Decoding the new economy

Fighting in the sandbox

The walled gardens of the mobile phone industry aren’t good for users.

The current spat between Microsoft and Google over the Windows Phone YouTube app illustrates the value, and hindrance, of the internet’s walled gardens.

Google’s locking Microsoft Phone users out of YouTube shows the strength of these online empires and when coupled with control of the mobile phone platforms, as Google has with Android, it makes it hard for outsiders to compete.

In one respect, this is corporate karma coming back to bite Microsoft who ruthessly exploited their market position with Windows, MS-DOS and Office through the 1990s and early 2000s.

That doesn’t change the problems facing Microsoft Windows Phone users who want the same access to internet services enjoyed by Android and iPhone owners.

Being locked out of a service because of the product you choose to use is in many ways the antithesis of the internet and challenges the underpinnings of the online economy.

All internet and mobile phone users need to watch how this spat between Microsoft and Google develops, captive markets aren’t good for anyone.

Google and Microsoft show how online business is changing

Google and Microsoft’s quarterly reports show how all businesses are vulnerable in times of change.

Both Microsoft and Google yesterday reported their second quarter earnings for 2013 and both missed the targets expected analysts. Does this really mean anything?

Microsoft’s earnings were particularly notable as they included a $900 million dollar write off on Surface RT inventories, this almost certainly means a key part of the company’s tablet strategy has failed.

What’s striking in Microsoft’s earnings report is the terrible performance of the Windows Division which saw sales increase 10% year-on-year to 4.4 billion dollars, but earnings collapse by over 50%. Excluding the Surface RT write off, the division would still have seen a ten percent fall.

The company’s statement emphasised how the division is struggling with increasing costs.

Windows Division operating income decreased $1.3 billion, primarily due to higher cost of revenue and sales and marketing expenses, offset in part by revenue growth. Cost of revenue increased $1.2 billion primarily reflecting product costs associated with Surface and Windows 8, including the charge for Surface RT inventory adjustments of approximately $900 million. Sales and marketing expenses increased $344 million, reflecting advertising costs associated with Windows 8 and Surface.

At Google, the company’s 2nd Quarter report show trend is still upwards but the core business of online advertising is showing some cracks as the total number of paid clicks grows, but the value of each falls. At the same time traffic aquisition costs are rising at the same rate as revenues.

This could indicate that advertisers’ appetite for online links is fading. For smaller businesses, the cost of adwords campaigns has been escalating to the point where the old days of newspaper classifieds and Yellow Pages listings start to look cheap.

Couple the cost of advertising with the inevitable ‘ad blindness’ that web surfers have developed and a worrying trend for Google starts to appear. Overall Google’s net profit margin was 26%, down from 31% a year earlier.

While both companies remain insanely profitable – Google earned $14 billion this quarter and Microsoft $6 billion – both businesses are showing stresses as their markets evolve. It proves no business can afford to be complacent in these times.

Google and the workplace

Google’s evolution in hiring practices and HR policies describes the risks of relying on gut feelings and the importance of workplace accountability.

Over the years Google has attracted attention for its employment practices, particularly for its quirky interview questions which challenged many a genius.

It turns out those brainteasers have proved to be less than effective, as has the interminable interview process that saw job candidates endure dozens of meetings before being offered a role at the company.

A recent New York Times interview with Laszlo Bock, senior vice president of people operations at Google, discusses some of the company’s employment experiences along with some of the ways the organisation manages staff.

What’s notable is Bock’s findings on Google’s gruelling interview process with its brain teaser questions;

We looked at tens of thousands of interviews, and everyone who had done the interviews and what they scored the candidate, and how that person ultimately performed in their job. We found zero relationship.

The New York Times interview is particularly interesting as it reveals much of Google’s legendary employment criteria – particularly that of hiring only graduates with high university marks – turned out to be effectively useless.

Most telling though is what Bock found about managers and leadership;

We’ve actually made it harder to be a bad manager. If you go back to somebody and say, “Look, you’re an eighth-percentile people manager at Google. This is what people say.” They might say, “Well, you know, I’m actually better than that.” And then I’ll say, “That’s how you feel. But these are the facts that people are reporting about how they experience you.”

You don’t actually have to do that much more. Because for most people, just knowing that information causes them to change their conduct.

Who would have thought that accountability would make people behave better and more effectively?

Despite Google’s learning on hiring and management, things still go wrong. Business Insider’s Nicholas Carson has a wonderful story on the difficulties at restaurant review site Zagats which was taken over by the search engine giant and absorbed into their maps and geolocation divison.

