Last night for the monthly ABC Nightlife tech spot we looked at Samsung’s spying TVs and some of the other aspects of security with connected devices.
During the listeners’ calls it became very clear many are worried and scared by technology’s rapid progress. This is a challenge for the leaders of both the tech industry and governments.
Lenovo’s actions raise a serious concern for business as many of those home units may have been connected to office networks under corporate Bring Your Own Device policies and the spoofing of security certificates could cause no end of problems and risks for IT managers.
Another concern Lenovo’s actions raise is about the Internet of Things; if various devices on a network are messing with data integrity, confidence in the information being generated is eroded.
For the tech industry, it’s essential to regain the community’s trust. Equally however it’s essential for business and political leaders to have an honest conversation with voters and workers on how the structure of the workforce is changing.
A San Francisco taxi company reinvents itself for the app economy.
Taxis have gotten their ass kicked” says Hansu Kim, owner of San Francisco’s oldest taxi company.
Kim’s company, DeSoto, is changing the name it has held since the 1930s to Flywheel in an agreement with the taxi hailing app of the same name. The San Francisco Chronical describes how DeSoto and the city’s other taxi companies are finding times tough now Uber and other services have moved into what was a safe, regulated business.
DeSoto’s move is a sign of the times as older business models evolve; moving to an app based hailing service improves the experience for everybody in the cab industry and radically changes the economics of getting a ride across town.
The main reason for Uber’s success is being able to identify both drivers and passengers which improved confidence in the system. In turn, this changes riders expectations and taxi’s fare structures.
For companies competing with Flywheel the question will be do they participate in this service or do they create their own app. For the industry in general it makes sense to share the infrastructure but for uses it may well be in their interest to have competing apps with different levels of service.
As the levels of car ownership continue to fall, how taxi hailing and car hire apps evolve will drive the development of our cities through this century. DeSoto and Flywheel’s experiment is the start of many as older businesses adapt to a changing economy.
A tour of Telstra’s consumer insights centre shows us the software driven business of the future
Yesterday Australian incumbent telco Telstra took the media on a tour of its showpiece Customer Insights Centre in downtown Sydney.
The company is justifiably proud of the facility that includes a 300 person auditorium, broadcast quality TV studio, a restaurant, workshop and collaboration spaces.
Welcoming visitors is the centre’s Insight Ring, a nine metre circle-shaped platform that surrounds guests with digital insights mined from Telstra’s information services. Leading off the reception area are a range of displays showcasing the company’s products and capabilities including wearable technologies, 3D printing and Ged The Robot.
Marking the centre as a modern facility the display spaces where Telstra and its partners can show off technologies to industry bodies and prospective clients.
Ged, the Telstra robot
The previous space two floors higher in the building was beginning to show its age after seven years and the fixed displays of technology in the older facility dated the centre, something that’s a disadvantage in an industry changing as quickly as telecommunications.
In the new centre, the demonstration facility is largely screen based so displays can quickly be adapted to show off the technologies aimed at whichever industry they are pitching.
The software driven demonstration centre
Andy Bateman, Director of Segment Marketing at Telstra, who lead the tour was proud to show off the current display that had been set up to showcase the company’s banking products.
Bateman described how the facility can be quickly altered to suit the needs of specific demonstrations, this was a degree of flexibility missing in the PayPal innovation center in San Jose, which is more comprehensive in its displays but requires a major fit out to change anything.
However software doesn’t always have the upper hand, just opposite the Telstra centre is the Sydney City Apple Store. In some ways, the two facilities opposite each other illustrate one of the big technological and market battles of this decade.
View of the Apple Store from the Telstra Centre
For most businesses, software will define the future way of working but for the smart hardware vendors will still be making good money.
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.
“People being able to participate on their phone, no matter where they live, even if they’re in a remote rural village in Tanzania or Kenya, they’ll be able to save small micro-payments,” Gates told The Verge during an interview in New York. “They can participate on the economy through their phone, but also in the fall when it’s time to pay the school fees, they’ve saved the money for the year. That’s transformative for their family.”
