What if Advertising Doesn't Work… At All?

Forget not knowing which half does not work.  Click through rates are at 0.02 – it is not that hard to imagine 0.00.  OK, maybe a Bud advert gets a guy off of the couch and headed to the frig to have another beer.  But outside of that could there be anyone left that believes anything they see in advertising?

When AT&T says they have the best cell coverage, or BP says they really care about the environment, we know that in fact the opposite is true.  Following this line of thinking I suppose the scale of advertising effectiveness could go below 0.  There are a few attack ads I have seen this campaign season that have inspired me to fight harder for the guy being attacked.  I would put that in the negative effectiveness category.

Advertising worldwide is a $400B industry.  If everyone comes to believe that advertising just does not work, it could free up that money to do other things – like lower the cost of products, or pay for R&D.  Alternatively, it could be a means to accelerate creative destruction.  Essentially a tax on companies that make bad products or that have weak values.  They spend their last available dollars on big branding efforts and then go out of business.

It is interesting to note that Google, a company that makes its money selling advertising, does very little advertising of its own products and services.   We could say that with over 65% market share – they don’t have to advertise.  If we see a big campaign out of Google, it may be a sign the end is near!

What will a world without advertising look like?

The Microsoft Effect

The Hawthorne Effect famously demonstrated the changes to worker productivity resulting from changes in work environment.  Like many studies the key learning turned out to be somewhat different than anticipated.  Initially intended to figure out if lighting levels or other environmental factors impacted productivity the result turned out to be that workers did better when working together to improve the conditions.  The improvements were not dependent on the changes but on the process of working together to make the changes.

I have to wonder if the same thing is happening in the Microsoft/Google/Apple race for the hearts and minds of the workers.  Each is courting the users with new and improved ways to be productive.   Microsoft has of course dominated the worker productivity area with the Office suite and the addition over the years of Outlook, Access, Visio, and OneNote. Google helps workers find stuff and has innovated around the edges with priority inbox in gmail and better spam filtering and Google docs and drive. Apple has turned the world mobile, brought about the app revolution, and companies now shower iPhones and iPads on their employees like they used to do with sales trips to Hawaii.

I am 24 hours into using my new Windows RT Surface and all I can think about is how much work I could do on the thing.  It has been 90 years since Elton Mayo did his study in Hawthore, IL, maybe it is time for a new study.  We could call the key learnings the Microsoft Effect.

Technology That Changes The Game

It was a relatively short time ago that computers were produced in the dozens, cost millions of dollars, and were run by the phone company, the government, and a few very big businesses.  The most technological thing that a small business had was a cash register.

In an office environment like a law firm or an accounting firm, there were typists, and a copy machine, and the only cloud application was the connection to AT&Ts big computer (the phone).  In some cases professionals had specialized tools -- I for example had my HP12C programmable calculator.  I never programmed it to do anything though.  Amazingly, HP still sells that very calculator - 30 years later.

Then came the PC and voicemail and email and mobile phones and well, we all became computer operators plus whatever our jobs had been before that.  Now we spend so much time staring at the screen that we feel like computer operators all of the time -- so it is no wonder that we sometimes forget that we have actual jobs to do.  Facebook even relieves us from having to pull away from the computer to waste time at the water cooler.  

We have become much more productive despite the time we have to spend getting our machines to work for us.  Since the introduction of the PC, GDP per capita in the US has grown from $27,000 to $47,000 per year.  And that is the average for the entire country.

Keep in mind that workers that use PCs have done much better than the rest of the population, so the productivity has more than doubled for PC users. Advances in technology drive our economy and our ever improving quality of life.  This is an easy argument to make when you consider that penecilin was an advancement in technology.  A bit harder in the context of nuclear weapons. 

These advances in technology have provided for us so much extra time and money that we don't know what to do with it all.  Most of us have more than one computer plus a phone with computer like computing power plus maybe a tablet too.  

There are two types of advances in technology: incremental things and game changers. New computing capacity that reduces the time to run a report from a giant database is incremental.  New sensors that report every person's location, everything they purchase, and many of the things that they think and say into a giant database is a game changer.

The incremental things we get from technology are gains in efficiency that make one business more productive than another.  Game changers are new capabilities that just could not be done before and that completely change the business environment.

As the cost of compute cycles comes down the incremental functions will blend into the background and deliver less and less profit to their makers -- so look out HP and Dell.  Game changers will become the whole game and command more and more of the profits.  And as always the pace of change will be accelerating.  Very few companies have the will to change their own game.  Apple did it with the iPhone and now generates half of their revenues from a product they introduced only 5 years ago.  Google did it to the advertising industry -- but it remains to be seen if they can do it to themselves.  Microsoft is in the process of trying to change their game with Windows 8.  Will they be able to do it?  

