the economic benefits.

    Subsidies like this would be even better if they were part of some grander economic plan, but like all the payments given to the film production, motor manufacturing and other industries, they are based more on populism than any strategy – the politicians may as well be giving free beer out in Launceston’s main street.

    Why the community support is so tepid for the Supercars event is so tepid is something I’m going to be exploring in the next few days as I meet various business leaders in Launceston and Hobart to hear how the state is positioning itself in the 21st Century.

    In the meantime, the V8 Supercars “travelling circus” has moved on, hopefully Tassie will have some more long term jobs to show for it.

    Paul travelled to Tasmania and the V8 Supercars courtesy of Microsoft Australia

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  • Are Australians too risk adverse for startups?

    Are Australians too risk adverse for startups?

    Last week I had coffee with Clive Mayhew who chairs the board of Sky Software, a Geelong based student management cloud service.

    Clive covered a lot of interesting aspects about Sky’s business; including the opportunities for regional startups, government support and his experiences in Silicon Valley during the dot com boom. All of which I’ll write up in more detail soon.

    One notable point Clive raised was how he struggles to get Australian staff to take equity in the business – people want cash, not shares.

    The question Clive raises is why and that question is worth exploring in more depth.

    My feeling is that it’s a cultural thing related to property – four generations of Australians have been bought up believing housing is the safest way and surest way to build wealth.

    As a consequence young Australians are steered into getting a ‘safe’ job and plunging as much money into accumulating property equity as early as possible. Just as mum and granddad did.

    Even those who don’t want to play the property game are affected as property speculation pushes up prices and rents; the landlord or bank won’t accept startup stock to pay the bills so employees need cold, hard cash to keep a roof over their heads.

    The other angle is tax and social security policies, through the 1970s and 80s various business figures used share option schemes to minimise their taxes and successive Australian governments have passed laws making it harder for businesses to offer these incentives.

    Interestingly this not only affects the Silicon Valley tech startup business model but also hurts the aspirations of Australia’s political classes to establish the country, or at least Sydney, as a global financial centre.

    Putting aside the fantasies of Australia’s suburban apparatchiks – which if successful would see the country being more like Iceland or Cyprus than Wall Street or the City Of London – it’s clear that the existing government and community attitudes toward risk are reducing the diversity of the nation’s economy.

    That the bulk of the nation’s mining and agricultural investment, let along startup funds, comes from offshore despite the trillion dollars in compulsory domestic superannuation savings is a stark example of risk aversion at all levels of Aussie society, government and business.

    For those Australian entrepreneurs prepared to take risks, the risk adverse nature of most people becomes an opportunity as it means there’s local markets which aren’t being filled.

    The problem for those local entrepreneurs is accessing capital and that remains the biggest barrier for all small Australian businesses.

    How this works out in the next few decades will be interesting, it’s hard not to think though that Australians are going to have to be weaned off their property addiction – whether this takes a harsh recession, retired baby boomers selling down their holdings or government action remains to be seen.

    In the meantime, don’t base your business plan on staff taking equity as part of their employment package.

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