Meritocracy Consulting Blog

February 10, 2010

Microsoft, stop copying Apple! Your old strategy will work just fine.

Filed under: Apple, Microsoft, Tech — Scott @ 3:25 am

In many posts I point out the perils of vertical integration.  Yes, Apple has succeeded with a strategy of vertical integration, but correlation is not causation.  They have not succeeded because of vertical integration, they have succeeded in spite of it (so far).

In recent years, almost everything Apple has done has been genius…not necessarily complicated:

Apple’s computers are successful because they clearly found a niche of people that like design, aesthetics and being different…then they built on their success and actually grew this market…or rode the naturally growing trend of discerning consumers.

Apple’s ipod was successful because at it’s launch consumers had thousands of dollars of free/stolen music sitting on their computer.  This phenomenon created an unnatural majority of consumers who were willing to overpay for “the best” and even “fashionable” product that leveraged their existing music collection….then we got hooked.  Imagine if you found a briefcase of $1,000,000 in cash in your backyard.  Are you going to go ask for tax advice from H&R block, or are you going to pay $400/hr for advice from the top legal accountant in your area?

Apple’s iphone was successful because no competent software company took the mobile space seriously.

Apple’s ipad will be successful for the same reasons as the iphone.  Amazon has demonstrated that their is a growing new interest in display only media consumption, but like GPS device makers (who demonstrated the market for high quality mobile experiences), Amazon has created a 1 trick pony.  People want a multi-function platform.

On computers: In any space with public consumption (think sunglasses…not cereal), there will always be a luxury market.  If other people know what you buy, then at least some people will really care about how they are perceived for their purchases.  As prices drop or as the visibility grows, the base of luxury or fashion conscious consumers will also grow.  As prices dropped, people started buying more laptops and computers truly became “personal” (not shared by families).  Apple perfectly seized the opportunity to make people feel special…the reliability and beauty of their software were just differentiation points that further helped convince customers to pay a bit more.

On the ipod: Apple’s product was elegant.  Even excluding the ability to purchase music, itunes was leaps and bounds ahead of Windows media player and winamp.  The fact that people could purchase music legally through itunes just further added to the excitment and allowed retailers, journalists and the media to refer to the ipod/itunes combo as “the solution” to piracy.

On the iphone: Sorry Nokia, Sony, Palm and every other pre-iphone mobile OS maker, your software was terrible.  Apple was the first company to stop “trying to allow mobile phones to use the internet” and they actually figured out how to do it.  If anyone used a phone to try to access the internet BEFORE the iphone you know what I am talking about…your internet access was a party trick at best.  The app market, media integration and touch screen were all great features, but really Apple’s main differentiator was the fact that they made the mobile internet experience fun and possible.  Blackberry was leading the pack in a major way before the iphone.  They countered with an inferior touchscreen, when they should have leveraged their strengths and ONLY their strengths.  If they expanded the accessibility and quality of their apps, addressed the crappy browser, continuously stayed 3X over apple in video and picture quality (which Apple was not very aggressive with)…they would still be leading.  Only when they figured out how to advance touch should they have come out with a touch screen.  Apple pushed mobile forward, but they are not invincible.  Picasso said “good artists copy and great artists steal”, but artists that copy and produce something inferior may damage their reputation forever.

On the ipad: Simply put, Apple has a track record and lot’s of street cred.  They deserve it.  With that said, Bill Gates has been talking about tablet computing for 10 years.  After the ipod came out…and then the iphone…and then the Kindle…what is Microsoft waiting for?  Their existing tablet OS is not that bad, for the past 5 years they should have been developing more “tablet specific” UIs while working on pushing their partners to the exact specs of Apple’s ipad.  I think they feared they would cannibalize laptops and desktops.  I could write many separate posts about how short sighted it is for companies to fear cannibalization, but in short, if you have an idea for a product that consumers would like more than what you currently offer…if possible, do it, or someone else will.

Despite acknowledging Apple’s many successes, Microsoft should not follow Apple down the road of vertical integration. Ever heard the expression that “you should leave the dance with the person that brought you”?  This advice should have been applied by Microsoft the past 5 years and will prove critical to their ability to maintain their relevance going forward.

