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.
Is it now the turn of the CIO to go the way of the tea lady
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.
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.
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.
SurveyMonkey raises another $250 million to fund future expansion
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.
The IT services business is shrinking in the face of changing computer usage.
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.
Nadella’s vision isn’t really anything new; it differs from Ballmer’s ‘devices and services’ strategy but the thrust of the business was always going to be on cloud services and the company’s Azure services regardless of any conceits around tablets or professional offerings.
Of the three key areas Nadella identifies — Windows, Office 365, and Azure — two of them are problematic; the Office 365 for reasons already mentioned and the Windows product line.
The ‘Windows everywhere’ strategy, which also happens one of Ballmer’s earlier initiatives, is doomed as the operating system is not suitable for smartphones or lightweight internet of things devices.
Even if Windows was successful on smartphones or could be successfully ported to low powered smart devices, the margins are tiny compared to the traditional desktop market that was so profitable for Microsoft in the past.
Mantras about ‘productivity’ count for nothing as every software and cloud computing company cater for the B2B market is delivering a service that claims to improve customers’ productivity. That Office is declining as a profit centre only makes things harder for the company.
If anything, Nadella’s discussions illustrate the company is still casting around for the next big profit centre. As the Windows and Office franchises decline, time may start to run out for the current management just as it eventually did for Ballmer.
Giving away Office apps may lock some users into the 365 service and could prove moderately profitable, but last week’s moves indicates a much smaller future For Microsoft.
A primary school science project shows how communities can start using open data to monitor their neighbourhood’s environment
Last year Alicia Asin of Spanish sensor vendor Libelium spoke to this site about her vision of the internet of things improving transparency in society and government.
Coming in equal first were a group of students from Neutral Bay’s state primary school with their Bin I.T project that monitors garbage levels in rubbish bins.
The kids built their project on an Arduino microcontroller that connects to a Google spreadsheet which displays the status of the bin in the school’s classrooms. For $80 they’ve created a small version of what the City of Barcelona is spending millions of Euro on.
With the accessibility of cheap sensors and cloud computing its possible for students, community groups and activists to take the monitoring of their environment into their own hands; no longer do people have to rely on government agencies or private companies to release information when they can collect it themselves.
Probably the best example of activists taking action themselves is the Safecast project which was born out of community suspicion of official radiation data following the Fukushima.
We can expect to see more communities following the Safecast model as concerns about the effects of mining, industrial and fracking operations on neighbourhoods grow.
The Bin I.T project and the kids of Neutral Bay Public School could be showing us where communities will be taking data into their own hands in the near future.