Advertisers Trade Digital Dimes for Mobile Pennies

Tomorrow is the big Windows 8 / Surface Launch, so I will continue on with the Microsoft vs. Google vs. Apple thinking from yesterday.  

Henry Ford is credited with the famous line:  "I know that fifty percent of my advertising is wasted, I just don't know which half."  I wrote a post about this a few years back and also dug into the idea that Google is trading analog dollars for digital dimes.  Which turns out to be easier for Google, the company that gets the dimes, than for other advertising providers that are losing the dollars.  The advertising dime migration is fueling a whole bunch of creative destruction in the advertising business.

It is going to get much worse.  Every day advertising gets more measurable and it might just turn out that the non productive half of the advertising business is in fact bigger than half.  In an anemic growth environment, or worse yet another recession, companies might just find a better use for a big part of the $600B presently spent on advertising.

If so, what happens to all of the technology companies that have placed their bets on making advertisers their customers?  What if the digital dimes get traded for mobile advert pennies?  Google was perfectly happy getting new revenue away from the newspapers -- so they did not care that their prices were a tenth of the market.  But if Google has to trade its own dimes of revenue for pennies -- it is going to hurt.

All the while Microsoft soldiers on making businesses productive.

Business Runs on Microsoft Software. Period.

It is insteresting and instructive to take a step back from the big ecosystem builders and think about who their customers are and what they are selling.  Just so we all start from the same point on the map, I am going to clarify that customers are the people that pay and they pay for whatever a vendor is selling.

Microsoft

This is a big week for Microsoft with the long anticipated Windows 8 launch.  Even though I am very much looking forward to getting my MS Surface (hardware) this week, Microsoft is still the maker of software and its customers paid $16 B in the most recent quarter and generated $5.3B in profits including for operating system software ($3.2B revenue /$1.6B profit), servers and dev tools ($4.5B/$1.7B), and productivity and business software ($5.5B/$3.6B).  This is highly profitable business with one half of all revenue returned in profits.  You will notice that a bit over $2B is missing from this revenue analysis - because that is the amount MS generates from XBox -- without generating any profit.  Ouch!

Simply, customers pay Microsoft for the software they need to be productive.  Anyone who has tried to be productive on an iPad knows what I am talking about.  Producers need Microsoft's products to produce.

Apple

Apple quite famously makes more revenue and profit on the iPhone than all of Microsoft combined.  In its most recent quarter it generated $16.2 B of a total of $35B from the iPhone at 43% margins.  Any company that can grow from zero in 2007 when the iPhone was introduced to over $60B in annual revenue from a single new product line - deserves to be the worlds most valuable company.  Even more impressive is the $9.2B in iPad revenue last quarter from a product just 30 months in the market.  However, as Apple is demonstrating with the change of the standard cable plug on the latest version of the iPhone - it is selling devices that are driven by their popularity, not by business acceptance.

So, customers pay Apple for fashionable gadgets and Apple cranks out fashionable gadgets like no one else.

Google

Google has revenues about the same size as Microsoft's.  The most recent quarter concluded with $14.1B in revenue and $7.45B in profits. 75% of Google's revenue comes from advertising.  Advertising was 97% before the acquisition of Motorola -- and Motorola now makes up 19% of Google's revenue.  Google makes all kinds of software (gmail, Google docs...) but most users get those services for free -- and the customers are the companies that pay to place their advertisements where those users can see them.

So customers pay Google for advertising.  Google dominates the search market with 65% of all internet search traffic.

When analyzed from the perspective of the paying customer it is almost hard to believe that these three companies are fierce competitors.  No one buys Microsoft products to be seen with them in the first class lounge at the airport.  Almost no one pays Microsoft for advertising.  Just about everyone pays Microsoft to make their businesses run.

What is CRN Smoking?

CRN ran a story this morning about how Microsoft is like Philip Morris.  I know that expecting web sites to avoid link bait is like expecting candidates running for the oval office to tell the truth.  Even so, this one is over the top.  There are many companies with comparable growth rates to Microsoft.  Picking the one that sells an addictive product that causes cancer and that spent decades undermining efforts to understand the effects of cigarette smoke -- is poor form.

The article did make one good point though:  when channel partners pick the vendors they partner with, they are making investments.  In fact, they are making very big investments.  

CRN says that channel partners should partner with Apple, Cognizant, Google, Rackspace, and Salesforce.com instead of Microsoft because those companies are growing faster. Really?!?

Let's take this apart company by company:

Apple:  Apple is in fact starting a partner program.  Apple however does not have a single enterprise software app.  It can offer a desktop operating system, and a productivity suite, but Microsoft has hundreds of products -- and most of them solve very real enterprise computing problems.  

