Decoding the new economy

When margins collapse

Giving away your once most profitable product is a sure sign your industry is in trouble

Two of the key indicators that your business model, and industry, is being threatened is declining sales and margins.

A good example of this is the story Microsoft are urging their Chinese resellers to use Office 365 as a loss leader to get their foot in the door with customers.

Not so long ago Microsoft Office was a huge cash generator for the business; now it’s a loss leader.

If anything this shows how the margins in the software business are being eroded by cloud computing. Businesses like Microsoft and its resellers that have grown fat on big margins now have to evolve to a very different marketplace.

This means a very different way of doing business, a different way of delivering products and much more streamlined operation that doesn’t need battalions of highly paid salespeople and managers. In fact those managers and salespeople become a very expensive legacy item in a cloud computing world.

Microsoft are by no means the only company to find themselves giving away once profitable products in order to maintain their market position but when that starts happening it’s clear the time has arrived to find a new line of business.

In Microsoft’s case that’s been a pivot to the cloud, however the company will never find things as lucrative as the good old days when software was sold in boxes or licensed out with impossible to read agreements.

Funnily, the same thing is happening in the telcommunications world. It’s an interesting time to be in business.

The fight for cloud computing’s sweet spot

An old PC industry was is being re-fought in the cloud. Will the result be different this time.

One of the great market battles of the PC era was the fight between the ‘best of breed’ software designed to do specific jobs well — Lotus 123, WordPerfect, and Harvard Graphics — versus the bundled ‘suites’ led by Microsoft Office.

Bundled suites of programs offered a common platform and cheaper price over buying products individually.

In the case of Microsoft Office, it also helped that the software giant was aggressive in undercutting the market and leveraging the deals it had made with hardware vendors and system integrators.

The winner of that battle was Microsoft as it turned out customers preferred the cheaper price points of the bundled packages and the common software platform made it easier to share data across the applications.

In the cloud computing field that fight is happening again as Zach Nelson, CEO of Netsuite, describes; “I think the next battle is going to be the same battle that happened in the client-server world. Is it the best of breed cloud apps or is it the suite?”

Nelson believes the suite vision will win out, “the suite is going to win again for exactly the same reasons why the suite won in the client-server world — it’s very hard to synchronise data between applications.”

Given Netsuite’s business, as its name suggests, is in providing a suite of software it’s no surprising that Nelson believes their way of doing business will prevail. Those providing ‘best of breed’ stand alone cloud applications naturally disagree.

Chris Ridd, Australian General Manager of accounting service Xero, disagrees with Nelson’s view. “With cloud and open APIs you have the holy grail of interoperability,” Ridd says. “In the 1990s the open systems were too early and didn’t work as well as they do today.”

Ridd also points out that Xero has over 350 add on services, ” I don’t think any suite can deliver that” he says.

History is on Nelson’s side but it may be that in this case history doesn’t repeat as the technology has moved along and now stand alone apps are what the market wants.

Time will tell although its unlikely whichever prevails will have anything like the success and market domination of Microsoft Office during the PC era.

Could Windows 10 be Microsoft’s last desktop operating system?

Could Windows 9 be Microsoft’s last desktop operating system?

On Tuesday Microsoft are expected to announce their new Windows 10 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

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 ($ million)

Should that decline continue with Windows 10, 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.

Apple and the long game

Apple’s real game is in controlling a large part of the payments industry and the internet of things. The iPhone6 and watch are key steps in that strategy.

As expected, Apple announced their new range of iPhones and a smart watch today with many digital trees being felled as the tech media falls over to describe all the shiny features of the new devices.

Buried in Apple’s announcements though are the company’s real long game in payments and the Internet of Things.

For the IoT, the various ‘kits’ Apple have announced in the last year — HomeKit, HealthKit and now CloudKit — are the serious plays in this space as they bundle together programs, devices and data streams across health and smarthome applications.

CloudKit moves Apple onto another level as it makes it easier for developers to build back end applications that tie into smart devices; even if someone isn’t using Apple equipment they still may find themselves firmly in the walled garden of Cuptertino.

The long awaiting release of Apple Pay leverages iTunes’ strength as a payment platform, bundling a secure chip into the new iPhone adds to the company’s pitch of being a trusted partner to merchants and payments processors.

What today’s announcements of new hardware, software and APIs indicate is Apple’s shoring up the perimeters of its walled garden.

For it’s competitors, this raises the ante; Google Wallet has nothing like the market penetration or customer acceptance that iTunes has and earlier this week Amazon effectively admitted the Fire smartphone has been a failure by slashing prices. Facebook has made promising noises about payments but still remains locked in an advertising driven business model.

While there’s no doubt the new iPhone will be a success, although the jury is out on the smart watch, Apple’s real game is in controlling a large part of the payments industry and the internet of things. Today’s announcements are a key step in that strategy.

