A Brief Interview with John Thompson, Microsoft’s New Chairman, Provides Some Clues as to Likely Near Term Future Priorities for this Mature ISV

On February 28, 2014, Mia Saini of Bloomberg TV briefly interviewed John Thompson, Microsoft’s new Chairman. Saini includes some questions about Mr. Thompson’s other significant current venture, Virtual Instruments. But this post will only speak to a few of the discussion topics specific to Microsoft.

John Thompson did not assume a Defensive Posture as He Handled Some Challenging Questions

Anyone watching Thompson’s video on the Satya Nadella web page on Microsoft’s web site will note his objective, in his new role as Chairman, to improve the quality of Microsoft’s dialogue with the investor community.

Saini opened the interview with the following statement: ” . . . Many say, and it’s a widely held view that innovation is not happening on Microsoft’s base products. What do you say to that?” (quoted from a video interview with John Thompson, Microsoft’s new Chairman. The interview was led by Mia Saini of Bloomberg TV. A link to the entire interview is provided above).

Thompson’s reply began with reference to Microsoft ” . . . as a company with an enormous amount of resources . . .” (ibid) and then turned the conversation into his preferred direction: ” . . . The issue, quite frankly, for us is about focus”.

Readers may want to watch the video interview with Satya Nadella on the Satya Nadella page of the Microsoft Site. Nadella spends time in this video discussing the need for innovation at Microsoft. But this new perspective, as presented by Thompson, adds another dimension to the conversation — the need for focus, running parallel.

Thompson goes on to note one of the main reasons Nadella was selected for the CEO role: ” . . . he understands exactly what needs to happen to move Microsoft forward . . .” (ibid) So the viewer is left with a picture of Nadella as a new leader capable of marshaling “enormous resources” in a focused manner to build new base products, etc.

A Couple of Other Points Worth Noting

  1. When Saini noted the importance of Cloud products and services, Thompson interrupted her with a “for sure”. So clearly he gets the cloud imperative. He also made a big claim Microsoft naysayers may want to note ” . . . Office 365 is a very, very successful cloud based application” (ibid). It will be interesting to follow the performance of this product in Microsoft’s coming earnings reports.
  2. It doesn’t look like the consumer products effort will be wound down any time soon. Thompson noted ” . . . another focus of Microsoft’s strategy is how we become even more relevant to consumers, and the Devices and Services strategy that was launched about a year ago, is very much a part of that” (ibid)

Disclaimer: I’m long Microsoft

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Does It Make Sense for Google to Continue to Pursue a Brand on the Societal Edge?

On Monday, November 25, 2013, The online New York Times published an article by Andrew Pollack titled F.D.A. Demands a Halt to a DNA Test Kit’s Marketing. The DNA Test Kit of interest is manufactured and marketed by 23andme, a business operating with the financial backing of Google.

Opting to invest in a product like this one, from 23andme, which is positioned at the edge of the range of products sanctioned by the U.S., as a society, is, to put it kindly, a questionable decision by management. Google is a publicly traded business and, therefore, has a responsibility to its shareholders, one would think, to provide notice to them of any intention to proceed on an investment like backing 23andme, before proceeding on it.

Unfortunately this isn’t the first example of risky product marketing decisions on Google’s part. Google Glass is another. Once again, mainstream media picked up on a recent case where a woman received a speeding ticket, in California, along with another ticket for wearing Google Glass.

One needs to ask if product marketing at Google is aware of how they are branding the business by pursuing these types of products, and, once again, if it’s in the best interest of Google shareholders to proceed in this direction.

From the looks of the initial advertising campaign for the Moto X smart phone (which hasn’t fared too well with the public), it would seem product marketing is aware of the “edgy” brand Google is magnetizing, and may want to keep it that way. The initial campaign, as I wrote about earlier in this blog, was memorable for the models it included who all sported a lot of tattoos.