Cognizant:  Most people have never heard of this company.  It is in fact a $6 billion dollar company, but it is a consulting and outsourcing firm -- a competitor to most channel partners.  I bet it is a very big Microsoft partner.  So there really is no reason a solution partner would partner with this organization instead of Microsoft.

Google:  Google is kicking everyone's behind in search.  True.  But I can't think of how it would make sense as a channel partner to give up Microsoft's partner program in exchange for Google.  Google offers no side by side go to market capabilities to support partners.  Even if we were to humor CRN and think for 10 more seconds about this one - how can a partner make any money deploying Google Docs?  This is one of those cases where Google takes a dollar someone else is making and turns it into a dime of advertising for itself.  So Google can take revenue away from Microsoft, but it does not have that dollar to share with its channel partners.

Rackspace:  Rackspace is not even a software company.  

Salesforce.com:  Salesforce.com, like Oracle (where Benioff came from) has a nasty habit of eating its own young.  A few companies have made a living working with Salesforce.com, but most get run over by their scorched earth sales team.  And all of that to partner with a company that has one product.  Oh sorry, two products if you count Chatter as a seperate product.

Microsoft has made its way in the world by working side by side with its hundreds of thousands of partners worldwide.  There are some companies that are growing faster, but none that comes anywhere close to supporting a partner ecosystem like Microsoft does.

It is hard to imagine what CRN was smoking when they proposed that Microsoft was like Philip Morris!

Licking the Cookie

Fortune Magazine and an unfortunate number of other publications have reported on phenomenon called "Licking the Cookie" at Microsoft.  You know, practice of claiming ownership of a project and therefore preventing anyone else from actually working on it.  Just like when you were a kid and your younger sister licked the last cookie on the plate to keep you from eating it.

The image is hard to get out of my head and now I see the same phenomenon everywhere.  What is it that compels people to get in the way of a problem, just so that one day, if they ever get around to it, they could take a swing at solving it?  Owning unsolved perpetual problems does not seem like the most logical way to advance or otherwise gain job security.

This dynamic does enter the logical universe when the cookie licker also owns whatever would be replaced when the problem is solved.  The guy in charge of a multi-year CRM implementation would most certainly throw sand in the gears of any conversation with Salesforce.com.  Better yet, he could lick the Salesforce.com cookie and make sure its evaluation never ever sees the light of day.

Entrenched interests are doing this everywhere.  Most visible to me is the movie industry trying to prevent a free and open internet and drafting behind them are the television and cable people.  Every once in a while a bright light shines out from one of the big auto makers, but for the most part they are sitting heavily on alternative fuel vehicles.

We are very lucky here in the US because we have a vibrant start up ecosystem that will gladly run around the ends of the big fat cookie lickers.  Not so much in other economies.  So thank you Google for turning the newspaper industry up side down and go Tesla!

Amazon Could Crush Apple in Maps, and Maybe Google Too

The biz is all cranked up over the Apple vs Google Maps thing that came from the latest release of Apple's mobile operating system, IOS 6.  See this article in the NY Times.

In the background however, Amazon has been building its own maps capability.  In July of this year Amazon bought mapping company UpNext and I think Amazon could come from behind to leapfrog Apple and maybe even catch up to Google.

Impossible?  After all, the reason that Apple has rushed its mapping solution to market before it is ready is because Apple needs user data to improve the service.  

Amazon just happens to have a close relationship, a codependent relationship some would say, with delivery companyies like UPS and FedEx.  UPS has 250,000 drivers!  It would not surprise me if there are 500,000 drivers worldwide driving all day, every day, delivering stuff -- much of which is from Amazon.  This year Google announced it has driven 5 million miles collecting mapping data.    If Amazon got its 500,000 drivers to collect map data -- that would be only 10 miles for each driver.  It would take more time to install the collection equipment than it would to surpass all of Google's collections efforts so far.  Call it a week to install the stuff and by the end of the first day, Amazon would have 10x the data that Google has collected.  

Not only that, but professional drivers in every market in the whole world could return much higher quality data than users could.

Could be cool.

Marissa’s Brains and Steve’s Brute Force

I have never been pregnant so I am not going to comment on Marissa Mayer's condition or how it relates to her new job at Yahoo.  I have never been CEO of a multi billion dollar company either, but that is not going to stop me from commenting on what I am sure is going to be one of the most interesting meetings in the near future -- between Marissa Mayer and Steve Ballmer.

Microsoft and Yahoo have a complicated past and a complicated present and likely a complicated future.  This first meeting is going to be interesting for a number of reasons not the least of which is the way that Ballmer has targeted Google so intensely and for so long.  Now he is going to be sitting across the table from the devil herself, and she is exactly what he needs -- a smart experienced person with design sensibility and vision.

While he is realizing how she could help him, she is probably doing the same.  I don’t know anything about her willingness or ability to use brute force to crash through barriers, but Ballmer’s tendency to do so could be quite useful to her.