Bringing banking to the masses through mobile phones is one example of how emerging markets can leapfrog the technological and institutional barriers that have given the western world a head start.
Surveying 27,000 participants around the world, Edelman follows up with questions to what they call ‘informed publics’; 6,000 college-educated followers of business and news media with a household income in their country’s and age group’s top 25%.
Across the board trust in institutions have fallen with nearly 60% of countries falling into the ‘distruster’ category and the news isn’t good for businesses and governments.
That decline in trust is a striking result given the ‘informed publics’ cohort are their country’s middle class and it shows the stresses being felt in affluent groups.
“There has been a startling decrease in trust across all institutions driven by the unpredictable and unimaginable events of 2014,” the company’s release quotes CEO Richard Edelman. “The spread of Ebola in West Africa; the disappearance of Malaysian Airlines Flight 370, plus two subsequent air disasters; the arrests of top Chinese Government officials; the foreign exchange rate rigging by six global banks; and numerous data breaches, most recently at Sony Pictures by a sovereign nation, have shaken confidence.”
Whether the events of 2014 are responsible for the erosion in trust as Edelman claims is up for debate, the decline of trust in innovation indicates the general atmosphere of mistrust is a much bigger issue.
Trusting innovation
Particularly notable is the Australian result where over half the respondents believe innovation is happening too quickly and that it is being driven by greed. Only some, a piddling 14 percent, see innovation as making the world a better place.
Those results are a concern for a country looking at dealing with a high cost economy. At this stage of Australia’s development it’s necessary for industry and society to be implementing new ways of doing business, not looking back to the past.
One shift that marks a change in society is that online search engines are now more trusted than the media outlets that provide the news, that the population trusts algorithms more than journalists is something that should concentrate the minds of newspaper and magazine proprietors.
Other opportunities for building trust include listening to customer needs and feedback, treating employees well, placing customers ahead of profit and communicating frequently on the state of the business.
Clearly building trust is the task of all staff but it starts with an organisation’s leaders to ensure ethics and openness are rewarded. In that light it’s not surprising that trust is declining given the way unethical financiers and opaque politicians have been the main beneficiaries of the post crisis economy.
While a time of declining trust means our institutions are under great stress, it also means there are great opportunities as well for smart businesses and leaders. The challenge is to show the ethics and openness that the public is calling for.
McDonalds and the declining franchising model of fast food chains are another symptom of a changing economy and society
One of the biggest business innovations of the late Twentieth Century was the franchising model. Now as technology changes that way of working isn’t necessarily the force it was a quarter century ago.
While the concept itself wasn’t new – The East India Company at the beginning of the Seventeen Century was a type of franchise – the model really took off in modern business with the automotive industry where different manufacturers granted franchises to their brands.
After World War II it was the fast food industry that developed the franchise model into a tightly controlled, procedure driven way of doing business.
Building the fast food franchise
The fast food franchise model worked well for everybody; for the brand, it meant they could expand without huge layouts of capital while for budding local entrepreneurs purchasing a franchise meant buying into a proven business model with a known brand name.
McDonalds was the leader in the fast food franchising sector; the company expanded across the US and then globally on the back of the procedures first developed by the founding brothers then expanded by Ray Croc as he sought to roll out an industrial scale burger chain where a cheeseburger in Arkansas tasted the same as one in Alaska.
To achieve this, he chose a unique path: persuading both franchisees and suppliers to buy into his vision, working not for McDonald’s, but for themselves, together with McDonald’s. He promoted the slogan, “In business for yourself, but not by yourself.” His philosophy was based on the simple principle of a 3-legged stool: one leg was McDonald’s, the second, the franchisees, and the third, McDonald’s suppliers. The stool was only as strong as the 3 legs.
Croc’s concept was fantastically successful as the franchisees took the operational risks and stumped up most of the capital while McDonalds providing the branding, procedures and supplies.
