Decoding the new economy

One platform united under Microsoft

How the software giant wants to lock corporate customers into their products.

Microsoft’s annual Australian TechEd conference on the Gold Coast this week comes at an important time for the software giant as the company launches a range of products to meet the major threats to its tech industry dominance.

With the move away from desktop and laptop computers to smartphones, tablets and cloud computing services Microsoft’s profitable server and office franchises have become less relevant in a rapidly evolving market place.

To counter this move Microsoft are refreshing most of their key product lines this year including launches of Windows 8, Windows Server 2012 and the high stakes Windows Phone 8.

Underlying these releases is Microsoft’s “one consistent platform” offering a seamless experience between traditional in-house servers, the company’s Azure cloud product along with the services of partners, integrators and resellers.

Core to Microsoft’s enterprise strategy is their Hyper-V virtualisation product that allows businesses to reduce costs and business complexity by easily replicating systems onto different servers or networks. At present Microsoft claims 25% of the Australian virtualisation market compared to VMWare’s 50%.

At the home and small business ends of the market Microsoft also have a “one consistent platform” strategy with services like Office365 offering the same look and feel regardless of whether they are using a smartphone, tablet or desktop computer.

Microsoft hopes to replicate the success they had in the 1990s by locking customers into their integrated cloud and server environment. This is consistent with the “own the customer” strategies of other major players like Apple, Amazon, Facebook and Google.

The flaw in trying to own the customer across all devices is the difference in technologies – what works on a desktop computer with a mouse, keyboard and large screen doesn’t necessarily succeed on a smartphone or tablet computer using a smaller touch screen.

Windows 8’s development has illustrated how Microsoft are struggling with their aim delivering a consistent look across all platforms as early users struggle with the now renamed “Metro” touch screen interface and demand they get their start buttons back.

The inconsistency between platforms also appears with the cloud based Office365 productivity suite which lacks many of the advanced features of the desktop Microsoft Office packages that dominate the PC market.

Office’s advanced functions are one of the areas where Microsoft has successfully held off competitors like Google Apps as office workers – and writers – find the richer features in the desktop application actually matter when using word processors or spreadsheets.

Another of the advantages Microsoft has over Google and other cloud based competitors is their army of software partners, integrators and resellers supporting their products.

One of the pillars of the “One Consistent Platform” strategy are the service providers who have built their businesses on supporting Microsoft’s products. With the move to the cloud many of these integrators and resellers have been threatened by the reduced margins offered by online services.

The stakes are high for Microsoft and their partners as the computer industry moves away from the model which has worked well for them over the last twenty years.

Whether customers will stay with the revamped Microsoft services and products is going to depend on how well the “One Consistent Platform” is executed. As Apple, Facebook and Google have shown, customers will stick with one service if their needs are being met.

Microsoft TechEd Australia 2012

Microsoft’s Australian TechEd in 2012 comes at an important time for the software giant.

2012 is the year that will define Microsoft as the market place they have dominated moves to tablet computers and smart phones.

The challenge for Microsoft is how they migrate their desktop and server products to the platforms dominated by Amazon, Google and Apple.

At this year’s TechEd Australian conference the pressure is on Microsoft to present how they will deal with this challenge from tablet computers, mobile phones and cloud computing.

The big ticket item is the Windows phone. After the disastrous launch of the Nokia Lumia 920, Microsoft has to convince the market place they have a viable competitor to the iPhone and the plethora of Google Android devices.

Microsoft have taken the opposite strategy to Apple in trying to offer the same operating system on all their devices. If Windows 8 can run on all systems then they have a chance of locking high margin corporate users onto their platforms.

Windows 8 itself has to have a compelling story to tell. Much of Microsoft’s future relies upon a successful rollout of the new operating system that meets the demands of both consumers and businesses. Users increasingly expect social media and cloud computing services to be integrating into their systems.

Cloud computing is an important part of Microsoft’s corporate strategy and how the new version of Windows Server delivers on the business requirements of using cloud services will be an important factor in the product’s success.