Microsoft (perhaps still the best software firm) decided to create an XBOX instead of leveraging their strengths (creating software, and presumably software games). While the XBOX is doing OK, the approach alienated many other companies who previously were diehard Microsoft supporters. While it is hard to imagine, what if Microsoft instead created a gaming OS and allowed other companies to create the hardware? Perhaps through a distributed network of peripheral and software creators, innovations such as the Wii remote, TIVO and boxee would have first emerged within the Windows gaming ecosystem. Instead, Microsoft’s media center is on life support, and lightweight hardware devices that stream media are gaining traction as an alternative to bloated and expensive windows home servers. Perhaps most importantly, if Microsoft were more focused on their core businesses they would have been able to jump in front of the curve on Gmail, Youtube and Google Docs while avoiding the Windows Vista disaster.  It is a tough position to criticize successful ventures (like XBOX), but it is my belief that a more focused and consistent approach by Microsoft would have positioned them much better for future success in their 5 largest (or most significant) divisions:

  1. Operating systems and server software
  2. Office software
  3. Mobile, tablets and embedded software (like gas pumps, home appliances, etc…)
  4. Search
  5. Advertising

Microsoft got distracted by the excitement around the ipod and now the iphone…their approach should have been that of the Android. Essentially, Google (with the Android) is giving away the mobile OS to further their strategic goals with items 3, 4 & 5 above, and possibly to give them a strategic beachhead on items 1 & 2 as well. Yes, Microsoft was out front with a mobile strategy, but they were trying to charge $10 for an average…non-innovative mobile OS. Really Microsoft? No internal leaders were able to recognize and galvanize the troops to realize that mobile, search and advertising are your 3 largest vulnerabilities and have been for the past 8 years? Instead, they released a buggy OS, attempted to build a proprietary software/hardware combo with the Zune and XBOX and now are playing catchup big time in all categories (except the operating system…which they lead, but now finally has real competition).

Bill George wrote that this past decade has essentially been lost for American businesses and he critiques the lack of leadership that one demonstrates when they apply (possibly misapply) Milton Friedman’s overemphasis on “shareholder” value.  Companies have focused on financial engineering, outsourcing and cost-cutting…over leadership.   Cost-cutting is great, but a smart, trained and motivated workforce can be re-tasked (rather than fired) if a company has innovation pipelined and a business strategy based on continuous improvement and innovation…essentially a sense of pride and desire to create a lasting and meaningful business.  In layman’s terms, Microsoft should not covet thy neighbors strategy…their problems are related to user experience and a lack of innovation. Any of Microsoft’s new closed systems are not going to solve those problems and instead it alienates all of their customers and partners who have been patient and supportive of their open and clunky (read ‘non-apple’) strategy for years. Those supporters are deteriorating…along with Microsoft’s ability to collect their toll on all computer users.

Some argue that it is not possible for Microsoft to fix their problems (i.e. buggy and non-innovative software) without moving toward closed and vertically integrated solutions.  I believe this conclusion is myopic and possibly delusional.   Microsoft knows that their “partnership strategy” got them where they are, they need to stick with it.  Does that mean change nothing?  Absolutely not.  Specifically, they need to take a close look at their faults and user complaints, reassure their hardware and reseller partners that success will be shared, outline a clear vision, and then copy just 1 thing from Apple…the ability to under-promise and over-deliver.

February 5, 2010

Has Apple changed our view on vertical integration?

Filed under: Apple, Google, Microsoft, Uncategorized — Scott @ 4:35 pm

For it’s entire history, Apple has essentially stuck with the approach of vertical integration, increasingly controlling every aspect of the value chain. Recently, this model has been hugely successful, encouraging the company to broaden their control to include ownership of chip manufacturers, control over manufacturing, extremely strict software standards, a nearly closed ecosystem and proprietary retail stores.