Many other industries, and fast food chains, copied Croc’s idea and the modern franchise model spread from hamburgers to lawn mowing to industrial safety services. During the 1970s and 80s, a smart, hard working entrepreneurs could do very well buying one of the bigger franchises.
Wobbling franchises
Around the turn of the century though that model started to wobble; during the 1990s the sharks began to move into the franchising industry with many sub-standard systems. McDonalds and the other fast food chains compounded the problem of poor performance by selling too many franchises in a mad dash for growth.
Young entrepreneurs have changed as well; rather than raising several hundred thousand dollars to pay franchise fees to be constrained by a strict set of procedures, today’s keen young go getters are more interested in the opportunities of building new businesses from scratch as startups.
Access to capital is also a problem as today its harder to raise money from a bank unless a business owner has ample home equity or other real assets to secure lending; the risk adverse nature of banks is making it harder for these capital intensive businesses.
Technological change
The killer though for the franchise model seems to have technological and social change; as consumer lifestyles and preferences changed, so too has the underlying demand for both franchises and their products.
McDonalds’ fading in the United States illustrates this change as companies like Chipotle take over from the once dominant chain as technology has made it more efficient to standardise procedures and customise food service.
Once McDonalds was an investor in Chipotle and Quartz Magazine describes how the relationship foundered with one of the key points of friction being differences over the franchising model.
“What we found at the end of the day was that culturally we’re very different,” Chipotle founder and co-CEO Steve Ells said. “There are two big things that we do differently. One is the way we approach food, and the other is the way we approach our people culture. It’s the combination of those things that I think make us successful.”
Just as technology – the automobile created the increasing suburbanisation of America – drove McDonalds’ growth so too is it now contributing to the chain’s demise as chains like Chipotle can cater to a market with different expectations and deliver a product that doesn’t need the mass production techniques of the 1950s.
As a consequence, the big procedure driven model of franchising isn’t so necessary any more. While the concept of franchising remains sound, what worked in the post World War II years isn’t so compelling today.
It’s fashionable to think of companies like newspapers as being the victims of technological change but the truth is most of the businesses we think as being dominant today are the result of advances over the last 150 years, the evolution of McDonalds and the franchising model is just another chapter.
The performance of Apple and Microsoft in recent years show two very different management philosophies.
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 2000-2014Apple 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.
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.
If you want digital leadership you’re going to have to provide it yourself, waiting for the government is no answer.
Last week’s events in Canberra shows business can’t wait for the government to lead industry change. If you want to keep up with technology, you’re going to have to do it yourself.
In the wake of the Global Financial Crisis many of my business clients were in trouble as banks tightened their lines of credit and consumers slammed their wallets shut. After a decade of running businesses, it was time to get a job.
The job I found was with the small business division of the New South Wales Government’s then Department of State and Regional Development where I quickly discovered how many companies and ‘entrepreneurs’ came looking to the government for money and leadership.
While there were some state government support programs available for exporting, high-tech and biotech businesses almost all of those approaching the Department were hopelessly unqualified for the assistance that was at best only involved marginal amounts of money.
The toughest part of my job was gently turning those people away without upsetting them too much. Often I failed and part of the reason for that was that many of those believed the government would take leadership in a changing digital world and fund ideas that would help the state’s and nation’s competitiveness.
I was reminded of my brief period as a public servant and the futile attempt for with last week’s disasters for the Australian tech sector; the Prime Minister’s claim that social media is little more than digital graffiti and the still born announcement of a Chief Transformation Officer.
Last week’s announcement of Chief Transformation Officer who happens to have no budget – the UK office the local initiative is based upon received more than a hundred million dollars in the Brits’ last budget – is probably the best indication of how far behind the ball Australian governments, particularly the Federal level, are in dealing with a changing economy.
A Chief Transformation, or Digital, Officer can be an important catalyst for change but to achieve that they have to have the support of the organisation’s leadership; if the CEO or minister isn’t on board then the CTO or CDO is doomed to irrelevance.