And they both have the same problem -- their own companies.  They each have an opportunity to use the strength of the other to influence their own teams.  Marissa can get Steve to beat her cranky board members into submission and Steve can get Marissa to get his team to stop fighting with each other and focus on the challenge at hand.

Solving the Tablet Puzzle

When I was a kid my mom taught me how to solve puzzles.  She said to find the corners first, then the edge pieces, then assemble the frame, then sort the pieces by color...  It was a sound process and surely was easier than randomly picking one of the 500 pieces out of the box and trying to figure out where it went.  From that experience I learned that solving the puzzle depended heavily on the sequence.

It is interesting to see how the four big players in tablets computers:  Apple, Amazon, Google, and Microsoft are each approaching their complex puzzles.  Just like doing puzzles with my mom, the sequence is everything.

The first entrant into the market was Microsoft - over a decade ago.  Bill Gates was correct that tablets were going to be big.  We now know that his vision was extraordinary.  Unfortunately, he was pulling one piece out of the box and there was really no hope of fitting it in with the other pieces.

Meanwhile, Steve Jobs was laying down the corners and the frame of his puzzle with the iPod.  It was a simple but amazing device that enabled users to do one thing:  carry 1,000 songs in their pocket.  At the time the next best solution held only 10 songs.  Then the iPod lead to the iPhone, the iPod Touch, all those apps and app developers, and finally the iPad.  That final puzzle piece was easy to place in the picture because so many other pieces were in place already.

At the same time, Amazon was creating an amazing shopping experience for books and everything else in the universe on its web site.  By the time it introduced the Kindle (same time as the iPhone in 2007) its puzzle was pretty well formed too.  The Kindle put hundreds of books in your pocket and there really was not another alternative.

Just after that, in 2008, Google introduced its Android Operating System and the Chrome Browser.  This story is a bit more complicated because Android was started outside of Google in 2003 and acquired by Google in 2005.  Either way, the Google puzzle was being assembled well before the Samsung Galaxy Tab was introduced in late 2010.  Add the proliferation of Android devices, 400,000 apps, and by the time we arrive at yesterday's announcement of the Nexus 7 a great deal of the Google tablet puzzle had been filled in.

It is true that there were a billion personal computers already running Microsoft operating systems when Bill Gates introduced his tablet in 2002.  Surely that would form up the Microsoft puzzle. Right? So why does it seem like Microsoft is just now pulling out the first puzzle piece with the Surface and holding it over a blank table?  Because Microsoft is trying to start a whole new consumer puzzle -- and all of its existing puzzle pieces make up an enterprise picture.  Yes we use the Windows OS at home -- but it has not created any more of an ecosystem than Phoenix BIOS -- which we all run at home too.

It is going to be tough for Microsoft to complete its consumer tablet puzzle.  The Surface may end up being a great device, it may get a great response from Microsoft's enterprise customers.  But it is going to be hard to put the pieces together for consumers.

Taking the P out of Freemium

The numbers in the Freemium business model are similar to direct mail.  2% of the users buy.  Fortunately for the businesses selling their services through the Freemium model, serving the 98% is about as cheap or maybe even cheaper than sending out direct mail pieces.  Better yet, the cost of servicing the users that don't pay is offset by selling access to them and their data to advertisers.  

All good?  Yeah!  But wait, what happens when some other company swipes the 2%?  In an emerging marketplace where new entrants create new sectors and then have them all to themselves, this all works great.  But as the market matures and competitors flood in, it is pretty easy to see how there could be a company that gets the Premium customer and does not have to give away their service to 98 out every 100 users.  

What if small businesses try out cloud storage with DropBox, but when it comes time to pay, go to Box? Box bills itself as the enterprise version of DropBox and it could play out that users perceive that it would be silly to pay DropBox when they could get an enterprise version at Box.  Maybe this is why Box has been able to raise $150 million even while Google is entering the market with Google drive and Microsoft is entering the market with Skydrive.  Could those companies be serving as Freemium providers just driving Premium users to Box?

This is what Apple has done.  They dominate the Premium part of the hardware market and their share of the profits in the industry far exceeds their share of the market.  

Market Like an Engineer

It seems that every time I attend a presentation, usually at a conference, given by a Googler, it starts with the disclaimer "I am not a marketing person...". The narrative from there can devolve into a rif against the evils of sales and marketing people and the comparative virtues of engineers. Despite the hyperbole, they do have a point. Marketing without good engineering is just snake oil sales.

Here are three virtues of engineering that I appreciate the most:

1. Desire to build a better mouse trap: Good engineers want to be useful and solve problems. Engineers don't want to work on something that is not really a problem, or that is invented just to serve some other purpose.


