Exploring Alternative History

Tablet circa the year 2000

Bloomberg has a nice piece revisiting the broad vision Microsoft laid out in June 2000 at the grandiosely named Forum 2000. They even have an edited cut of some of the scenario videos developed for the event to bring the vision to life.

The event was originally scheduled to open the new millennium in January with a bang and more importantly to lay out Microsoft’s vision for the 21st century. The company felt intense pressure to reassert its thought leadership on at least three fronts. Microsoft, by virtue of being a business with actual profits, probably had an even greater relevance problem during the height of the dot com mania than it does today. Second, the unrelenting antirust assault on the company was building to its climax and the company desperately wanted an alternative narrative. And, largely forgotten today, the company was very concerned about demonstrating it would not lose a step in the transition to its brand new CEO, one Steven A. Ballmer, who had just taken the reins from Bill Gates.

The event was pushed from January to March and then ultimately June because the dates kept overlapping with antitrust rulings. That event kicked off a train of events that lead us directly to Microsoft’s current situation and the search for a new leader. It definitely provides a glimpse of a different trajectory for Microsoft over the last decade.

The original process to define Microsoft’s forward vision was through a set of technical committees made up of Microsoft’s best and brightest technologists. Despite high hopes and leaks to the press that such a process was under way, this approach was pretty much a complete bust. As that became apparent, Steve asked Paul Maritz to oversee an effort to pull together a compelling vision for the company. Paul described this exercise as “creating a new parade”.  A small and fairly eclectic group was formed of people from across the company but largely outside the engineering ranks. We sketched out the broad attributes of what things going forward would look like and then five sub-teams were tasked with making this brave new world come alive for consumers, small business, enterprises, knowledge workers and an end-to-end healthcare scenario that illustrated what developers would be able to build. Each group scripted and then shot professional quality videos from the user perspective.

I don’t think people appreciate how close Microsoft came to completely imploding in 2000. Employees woke up every day to relentlessly negative headlines from the DoJ case. It was not yet evident that the surreal world of the dot com bubble had ended, and even if you weren’t being wooed daily to join revenue-less startups with ridiculous valuations, you felt obligated to explore options.

Forum 2000 changed all that internally. It provided a sense of purpose and showed how the whole could be greater than the sum of the parts. Soon after Forum 2000, Mark Lucovsky, one of the key contributors to Windows NT, the inventor of Win32 (he also likes to brag he invented “DLL Hell”) and one of the company’s distinguished engineers, showed up with an architecture to make the Forum 2000 videos real (the ability to actually implement had not been the foremost consideration in painting the vision…). This lead to .NET My Services (aka hailStorm) which was announced in the spring of 2001.

.NET My Services was a cloud-centric model using web services to deliver consistent, personalized experiences across a wide variety of devices (including non-Microsoft devices – the very first device demonstrated was a Palm). It was also an API-first model, which meant any endpoint could access the system (this is an approach the Facebooks and Twitters claim, but regularly violate in the name of “protecting the user experience” which really means protecting ad revenue). It was a major departure from Microsoft’s traditional PC-centric platform and also introduced a subscription business model as opposed to the traditional license model. It was an open platform accessible from any device or service through open XML-based protocols but could be bootstrapped using Microsoft’s vast footprint of devices, applications and services. It represented a fundamental shift to a service-centric world, both technically and in terms of business model.

By 2001, it was clearer that the dot com mania had been a giant bubble and wasn’t coming back, plus the appeals court ruled that Microsoft would survive the antitrust proceedings intact. The confidence stemming from these positive external factors, however, ultimately undermined Microsoft’s desire to invest and realize the new vision.

Competitors like Sun Microsystems, no doubt horrified that their years of lobbying had failed to hobble the company, now faced a revitalized Microsoft with a vision for the future that was compelling to customers and driving the industry discussion. When they probably should have been figuring out how to save a business shackled to the dot com ship, Sun embarked upon a very effective campaign of demagoguery around Microsoft leading the shift to a user-centric model. As a result, My Services ushered in the first big industry debate around identity and privacy in the cloud. In retrospect, Microsoft’s personal computing heritage and fundamentally user-centric approach to give users full control over how their data would be shared looks vastly superior to today’s world administered by the almost interchangeable Big Brothers of Facebook, Google and NSA.

With the competitive and existential threats from dot coms and the DoJ having abated by this time, Microsoft chickened out on seeing it through. It was easy to back down from the industry debate over identity, shirk the challenges of figuring out the subscription service model and revert to the comfort and familiarity of good old Windows and Office. Harvard Business School later did an interesting case on the tensions between the old and the new camps inside the company and how it played out.

I don’t think it is widely appreciated that WinFS was born of a desire to realize the My Services scenarios, but to do it in a Windows-centric way. There was broad agreement on the importance of the scenarios, but strategic nostalgia for Windows resulted in the company trying to rethread them through the franchise and revisit the eternal dream of integrated storage. Instead of the truth being in the cloud, the truth would reside on Windows and everything would have to sync with your PC (just don’t turn your laptop off…). This decision triggered a sequence of events that directly brings us to the present day where the erosion of the Windows franchise played no small role in Steve Ballmer’s departure,

My Services was shut down, with CTO and WinFS cheerleader David Vaskevitch dismissively telling the team the company “didn’t need another $500 million business”. The fixation on WinFS technology brought down Longhorn, the release of Windows scheduled to follow Windows XP. Simply put, WinFS was too ambitious technically. After much internal debate, Longhorn came to an end with the “Longhorn Reset” whereupon the company embarked on the far less ambitious Windows Vista (and WinFS was never to be seen again, although I have flashbacks when I listen to the Hadoop guys talk today). However, given it had been over five years since Windows XP had shipped, the company felt pressure to rush the product out the door to meet obligations to customers who had paid for a new version of Windows as part of their enterprise agreements. Hence the “Vistaster” of shipping a half-baked version of Windows.

The company then spent three more years cleaning up the quality, performance, haphazard user experience and packaging of Vista, resulting in the very solid Windows 7, but failing to move the PC industry forward in any material way during that time. Windows XP remained the most popular version of Windows and Microsoft was forced multiple times to extend the end of life of Windows XP by a customer base that was just not compelled by multiple subsequent releases.

Meanwhile, iPhone and iPad (and imitators like Android) were in market and Microsoft’s Post-PC nightmare was looking very real. The company decided to focus Windows 8 almost exclusively on tablets, hoping to pull the tablet category back into the PC universe. Except that didn’t happen. Windows 8 on tablets received mixed reviews. Surface was a costly mistake, both financially and in its impact on critical OEM relationships. And it screwed up the desktop experience for billions of PC users (one senior Microsoft executive told me Windows 8 was only for tablets, but didn’t answer my question of why they neglected to mention that in the advertising). Which brings us to the present and the search for a new CEO.

In retrospect, this sequence of events is crystal clear in a way it never is in the fog of the present. Even with greater commitment, there are a million other ways the Forum 2000 vision could have gone wrong. Parts of the vision were dead on, others such as assuming tablets would rely on a stylus were big misses. It was still predicated on bootstrapping from the current Microsoft installed base, which would force a myriad of tradeoffs between old and new every day. There were major business challenges to overcome in building a successful subscription business, particularly as the Google advertising revenue volcano was just beginning to erupt. Microsoft subsequently spent years drooling over the prospect of hundreds of billions of dollars of advertising moving online, without fully internalizing that capturing those revenues would require behavior that was in many ways antithetical to the personal computing ethos at the core of the company. The good news is the rise of the tablet kept Microsoft from turning Windows into an ad-funded desktop billboard monstrosity.

The Price of Success

And of course, Microsoft faced the innovator’s dilemma in spades. The last decade of Microsoft’s history is a classic and very public case study on how a very successful company deals with disruption (disruption it knows is coming). The dissipation of the Forum 2000 vision was very much the result of a battle between seemingly reactionary forces exercising their fiduciary responsibilities and the hazy dreamers of a less distinct and unproven future. The counter-revolution obviously prevailed, at least temporarily.

Some have even argued that Microsoft did the right thing by maximizing Windows profits for as long as it did (and is still doing even though Windows profits dipped slightly below $10 billion in the last fiscal year). Horace Dediu’s recent podcast “The Limits of Executive Power” has an interesting take on this (and smart commentary recently on Microsoft is hard to find):

We begin with a defense of Ballmer for preserving great things, continue by condemning him for not having destroyed those very same things and end by asking whether anyone could have done the right thing.

The Innovator’s Dilemma came out in 1997. We all read it at Microsoft and were looking for disruption behind every tree. Discussions about the need to cannibalize Windows before someone else did have been going on for at least 15 years. And in the meantime, the company has banked profits from Windows alone in excess of $100 billion (I have not done the actual math but the number is of this order of magnitude). Clearly undermining that profit stream proactively 15 years ago was the wrong thing to do, but how should the company have avoided its current situation? The company invested in pretty much every kind of non-PC device including smartphones (Microsoft was the leader in this space as recently as 2006), tablets (albeit with styluses) and a bunch of goofier form factors.

I believe the fundamental problem was the unwillingness and/or inability to transcend the single device (UPDATE: I should make explicit that this is a reference to Tim O’Reilly’s popularization of Dave Stutz’s farewell from Microsoft missive which was written after the My Services experience). Microsoft had the vision and means to both lead the industry and bridge its existing businesses to a cloud-centric, multi-device world, but failed to follow through. Now it finds itself belatedly embracing this model but from a disadvantaged position. It is yet another technology industry example of innovations conceived in one place being successfully commercialized elsewhere that lacks the baggage of the conceiver.

Near the end of my tenure at Microsoft, I was in a meeting with a cast of thousands. One of the presenters said “we wouldn’t want to do another hailStorm”, expecting all the heads in the room to nod in unison. The SVP in the room turned to me and said “we should have done hailStorm” to which my answer was “damn straight”. The rest of the room was aghast. I suspect this viewpoint is not as contentious now, even at the board level. Success can be a bitch.

Now Every Company Really Is A…

My stump speech seven or eight years ago included two assertions: 1.) every company is now a media company and 2.) every company is now a software company. Someone recently reminded me of that pitch and while it seems obvious today, it was definitely before its time. The globe-spanning organizational behemoths I was then hectoring weren’t buying it (but unlike with mainframe customers, I don’t think anyone ever called me “son” in the course of the conversation).

The media company prediction came out of the path we were taking with Microsoft’s developer platform business. That business at Microsoft, despite Steve Ballmer’s infamous and sweaty “Developers, Developers, Developers!!!” performances (and you should see him order lunch: “Pastrami, Pastrami, Pastrami!!!” with all credit to Bruce Ryan for not only coming up with that line, but shouting it out while Steve was in the sandwich line), was strategically important but a sideline by any quantitative metric. The developer audience had an endless thirst for content but was also very suspicious of anything that reeked of marketing. Intermediaries, particularly the press, had a tendency to water things down and didn’t always fully comprehend the topic at hand. So we started to reach out directly to the developer audience and sidestep the traditional gatekeepers.

Those were the early days of corporate blogging. We had a sign in the office showing “Days Since Last Blogging Accident” (I’m looking at you Scoble 😉 and spent too much time fighting off a prominent executive who wanted to ban blogging across the company (ironically, he went on to probably blog more sheer word volume than any other blogger ever). The genesis of Channel 9 also happened in this time, which provided an authentic and humanizing behind the scenes look at the Microsoft developer platform (it was also as much a rejection of MSDN, a CD-ROM library of developer tools that had clumsily migrated to the web, as anything else). Channel 9 also quickly metastasized into a vibrant community around that content channel. The end result is we found ourselves using cheap digital technology to program (in the TV sense) directly to our audience.

It seemed obvious at the time that everyone would be doing this soon. And this was before the rise of social media, the christening of content marketing or the fixation on the CMO as the new Great White Whale of IT, all of which have fueled the ability for anyone to be their own media business. Meanwhile, the traditional media continue to face gale force headwinds (e.g. the New York Times recently paying to get rid of the Boston Globe, which they paid over a billion dollars for not so long ago). Dan “Fake Steve Jobs” Lyons chronicles the ranks of traditional journalists taking to the lifeboats to join the corporate media ranks, a path he too has taken. There is some irony that being in the media business is increasingly attractive to everyone except those actually in the media business. Even the old line about not getting into a fight with someone who buys ink by the barrel has far less applicability when printing presses are ridiculously cheap (and the guys who buy ink have to budget for bankruptcy lawyers).

In terms of every company becoming a software company, Marc Andreessen nailed this with his Wall Street Journal essay “Why Software is Eating the World”. Software no longer just replaces older generations of software, but everywhere you look software is chewing up and spitting out enormous traditional industries. Skype finished off the long distance business. iOS and Android broke the operator chokehold on the mobile experience (“hello Mr. dumb pipe!!!”). Netflix destroyed the DVD rental business (remember Blockbuster?) and is now driving the DVD itself to extinction as a medium. Uber has pushed the taxi business to lawyer up in the absent of any other strategies for coping with change. Barnes & Noble is a case study in understanding the software threat but then mismanaging its play to the point of threatening the viability of their still profitable bookstore business. AirBnB is not appreciated by hoteliers for opening lots of vacancies. The hottest thing in cars is software that powers the entertainment system. connects with your smartphone, manages the hybrid powertrain and is poised to resurrect the slogan “leave the driving to us”. The energy revolution that has pulled the rug out from under OPEC, Vladimir Putin and predictions of peak oil owes much to advances in data analysis and visualization software. And we’ve recently learned that even the world’s second oldest profession — spying — appears to have become a vast software play.

At a time when the assumption is you outsource everything you can outside your core business, both media and software development are being in-sourced with a vengeance. You just can’t live without them.

Open Season: A Short Industrial Drama

Cloud Foundry had a pretty good week with endorsements from Baidu and IBM. Both relationships were developed after I left VMware so what follows is purely speculation on my part. But some companies have a tough time getting over their history and playbooks, so it is easy to imagine how things went down.

Warning: this post contains serious “inside baseball” about the past and present of software standardization and open source mechanics. If you don’t know what ECMA oxymoronically used to mean or haven’t debated the merits of different open source licenses, you may want to stop reading right now (go see Pacific Rim or read up on Bitcoin instead). I may be the only person who gets some of these jokes. Apologies to David Mamet.


Scene: a hipster office in SOMA populated by dogs, twenty-something Siamese programmers and two older gentlemen trying with limited success to project a casual air.

Jim – a Pivotal executive
Dan – an IBM executive
Angel – an IBM standards executive

Dan: We’re from the IBM company and today is your lucky day. We have decided Cloud Foundry is going to be the platform-as-a-service for the cloud.

Jim: Oh…

Angel: It’s still early days for the cloud.

Dan: The way this will work is IBM will make Cloud Foundry open and therefore viable for the enterprise. We know how to do this and will tell you what you have to do.

Jim: I’m not sure I follow as our strategy has been to make Cloud Foundry as open as possible from day one. Am I missing something?

Dan: Cloud Foundry cannot be used in the enterprise until IBM gives it our blessing. It is critical that enterprises only use open technologies.

Jim: Open like the mainframe?

Dan: Watch your tone son. We’re from IBM and we make sure that enterprises are not locked into proprietary technologies.

Jim: I’m definitely not following you. What do you mean by “open”?

Dan: Openness depends on having a comprehensive governance strategy. We will work with you to create a Cloud Foundry Foundation to manage the governance of Cloud Foundry.

Jim: What exactly would such a Foundation do? And isn’t “Cloud Foundry Foundation” kind of awkward phrasing? Did you consider just Foundration? That domain might still be available.

Dan: The Cloud Foundry Foundation will handle the governance of Cloud Foundry. With a formal governance process as defined in bylaws, Cloud Foundry will then be open so enterprise customers can embrace it.

Jim: Hmm.. I assume you’d describe GE as an enterprise customer. They’ve embraced Cloud Foundry to the tune of investing $105 million. And they’ve never mentioned the word governance as far as I can recall. They have been known to throw around terms like productivity and time-to-market.

Dan: Let me help you understand how this will work. Do you remember Java and Linux? IBM made those technologies successful in the enterprise by ensuring they were open. We will do the same thing for Cloud Foundry. But you will need to follow our direction.

Jim: You’ll have to excuse me as I was in junior high school when you were running that playbook for Java and Linux. But I’m still not certain what this has to do with Cloud Foundry.

Dan: Enterprise customers expect new technologies have formal governance processes so they can trust them to be open. For example, it is critical there be explicit rules to specify the voting rights for different classes of membership and how to deal with conflicts of interest on the board of directors.

Jim: I am afraid I still don’t understand what this has to do with making it easier for customers to build applications for the cloud. I defer to your knowledge of the previous century as well as conflicts of interest, but it seems customers today are more focused on functioning code that solves their business problems than governance processes. But you should explain to me what governance you think is necessary.

Dan: The Cloud Foundry Foundation will be a legal entity with a steering committee which will define all the subcommittees necessary for different aspects of Cloud Foundry. Obviously, we will use Robert’s Rules of Order.

Jim: Is this how you created the Java programming model?

Dan: Exactly.

Jim: You do know the majority of enterprise Java development is done today with the Spring Framework which was developed to shelter developers from the horrors of committee-developed technologies like EJB?

Dan: Son, enterprises can’t build enterprise solutions without enterprise technologies like EJB. When you start doing transactions, it is no longer child’s play. You may have your simple solutions for simple problems, but IBM solves enterprise problems.

Jim: I won’t ask how it is that the biggest Internet companies on the planet somehow manage to do transactions at vastly greater scale than any enterprise that uses IBM technology. I guess I should also be surprised the cloud has gotten as far as it has without any committees and Robert’s Rules of Order.

Angel: It’s still early days for the cloud.

Jim: Your faith in committees is touching, but pretty much for every broadly successful technology in the world today, there was a committee-driven alternative that failed. Take IP vs. OSI, or HTML succeeding only by throwing away the vast standardized bulk of SGML. I think the world has learned from these experiences. We have seen over and over that committees are prone to making bad political tradeoffs, delivering least common denominator solutions and losing sight of the real problem at hand. Premature standardization is a killer; you need to allow for experimentation, evolution and finding the proverbial product-market fit.

Dan: Son, you need to understand how things work in the enterprise.

Jim: Is there more to IBM’s cloud strategy than a vague appeal for standards? Do you really think a bunch of random committees are going to keep up with Amazon Web Services? I guess it could be a good strategy if they’re laughing so hard they can’t get any work done.

Angel: It’s still early days for the cloud.

Dan: Let me give you a recent example. Have you heard of OpenStack? IBM is making OpenStack part of the open enterprise cloud.

Jim: I am familiar with OpenStack as it turns out. In fact, Cloud Foundry runs on OpenStack. I do seem to recall you guys jumped on the OpenStack bandwagon a couple years after it got started. Are you saying IBM is somehow responsible for OpenStack’s momentum?

Dan: IBM is making OpenStack open and acceptable for enterprises.

Jim: So what contributions have you made to OpenStack?

Angel: We have dozens of our best standards people working on OpenStack.

Jim: I was thinking more in terms of code. NASA and Rackspace have contributed major pieces of technology – what has IBM brought to OpenStack?

Angel: It’s still early days for the cloud.

Jim: Well, even if software development is not your focus, you do operate a lot of outsourced IT infrastructure. With IBM’s enterprise presence you must have a lot of customers running OpenStack today. How many megawatts of OpenStack capacity are you operating?

Angel: It’s still early days for the cloud.

Jim: I’m not sure where you guys have been for the last decade, but the world has changed. We now achieve openness at the engineering level, not with lawyers writing bylaws and Robert’s Rules of Order. The days of heavyweight governance via committees staffed by people whose primary skill is sleeping while sitting up have probably come and gone. Cloud Foundry is extremely open today by any practical measure. The code is all on GitHub under the very permissive Apache license. Is there something we’re missing?

Angel: What is this Geet Hub? Can you spell that for me?

Jim: GitHub is a public code repository. Anyone can submit a pull request and contribute code to the project. If you don’t like the vision or want to do something different that is more tailored to your specific needs, you can always fork the project and take it in whatever direction you want.

Dan: (visibly flinching and frothing) Are you mad? Anyone can just contribute code? To a product that will be used by enterprises?

Dan: You encourage people to fragment the project by modifying it and making derivative works? (pause)  Do you not know any history boy? We spent years trying to minimize Java fragmentation. Microsoft would taunt us that even Ivory soap was only 99 and 44/100th pure. Despite Herculean efforts, we never quite achieved it, but we tell ourselves, much like with the current economic recovery, it could have been so much worse. You would let anyone do whatever they want with the software? (aghast)

Dan: How will enterprises ensure they’re getting the official version of Cloud Foundry? Do you not see how critical it is to have a Foundation that controls Cloud Foundry?

Jim: The market decides what the best version of Cloud Foundry is, not some committee. If you don’t like the direction, you could always fork and go in whatever direction you think is most appropriate. One would think with 400,000 or so employees, IBM would have some people who could write code as opposed to committee minutes.

Dan: Surely you jest. We can’t rely on the market to make decisions for the enterprise. That is IBM’s role and has been since the dawn of information technology. If you don’t fully appreciate the criticality of governance, we can go elsewhere. We have options. We could bless OpenShit, sorry I mean OpenShift instead. I bet Red Hat would play ball. We’re old friends with their standards guys.

Jim: Good luck with that.

Dan: Or we could bring the full might of IBM’s research labs to bear and build our own platform-as-a-service. Don’t underestimate the technological prowess of the IBM company. We get more patents every year than any other company. We can write the letters IBM at the atomic level. We are going to positively own the burgeoning robotic game show contestant market. We can make WebSphere the application platform for the cloud. WebSphere is the biggest middleware on the planet, though I’m not sure why the development team was laughing when they said that. If you don’t hand over Cloud Foundry to the Cloud Foundry Foundation, we’ll just compete with you.

Jim: You’d think with all those great patents, you’d have more innovation to show in your product line and wouldn’t be here trying to figure out how to co-opt the fruits of someone else’s R&D. I get that what’s yours is yours, like the mainframe, but you’d also like what other people have developed to be under your control. You’re welcome to participate in the Cloud Foundry ecosystem on the same level playing field as everyone else, but we’re not going to distract ourselves from building a great platform with some giant bureaucratic foundation. If you want to compete, by all means compete, but at some point you’re going to have to write some code people actually want to use. Maybe you can create an IDE that lets people write code at the atomic level. And with all due respect, WebSphere at this point is just a middleware museum. It is about as relevant to the cloud as the mainframe.

Dan (quietly to Angel): They’re onto us. Our strategy of blessing different piece parts defined by multiple slow-moving and conflicted committees that don’t work together well and need busloads of consultants to make them limp along may not fly in the cloud. This may be a problem for our earnings roadmap. Our CFO told Wall Street we’d have $7 billion in cloud revenues by 2015 and SmartCloud unfortunately isn’t looking that smart.

Angel: It’s still early days for the cloud.

Jim: I’ll tell you what. I’d hate for you to have to go back to Armonk and get yelled at by your CEO again for not working hard enough and not bothering to return customer calls. We’re doing a Cloud Foundry developer conference this fall and how about IBM sponsor breakfast there or something? You can buy some healthy fare and we can explain how in the past you would have brought donuts, but you’ve gotten religion about reducing middleware girth. You can even come to the advisory board meeting. And of course you can submit all the code you want to the project, but I realize that may not be your thing. But I do have one request if we’re going to work together: please don’t ever use that the word governance again in my presence.

Angel: It’s still early days for the cloud.

Jim: Yes, it’s still early days for the cloud…at IBM.


Note: the voices in my head for this are the default Xtranormal voices. In the sequel, the Bernank will make an appearance.

Dino Watch: IBM’s Q2 Results

 Dinosaur World by mcdlttx, on Flickr
Creative Commons Attribution 2.0 Generic License  Image via Flickr 

Our favorite “technology” company IBM “beat” the number last week and saw its stock pop on Thursday after announcing earnings. Bloomberg cheered the results:

“IBM Raises Annual Forecast After Earnings Top Analyst Estimates”

International Business Machines Corp. (IBM), the largest computer-services company, topped estimates with its second-quarter earnings and raised its forecast for the year after cutting costs and buying back shares.

Excluding a $1 billion restructuring expense, earnings were $3.91 a share, the Armonk, New York-based company said today in a statement. That beat the $3.78 that analysts projected on average, according to data compiled by Bloomberg. The company now expects to earn at least $16.90 a share this year, up from the $16.70 it forecast earlier this year.

IBM has managed to increase profit by shifting away from low-margin businesses, cutting jobs and repurchasing stock — even as revenue slows.

And why not be ebullient? Just look at these results:

  • Revenue – down 3%
  • Net Profit – down 17%
  • EPS – down 13% (with buybacks, outstanding shares are down 4% over the last year)
    • Software – up 4%
  • Services – down 1%
  • Systems and Technology (aka Hardware) – down 12%

Investors and analysts seem to have bought into IBM’s narrative to pay no attention to the the top line and focus only on ever increasing profit forecasts, never mind whether they come from financial engineering or engineering engineering. They’re constantly “transforming” the company and getting rid of unprofitable businesses so even as revenues go down, profits will only go up, up, up (at some point, I will do a projection of where to expect the intersection between ever declining revenue and ever increasing profits). A couple financial notes on this quarter:

  • IBM is masterful in obfuscating their results and particularly forward guidance, as they guide to non-GAAP results as “most indicative of operational trajectory”. They sow a lot of confusion with a billion dollar write-off to lay off upwards of 8,000 employees (because companies that are killing it are always doing restructurings of this magnitude…). All this noise turns out to have obscured the fact they actually dropped their sacred future profit forecasts. It took the markets 24 hours to figure this out and IBM’s stock price gave up its initial pop from earnings.
  • Without a material drop in their effective tax rate, the results this quarter and last quarter would have been much worse. Pre-tax income was down 20%.
  • IBM’s all-important profit forecast previously included an assumption of a major divestiture, presumably the x86 server business, which they have walked back: “a substantial second-half gain that it was expecting in its prior view of earnings per share will not likely be achieved the end of 2013.”  Eventually, the cookie jar of one-time profit bumps will be empty as you can only sell off so many of the businesses your describe as crummy.
  • It looks like profits are starting to correlate with revenue after a long period of non-correlation (aka the financial engineering years). In the charts below, we see IBM’s revenue looks highly cyclical with the economical downturn in 2008-9 but the recent decline is harder to pin on macroeconomics. Perhaps we are at a technology inflection point? And the once monotonic five year profit trend looks like it is rolling over. We also should credit Sam Palmasaino for having exquisite timing and/or skill, leaving the CEO job at the end of 2012.

IBM Net Income TTM Chart

IBM Net Income TTM data by YCharts

IBM Revenue TTM Chart

IBM Revenue TTM data by YCharts

Meaningless Numbers

I love the plum double-digit growth numbers IBM cites for arbitrary slices of their business with no baselines so you have no idea if they contribute $1 or $1 billion. Somehow, they have an incredible growth portfolio that doesn’t move the needle for the company as a whole:

  • “Key branded middleware” up 9% – presumably this is things like WebSphere, DB2, Lotus and Tivoli, all brands that are irrelevant in the cloud era. But the “key” modifier implies some other segmentation game is being played.
  • “Growth markets revenue flat” – that single line pretty much sums up IBM.
  • “Smarter Planet revenue up more than 25% in the first half” – leaving aside any effort to figure out what might constitute Smarter Planet revenue, one might conclude the rest of IBM’s revenue comes from a Dumber Planet™. But as IBM’s revenue continues to decline, there is evidence the Dumber Planet is wising up 😉 
  • “Cloud revenue up more than 70% in the first half” – given IBM’s paucity of cloud customer references, this may be the most nebulous of the bunch. IBM has said they’ll do $7 billion in cloud revenue by 2015, but their definition of cloud is of course cloudy. The cloud number I’d really like to see from IBM is their capex spend as a proxy for their cloud commitment. Total property, plant and equipment on the balance sheet has actually declined so far this year, while Google and Microsoft spent $3.5 billion on capex between them in the last quarter.

The problem for dinosaurs: if the meteor doesn’t get you, the (dust) cloud will.

Image: IBM Sales Team, Yucatan Penisula, 66 million years ago

Enter The Matrix: Microsoft’s Reorg


The new super-matrixed structure doubles down on “integrated innovation”, a model that has historically been tantalizingly just out of grasp from an execution standpoint. The new theory is shorter product cycles will mitigate failures of alignment across teams.

The pendulum swings to functional away from divisions that had clear customer focus and segmentation (ironically, Steven Sinofsky wins philosophically, even as he and most of his disciples lose personally).

The Microsoft org chart cartoon with guns pointed between organizations is getting a lot of airplay. It is worth pointing out it has always been the engineering organizations that had this kind of dynamic (sometimes even implicitly instigated by senior management – there was a a time when internal competition was in many ways more vigorous than external competition) and that there still are multiple engineering organizations. Windows and Office, for example, will always have different priorities, no matter what the organization.

This move elevates some of the strongest engineering managers in the company, but they will have to successfully step up to operate at a whole new level.

The marketing reorg will probably take a long time to sort out, with both new leadership and lots of people moving, which means Microsoft will likely be more internally focused than it should for 6-12 months.

I continue to believe the best, long-term strategy for the company is to proactively split itself up. This reorg of course makes that harder as everything gets mashed into one gigantic blob that will try to successfully span from your house to the warehouse, from the mom and pop shop to the Fortune 500’s top and from the wrist of your arm to the cloud server farm (Rap Genius here I come…).

One of the reasons I believe in splitting the company up is the succession issue. For the all the criticism SteveB gets (some very valid, some completely ridiculous), his are a very difficult set of shoes to fill. I can’t count the number of times I have asked people calling for Ballmer’s head who they would replace him with, only to hear crickets or worse, truly untenable alternatives offered up. This reorg doesn’t bring to light any internal potential candidates and with the elimination of the division presidents, also removes the “mini-CEO” presidential training grounds. Steve is still planning to run the company for a few more years (he has said many times he intends to stay until his youngest child goes to college and has been known to bellow “…and if the kid has to repeat a year, you get me for another year!”), so perhaps there is time to develop an internal candidate. But my guess is the next long-term CEO of Microsoft is not at the company today.

Meanwhile, some of the better posts on the reorg I have seen:

  • Hal Berenson dives deep into internal succession candidates.
  • Ben Thompson on the perils of functional organization in large companies, with the obligatory Apple comparison.
  • Xconomy doesn’t quite go line-by-line, but dissects some of the blather in Microsoft’s memo on the reorg (thereby saving me from having to do something similar). This memo is not an auspicious start for the new marketing leadership (though I suspect the writing team is not new).

A Cretaceous Checkpoint

In our last installment of doing tomorrow’s technological paleontology today, I laid out my case for why IBM’s future looks different than the last decade because financial engineering isn’t the kind of engineering necessary to make the transition to the cloud. For my efforts, I got a lot of financially-oriented pushback that basically amounted to “past performance is in fact an indicator of future performance” and pointers to predictions from all-knowing Wall Street analysts who think IBM stock is going ever higher. I don’t pretend to know where the stock market is going in the short term, but I do believe IBM faces massive headwinds in the midst of a generational shift in technology. Interestingly, people associated with IBM were unanimous in their agreement with my thesis, both publicly and privately.

Since then (March 30), we’ve seen:

  • IBM miss big for Q1 – they missed on both revenue and profit and both declined in absolute terms. The revenue miss was over a billion dollars so in all likelihood they have pushed considerable revenue into Q2. They reiterated their full year guidance so Q1 is evidently just a blip in their mind. CEO Rometty berated the sales force, saying “Despite a solid start and good client demand we did not close a number of software and mainframe transactions that have moved into the second quarter” and sent a video message to employees telling them to work harder and to actually call back customers. Executives were reassigned. Upwards of 8,000 employees are getting laid off. Obviously, there are no issues with the product portfolio or strategy,
  • IBM try unsuccessfully to sell its x86 server business to Lenovo – they couldn’t call out a business they want to sell as underperforming, so the venerable mainframe took the blame this quarter, but its server business overall is seeing double digit revenue declines and IBM’s x86 business is a big part of the problem. Lenovo thought the price was too high so it doesn’t look like IBM’s PC divestiture will be repeated on IBM’s terms. IBM seems to be saying they want to keep milking their big iron installed base but don’t think they can compete in the mainline server hardware business going forward (and make no mistake, cloud is consuming a ton of servers).
  • IBM buy SoftLayer for $2 billion – so maybe SmartCloud wasn’t the be-all and end-all of clouds it had been touted as and perhaps no one at IBM could figure out what “autonomic” meant either. This is a big acquisition and very different than the legacy software rollups IBM has been doing of late. They paid a pretty good premium, there is integration risk and this is real money that is no longer available for financial engineering. Everyone has looked at SoftLayer (including a few of my former employers) and this pencils out primarily a people acquisition. We’ll see if IBM can retain hosting talent, especially when it sounds like full-on integration is in the cards. As Barb Darrow reported:

    Dennis Quan, IBM’s vice president of SmartCloud, told me the plan is to build a “compelling IaaS layer that leverages IBM strengths in open standard-based private cloud, enterprise workloads and use of Openstack married with the speed and scale of what SoftLayer has today.”

    To non-IBMers, this sounds like a matter of glomming together at least two disparate sets of technology. A Frankencloud of sorts.

  • IBM complain that Amazon beat them for the CIA cloud deal – IBM cried foul after AWS won a $600 million deal to build a private cloud for the CIA. Evidently IBM was so upset about losing they filed a formal protest. It looks like IBM tried to buy the business with a lower bid so they could tell customers they run the CIA’s cloud but their complaint ended up highlighting the inadequacy of their cloud offerings. The GAO concluded Amazon offered a “superior technical solution”, Amazon’s proposal was “low” risk while IBM’s was “high” risk and that the CIA “reasonably determined that IBM failed to clearly establish the capability of its existing public cloud to auto-scale all applications”.  Tip to IBM: if it requires a busload of consultants, it isn’t auto-scaling. It is a bad sign when IBM can’t even win government contracts, although one could argue that the best way to impede the ever increasing scope of the all-seeing eye of our government would be to outsource the surveillance state to IBM.


Yup, all is going swimmingly in Armonk. I maintain my view that mean reversion is happening, the rainy day fund has been depleted, IBM can’t innovate on technology at a time they must, they’re still way behind on cloud, the big industry trends are against them and their traditional customers are not going to save them time because they have their own set of problems.

I originally thought because of the size of the Q1 miss, IBM would have no problem with Q2 but now I think there is a decent probability they will miss again (currency effects are likely to play a role). At some point, people will start to realize the problem is not a sales force slacking off, but more fundamental.

In our next visit to the late Cretaceous period, we’ll look at Oracle, a company besotted with recreating the business model from IBM’s glory days and who also claim to be afflicted with the lazy sales force disease.

Disclosure: I sold my tiny number of IBM shares that I acquired through no fault of my own at $208.