I’m wondering if Google is interpreting all of this “edginess” as a correct way to pursue the kind of “business as a rebel”, which Steve Jobs used with great success. If they do see a Jobs connection, they should, perhaps, follow his lead and do a better job of very carefully selecting ad agencies and PR firms to spread the word.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


An Exponential Growth in Sales is Not an Adequate Single Indicator of a Healthy Business

It’s now fashionable for investment commentators to point to a meteoric sales growth rate, sustained over several quarters of business activity, as the most important indicator of a business worth considering for investment. But a healthy sales volume for products, nevertheless, incorrectly priced, may not pay for the operating cost of a business.

An article written by Tiernan Ray, and published on the Barrons website on Saturday, September 21, 2013, BlackBerry Won’t Be the Last Victim of “Disrupters” is an example of this kind of exposition.

To understand Tiernan Ray’s concept of businesses as disrupters, one needs to buy into his notion of disruption. Disruptions can be defined as a type of business “disaster” Tiernan Ray attributes to technology companies once in an industry leadership position, but, later, merely an industry laggard. Examples of business disruptions include Blackberry, Nokia and even Microsoft. Tiernan Ray observes each of these businesses have been disrupted. They are each, in 2013, ” . . . franchises . . . displaced by newcomers . . . ” History, he claims, illustrate ” . . . those franchises never come back”.

I’m not so sure. As I I’ve noted over several posts to this blog, one of the biggest challenges facing a mature ISV, like Microsoft® is how best to put together a product marketing plan capable of sustaining the business at some reasonable size, given the level of revenue the business used to produce from the product lines disrupted by Tiernan Ray’s newcomers. Delivering Software as a Service (SaaS) via a multi tenant cloud subsription product model, historically, has NOT produced the revenue even these newcomers have required to fuel their challenges to the market leaders.

Tiernan Ray writes of two businesses he characterizes as disrupters, specifically Workday and Salesforce.com. “Workday is not profitable, but trades at 31 times this year’s projected sales, versus 3.2 times for Microsoft. Salesforce, whose earnings are a perennial matter of Wall Street debate, given that they exclude the cost of stock options, trades at 155 times the 34 cents a share it may earn this year.” These observations move me to conclude the investment community has lulled us into a mistaken set of concepts, meaning a bubble, since neither business can profitably sustain itself at present revenue levels. Even worse, I question whether dramatic growth in the sales volume of their incorrectly priced products will fix the revenue shortfall problem.

At least Microsoft is sitting on somewhere around $75 Billion in cash. I’m not sure either Workday or Salesforce.com can say the same.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Looking Further at Microsoft’s Announced Acquisition of Nokia’s Handset Business

We’ve recently commented (via several posts to this blog) on some changes at Microsoft®. The first of our posts included notes on Steve Ballmer’s July “One Microsoft” reorganization announcement. Most recently, we noted our thoughts on Mr. Ballmer’s announcement of his planned retirement from the position of CEO of the company, to occur sometime during the next 12 months. What’s consistent about our comments is our position about just what’s important about the product mix driving revenue at Microsoft. We think it’s all about Microsoft’s enormous customer base across large organizations in the public, private and not for profit sectors, and not much about the consumer product lines the company manufactures.

So we were surprised to read about Microsoft’s intention to purchase Nokia’s handset business. This move, on paper doesn’t seem to have much to do with what we take to be the core revenue driver for this business — enterprise software sales. We aren’t alone in our viewpoint. On September 7, 2013, Barrons published an article on a related topic, It’s the Shareholders, Stupid, written by Andrew Bary. Mr. Bary quotes Rick Sherlund, from Nomura Securities, arguably the leading industry analyst on Microsoft, on the subject of this latest announcement: “‘Investors have wanted Microsoft to reduce its exposure to a declining consumer space and focus on its stronger enterprise business and pay out more cash in the form of share repurchase and dividends. Management succession was thought to help in this regard, but the Nokia deal doubles down on the cost structure for the consumer business and makes it more difficult to reduce costs[.]'” (quoted from Mr. Bary’s article. We’ve provided a link to the complete article earlier in this paragraph).

Leaving aside Mr. Sherlund’s observations on the impact of the additional overhead costs Microsoft will have to shoulder once the acquisition has completed, his remarks about investor notions of where Microsoft should be looking to repair and expand its business are entirely consistent with our ideas on the same topic. So how can the acquisition of Nokia’s handset business be seen as contributing to the success of Microsoft’s efforts to repair its core enterprise software business?