Historically, vertical integration has been typically bad for companies, and definitely bad for consumers (think of how powerful companies have killed innovation and driven up prices):

  • Standard Oil – broken up as a result of anti-competitive practices and price controls achieved through their vertically integrated monopoly
  • AT&T – broken into baby bells, allowing Sprint and MCI to enter the market and drive down long distance prices
  • Current oil companies – controlling prices and discouraging alternative energy investment
  • Cable providers – local monopolies have contributed to the US having one of the slowest broadband speeds in the modern world…not to mention my $120/month cable bill
  • Apple – for years their vertical approach and refusal to just detach the OS from their hardware almost drove them out of business
  • Microsoft – leveraged their natural monopoly to arguably hurt software innovation for years and delay the potential of the internet
  • Mobile phone providers – through vertical integration they delayed the adoption of smartphones, stifled phone operating system innovation and continue to focus on customer lockin rather than on what customers really want…really fast mobile broadband and the freedom to use devices from any manufacturer

In a tandem post, I discuss how the business world has recently shunned conglomerates (once again), but is vertical integration something that finally works? I think that as more companies move toward vertical integration, they are charting a crash course that will eventually end with failure. This belief is entirely unpopular now as a result of tremendous success by Apple, Walmart and the vertically integrated oil companies, but I believe that we are reaching a point where weaknesses are visible in even the “shining examples” of vertical integration.

An impetus for this post and a related post on the failure of conglomerates was Bill George’s article on how the past decade is a lost decade because of an absence of leadership. Bill pointed out some grim statistics and briefly touched on the need for businesses to strive for long-term value. Dead on, but a little vague…immediately I felt like I had something to add in terms of diagnosing this “lost decade”.  Simply put, its cause can be attributed to a return to vertical integration and overemphasis on scale (as was common in the 1800s, and most recently in the late 1960s and early 1970s).

It seems like this past decade was plagued by an overemphasis on blocking competitors instead of differentiating through innovation. While these techniques can be effective for optimizing profits in the short-term, it is not surprising that the US is now struggling to maintain its worldwide leadership and create jobs. When companies place too much emphasis on blocking competition (through vertical integration, local monopolies or other non-innovative techniques) they create a hostile environment where the entire industry fights amongst themselves rather than looking to the future. In the short-term, there certainly will be some winners…like Apple, but in the long-term everyone loses…hence a 10 year period with no real economic growth for the United States.

Not convinced that vertical integration is a second rate strategy?  Check out a detailed look at Microsoft’s trend toward vertical integration as well as 7 more examples of vertical integration gone wrong.

There are literally hundreds of examples to show us why a strategy of vertical integration will ultimately will be bad for most businesses and society. As far as the decade being “lost”, it is my belief that poor leadership results in management’s decision to focus on the “strategy de jour” which seems to be to provide a complete vertical experience that is slightly less expensive. In the short-term this gains market share, but is very unlikely to change the world, improve our lives or spawn the next “unknown” industry. In fact, it seems like a focus on breadth instead of depth actually results in much slower innovation. Would we have been better off if Zappos and Mint stayed independent and continued to innovate with retail and personal finance…I think so. Consumers would benefit more if Quicken and Amazon had viable competitors.  Do I blame those entrepreneurs for selling?  Maybe a little, but it would be nice if late stage VC firms could have provided some liquidity and encouraged them to build standalone businesses.

We’re already seeing a lot of failed efforts and disintegration, but perhaps led by Apple’s relatively recent success as a “total closed system”, I think we will have several more years before this mindset breaks down and true innovation is unleashed.  Do I know what will drive the next phase of growth? No, but if Microsoft had their way back in 1998, the internet would have been used only for allowing customers to download windows applications.

In another post, I advise companies to ignore Apple’s unlikely success and point out several companies that I hope stay focused on just what they are doing.

In summary, working with partners is scary and unpredictable.  The allure of boxing everyone out and doing everything yourself continues to grow as Apple and others find success with this strategy.  If as consumers we can see the benefit of “companies doing less well”, then we should trust history and expect focused companies to win out in the end.  Realistically, innovative companies will probably find a way to leverage partnerships and truly “open platform” strategies will prevail…I do trust markets.  The question, is how long will it take and at what cost to shareholder value and society at large.  Perhaps somehow we can wake up consumers to reward smaller, more focused companies…or MAYBE, the government can empower focused, open and highly innovative companies to thrive faster.

Ironically, if we all put down our iphones and support platforms like Android (and hopefully other new open platforms as they emerge), we’ll actually get better phones a few years down the road.

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