One of Microsoft’s most profitable product lines has been their Office suite of applications. Margins on Office have been under pressure since the release of the free Google Docs suite and the corporate Google Apps product.

The advantage Microsoft have in the office productivity market is their products have the full range of feature business users need and Google, and Apple, have struggled to include these tools in their products.

With new versions of Office, Server, Phone and Windows all being released Microsoft have a lot of stories to tell and the stakes for the software giant are huge. It’s going to be an interesting few days at the Gold Coast Convention Centre.

Finding the perfect customer

Combining old techniques with big data technologies and social media monitoring open new opportunities for businesses to learn more about their customers.

With the rise of social media we’ve spoken a lot about customers’ ability to rate businesses and overlooked that companies have been rating their clients for a lot longer. The same technologies that are helping consumers are also assisting companies to find their best prospects.

A business truism is that Pareto’s Rule applies in all organisations – 20% of customers will generate 80% of a company’s profits. Equally a different 20% of clients will create 80% of the hassles. The Holy Grail in customer service is to identify both groups as early as possible in the sales cycle.

Earlier this week The New York Times profiled the new breed of ratings tools known as consumer valuation or buying-power scores. These promise to help businesses find the good customers early.

While rating customers according to their credit worthiness has been common for decades, measuring a client’s likely value to a business hasn’t been so widespread and most companies have relied on the gut feeling of their salespeople or managers. The customer valuation tools change this.

One of the companies the NYT looked at was eBureau, a Minnesota-based company that analyses customers’ likely behaviour. eBureau’s founder Gordy Meyer tells how 30 years ago he worked for Fingerhut, a mailorder catalogue company that used some basic ways of figuring out who would be a good customer.

Some of the indicators Fingerhut used to figure if a client was worthwhile included whether an application form was filled in by pen, if the customer had a working telephone number or if the buyer used their middle initial – apparently the latter indicates someone is a good credit risk.

Many businesses are still using measures like that to decide whether a customer will be a pain or a gain. One reliable signal is those that complain about previous companies they’ve dealt with; it’s a sure-fire indicator they’ll complain about you as well.

What we’re seeing with services like eBureau is the bringing together of Big Data and cloud computing. A generation ago even if we could have collected the data these services collate, there was no way we could process the information to make any sense to our business.

Today we have these services at our fingertips and coupled with lead generators and the insights social media gives us into the likes and dislikes of our customers these tools suddenly become very powerful.

While we’ll never get rid of bad customers – credit rating services didn’t mean the end of bad debts – customer valuation tools are another example of how canny users of technology can get an advantage over their competitors along with saving time in chasing the wrong clients.

How much server space do Internet companies need to run their sites?

How much server space do companies like Google, Amazon, YouTube, Hotmail and Facebook need to run their sites?

“How much server space do companies like Google, Amazon, or YouTube, or for that matter Hotmail and Facebook need to run their sites?” is the question I’ve been asked to answer on ABC Radio National Drive this evening.

This isn’t a simple question to answer as the details of data storage are kept secret by most online services.

Figuring out how much data is saved in computer systems is a daunting task in itself and in 2011 scientists estimated there were 295 exabytes stored on the Internet, desktop hard drives, tape backup and other systems in 2007.

An exabyte is the equivalent of 50,000 years worth of DVD video, a typical new computer comes with a terabyte hard drive so one exabyte is the equivalent of a million new computers.

The numbers when looking at this topic are so great that petabytes are probably the best way of measuring data, a thousand of these make up an exabyte. A petabyte is the equivalent to filling up the hard drives of a thousand new computers.

Given cloud computing and data centres have grown exponentially since 2007, it’s possible that number has doubled in the last five years.

In 2009 it was reported Google was planning to have ten million servers and an exabyte of information. It’s almost certain that point has been passed, particularly given the volume of data being uploaded to YouTube which alone has 72 hours worth of video uploaded every minute.

Facebook is struggling with similar growth and it’s reported that the social media service is having to rewrite its database. Last year it was reported Facebook users were uploading six billion photos a month and at the time of the float on the US stock market the company claimed to have over a 100 petabytes of photos and video.