We think this move is understandable when one considers the comparatively diminutive positive impact on earnings from cloud products. If enterprise markets are truly moving away, in droves, from on premises computing solutions, then Microsoft is clearly at the start of a long road of shrinking revenue contributions from its Office products, if not its operating system profits, as well.

Smartphones are pricey devices with an average cost, here in the United States of approximately $500.00 each, if not higher. So buying an admitted laggard in the market, which, nevertheless, was once the biggest manufacturer of mobile phone handsets in the world, can be seen as a means of shoring up the bottom line with a nice chunk of hardware revenue, to copy a page from Apple’s playbook. As well, enterprise business is looking like a market in need of a replacement for the ubiquitous “Blackberry”. The Windows Phone O/S on the Nokia Lumia handset, is, we think, a very good option enterprises will have to consider.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Is the Dell Buyout Simply Buying Time on a Trip to Nowhere?

I’ve watched the history of Dell closely over the last several years. Several of the companies Dell recently acquired, principally Quest Software, are familiar names to some of my clients. I’ve also listened to several of Dell’s most recent quarterly earnings reports and supported some of the notions management presented in these meetings.

But Dell did not schedule a quarterly earnings report for the last fiscal quarter, so those periodic management presentations came to an abrupt end. I have to say, coincidentally, I also lost interest in the company. I find it hard to follow businesses with a history of missing on objectives. Recently I had to place Dell in this group.

So when I read an article in the online edition of the New York Times, on Thursday, September 12, 2013, Dell Shareholders Approve $24.9 Billion Buyout, I came away with the thought this buyout, worst case, may prove to be no more than a means of buying time on a business plan with an ambiguous objective, going nowhere.

As Michael J. De La Merced and Quentin Hardy note in this article, “Mr. Dell has not given detailed plans for how he hopes to bring his company into the modern tech world, though he has already spent $13 billion on acquisitions, primarily software and networking companies, to build a cloud business aimed primarily at small and medium-sized businesses, long a core market for Dell.” (Quoted from an article published on the New York Times website on Thursday, September 12, 2013. I’ve provided a link to the article above), I silently noted, “what else is new? After all, these acquisitions began a long time ago. Now, after over 10 years of acquiring, digesting and integrating market leading businesses into the Dell pantheon of technology offerings, it can no longer be acceptable not to have a plan of “where we’re going”.

Of most importance, regardless of whether the company operates privately, or as a public company, there is still an imperative to make money, if for no other reason than to grow the business. So we all could use a better idea about how Dell plans on replacing lost dollars from shrinking sales of PCs, laptops, servers with seats on cloud offers.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Microsoft Reorganization Promises to Remove Internal Impediments to Growth

We’ve written often in this blog on the topic of sales team architecture. One of the concepts we’ve written about is a matrix sales team structure. Early stage technology businesses gain a substantial amount of momentum by implementing a matrix sales team structure, which fields a healthy, but, nevertheless, contentious set of teams to do the job required of the revenue generating side of the business. When geographically focused sales team compete with national account teams, and even OEMs for the same business, you’ve got three operative units working to successfully close business for you. If your competitors have merely one unit competing with you, the odds are 3 to 1 you’ll win, right? So contention between Line of Business (LoB) units certainly has its place, at least for emerging technology businesses.

But contention between LoBs does NOT work well for mature ISVs with enormous market presence. Microsoft is an example of this type of business. Steve Ballmer’s One Microsoft announcement, and the supporting Memo, Tranforming Our Company illustrate the depth to which LoB contention probably undermined the company’s efforts to move forward from an on premises, enterprise-centric brand to a brand more in keeping with its new rivals — Linux/OpenSource (Google Chrome, Ubuntu, RedHat, etc), Google Apps, and, on the hardware front, Apple’s iPad and iPhone.

As we wrote in this blog in a post we will publish shortly, the Apple contention was really not Microsoft’s problem at all. So their announcement in late June of a port of the Office suite of apps to run on the iPhone makes perfect sense and exemplifies a big step forward — at least as we see it — towards disconnecting their brand from the brands of Intel hardware OEMs who also happen to be Microsoft customers.