2. Disdain for waste or duplication of effort: Engineers want to share their work so those that come after them can build on top of their efforts instead of wasting effort relearning what has already been learned by someone else. While this does not always result in good documentation, it does produce a collaborative atmosphere with vibrant knowledge sharing.


3. Thirst for customer feedback: Engineers want to know as much as possible about the customer experience using their product. If you give engineers a choice between the good news (compliments) and the bad news (criticisms) they will take the bad news because it will help make the product better.

These traits are encouraged in engineering departments because most engineering departments are set up like academic institutions where sharing knowledge is rewarded and failures are celebrated as long as there is strong thinking behind them.

Marketing people that think like engineers apply these same virtues to their objectives. They want to get their product into the hands of people that can use it, they don't hoard data, and they want to know the real numbers.

The people running marketing departments need to think about how to create an environment that encourages marketers to market like engineers.

Google becomes Microsoft as Microsoft becomes IBM

There was a good article in the NY Times business section today about Google.  Mostly about how Google is growing up.  It reminded me of talk around Microsoft at the peak of its ride.  At that time, the last thing Microsoft wanted to do was to become IBM.  But they have.  IBM has done an amazing job of reinventing itself as a consulting company, and Microsoft has taken over as the legacy systems company.

Google meanwhile, is under increasing pressure from governments about its monopoly power, and use of customer information.  All of the sudden, Google is spending just as much time and energy dealing with the government as Microsoft did with the Justice Department in its day.  Actually, IBM had that same problem too.  

So the pattern is:

1. Old monopolist gets pounded by the government
2. New entrant uses the opening to build a new monopoly
3. New company is the darling of everyone (and stock goes to $600)
4. New company becomes old monopolist
5. Go to step 1

Also, today I started a new page where I am tracking the new tech bubble.  Check it out here.

The Cloud is Out of Our Control

Anyone familiar with network diagrams knows that the cloud symbol is used to refer to the things outside of the control of the network owner. In the old days it meant our network connects to the Internet here, or connects to the telephone network here.

Wait, that is still what it means!  By this definition we have had cloud computing since the 50s. What is the big deal about all of this “Cloud Computing” then?

True to the definition, we are shifting more computing from inside our networks to the part of the diagram depicted by the cloud – the part out of our control.

Web email (gMail, Hotmail…) was the first mainstream application of this, but network administrators know that the migration to the cloud started well before that with security services, enhanced phone services, distributed computing grids.  And everyone else is watching as we are now getting cool cloud apps like Dropbox, Evernote, Google Docs, and Office 365.

So are we just back to timesharing the VAX? Well, no.

Yes MS Azure, AWS, Google App Engine, OpenStack, and the dozens of other offerings do look a lot like mainframe timesharing with one big exception – the new cloud services talk to things inside your network, and talk to each other.

All of this talking is done with Application Programming Interfaces (“APIs”).  These are instruction sets that enable people or computers to interact with systems, without being in the system. 

We will all be hearing a lot about APIs in the weeks ahead because how they are used and who owns them is the center of the currently front page lawsuit between Google and Oracle. 

Tale of Two Conferences

I was fortunate enough to attend two Cloud Computing conferences today.  They were right next door to each other in Seattle, one at the Sheraton (CloudFair2012) and the other at the Convention Center (Cloud Intelligence Conference).  It was an interesting study in the current state of tech marketing because the CloudFair was dominated by Google and the Could Intelligence Conference by Microsoft.  While it is not really fair to make a full comparison because I could only attend part of each (the CloudFair is in the workshop day of a three day conference and the Cloud Intelligence Conference was only a one day thing), it was a great way to see the contrast between how Google and Microsoft reach out to their markets differently.

The experience reminded me of the great exchange between Bill Gates and Steve Jobs at the All Things D conference in 2007 where Walt Mossberg asked them what they appreciated most about each other and Steve said that he admired Bills ability to partner, and Bill said he wished he had Steve’s sense of style.  Two great companies, two completely different approaches.  The same can be said for Google and Microsoft.  Microsoft still knows partners and Google’s “style” is to turn as many of its engineers into marketers as possible.

Microsoft Knows Partners

At the Cloud Intelligence Conference, the speakers were mostly talking about Microsoft Azure and Office 365, and most of the speakers were not from Microsoft, but partners of Microsoft that help Microsoft customers run their Microsoft products.  These partners are formidable companies in themselves, and some have products that integrate closely with Microsoft’s offerings.  The speakers were talented, had a great deal to contribute and were not just pitching their own services.  Since just about every company has Microsoft in its IT infrastructure somewhere, it is a given that the audience were already Microsoft customers.  The presenters took advantage of this fact and were helping Microsoft customers see what was on the way to them from the mothership.  The negative of this approach was that the audience did not feel that they were getting the inside view into Microsoft, and there was a bit of a theme of ‘yes we are keeping up with the cool kids’.  Neither of these is going to push customers off of a platform already through their organizations.