According to one of Microsoft’s blogs, Hotmail has over a billion mailboxes and “hundreds of petabytes of data”.

For Amazon details are harder to find, in June 2012 Amazon’s founder Jeff Bezos announced their S3 cloud storage service was now hosting a billion ‘objects’. If we assume the ‘objects’ – which could be anything from a picture to a database running on Amazon’s service – have an average size of a megabyte then that’s a exabyte of storage.

The amount of storage is only one part of the equation, we have to be able to do something with the data we’ve collected so we also have to look at processing power. This comes down to the number of computer chips or CPUs – Central Processing Units – being used to crunch the information.

Probably the most impressive data cruncher of all is the Google search engine that processes phenomenal amounts of data every time somebody does a search on the web. Google have put together an infographic that illustrates how they manage to answer over a billion queries a day in an average time of less than quarter of a second.

Google is reported to own 2% of the world’s servers and they are very secretive about the numbers, estimates based on power usage in 2011 put the number of servers the company uses at around 900,000. Given Google invests about 2.5 billion US dollars a year on new data centres, it’s safe to say they have probably passed the one million mark.

How much electricity all of this equipment uses is a valid question. According to Jonathan Koomey of Stanford University, US data centres use around 2% of the nation’s power supply and globally these facilities use around 1.5%.

The numbers involved in answering the question of how much data is stored by web services are mind boggling and they are growing exponentially. One of the problems with researching a topic like this is how quickly the source data becomes outdated.

It’s easy to overlook the complexity and size of the technologies that run social media, cloud computing or web searches. Asking questions on how these services work is essential to understanding the things we now take for granted.

Stranded markets

Businesses with old, declining markets are going to slowly fade away

“Stranded assets” are an accounting term for property that’s worth more on the books than it is in the marketplace.

Often the valuation problem has come about because of market, legislative or physical changes – what was a valuable and useful asset becomes isolated from the rest of a business.

Customers are biggest asset we have in our business – so what happens if our customer base becomes a “stranded asset”?

This situation isn’t far-fetched in a time when technology changes a marketplace – a blacksmith providing services to stagecoach companies would have been in this situation a hundred years ago.

In response to Are Businesses Fleeing the Online Space?, Xero’s Australian CEO Chris Ridd made some points about the problems MYOB have in the accounting software marketplace.

We see that going online to the cloud is finally allowing many small businesses the opportunity to avoid the “walk into Harvey Norman and fork out hundreds of up-front dollars on on-premise software” experience and instead go straight to the simplicity and cost efficacy of the cloud.

This is evidenced in our numbers and the fact that 40% of new customers signing up to Xero are coming from no software. (I mentioned last week at the NBN Forum that it was 30%, but we doubled checked and were staggered to find it was actually a lot higher). So we are creating a new market and cloud is therefore increasing the addressable market for accounting software. The cloud changes the economics of doing IT and makes automation of the business accessible and attractive to a whole new category of SMEs.

Chris’ point is interesting – the new generation of businesses aren’t going to the computer superstore and buying box software. Which is a problem for those who sell box software such as MYOB and Harvey Norman.

What’s more, customers have moved away from those same superstores along with things like phone directories and classified ads, which is the problem companies like Sensis and Fairfax have to deal with.

A decade or so ago, MYOB, Sensis and Fairfax were dominant in their markets with a loyal band of customers. Today the remaining customers – many of whom have not changed their business plans for decades – are”stranded markets” made up of holdouts who won’t move to new technologies.

Those holdouts aren’t particularly profitable and they are slowly leaving their industries through retirement or, increasingly for these slow adopters, going broke.

Being dominant in a market that’s declining in both profits and sales is not the place to be for any business.

It’s difficult for the managers of these enterprises to move as their existing products are their core business, which is the classic innovators dilemma, but the alternative is to end up like Kodak or Sony.

One thing missed in the eulogies for Steve Jobs is how he overcame the innovator’s dilemma problem within Apple. When it became apparent the old Mac OS was a barrier to innovation, he killed it along with the floppy disk and Apple Device Bus.