The problems at Zagats though owe more to a cultural mismatch, as Carson writes;

It’s about the collision between the wealthy dream world of the technology industry and the scratch-and-claw meager existence of freelance writers.

One of the notable things about the current dot com boom is the contempt technologists and entrepreneurs have for content creators.

In the Silicon Valley view of the world founders and coders deserve to be generously paid but artists, musicians and writers should be thankful for the exposure they get and the odd dime thrown their way.

Google’s struggles with Zagats also exposes another problem with the tech industry’s hiring practices – that of ‘permatemps’ who never get on the payroll and have few benefits and no security. For years this was a problem at Microsoft and it remains a common practice today.

The story of Google’s evolution in hiring practices and HR policies is something all managers should read as it describes the risks of relying on gut feelings and the importance of workplace accountability.

IT industry feuds are buried as business models collapse

The collapsing personal computing and server markets are forcing once powerful competitors to bury animosities and feuds as industry giants face a troubled future.

Samsung’s exit from selling desktop computers illustrates how quickly the PC industry is collapsing which underscores Michael Dell’s urgency in his attempts to take Dell Computer private along with the spectacle of once hostile competitors like Oracle and Microsoft embracing each other.

Earlier this week Microsoft Australia hosted a briefing at their North Ryde office to show what the company is doing with their Azure cloud computing service, which is part of the company’s quest to find revenues in the post-PC world.

Microsoft are quickly adapting to the new marketplace. This week in Madrid, the company hosted their European TechEd conference where they showed off their Cloud First design principles of software built around online services rather than servers and desktop PCs.

One important part of Microsoft’s cloud strategy is establishing pairs of data centres to provide continuity to the various zones, including China, across the globe. Each individual centre is at least 400 miles apart from its twin to avoid interruptions from natural disasters.

Interestingly, this is the opposite of Google’s data centre strategy and quite different from how Amazon offers its data services where customers can choose the zones and level of redundancy they want.

There’s no real reason to think any of these three different philosophies are flawed, it’s a difference in implementation and each approach brings its own advantages and downsides which customers are going to have choose between.

While Microsoft is showing off its new direction, HP CEO Meg Whitman was in Beijing proclaiming that “HP is here to stay” and laying out the company’s path to survival in the post-PC world.

Like Microsoft, HP is putting bets on cloud computing and China, Whitman emphasized the work she’s been doing engaging with Chinese companies while promising “a new style of IT” and that “HP is in China for China.”

A key difference to Microsoft and Dell is that HP is doubling down on its desktop and server businesses with a focus on selling into the Chinese market. This is a high risk move given China’s investment into high speed networks and the global nature of the cloud computing movement.

One of the boasts of Whitman and her management team is that HP have added a thousand Chinese channel partners over the last twelve months, this is an effort to replicate Microsoft’s market strength in mature markets which has given the software giant breathing space against strong, cashed up competitors like Google and Apple.

Whether this works for HP in China remains to be seen, in the meantime Microsoft are trying to move their huge channel partner community onto the cloud with various offerings that give integrators who’ve traditionally made money selling servers and desktops some opportunity to sell online services.

A selling point for Microsoft is yesterday’s announcement they will offer Oracle databases on their Azure platform. The ending of animosities between Microsoft and Oracle is an illustration of just how the collapse in the PC and server markets is forcing market giants to forget old feuds and build new alliances.

With the server and personal computing markets being turned upside down, we’re going to see more unthinkable alliances and pivoting corporations as once untouchable industry giants realise the threats facing them.

The PC industry’s search for new directions

Microsoft and Dell struggle to reinvent themselves in the post PC era

All Things D reported over the weekend that Microsoft executives are fretting over a major restructure being planned by CEO Steve Ballmer. This is part of the fundamental changes challenging the entire PC industry.

Ballmer is dealing with massive changes in Microsoft’s core business as PC sales decline with customers moving to smartphones, tablet computers and cloud computing so finding new markets is a priority for the company’s board and senior management.

The same problems are facing all the major players in the PC industry and it’s the main reason why Dell is in the throes of a battle to take their business private, what’s fascinating is the different ways these companies are responding to these changes.

In Dell’s case the company’s looking at becoming “an Enterprise Solutions and Services (ESS) focused business” – essentially copying what IBM did a decade ago in moving from hardware and focusing on consulting and services to large corporations.

Microsoft on the other hand sees the future in devices and cloud computing with Ballmer telling shareholders last year that becoming a “devices and services company” is the future.