Google Is Not Evil and Engineers are Not Marketers

Google as a company defines itself by declaring what it is not (evil) and continues that method with Google engineers declaring they are engineers and not marketers.  These guys were great speakers, very knowledgeable, easy to listen to, and clearly passionate about Google products.  In addition, and in contrast to Microsoft, they did a good job of letting the audience get a sense for the inside Google perspective.  Developers do like that kind of thing a lot.  The talks were clearly aimed right at the users with no reference to partners or how a partner could use this technology to take better care of its clients.  It is very possible that there were partners in the audience that were going to do just that.  It was interesting that the Google guys were both published authors and took the opportunity to plug their books.  I suppose this could be a result of Google’s culture of academia (where college professors are always writing and plugging their books).  It was a bit ironic however, because they did say they were not going to try to sell the audience anything, well except their books.

Great change only happens when innovation makes things 10 times better.  Clearly the tools available to businesses through the cloud are at least 10 times better, so this is going to be a time of great change and it is hard not to be excited about it.  It will be interesting to continue to observe these two great companies build their tools and their markets.  Along the way Microsoft will surprise everyone and innovate, and Google may even surprise themselves and do some marketing.

Golden Opportunity for Microsoft

Microsoft recently reported that the Defense Department repels 250,000 attacks on its networks – every hour.  I suspect that Microsoft has more experience with hostilities in cyberspace than any other company.  I do not know of a published list of the biggest targets for hackers, but the US Government has got to be close to the top of the list, financial institutions are probably next, big companies like GE and P&G and GM have got to be up there too.  Literally every enterprise customer of Microsoft spends a great deal of time and money dealing with these attacks.  I also do not know how much of their budget is actually paid to Microsoft, but with the cloud offerings MSFT is now selling to big enterprises – the number must be growing.

It does seem like Microsoft badly wants to be a consumer focused company.  There is a security need at the consumer level too.  Our citizens may not have the designs of weapons, or the controls to the predator drones behind their personal firewalls, but knowing that half of all credit cards have been compromised by cyber attacks is enough to make the point that consumers have things to protect too.  Once again, Microsoft has more technical expertise and experience data on the consumer attacks than any other company. 

But… Does anyone really want to talk about security?  It does sound a lot like that annual call from the insurance agent who wants to talk about how to increase, well, his commission. 

The changes that Google made last week to further personalize search could be the opening that Microsoft needs to get the conversation going.  Google is increasingly showing you just you want to see – even if some of what you get in your search results comes from things you own – like pictures on Picasa web.  Desktop search never worked for Google or for Microsoft, but as more content migrates to the cloud, we can expect to see our personal, not public, items mixed in with public search results.  We cannot expect Google to be so foolish as to put Gmail into the personal search results, but Google+ posts are sometimes public and sometimes personal.  If these latest changes are meant to push Facebook and Twitter to make their content available for searching, and Google is successful, the line will go too far towards the personal end and consumers will be more than a little upset when their private Facebook posts are next to Wikipedia entries in the search results.

Microsoft could be the safe place to get search of private emails, documents, and photos.  I have Copernic Desktop Search installed on my Windows 7 machine and it is amazingly good.  And I am quite sure that neither Google or Microsoft or anyone else is building an index of my stuff on their servers.  I would trust Microsoft to do this work and the only reason I have a non-Microsoft product doing this is because even after hours of trying, I could never get the desktop search index to work on Windows 7.

My dream, and I suspect the dream of many other consumers, would be to have a company I trust, deploy a capable private search tool, and do it in a way that protects me from the outside (desktop search and security) and then take it to the next level – making all of my private stuff available across all of my devices, all while maintaining my security.

Be Insanely Great -- or Go Home

Steve Jobs was widely considered one of the best salespeople ever.  Who else could have sold the music industry on iTunes?  However, he also recognized the downside of too much dependence on salespeople: Here he describes it to Walter Isaacson:

…The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important. The company starts valuing the great salesmen, because they’re the ones who can move the needle on revenues, not the product engineers and designers. So the salespeople end up running the company. John Akers at IBM was a smart, eloquent, fantastic salesperson, but he didn’t know anything about product. The same thing happened at Xerox. When the sales guys run the company, the product guys don’t matter so much, and a lot of them just turn off.

Google also does salespeople differently. Here is a great post from Charlie Warner describing the differences.    Like Apple, Google seems to recognize that salespeople are important, but all companies have to work to ensure that the salespeople do not steal all of the oxygen at the company.

Salesforce.com spends half of its revenue on sales and marketing.  They also spend very little on R&D.  Here is a post I did comparing sales to R&D spending at the leading technology firms.

