Decoding the new economy

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

How can Microsoft adapt to a market that’s shifting away from the products which have delivered spectacular profits over the last thirty years?

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.

Moving to a subscription economy

Customer subscription models are changing many industries which opens up opportunities for smart businesses

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

Sports cars, the cloud and the need for broadband

How the V8 Supercar races use the internet and networks shows why businesses need reliable communications and the way organisations are using cloud computing.

My relationship with sports cars is similar to horses – I have a vague idea of which end water goes in and where not to stand.

So Microsoft’s invite to the Launceston V8 Supercars to showcase their Office 365 cloud service as the race’s official sponsor wasn’t expected but it was a good opportunity to see how a sports organisation uses modern technology.

Riding the cloud

At the opening media conference V8 Supercars CEO David Malone and Finance Director Peter Trimble described the IT problems the organisation had in the early days.

“We were penny wise and pound foolish” said Peter about their small business system that couldn’t grow with the event.

To properly meet their needs V8 Supercars would have needed a bank of servers, cumbersome remote access software and a full time team of several IT staff for their scattered workforce and constantly changing locations.

With cloud services, they eliminated many IT costs while simplifying their systems.

That staff can now access documents regardless of location is a very good case study of where the cloud works well and understandable that Microsoft wanted to show off what their services can do.

Networking the cars

When challenged about the point of car racing, enthusiasts cite how the sport is a test bed for the motor industry.

The motor industry is one sector leading the internet of machines with one car manufacturing executive recently describing the modern motor vehicle as being a “computer platforms” on wheels.

Eventually we’ll see our cars connected to the net and reporting everything from the engine’s servicing needs to the driver’s musical tastes.

That’s reality in today’s high performance racing, both the drivers and the cars are in constant contact with the crews as sensors report everything from engine performance to the foot pressure the driver is putting on the accelerator pedal.

As continuous data feeds from the cars is essential to the teams the event has its own trackside network with receivers located along the course that are used for both vehicle telemetry and the video feeds from both car mounted and fixed cameras.

Owning the rights

In what’s becoming the future of sports broadcasting, the V8 Supercars organisers run their own camera crews and provide the feed to their broadcast partners and media outlets.

This allows them to control all the rights across TV, cable and online channels.

Having full control of the pictures also gives the V8 Supercars more revenue through signage and sponsorship by guaranteeing advertising placements which wouldn’t be available if they didn’t manage the feed.

Connectivity matters

v8-supercars-launceston-communications-cable — Spaghetti Junction as the various feeds come together

Getting the images out to the media and broadcast partners along with delivering the in car data to the racing teams is major challenge for organisers. The communications centres resemble a giant bowl of cable spaghetti as various groups plug into the network.

It’s no coincidence that part of the deals the V8 Supercar management strike with track owners and governments includes providing fiber and microwave links to the venue.

That single factor illustrates how vital communications links are to a modern sporting event.

Another important factor is that everything will be packed up and taken away. Following Launceston, the entire show is packed up and moved onto Auckland, New Zealand. This in itself is a major logistic challenge which would fail without good connectivity and reliable systems.

v8-supercars-launceston-truck-fleet — the fleet of trucks ready to move on

It’s easy to dismiss the V8 Supercars as a bunch of testosterone driven rev-heads, but the challenges in staging these complex events fifteen times a year shouldn’t be underestimated.

We also shouldn’t underestimate how important communication links are to any business. It’s why debates about the need for high speed internet services are last century’s discussion.

Hurtling into the post PC era

The latest computer sales figures are not good for those businesses who depend up personal computers.

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.

Apple and the argument for hybrid cloud computing

The argument between cloud computing purists and hybrid advocates continues with both sides suffering setbacks

There’s two different philosophies about cloud computing, hybrid and ‘pure’. In recent days the hybrid school hasn’t been doing so well, but the matter isn’t settled yet.

Pure cloud computing means doing everything in the cloud with all your software running over the net with the data stored on other people’s computers and everything is accessed through web browsers.