From what we see of the reorganization, at least on paper, we think it’s a powerful move in the right direction for the company. We hope the results prove the announcement to be accurate, but only time will tell.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Some Thoughts On the Reliability of Forecasts for Business Planning

We recently watched an interview with Mark Cuban taken at the Clinton Global Initiative America Meeting, held in Chicago in June, 2013. When asked about the value of loans for very early stage businesses, we heard Mr. Cuban reply as follows: ” . . . loans are a dumb move for entrepeneurs. Banks expect regular repayment on specific dates. When you’re starting a business you have very little indication, if any at all, where your first or next sale will come from.” (this is merely our summary of what Mr. Cuban actually said)

We think his position is absolutely true, and brings into question another point, not touched on during the interview, but, nevertheless, very important for entrepreneurs thinking about starting tech businesses to consider: Forget about forecasts, they will not be reliable. Revenue and sales activity for very early stage tech businesses are especially difficult to forecast. There is a hidden moving target at work. Markets themselves can change, radically.

If forecasts are inherently unreliable for very early stage tech businesses, then why does a business plan remain an essential document for financing discussions, and, in some cases, customer relationships? Business plans are especially popular with banks, and the U.S. SBA. But remember Mr. Cuban’s point. Better to forget about conventional financing if your start-up business notion is in a technology area.

Venture Capitalists (VCs) also like to read business plans. Perhaps it’s easier to broadly estimate revenue for the types of markets of interest to VCs. These markets may not even exist, so estimating zero revenue for the first one to three years, as markets are built, may be acceptable for a business plan for VC review.

Even mature businesses built around technology products are tough to forecast. You can’t lose sight of an important variable largely out of your control: market sentiment about specific products. In 2013 PCs are largely out of favor, but just five years ago they were a very popular and accessible method of computing. So even the best sales team will have a tough time hitting their numbers in 2013 if they are selling commercial software to a PC market.

The key point, for tech entrepreneurs is to approach the task of forecasting with a very strong sense of skepticism.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Manage Conflicts Between Line of Business Silos to Ensure a Successful Acquisition of a Competitor

In an article published on the TechCrunch site on May 9, 2013, titled Microsoft To Fold Yammer Sales Team Into Office 365, Identity Surfaces As A Core Focus, Alex Williams the author of the post notes “Microsoft also is making a point to focus on identity management and other issues as part of its road to full integration [of Yammer].” (quoted from Alex Williams’ article as published on TechCrunch. A link to the entire article has been provided here).

We’re not sure what Mr. Williams means by “identity management.” But we think it’s safe to assume he’s referring to “identity management” as the task of managing public perception of the product brand of the SharePoint component of Microsoft’s Office 365 offering as well as the same brand messaging for Yammer as the two products are integrated.

We’ll spend a couple of posts to this blog on the news Mr. Williams reports in his short post. A lot of tech businesses have attempted the same type of identity management in the past. This activity comes up as businesses are folded into one another as marketplaces consolidate. More often than not the efforts fail. As the emperor’s new clothes fall away, what looked to be a promising marriage of two organizations disintegrates into not much more than one business digesting another. It makes sense to eliminate competition, but buying them out is a comparatively costly method.

Most of the difficulties arise between line of business units (LoBs). Usually, as in this case, the recently acquired business is a direct competitor of an LoB with a lot of power in the acquiring business’ organization. Rather than fostering a healthy environment of contention, a decision is made to “fold” or “integrate” the acquired business into the new parent, as Mr. Williams has noted in his article.

Almost always this decision works to the detriment of the acquirer. More on this topic with the next post to this blog. If you’re grappling with a decision about whether or not it makes sense to buy out your competition, drop us a message. We would welcome an opportunity to learn more about your objectives.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Opting to Service a Niche Market can Provide a Small ISV with an Attractive Revenue Stream

The concept of a “mom and pop store” is seldom applied to the ISV business. But we think that it’s worth the time required for a small ISV CEO to think about a notion like this one, meaning a plan that promises a healthy, albeit, limited revenue stream. The macro setting for this discussion, of course, has to do with scale, which is a very important setting, indeed, but one that we haven’t plans to cover here.