The Prime Minister’s blithe dismissal of social media as being digital graffiti over the weekend shows just how little support an office charged with managing the Australian government’s transition to digital services will get from the executive. The sad thing is none of the likely alternatives – on either side of politics – to the current Prime Minister seem to be any more across the changes facing governments in a connected century.
One good example of the profound changes we’re seeing is in agriculture; this feature on farming robots shows just how technology and automation is changing life on the land. These applications of robotics are going to affect every industry, including government.
Microsoft is making the shift to the cloud and devices, but those markets are turning out not to be profitable.
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
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.
When the ‘unicorn’ label was coined by Aileen Lee in November 2013 it was to highlight the rarity of the beasts – on 39 existed at the time.
Today, just on a year later, there are eighty unicorns and the growth doesn’t seem to be slowing as more companies are raising funds or looking at trade sales or IPOs that will value their business at over a billion dollars.
Betting on the unicorns
Some of the business on the Fortune 80 unicorns list – like Elon Musk’s SpaceX and medical testing venture Theranos – are big, brave bets on future technologies which could prove incredibly profitable if successful. These are to today’s market was Google was at the turn of the Century.
Others, such as Xiaomi, Meituan and Flipkart, are betting on massive growth in emerging markets which China’s AliBaba has shown to be huge opportunity.
Some are already profitable and showing great potential to deliver the multibillion dollar valuations; companies like data analytics firm Palantir, developer tools vendor Atlassian and Uber are in this camp.
Many though are platform based, transaction plays that hope to clip the tickets on fields such as rental accommodation, payment systems and e-commerce. Some will be insanely successful but most have a distinct whiff of irrational exuberance about them.
Frothy exuberance
Driving that irrational exuberance is the money tsunami which has overwhelmed the financial sector since the Global Financial Crisis. As Quantitive Easing has fattened the banks’ and corporate America’s coffers, managers have sought to get their lazy dollars doing some work and the startup sector is an attractive, and sexy, place.
That influx of money has in turn has driven a spiral; as companies like Facebook have found themselves cashed up, they’ve bought more companies – Instagram and WhatsApp are the best examples of this – which in turn has increased valuations and expectations across the board.
Some of the risks in this current mania are obvious, but the question of survival when your business is valued so high becomes a pressing issue as Twitter have found with the company flailing around looking for a revenue stream to justify its fifty billion dollar valuation.
Probably the best, or worst example, of struggling to justify massive valuations is found in one of the original unicorns; Google and its YouTube division.
Monetizing YouTube
Right now YouTube is trying to screw musicians with onerous terms in return for, in the case of most artists, will be a pittance. It’s necessary for YouTube to do this so the service can capture as much value as possible to justify the rates of return demanded from its management, particularly as it’s appearing the online display advertising market is beginning to plateau.
That dash to generate revenue may become more common when investor finance starts to dry up; faced with the need to generate cashflow and satisfy the needs of impatient investors who’ve been denied a profitable exit, many of today’s unicorns could find themselves in a difficult position in a tighter VC climate.
Unicorns were once mythical creatures; now they’re real, at least in Silicon Valley, they’re going to have to learn how to fight for survival.
Alibaba’s Jack Ma has a fascinating snapshot of how global trade is going through a radical period of change
“We’re crazy, not stupid” is how Jack Ma describes his Alibaba team in an interview at the World Economic Forum in Davos, Switzerland, yesterday.
Much has been written about Jack Ma and the spectacular success of Alibaba and the WEF session with Charlie Rose is an opportunity for Ma to flesh out the story and destroy some of the myths.
One of the fascinating anecdotes Ma tells is how US cherry growers are preselling their harvests to Chinese customers through Alibaba and cites various other primary producers doing similar campaigns as how American small businesses can sell into the PRC market.
Ma’s interview is a fascinating snapshot of how global trade is going through a radical period of change, the shifting of China’s economy and where the future lies for many industries.