Making business more flexible with cloud computing

Businesses not fully using cloud computing are being left behind

This post is third in a series of four sponsored stories brought to you by Nuffnang.

One of the challenges for a growing business is the cost of equipping new workers, cloud computing is making this easier and making companies more flexible.

Not so long ago, the cost of setting up a new staff member with a computer, software and all the other oncosts was prohibitive. In industries like architecture, design or Engineering it was quite possible to spend $30,000 on a fully equipped workstation.

For most businesses it was quite typical to send $3,000 on a PC fitted out with Microsoft Office, line of business software and associated IT setup costs.

Often the employee costs were even higher as they spent days sitting around waiting for the IT people to get around to setting up an account or a new license to arrive for the critical business software tools.

For businesses with varying workflows — particularly those in project based industries like designers and architects — these costs were a major hassle if you were only taking on a contractor or temporary worker for a few weeks. It either meant wasting capital on expensive equipment that was unused most of the time or paying outrageous rental fees.

With the arrival of cloud computing all of this changed and the relatively cheap cost of setting up new workers is now one of the reasons why it’s so easy to start a business.

Another benefit of cloud computing is it allows staff to work from home and on the road. Not so long ago, remote working was a complex and expensive thing to set up, now the cloud services don’t care where you’re connected.

The modern cloud computing model is coming up to being a decade old and smart businesses are using its benefits to their advantage, those who haven’t explored the benefits are being left behind.

Apple’s security challenge

As Apple move into the internet of things, they are going to have to take cloud security more seriously.

This week’s news about celebrities’ personal photos being stolen from their iCloud accounts would be irritating Apple ahead of their September 9 media event.

Unfortunately for Apple they seemed to have walked into this by making things convenient for users rather than enforcing strong security measures.

As Arik Hesseldahl in Re/Code describes, this breach was probably due to Apple not encouraging two factor authentication and not limiting the number of password guesses.

The latter is particularly irritating as it shouldn’t be hard for a system to pick when a brute force attack — a computer guessing a password millions of times a second — is being staged against a user.

It’s also trivial to limit the number of guesses as most other services do.

For users, the best protection is to have complex passwords which reduces the effectiveness of brute force attacks. It’s also worthwhile being careful with your personal nudie photos.

The consequences of having your iCloud account compromised are more than just losing your embarrassing photos, Wired’s Mat Honan had his entire digital life hijacked through this method two years ago.

With Apple aspiring to control the smarthome and smartcar markets, the consequences of accounts being breached becomes exponentially greater. These are issues Apple and the rest of the internet of things industry need to take seriously.

Hopefully at Apple’s big media event next week, some brave journalist will stand out of the assembled masses of sycophant hacks and ask CEO Tim Cook some hard questions about security on the shiny new iDevices.

Driving the hybrids — VMWare and the case for hybrid cloud computing

VM Ware is pivoting its business to a mix of cloud and onsite technologies for its long term survival

A decade ago VM Ware disrupted the corporate IT world with its virtualisation software that changed the way big organisations used their servers. Today the company is facing up to the challenge of dealing with its own business being disrupted.

In the late 1990s when a big business wanted a new server it had to get someone to physically install one, VM Ware’s founders came up with the idea of ‘virtualisation’ with their software creating a virtual server that looked to the network like it was a discrete, real computer.

Naturally this was quicker and cheaper than buying and setting up a whole new server and VM Ware was an immediate success that upended the ‘big iron’ end of the computer industry.

Today VM Ware is valued at $42 billion on the stock market and is one of the IT industry’s giants.

However the virtualisation market itself is being disrupted by cloud computing. For many businesses, it’s even cheaper to pay Amazon, Microsoft or another cloud service to provide the servers for you.

So VM Ware is reinventing itself with a range of services to meet the challenge from the cloud providers. One of it’s key strategies is to provide a ‘hybrid’ cloud where customers run some IT services on their own servers and others on the cloud, the idea is this offers the best of both worlds.

This is almost the same challenge that Microsoft faces as both companies see their core business models being threatened by internet based technologies, something that VM Ware CEO Pat Gelsinger concedes.

“We think of Microsoft having a strategy much like ours, given they have on premise and in the cloud,” says Gelsinger. “We sort of agree on the shape of the market. We would say that Amazon and Google see a different shape in the market.”

Amazon and Google’s view is a ‘pure cloud’ model where companies and consumers run all their IT on web based services. In that world, purists like Xero’s Rod Drury are openly disdainful of the hybrid model believing it to be cumbersome and adding complexity to a simple business solution.

For companies like VM Ware and Microsoft their future lies upon the hybrid model being adopted by business. This is a high stakes industry battle which will define the careers of many IT workers and the shape of the businesses they work for.

Paul travelled to the VM World conference in San Francisco as a guest of VM Ware.

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