I think all customers are in one of two states.  They either believe that the product or service they are getting is unbelievably great, or they believe there must be something better out there.  Every company should employ this measure of customer satisfaction.  The danger is to think that the customer is happy because they are still paying the invoice.  There are many customers who do not complain, but are still looking for an insanely great solution.  When they find it, they will not go to their current vendor and say:  do you want to compete to keep my business?  They just leave.  

Products must be insanely great to compete in the marketplace. 

Last Mile to the Channel Partner

Just like with other networks, the Last Mile connecting a Partner Network to its Partners is expensive and complicated.

All channel partner programs have infrastructure designed to manage the relationship with partners.  From the simple to the sophisticated, this infrastructure accomplishes a variety of critical tasks including registering partners, enabling them with sales materials and support, delivering leads, tracking performance, managing certifications, and many other functions.  These processes and systems are in effect a network of sales and marketing people and PRM/SFA databases and applications.

To function, all networks must reach their customers and a partner program network is no different.  The link between the network and the customer is called the last mile, and just like with a phone network, the last mile is the most challenging because the investment required to reach a new partner is uneven, and in many cases will never pay off.  Extending the phone network to the last farm on the road will never make financial sense – that is why the FCC has made the phone company provide service to everyone.

Companies have tackled the last mile problem with their channel partners in three distinct ways:       

• Invest everywhere and dominate the market (Microsoft)
• Invest heavily in obviously high value partners (HP)
• Make the partner come to the network (Google, Amazon)

These differences are logical when taken in the context of gross margins.  Microsoft and other software companies have the highest gross margins, so they can spend much more than everyone else.  HP and the hardware companies have much lower margins, so they have to be more careful to invest only where they know it will generate additional sales.  Google and Amazon and other similar businesses have many more partners, and their transaction size is much smaller – making anything other than a fully automated approach hard to justify.  It is just not possible to cater to the individual needs of partners if there are millions of them.

As the technology industry evolves and these companies move into new markets, they will have to adapt to new margins and transaction sizes.  This will be much easier for companies working up the list, than those working down the list.  Those with skills developed in low margin and small transaction sized businesses will have to learn to invest more in the last mile – learning to spend more is enviable compared to those who have to learn to spend less.

The Value of Second Level Assets

A smart Wall Street guy recently described to me a new way to think about the value of a stock in an overheated market.  He proposed that there were really two parts to value.  The first of course is the underlying value of the share.  And the second is the option the holder of the share holds implicitly to sell the share at a time of his choosing. This could be called the option to sell to the greater fool, but let's not start calling people names.

This second layer of value can be greater than the first.  In other words, particularly in a momentum market, the right to sell is worth more than the stock itself.  This is interesting because it is a good visualization of an emerging class of assets that derive their value entirely as a function of their relationship to an underlying asset. 

Some will say this is nothing new.  A steak at a steak house costs three times as much as a steak at home.  Such an item could be described in two parts as well: the steak and the experience of eating it at the steak house.  Again the second part is likely more valuable than the steak itself.  Milk at the Mini Mart has two parts, the milk, and the convenience of buying it quickly. 

In markets where innovation is changing the cost of producing and delivering things, the cost of the underlying asset is decreasing quite quickly.  Take ebooks for example, the cost to create and deliver the next copy of an ebook is essentially zero.  This creates an environment where it is easy to see how there is relatively more value in the second, derivative asset, than in the ebook itself.   The derivative asset to an ebook could be merely the recommendation of the right book, or who is reading what book, or comments about the book, or quotes from the book.  If you were about to pitch a big deal, how much would you pay to know what the person on the other side of the table was reading the day before your meeting?  At the risk of offending the authors who clearly invest themselves in their craft and create valuable work, we must ask: Is there more value in the marketplace to the second level information about the book than in the book itself? 

Apple, Google, Amazon and Facebook have been named as the new horsemen in technology.  These companies recognize the value of being one layer removed from the actual asset.  Google and Facebook both pay their customers (by offering free services) in exchange for this second level information – so clearly they assign value to it.  Apple exploits the second level information less than the others – mostly because it’s history is making money selling devices.  They are getting smarter about this all of the time and the Apple iCloud announcements last week betray their interest in being in the second level game.  Amazon is the one with the superior business model.  Not only does Amazon make money selling products, but they are expert at using the second level information to sell even more stuff.  Amazon has a much more concrete awareness of what you “like” and knows how to use that information to present you with other products to purchase.

