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.

Who is Hiring the Black Hats?

Ever since David Segal wrote his great piece in the NY Times last month about JC Penney’s black hat antics of SEO, I have been thinking – really?  JC Penney intentionally gaming Google!  There has got to be more to this story.  Danny Sullivan followed up with an insider’s take on it – but I still thought – where is the rest of the story?  The web lit up with all kinds of commentary including this from SearchEngineWatch, and this from SearchMarketingWisdom, who also posted this response from JC Penney with an enthusiastic corporate speak counter argument to the New York Times. 

All of this has contributed immensely to the celebrity status of Matt Cutts, the guy at Google who fights search spam and swiftly pounded JC Penney’s search results into the ground.  The story continued with this good piece on NPR’s On the Media show with Bob Garfield last week.

I think we live in a country where the good guys, the white hats, win in the end.  Who knows, if Libya’s citizens prevail, maybe we live in a world where the bad guys, the black hats, are more readily punished.  In following this saga however, I have still not encountered what I have been looking for as the rest of the story;  who is hiring the black hats?  So I am going to propose this hypothesis:  the black hats exist because the white hats hire them.  It is the laundering of bad behavior through the presumed respectability of the good guys. After all, the US military hires Blackwater (now Xe Services because their reputation got so black they had to abandon their old brand) to do it’s black hat stuff.

We see this from time in our industry.  In the marketing services business we have encountered competitors who produce false reporting – and amazingly they don’t get fired by their clients.  They don’t get fired as long as the reports continue because the good people who hired them need the “results” to keep their budget or their jobs. 

It is a competitive world out there and marketing is getting more and more focussed on measurable results.  It is not hard to imagine a good, well intentioned, marketing services firm getting desperate and going to the bad guys -- just to boost the number -- just this one time.  Then, well, you know the rest of that story.

Maybe our industry needs a black hat amnesty day.  A day that all performance expectations can be re-set so our industry can purge the black hats and get back to doing the work of the good guys.

Bigger Was Better Until Now

The Factors of Production Disassemble and Big Business Dissembles

Companies have been citing economies of scale as reason to acquire, merge, or grow ever since the beginning of industrialization.  It is not hard to grasp the idea that the cost of each additional unit will drop as more units are produced.  There are every day examples of this from ordering business cards to getting the next bigger bag of popcorn at the theater.  Doubling the size of the order rarely doubles the cost.  In addition to increasing competitiveness by lowering production cost, manufacturers have also been heavily incented to acquire their suppliers to secure raw materials consistently.  In addition, when significant research and development investment is required - large scale is required to justify that investment.  Bringing a new drug, airplane, or car to market can only happen when large scale production is the likely outcome.

Natural monopolies are sometimes formed when new technologies are discovered and more so when large initial investments are required.  The first railroad, telegraph, and electrical grid are good examples of natural monopolies.  Once the track was laid down, the cost of running the train was so much less than the next competitor (who still had to build their track) that protecting the monopoly and remaining profitable was not only conceivable by likely.  In the case of the telegraph, the network effect rewarded the first to market because the usefulness of the network increased as more people were connected to it, further securing the monopoly.

For all of these reasons we have lived our entire lives in a world where bigger was better.  Until now.

Over the past 30 years just about every part of business has been disassembled and the parts can now be purchased as needed, when needed, and for cheap.  Big time computing infrastructure is available for rent.  Enterprise quality business process systems from the mundane (travel expense management) to the exotic (advanced materials management) can be provisioned in a matter of days and delivered economically to large and small teams alike.  Anyone with an idea, some know how, and a credit card can bring it to life and to market faster and cheaper than ever before, and tomorrow it will be even faster and even cheaper. 

The railroad company may still have a monopoly on the use of its tracks, but the customer can pick from any of dozens of carriers that are putting containers on the train, so businesses large and small are able to ship their products anywhere for no initial investment, and very low cost.  Amazon.com may own all of the distribution centers, but anyone can sell their products through Amazon.com.  Apple may own the iPhone, but just about anyone can put an app in the app store.  Google may have the biggest search engine, but anyone can buy an ad.

However, before we get too excited about this new world of entrepreneurship we must look at the remaining barriers.  There are still two large hurdles: government regulation and selling cost.  Any large firm not offering access to its railroad tracks is doomed unless government regulators can be deployed to prevent competition. Also, in selling, some large businesses can prevent their customers from being exposed to new entrants by blanketing the market with salespeople.  Oracle and its mini-me Salesforce.com, dedicate $5B (20% of revenue) and $700M (50% of revenue) respectively to sales and marketing.  They have the reach to simply shout down any competition for customer mindshare. 

These government and selling advantages are significant because to date they have overcome the many large firm disadvantages.  Poor performing employees have many places to hide in big firms, even top performers spend an inordinate amount of time fighting internal battles, and real live feedback from the marketplace rarely makes it through the ranks to the top decision makers.  For these reasons top talent gravitates to smaller firms where the opportunities for advancement and the big payday are greater and there is just plain less brain damage.  The small firms have the smartest people, whose motivations are more closely aligned with business success, who are closer to the customer, and who have access to all of the tools and infrastructure previously only available to the big players. 

Both of these problems are self-correcting. 

Government protection may benefit a business but it kills the market.  More people every day make their residential location decisions based on access to high speed internet.  Taken to the extreme, these decisions may not be between one part of a city and another, but instead over an international border.  People went to Canada to escape Nixon’s draft, why not Australia to escape the reach of Genachowski’s FCC?  It is not hard to imagine a young software engineer with school age children attracted to Australia by fiber to the home and good schools.  Comcast and its lobbyists win in the short term, but even they lose in the end as they ride their shrinking market into the ground.

WikiLeaks may offer a middle ground to the all or nothing proposition of killing the entire economy.  They have announced plans to release documents targeting big business starting with the big banks.  It is suspected that the first target is going to be Bank of America.  This will expose the tactics large enterprises use to protect their positions.  In banking it is likely the manipulation of the bank regulators and deceiving their government and shareholders about their financial condition.  In technology it will probably be the anti-competitive behavior associated with patent trolls, mergers, and the implementation of standards.

In Selling, the small firms need to push forward while gravity does its work.  Salesforce.com spends fifty cents of every dollar of revenue on sales and marketing because they can.  With 95% gross margins, they have the money.  The increased competition from the many small businesses offering sales process automation tools will drive gross margins down. Each bee sting may not seem like much to worry about, but even Microsoft expects its margins to drop from over 80% now to 40% as their customers move to a cloud computing model.  This is happening to the entire industry and the big spenders on sales and marketing are going to either get crushed, or adapt.  Either way, there will be much more oxygen available for the little guy at the customer’s table.

As the disassembly of business offers opportunity to small up starts, the big established firms will dissemble.  Watch for support of entrepreneurial activity while absorbing potential competitors, claims of working with the government to open markets while increasing regulatory burden, and ever increasing attorney headcounts.  Change is hard for anyone and really hard for the big guys.