Apple’s customers hated it as most of them had a substantial investment in the hardware which Jobs had made obsolete overnight. But almost all of them came back and became greater fans.

News Corporation are trying a different tack to Steve Jobs in splitting the operation into an “old” business and a “new’ business. That way the old business can find a way to make money or quietly fade away without affecting the newer, more dynamic entertainment and electronic arms of the organisation.

The challenge for MYOB – along with Harvey Norman, Fairfax and Sensis – is to move their customers to the new technologies, those who won’t go are the past and those stranded customers will isolate the business from the mainstream.

Why would a plumber want a broadband connection?

A question that still bugs me from the Cloud + NBN forum this week is “why would a plumber want a broadband connection.”

It doesn’t seem so long ago that question was asked about mobile phones – in the early 1990s the question made sense as cellphones in those days were heavy bulky things that sat in cars. They were of little use to plumbers or anyone else except the executives and politicians who could afford them.

Today there are few plumbers who don’t have a mobile phone.

Why would plumbers want a broadband connection? Job scheduling, inventory management, stock ordering, quoting and invoicing are five tasks that spring to mind.

One of the big areas for all business is research and training. Keeping up with industry changes, particularly in fields where professional development is required to maintain your license or accreditation, is made far easier with online learning services.

For the plumber, being able to find out what’s new on the market and how to install or maintain the latest products keeps them in the marketplace.

Then there’s the necessity of being listed online – without a broadband connection the local plumber will struggle to keep up to date with the sites customers are using to find tradesmen.

Even asking the question “why should a plumber be online?” betrays just how many of us aren’t understanding how business is changing.

So you think services are easy?

The differences between service, hardware and software businesses shouldn’t be understated.

ZDNet columnist Ed Bott is possibly one of Microsoft’s closest followers and among the few to defend Windows Vista, Ed though can’t be faulted for doing the hard yards including reading Microsoft’s stock market10-K filings.

In their most recent filing, Ed finds Microsoft has used the word “service” 73 times as opposed to 44 appearances last year.

A key phrase in the filing is “a growing part of our strategy involves cloud-based services used with smart client devices.”

This is consistent with the hands on previews of Windows 8 which Microsoft have been giving journalists over the last few months. Something that leaps out is the integration with online services; something that both Google and Apple have also been pushing.

What should worry investors is that moving into services isn’t easy. Service businesses are far more labour intensive and, as a consequence, far less profitable.

Despite having relatively low labour costs, cloud computing services are problematic as many sectors have been commoditised, which is the genius of Salesforce in establishing a profitable niche.

The fat margins Microsoft are used to in their core software business can’t be replicated in the cloud based markets, which is one of the reasons why customers are switching to the cloud.

Microsoft’s problem is shared by telecommunications companies who are finding their cloud offering don’t generate the same ARPUs — Annual Revenue Per User — that they’ve become accustomed to in the mobile phone market. Which means pain for executives whose KPIs are tied to historical performance.

For Microsoft, the problem is compounded by their simultaneous move into hardware with the Surface tablets. Meaning the company’s has to deal with two significantly different business models to the ones they are used to.

Again Microsoft aren’t alone in this, Google is having similar problems adjusting to the hardware market though its acquisition of Motorola Mobility.

Integrating hardware with services and manufacturing isn’t impossible, we only have to look at Apple for how a company can succeed in that space although most managements struggle with the very different demands of each sector.

During the 1980s we saw the rise of the “all business is soap” philosophy where MBAs and management consultants preached that the challenges of running a business were the same regardless of whether you sold cleaning products, soft drinks, computers or automobiles.

Those folk were wrong. Most famously the Australian media company Fairfax hired as CEO a business school professor who preached this philosophy and managed to ignore the rise of the Internet, the echoes of the failed McKinsey ideas haunt Fairfax over a decade later.

While its possible for a software company to succeed at services or hardware, the magnitude and complexity of the management challenge shouldn’t be understated. Both Google and Microsoft will be defined by how well their leaders succeed.

Category: cloud computing

One platform united under Microsoft

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