So how does one apply this cliche to the small ISV business? Attending to the specific needs for computer processing for niche markets can produce software that will not only pay for itself, but generate an attractive revenue stream in much the same manner that a small country store that serves as the only source for groceries for a town of a 1,000 people can do so for its owner.

In fact, we saw this done several years ago when we were based in just such a rural locale. A colleague (an ex professor of computer science from a prominent local university) set up an ISV around no more of a business model than as a production house for a software package that automated all of the steps required by non profit organizations as they plan conferences and actually manage them. One can argue that, today, there is a cloud application somewhere that will do all of that, but we have to say that we are not aware of such a package. An attractive unit retail price for this software application promised to keep this ISV running profitably with a staff of 4 or 5 programmers for quite a while.

It makes sense for entrepreneurs committed to an ISV business model, who want to maintain complete control over their business, and are not reluctant to address the needs of small markets with deep pockets to seriously consider product development for highly specific needs. Of course, an effort must be made to ensure that these small markets, nevertheless, still include some players with deep pockets. Certainly there is no excuse for wasting time developing solutions for highly limited markets that lack the financial means to feed a growing business.

But for markets that measure up, it should certainly make sense for small ISVs to build solutions, especially where these solutions can be delivered to customers via a subscription offer that avails of the cloud. Sometimes it makes sense to “think small.”

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Dell Implements an Acquisition Strategy to Fundamentally Transform Its Business Model

As we wrote in the prior post to this blog, “ready, fire aim” as a product development strategy should not be applied to fundamental transitions in a business. “Ready, fire, aim” is a method of entering markets, and, subsequently, effecting very rapid changes in product design. Doubtless, an approach like “ready, fire, aim” can be very effective for product development as it permits businesses to enter markets very early, albeit with some risk to brand should early version of products fail to meet minimum levels of satisfaction in a market.

The key objective that should drive a decision to implement “ready, fire, aim” is timing an entrance to a market. With particular regard to technology products and services, it is generally advantageous to enter markets early. Further, it is generally the case that early entrants to markets for technical solutions are harder to displace by competitors who arrive later. Therefore, “ready, fire, aim” is a sensible approach to the right set of opportunities.

Making fundamental changes to what you sell does not constitute a right opportunity to implement “ready, fire, aim”. On the contrary, it is critically important that this type of fundamental change be carefully thought through, with especial care to consider the negative ramifications of mistakes. We treated some of these points in the prior post to this blog. For the remainder of this post, we think it will be useful to present our view of what Dell is up to with its recent set of acquisitions, given its intention to transform its business. We do need to note that we do own shares of Dell stock; therefore, we have an interest in Dell succeeding at its strategy. The reader has now been warned.

In fact, Dell is looking to make the same type of fundamental change in its revenue model that we have presented in these recent posts to our blog, albeit at a much bigger scale. We are focused on emerging tech businesses. In contrast, Dell is a mature, publicly traded businesses with a major presence in the markets for hardware products like desktop computers, servers, networking devices, printers, backup solutions, and more.

Back in 2007 Dell publicized its intention to enter other markets, namely the solutions markets for enterprise business (we are using this label to include public sector organizations of comparable size, as well as comparable size organizations in the not for profit sectors) needs for software solutions, and, integrated solutions that include hardware and software components, together with the specialized expertise required to put all of these components together into a working system.

Over the last four years Dell has consistently executed on this strategy, albeit with a level of positive effect on its bottom line that has not meant with widespread approval from the investment community. It is not our intention in these posts to opine on why Dell has only marginally benefited from these acquisitions; rather, we make reference to Dell as an example of why a business should consider buying its way into a market, rather than trying to build a presence from ground up. We think Dell’s plan makes sense, and, further, constitutes a safer method of fundamentally transforming a business revenue model.

In the next post to this blog we will look at a typical problem area that can stymie a business looking to buy its way into a market — assimilation.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved