Author Archives: Charles Fitzgerald

Ballmer vs. Chambers: A Corporate Cage Match

Amidst adding Cisco to Dinosaur Row, I asked someone “If Steve Ballmer got run off by Wall Street, how does John Chambers still have a job?”

Both are/were long-tenured, non-founder CEOs of two of the biggest technology companies. Both have presided over erosion of prior dominance during the course of the 21st century, even as revenues and profits kept growing. Neither has been shy about making sweeping calls about the future, yet their predictions have stubbornly refused to come to pass. Both found themselves increasingly reacting to rather then driving key industry trends (although Ballmer will eventually get credit for not missing cloud computing, which is coming for Cisco, even as Chambers continues to ply ye olde enterprise playbook in response). Ballmer’s tenure as CEO began January 1, 2000 while Chambers took the CEO chair in January 1995.

I’ve related this story before, but Steve was acutely aware of the consequences of taking office almost exactly at the top of the dot com bubble. He would bellow, not proudly, that “I’ve lost more market cap than any CEO in history”. After a couple years, he could amend that with “Thank god for John Chambers”.

Lets look at their performance during their shared tenure (January 1, 2000 to February 4, 2014). Revenue and profits are generally up and to the right, but stock performance is negative – presumably their future performance was already priced into the stocks. Microsoft’s total return is better with all the dividends, but still in the red over Ballmer’s tenure.

Total Return: Advantage Ballmer (Microsoft -15.3% vs. Cisco -56.8% )

CSCO Total Return Price Chart

CSCO Total Return Price data by YCharts

Market Capitalization: Advantage Ballmer (Microsoft -49.7% vs. Cisco -68.2%)

CSCO Market Cap Chart

CSCO Market Cap data by YCharts

Revenue Growth: Advantage Ballmer (Microsoft +333.5% vs. Cisco +156%)

CSCO Revenue (Quarterly) Chart

CSCO Revenue (Quarterly) data by YCharts

Profit Growth: Advantage Ballmer (Microsoft +175% vs. Cisco 75.12%)

CSCO Net Income (Quarterly) Chart

CSCO Net Income (Quarterly) data by YCharts

Bigendian Suit: Advantage Chambers

John Chambers, chairman and chief executive officer of Cisco Systems

(A picture of Steve in his red v-neck sweater — or worse, forthcoming Los Angeles “America’s Team” Clippers garb — is omitted as a matter of common courtesy).

Now you may say “but lets look at Chambers’ full tenure”, as he assumed the big boy chair five years before Ballmer. And you’re welcome to do that, even in our what have you done for me lately culture, but the record is uglier than that of the much derided Microsoft (I won’t even start digging up all those acquisitions everyone has rightly forgotten about). Will Chambers declare victory and head for the exits before the future pain becomes more evident at Cisco, or will he overstay his welcome until the hounds of Wall Street start baying for his head? Stay tuned. And then we can have a discussion about whether Cisco’s next CEO should be a product guy or another sales guy…

Tweetstorm Digest: July 10, 2014

Reprising today’s @charlesfitz Tweetstorm:

1\ Some quick reactions to @satyanadella morning Microsoft missive (sprawling, like the company).

2\ A first step to answering the biggest question about the company: why does it exist beyond just perpetuating its past?

3\ Shift from vapid (realizing potential) or means (devices & services, cloud-first/mobile-first) to end (productivity) is long overdue.

4\ Company has been at a loss wrt mission since achieving BHAG of computer on every desk and in every home.

5\ Productivity is Microsoft’s core but still some awkward stretching to cover full portfolio

6\ Still waiting for major deviation – addition or deletion – from Ballmer’s Microsoft. Bing and Xbox not going away (and rightly so).

7\ HailStorm vision is back: individual as hub for all the technologies in their life. Should have done it a decade ago.

8\ Microsoft’s disastrous embrace of the ad economy remains unresolved (devalued personal computing franchise, got none of the upside).

9\ Privacy paeans weaker than Apple; lumping with security feels like afterthought. Privacy path fundamental question for company.

10\ Still no answers for the Windows business, Company must pivot from personal computer to personal computing.

11\ More changes coming soon, including probably some layoffs. Marketing rationalization has been deferred for long time.

12\ My preference is still to break the company up. Would unlock a lot of value.

13\ Satya continues to endear himself to literate press with literary references ;-)

(Somehow periods seem more necessary here).

Dinosaur Row

IBM’s cloudy predicament is now widely understood.

BusinessWeek made IBM’s existential crisis a cover story (a concept that doesn’t really exist any more if you read the publication online):

Bloomberg Businessweek (US)

Forbes then called out recently departed IBM CEO Sam Palmasaino for his financial engineering shenanigans with “Why IBM is in Decline”. Cringely went one better with the full Gibbon in his new book “The Decline and Fall of IBM”.

To which I say, welcome to the club!

IBM employees have been crawling out of the woodwork over the last year to defend the holy EPS roadmap (even as Wall Street tells them “um, you might stop the financial engineering games and optimize for survival at this point”). While I have listened patiently, not a single Big Blue booster made an argument based on their product portfolio or confidence in their ability to innovate or adapt. They have a bad case of assuming past performance guarantees future survival.

The most compelling argument I heard from any IBMer was “Well, at least we’re not HP”. HP is in a similar situation as IBM, except a few years behind. On the plus side, HP has less software legacy (there are positives to not being a software company period). I’m waiting for HP to buy Rackspace as their SoftLayer-like “Hail Mary”, except paying more and doing it a couple years later due to the need to rebuild their balance sheet “autonomy”. But a wise man once told me “life is too short to work with HP”, so enough about them. Unlike some other vendors, I don’t think anyone really cares whether HP make the next transition or not.

The storm clouds of creative destruction blow not just in Armonk and Palo Alto. Things also look blustery in San Jose, home of another dinosaur: Cisco (or as I like to call them, “the IBM of networking”).

Cisco has many parallels to IBM:

  • Revenue has plateaued and oscillates between flat and down.
  • Competitive threats abound including fundamental technical and economic disruption.
  • They can’t innovate and have relied on buying R&D for even longer than IBM and to a greater degree.
  • Lots of acquisitions that haven’t had much discernable impact. One can argue IBM has done better with its acquisitions, where they at least milk the installed base for revenue even if the acquired products go immediately into maintenance mode.
  • They have lost the leading edge customers who prefer to build their own switches or rely on other vendors.
  • Their biggest customers may face an existential threat by continuing to rely upon them, facing competitors who don’t have that legacy dependency.
  • Their core competencies have shrunk to browbeating the press (and watch the press pay it back that the dam has finally broken on IBM after years of oppression) and manipulating Wall Street expectations (revenue only down 5.5% – it’s a beat!!!).
  • They are dismissive of the threats they face (a la “it is early days for cloud”) and take their survival and market position for granted.
  • Their product efforts focus on trying to pull innovation back into the old way of doing things (see Cisco’s ACI, which kind of misses the whole SDN point).
  • They believe they can play with the big boys in cloud but on a bonsai budget. Cisco’s Intercloud is another “multi-year, one billion dollar investment” in cloud capex that amounts to about six weeks of Google’s capex spending.

Cisco is flailing all over the place when it comes to communicating their strategy:

  • Competitive bluster and/or schizophrenia: they plan to “crush” VMware who is “enemy number one for Cisco” (but also maintain this SDN thing is not a big deal…). Yet VMware doesn’t even make their slide of competitors today or in 2018, when it seems they plan to compete exclusively with the cream of the late 20th century NASDAQ:

Cisco competitors prediction

  • Misdirection and/or distraction: “Hey, look at this $14 TRILLION dollar market over here. It isn’t just the Internet of Things, it is the Internet of Everything!” I’m a big believer in the Internet of Things (hold the “Every”) but am hard-pressed to understand what Cisco is going to do to capture any disproportionate part of that. Cisco’s IoT executives are so impressed with the opportunity they keep bailing out.
  • Safety in numbers: they would like you to believe their challenges are not unique to Cisco, but plague the whole “industry” (aka Big Old Tech with no appearances from the companies taking share). John Chambers forecasts “brutal” times ahead and provides this handy chart by which to track his self-selected cohort’s misery:

Cisco Chambers Keynote 5 Tech Revenue

Cisco picked the right peers with HP and IBM (aka Dinosaur Row), but Microsoft and Oracle are in a different class as I am sure this time series will prove out over time. We’ll be tracking the “Chambers Chart” going forward.

Beauty is in the Eye of the Beholder, Not the Copywriter

I have given this speech at least three times this month so it is time to commit it to permalink:

You don’t get to proclaim your product is beautiful.

Beauty is subjective. If your labor of love really is beautiful, people will notice and may even say so (feel free to quote the hell out of them) or spontaneously petition to have your product inducted in the Museum of Modern Art. But you don’t get to make that claim.

Please don’t tell me “beautifully designed” is one of your top three benefits. “Easy to use” – sure. “Intuitive” – hopefully even true. “So easy even a CEO can use it” – probably a stretch but go for it. But don’t tell me being beautiful is part of your value proposition unless you’ve developed some kind of robotic supermodel hybrid of Petman and Samantha from Her.

When you’re one of those startups that shows headshots and titles for everyone in the company, people may notice the team lacks a designer but has a deep bench of data scientists, DevOps dudes and even a dog.

And if you’re peddling an enterprise B2B app, which is where this problem seems most acute, recognize that enterprise customers will put up with <blink> tags and Comic Sans if the app gets the job done (TK check if this is the secret behind Salesforce’s beautiful user experience). But the opposite is not true.

Feel free to say your app is less ugly than anything ever created by Oracle or Salesforce. Or that you wish you had the design sense of Steve Jobs, or less ambitiously, even one of his self-appointed disciples. Or that you have aesthetic guilt about your tenure at Microsoft. Or that you just really like the color orange. Those are all factual statements. But claiming your product is beautiful is not. Don’t waste precious attention and put off readers with such verbiage.

Next time on marketing prose pet peeves and polemics: power made easy!

Small Blue and the Bonsai Datacenter

Bonsai by Andreas D., on Flickr
Creative Commons Attribution 2.0 Generic License  Via Flickr

IBM today announced new datacenter investment plans to bolster its cloud computing presence. They’re going to spend $1.2 billion to build 15 new datacenters (seen above, lower shelf). After some consultation with the Twitterati on matters of long division, it appears IBM is going to spend a whopping $80 million per datacenter. That may sound impressive until you consider that the big boys in cloud can spend half a billion or more per datacenter. Google’s most recently reported quarterly capex was $2.29 billion.

Perhaps IBM is has some special sauce that lets them go toe-to-toe with the big boys on the cheap? If so, they haven’t bothered to mention it and they’re not known for their low costs or frugality. I for one am disappointed IBM has stifled its usual impulse to pitch the mainframe as the obvious choice for the workload de jour. Surely there is a story to weave about cloud computing bringing the industry back to its timesharing roots, blah, blah, blah, mainframe uber alles? Or maybe they’ve beaten their heads against that wall enough to knock some sense into them.

In the absence of special sauce, it seems more likely that IBM is either confused about what it takes to play in the big leagues and/or lacks the financial resources. They continue to confuse cloud computing with web hosting. Do they really believe their Amazon depositioning is relevant or is it just an attempt to muddy the water? What does IBM say when Amazon utters the letters C, I and A? IBM also has real constraints on their ability to invest due to their prioritization of financial engineering over engineering engineering.

I will offer IBM some free consulting for their next big initiative to help them come up with some differentiation and a storyline beyond how much money they are going to spend. What are the odds that they find themselves budgeting a billion dollars for almost every initiative? (The way we knew they had given up on AS/400 was when their grand revitalization initiative was only backed by $125 million). “One billion dollars” has been the only page in their marketing playbook for a long time. Had I more time and dedication to the cause, I would collect all the “one billion dollar” announcements and assess their subsequent market impact. Because this is capex (and because it isn’t a round billion dollars), the $1.2 billion number is probably a real number unlike most IBM investment numbers. But there is at least one real billion dollar number for IBM and that is their Q3 revenue miss.

Various evergreen belittlements aside, IBM seems to have woken up to the reality of cloud computing and the existential threat it poses. The “it is early days for cloud” speaking point seems to have been retired. They’re overreaching and flailing around with announcements and advertising. but are at least trying to get into the discussion. But they still face an extremely difficult road. IBM’s ability to develop technology (the engineering engineering thing) has atrophied (“SmartCloud? Just kidding…”) and letting others do the technology development is risky (e.g. taking an OpenStack dependency in the absence of controlling your own destiny is looking a lot riskier). And IBM is operationally unproven across multiple datacenters. It is easy to needle AWS for outages, but another to avoid outages yourself. The real question is would anyone notice an IBM outage. Finally, IBM is constrained financially relative to the competition.

Many financial observers assume that because IBM is one of the few technology companies to have survived multiple generational technology transitions, they will successfully traverse this one as well. Past performance is definitely no guarantee of future survival in technology and IBM’s past transitions are notable exceptions to the broader industry history. And this transition is different in that the workloads in play are core workloads for IBM. With the minicomputer and PC transitions (the later of which was near fatal to IBM), the workloads in question were mostly net new and didn’t directly replace mainframe workloads. The cloud is taking core workloads, so even if IBM executes well and moves existing customers to its cloud, they will take a revenue and margin hit.

IBM is damned if they do, damned if they don’t. If they accelerate the move to cloud, they will undercut their existing business and miss their sacred financial roadmap. If they don’t, everyone else will partition up their existing business. Maybe they can thread that needle, but IBM has not shown any reason to believe they can successfully catch up to and compete with the leaders in cloud computing. Bonsai datacenters show IBM wants (or needs) to compete on the cheap.

A Dispatch from Cloud City

A few end of the year observations from Cloud City (aka Seattle):

Cloud Infrastructure

  • AWS remains a beast. Yet a chink in their armor is emerging…
  • Azure has become the clear challenger to AWS. The much maligned Mr. Ballmer is not getting credit for Microsoft’s embrace and execution on cloud. Unlike most of its cohorts rooted (mired?) in previous generations of technology, Microsoft is well on its way to making the cloud transition.
  • Despite very strong technology and an impressive operational footprint, Google Cloud Platform is still a hobby for Google. They are as yet unwilling to make the necessary non-technology investments to really compete to win here.
  • Private infrastructure clouds just aren’t happening – instead enterprises are both getting more comfortable (surrendering?) with public cloud and continuing to invest in virtualization (VMware obituaries were definitely premature).
  • OpenStack’s identity crisis is warranted. Without a credible ecosystem of OpenStack-based public cloud providers and little enterprise private cloud adoption, the OpenStack bandwagon is left providing ingredient technology to the industry itself, which doesn’t really need what the vendors are selling.
  • Rackspace’s OpenStack bet outcome is increasingly clear: they may not exit 2014 as an independent entity. They should have invested up the stack in higher value services like Amazon, not down (and to add insult to injury, I’ll wager their VMware business still is bigger than their OpenStack business). They’ve lost over half of their market cap this year. While they still sport a premium multiple, the overall trend is towards a SoftLayer kind of valuation which could put them in play for acquisition by the kind of legacy vendors who confuse hosting with cloud (isn’t HP out telling the world their balance sheet has finally recovered from Autonomy?).

Cloud Platform

  • PaaS is still a zero billion dollar category, but could PaaS end up being the level at which enterprises implement private cloud? I see more traction for PaaS than IaaS in the enterprise.

Big Data

  • In the absence of a strong set of customer successes, I think Hadoop may be spending some time in the trough of disillusionment. The challenge is not filling the data lake, the challenge is extracting meaningful and material business results from the lake. It is a data science problem far more than an infrastructure problem. How long will it take to transition to a Hadoop 2 that is robust, deployable, performance, has ecosystem support, etc.?
  • I continue to be amused that Google is so far ahead when it comes to big data that it is a material disadvantage for them. They get dismissed as proprietary while the rest of the industry is enraptured with Google’s technology from two generations back that has been awkwardly laundered through Yahoo.

What else is happening below the clouds on the ground?

Microsoft Decisions: What and Who

Cleaver by Mark Coggins, on Flickr
Creative Commons Attribution 2.0 Generic License via Flickr

 

Bloomberg has a piece today in which multiple off the record representatives of the Stephen Elop campaign share their candidate’s vision for the future of Microsoft. In a nutshell: more Office and axe Bing and Xbox. This is a hearty endorsement for what has become the conventional wisdom, on Wall Street and amongst its followers.

The Right Way to Break Up Microsoft

The premise seems to be Microsoft should give up, retreat to the “enterprise” because Microsoft at least still knows how to do that boring stuff, and milk the remaining cash cows for as long as possible. It is easy to see why Wall Street likes this model because they value short term earnings and find it hard to model messy technology transitions. But optimizing for past success and present financial return is not the best way structure the company going forward, because it doesn’t address the challenges facing the core businesses.

Instead of just lopping off money-losing parts, I reiterate yet again my call for a more fundamental breakup of the company with Windows, Office and Server & Tools (STB) all becoming their own companies (and I apologize for not being able to use much less understand the new super-matrixed, n-dimensional segment labels). There are a whole bunch of reasons to do this, but the core rationale is both Office and STB are better businesses if they don’t have to pay the Windows strategy tax. Both Office and STB are net payers of the tax while Windows is a net beneficiary. That may have made sense pre the Post PC era, but it no longer makes sense.

Office’s mission must be to enable productivity everywhere. Holding back iOS and Android support to advantage Windows Phone and Surface has been a disaster for Office and hasn’t helped Windows. There are companies like Box that exist but shouldn’t exist because of this strategy tax. Office could also straighten out their server strategy by decoupling it from STB (SharePoint is a floor wax and a dessert topping, both in terms of use cases which is Office’s fault but also architecturally which is a strategy tax).

Server & Tools can further embrace the heterogeneity they must and a clean break would let them truly focus on being cloud first where the operating system is an afterthought. Azure is already emerging as the clear challenger to Amazon Web Services and strategic clarity would help them focus on this battle for the future.

As for Bing and Xbox, I don’t really care but on balance would keep those businesses. Yes, they lose money but in the scheme of things it is not a lot and they are necessary assets for the future. The alignment of Bing and Office has attracted extraordinarily little comment, but is potentially a very interesting strategy. And while I am not particularly optimistic about Xbox One (too expensive, too focused on everything but games), Xbox should be part of a Windows company that offers you local devices and a cloud experience that spans however many screens you have in your life.

Making Windows, Office and STB independent businesses will not only unlock value, but also solves the CEO search conundrum. Finding someone who can manage the sprawl of today’s Microsoft is extraordinarily difficult and creating more focused companies makes it much easier to find successful leaders. Which leads us to…

The Curious Candidacy of Stephen Elop

Stephen Elop’s presence on the short list of Microsoft CEO candidates has always puzzled me. Why is he on the list? Why is he out actively campaigning for the job? His resume is that of a short-tenured opportunist who has left little mark on his employers except of course Nokia where he presided over the company’s collapse and ultimate exit from the mobile handset business. Nokia may have been doomed regardless of who was the CEO, simply a helpless pawn in the face of titanic disruption, but there is ample argument that the Burning Platform decision, the singular decision attributable to Elop over the course of his career, was a disaster. Many have claimed it was both the wrong decision (the argument is embracing Android would have played to Nokia’s strengths) and rolled out in an extremely damaging way. We can only debate hypothetical outcomes, but the fact is the recent global leader in mobile handsets finds itself out of that business with the assets sold at firesale prices to Microsoft.

But Elop is touted as an “insider” so his time at Microsoft bears examination. What impact did he make on the company that would qualify him to fill Ballmer’s shoes and lead Microsoft through the multiple transitions it faces? He inherited a smoothly running Office business that, to his credit, he didn’t screw up while he was there.

His signature initiative at Microsoft was developing Symbian clients for Office. This did introduce him to his next employer, where upon arrival he promptly cancelled Symbian. Bloomberg now tells us he believes Office should be more aggressive with iOS and Android clients. But the time to do that was when he was running the Office business, not years later.

He also doubled down on Dynamics, Microsoft’s business applications portfolio (the fact I feel compelled to include that definition tells you all you need to know about the outcome).

Neither the Symbian clients nor the Dynamics focus are on par with the Nokia catastrophe, though the opportunity cost incurred may be of that magnitude if the Office business doesn’t make the transition to the cloud. But nothing about Elop’s tenure at Microsoft suggests he is a exceptional candidate to help the company successfully navigate its many challenges. Beyond that, and perhaps most ominously, the Office development team apparently stopped talking to Elop, at which point he decided he wanted to relocate to Finland. Alienating your development team is bad form for software executives.

Elop is a polished, hard working and by all accounts nice guy (he arrived just as I left, so I have never met him but have talked to many people who have worked with him at different companies) who plays the executive role well. But Microsoft has big shoes to fill and needs a world class software executive. There is nothing in Elop’s record that suggests he is a guy who could return Microsoft to greatness. Boldly leaping (albeit anonymously) on the bandwagon of proposing to axe Bing and Xbox as if that will somehow address the Post-PC challenges of the Windows business does nothing to mitigate this concern.

It may be that Elop’s inclusion on the short list is to help manage a sensitive partnership and acquisition beset with interesting optical issues, and he is not really a candidate. But he is clearly campaigning for the job so invites this scrutiny. I fear for the Seattle real estate market if he is the only guy who actually wants the job.