It’s important to recognize a fundamental shift underway in our business and the areas of technology that we believe will drive the greatest opportunity in the future.

In Ballmer’s view those opportunities lie in cloud computing services and devices like the Windows Surface tablet computer and the smartphones, products which Dell struggled with during the 2000s.

These are two very different directions and it illustrates just how the major players in the PC industry are searching for new business models as the old one collapses.

How many of them successfully make the transition will be for history to examine; it’s easy to see Microsoft surviving given its massive financial reserves and market power, although nothing can be taken for granted as we could have said the same about Kodak twenty years ago.

Dell on the other hand is far weaker being smaller with a narrower product base and currently has the management distraction of competing buyout offers. Dell’s survival is far from certain.

Others, like HP, seem to be slipping into obscurity as management flip-flops from one scheme to another. The takeover of EDS as part of HP’s move into enterprise consulting does not seem to have gone well and the company is wallowing.

What we’re seeing is the rapid disruption of an industry that itself was the disruptor not so long ago. It reminds us that even the corporated giants of today are as vulnerable as the stagecoach companies of yesteryear in the face of rapid change.

Microsoft’s business fightback

Microsoft stake their place in the CRM market. How will this affect companies like Salesforce?

Yesterday a series of vendor briefings showed how Microsoft is fighting back in the enterprise computing market and taking on upstarts like Salesforce in the CRM and business analytics markets.

Microsoft’s briefing presented a series of happy customers – including Colliers International, Servcorp and Metricon Homes – describing how they had deployed the Microsoft Dynamics product.

All the businesses at the Microsoft event said how it fitted into their existing business IT infrastructure. All were Windows shops running Exchange and Sharepoint.

This installed base illustrates Microsoft’s strength in the Enterprise marketplace along with its partner network of resellers and integrators.

Microsoft’s partner network was illustrated at HP’s Next Generation of Information Workers briefing where the company’s workplace of the future vision is very much a Windows service, even the layout is a replica of the Window 8 tiled layout.

The Next Generation of Information Workers product is largely built over Microsoft’s Sharepoint and HP’s own Trim product which again shows how legacy providers are leveraging their established technology.

Whether this is enough to hold off the likes of Salesforce and other cloud based services remains to be seen. Being Windows-centric is particularly tough at a time when many employees bringing their own Apple iPads and Android smartphones to work.

Microsoft’s awareness of its position was shown in the billing of the briefing where the invite billed the session as showing how Microsoft competes with Salesforce.

That competition is manifesting itself with both Salesforce and Microsoft aggressively acquiring social, analytics and marketing platforms to compliment their CRM products.

If the competition was just a matter of size there would be little contest as Microsoft’s $290 billion stock market capitalisation is more than ten times bigger that of Salesforce’s.

But it isn’t just a matter of size. Microsoft are have a legacy business to protect while disruptors like Salesforce aren’t encumbered by older desktop and server products.

What is clear though is that Microsoft is gearing to fight for these markets.

Steve Ballmer’s big platform change

Microsoft contemplates big changes as the computer market evolves around portable tablets and smartphones.

All Things D today reports that Microsoft is considering a major restructure to reflect changed computing markets.

One of the big messages from The State Of The Internet report is we are seeing three simultaneous changes to the computer industry – the shift from personal computers to smartphones, tablet computers and wearable systems – and Microsoft is at the centre of these transformations.

One graph, first released by Aysmco and expanded in the Meeker presentation, illustrates how fundamental these shifts are to Microsoft’s business.

Microsoft’s domination of the computer industry was almost total at the beginning of the century and remained so until the iPhone was released in 2007. Then suddenly things changed.

With the success of Android and the iPad, the market shifted dramatically against Microsoft and the WinTel market share is now back to 1985 levels when the Commodore 64 was a credible competitor.

The change that Microsoft faces shouldn’t be understated, although the company’s strengths with products like Office, Azure and Hotmail (or whatever this year’s name for their online mail product is) give the once untouchable incumbent some opportunities, particularly in the cloud.

At the end of Mary Meeker’s presentation at the D11 conference, Walt Mossberg asked her about Microsoft’s view that tablets and smartphones are just new computing platforms. Meeker dismisses that with the observation that the data is clear, the market has shifted to Apple and Google.

“Google and Apple are driving innovation,” says Meeker. “Microsoft is not.”

The numbers aren’t lying for Microsoft. That’s why Steve Ballmer has to move fast and think creatively about the company’s future.

Tag: microsoft

Fighting in the sandbox

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