Hybrid cloud is where some of the work is done on your computer or smartphone with data often being synchronised between the device and the cloud storage.

Most smartphone and tablet computer apps do this and increasingly software like Microsoft Office and Apple iLife have a hybrid cloud computing angle.

Apple’s hybrid cloud service, iCloud, promised Apple users the ability to work on any device – laptop, desktop, tablet or smart phone – with the synchronised with central servers. Every Apple product you own can then access your iCloud data.

Recently though stories in the The Verge and Ars Technica report how Apple’s developers and customers are becoming steadily irritated by the lousy reliability of the company’s iCloud service.

Incumbent software and hardware vendors like Microsoft and Apple are pushing the hybrid idea for a good reason, it allows them to maintain their existing PC and laptop based products while being able to offer cloud services like their competitors.

For Microsoft and Apple, along with companies like Oracle, Dell and MYOB, the hybrid cloud gives them an opportunity to wriggle out of what Clay Christensen called The Innovator’s Dilemma.

Customers actually like the hybrid cloud as many distrust ‘pure’ cloud offerings as they don’t trust the providers or their internet connections. Basically they like to have a copy of their data stored in house.

The problem with the hybrid cloud is that it’s complex as Xero’s founder Rod Drury, one of the ‘pure cloud’ evangelists, said at his company’s conference last year, “hybrid technologies are cumbersome and add far more complexity into software. Cloud technologies are the right technologies.”

Complexity is what’s bought Apple’s iCloud unstuck as even some of best developers struggle with getting their programs to work with it.

All is not well for the ‘pure cloud’ evangelists either, as the shutting down of Google Reader has shaken many technologists and made them question whether the cloud is as safe as they would like.

Added to this uncertainty about the cloud is lousy service by providers, arbitrary shutting down of user accounts and the corporate boycott of Wikileaks – all of which have forced people to reconsider the wisdom of saving all their data or running applications in the cloud.

So the debate between the cloud purists is by no means over and it may well be that some form of hybrid, even just for local backup to your own computer, may turn out to be the common way we use cloud services.

What is for sure though is cloud software is biting deeply into the revenues of established software companies as people find the attractions of running programs and storing data on other people’s computers outweighs the risks.

Like all relatively new concepts it’s going to take a while for us to figure out how to use cloud computing most effectively in our business. The first step is how we manage the risks.

Democratising customer service

How a cloud computing service wants to radically change customer service and business

“Nobody got girls on the helpdesk” says Mikkel Svane, founder of online customer service company Zendesk.

Mikkel hopes to make customer service sexy again as businesses find they have to focus on keeping clients happy.

This is a reversal of management thinking of the 1980s where, as Mikkel says, “customer service is a cost centre, outsource it, don’t spend any time on it and don’t let customers steal any of your time.”

Now the internet gives customers to tell the world about a company’s service, the days of outsourcing or disregarding support are over.

Mikkel Svane and Michael Hansen of Zendesk

Cloud technologies are changing how software is used in business, as Mikkel found when he and his partners started Zendesk.

It became very obvious that building something that was easy to adopt, web based and integrated with email, websites. Something easy to use that didn’t clutter the customer service experience.

Something that moved from managing the customer service experience to focusing on customer service.

We built it, put it out there and customers starting coming.

A lot of these companies thought they could never implement a customer service platform. Suddenly small companies found they could compete with bigger competitors.

The appeal to investors

Having customers signing up proved to be a big advantage in Silicon Valley, no-one knew anything about a Danish company, but with local customers starting coming on board US Venture Capital firms understood what the company does.

That customer base proved powerful as Zendesk has to date raised $84 million dollars over four rounds of VC funding and is looking at a stock market float with an IPO in the next few years.

“Silicon Valley has a great tradition of building businesses.” Says Mikkel, “coming to Silicon Valley was such a big step for Zendesk, in taking it from being some little startup to being a real company that could scale very quickly.”

A question of scale

Groupon is a good example, when Mikkel and his team first met the Groupon team the group buying service was a team of four guys in Detroit. Groupon founder Andrew Mason personally signed off on the initial Zendesk subscription.