More examples of this construct emerge every day, and many in places commonly thought of as confidential:

• Banks:  I received an offer today from my bank to purchase access to their database of financial statements.  These are financial statements their customers have submitted as part of their traditional banking relationship.  Banks make money in many ways, and now they are making money selling access to the information they collect about their customers.
• Phone Companies:  The contents of your phone call cannot be “tapped” without a search warrant, but law enforcement regularly pays the cellular companies for the second level information.  That data includes, who you called, how long you talked, and where you were (while talking or just while the phone was on).  Law enforcement does not need probable cause or a search warrant to get this information and the cellular providers have automated access to the database, so the fees they collect are pur profit.
• Credit Card Companies:  Your credit card issuer makes 2 to 5% off of every transaction, plus they sell the information about how much you spend at what vendor.  Soon you will be seeing advertisements on your credit card bill.

Where could this go next?  Here are the services I would like to buy:

• On the plane:  I would pay extra to sit next to a thin person or better yet a client or potential client.  In the case of the potential client, I would probably pay more than the cost of the ticket itself.  This could also go for any event.
• Buying Things:  The next time I buy a house I would like to know which houses are going to come on the market next.  So information about people looking to move, getting transferred, or experiencing other life changes would be valuable to me.  Facebook could have this already, but other big databases will likely get mashed up to provide information like this.
• Healthcare:  The next time I get a cold or the flu, or better yet, before I get a bug, I would like to go online and see what is happening in my area.  Who is suffering symptoms (Google has this because people do searches for their symptoms, the healthcare companies have it once people go to the doctor, and schools and employers have it once people call in sick) plotted on a map and compared to historical data.
• The Government:  The government could become the biggest player in this area.  Think of the gold in the IRS’s databases.

Things are definitely getting interesting. Maybe my next post should be about privacy!

All New Horsemen

Erik Schmidt got some attention at the All Things Digital conference naming new horsemen in the tech industry.  The old horsemen were commonly listed as Microsoft, Intel, Cisco, Dell.  Schmidt rather self congratulatorily named Google,  Amazon, Facebook and Apple as the new four.  Sure things are changing, but a completely new field of horsemen, really? 

What is it with the horsemen anyway?  One must wonder how we got onto the horsemen thing in tech, it seems like we would want to stay as far away as possible from an allegory rooted in conquest, war, famine and death.  If you have some time to kill, check out the Wikipedia entry for the Four Horsemen of the Apocalypse, for a not so brief introduction to the idea of horsemen.

Is there a new reality in tech and if so is this it?

With the possible exception of Dell, which specialized in advanced supply chain management, the old four developed technology and sold it to individuals and businesses and those customers employed the technology to achieve their ends.  The old horsemen are in fact still in business, and will be for some time.  IBM may not have liked being left off of the old list, but they have done pretty well for themselves in the last decade with their stock up 50% in the last decade compared to losses for the others.

With the possible exception of Apple, the new four don’t sell technology at all.  I suspect they are often thought of as technology companies because of their use of the Internet in their business models.  The wholesale switch is notable, and mostly for Microsoft.  Indeed, Microsoft has not been performing well on the stock market over the last decade with a drop of over 50% while all of the others are up and Apple is up a whole bunch.

These new horsemen are going to drive the delivery of a new kind of computing services. Even if this shift only turns out to be half as big as Mr. Schmidt predicts, it is going to have a profound impact on how technology is sold.  This is commonly referred to today as the migration to the cloud, and is so overhyped that often we forget to stop and think about what that actually means. 

First a review, technology resellers used to make money marking up hardware and shrink wrapped software.  Then they made money adding integration and support services to the sale of hardware and software, and next they will make money delivering innovation.  Here are some examples of this phenomenon:

• DropBox (www.dropbox.com) is a file system in the cloud.  You can get to your files from any device.  It is Amazon’s infrastructure on the back end, but no one has to know that.
• WordPress or SquareSpace (www.wordpress.com; www.squarespace.com ) are content management systems in the cloud.  Anyone can publish a website or blog on these sites and all of the hosing is handled.  Although one step removed, these companies rely on Google for indexing and discovery.  Google is also seeding the next wave of these companies with Picasa and Google voice. These may seem like birds of a different feather, but before you say so think about searching images or audio files.  Google’s partners make money by helping their clients manage content and show up online in the right places.
• Security is making sure content does not show up in the wrong places like when credit card information is stolen, or weapons system blueprints land in Peking.  Facebook has designs on knowing who you are and where you are and (soon) what you buy and what you have access to.  Making sure the keys to the kingdom, your keys that is, remain in your own control is important and will be big business.  Emerging in this field are upstarts like Reputation.com and Klout.com, and established firms like Symantec.

Before you think that this blog post has gone off of the rails, let me state plainly that I am not proposing DropBox, WordPress, SquareSpace, Reputation.com, and Klout.com as services that partners can mark up and resell.  I am proposing that these are the new channel partners and that they exist in a sympathetic ecosystem with the new horsemen.

These forward thinking channel partners do not think of themselves as channel partners.  They think of themselves as the inventors of a new wave of services.  Nevertheless, they are channel partners because they make money packaging new technology into services that add value to consumers and business.