“What the hell is this company, we don’t get it.” Mikkel said at the time.

Three years later Groupon was the fastest growing company in history with thousands of support agents on their systems supporting hundreds of thousands of products.

Despite Groupon’s recent problems, Svane is proud of how Zendesk helped the group buying service with growth that no business had seen before.

“With Zendesk they got not only a beautiful, elegant system they also got the scale and the trajectory. Imagine if they’d tried to do that with an Oracle database? You’d have never been able to grow so quickly.”

On being a good internet citizen

In the past we talked about platforms – the Oracle platform, the Microsoft plaftorm – today the Internet is the platform.

“We are a good citizen on the Internet platform,” says Mikkel. “Shopify is a good citizen of the internet platform, these type of tools are easy to integrate. We are all good citizens of the Internet platform.”

Having these open system is the great power of the cloud services, they way they integrate and work together adds value to customers and doesn’t lock them into one company’s way of doing things.

The threat to incumbents

Vendor lock in has been a curse for businesses buying software. The fortunes of companies like Oracle, Microsoft and IBM have been built holding customers captive as the costs of moving to a competitor were too great.

Cloud services like Zendesk, Shopify and Xero turn this business model around which is one of the attractions to customers and it’s why huge amounts of money are moving from legacy solutions to cloud based services.

Another reason for the drift to cloud services is the reduction in complexity, the incumbent software vendors made money from the training and consulting services required to use their products.

Having simple, intuitive systems makes it easier for companies to adopt and use the new breed of cloud services.

Focusing on the business

Mikkel’s aim is to help businesses focus on their customers and products rather than worry about IT and infrastructure. In the long term it’s about helping organisations establish long term relations with their clients.

“Companies today realise that it doesn’t matter how much it matters how much I can sell to you right now, it pales into in comparison of how much I can sell you over the lifetime of our relationship. This ties into the subscription economy. It’s much more important for companies to nurture the long term lifetime relationship.”

Having a long term relationship with customers is going to be one of the keys for business success in today’s economy.

The days of transaction based businesses making easy profits from skimming a few percent off each sale are over and companies have to work on building long term relationship with customers.

Services like Zendesk, Xero and Salesforce are those helping new, fast growth companies grab these opportunities. For incumbent businesses, it’s not a time to be assuming markets are safe.

Retail and the internet of machines

Paypal and eBay are using the Internet of machines to put service station cashiers out of work.

Online retail and payment giants Ebay and PayPal hosted a media lunch in Sydney yesterday to publicise their Australian Business Update.

While eBay dominates the online selling market, PayPal’s position in the payment market place is extremely powerful with Internet monitoring company Comscore reporting in their Digital Wallet Roadmap how PayPal dominates the US market and does likewise in other markets like Australia.

Their update confirms the trends which have been obvious for some time, particularly in how mobile devices are now driving retail. eBay’s research indicates properly implemented multichannel strategies drives six times more sales than just having an online presence.

What was particularly notable with eBay’s presentation was how the Internet of Machines is changing the retail and logistics industries as smartphones and connected point of sales systems are cutting out jobs and middle men.

Paypal are particularly proud of their US partnership with cash register manufacturer NCR that integrates smartphone payments with the point of sales systems in restaurants, convenience stores and gas stations.

eBay illustrated this with their examples of coupon offers being tied to smartphone payment systems so people paying for gas with their smartphone get a voucher offer for various up sells.

Studies in the US have found a $10 offer can result in sales of up to $100. A pretty compelling deal for most merchants.

With these technologies, we’re seeing how connected machines are changing even the most mundane business tasks.

It may well be that the days of the service station cashier are numbered; it’s quite possible that in one generation we’ll have gone from full staffed gas stations to totally automated facilities.

The example of gas station attendants and cashiers is just one example of how automation is changing many retail and sales tasks. It would be a brave person to say their job isn’t safe.

Category: cloud computing

Hurtling into the post PC era

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