Windows Versus Linux Part 3: It Is Only A Matter Of Time

The strategy described in part two of this series can keep Windows in the game for a long, long time. But perhaps not forever.

The Dynamic Mixed Duopoly model, discussed in part one of this series, shows that strategic commitments to Linux by large entities could reach a tipping point and make Windows so unprofitable it is forced from the market in spite of its current megashare. Short of that, the model shows that these strategic actions assure that a Windows-Linux duopoly develops and endures.

Governments are in fact making strategic commitments to Linux. From Birmingham to Munich, from India's schools to Chinese government agencies, Linux is gaining precisely the institutional converts it needs to assure that the Windows monopoly becomes a true operating system duopoly.

The current battleground is the server market, where Windows and Linux are displacing Unix and just about everyone else. According to IDC, both are growing at double-digit rates in a market that is growing much more slowly, and the trend is for this to continue. A de facto duopoly is rapidly emerging.

In the desktop market, where the cost if Windows is pretty much invisible to consumers except when they want to upgrade to a new release, the Windows megashare makes it very sticky. But a perfect storm is coming that will make Linux a viable alternative to consumers worldwide. The conditions that will produce this storm will make the operating system irrelevant on the desktop and drive it nearly as far in the background as the BIOS. These conditions are the following:

• Universal broadband Internet access, affordable by everyone with superb reliability and performance. It is only a matter of time.


• Robust, full-featured browser-based applications in all categories that make the operating system GUI irrelevant. It is only a matter of time.


• The evolution of today's file system into a browser-based, search-based, location-independent paradigm, where local and online storage distinctions move to the background. It is only a matter of time.

The trends driving each of the above make them inevitable. You pick the time frame. Five years? Ten? More? No matter, the desktop duopoly is coming.

Another trend that amplifies the Windows desktop problem is the continuing decline in hardware prices. This leaves ever less room for hiding the cost of Windows. In fact, as I look at the Dynamic Mixed Duopoly model, even if a tipping point of strategic Linux adoption is not reached, ultimately the price of Windows drops to zero. Because of its initial megashare, this takes a very long time, but it is only a matter of time.

So Microsoft's post-Gates challenge is not a technical one. It is a titanic business model transition problem.

As a footnote to this series, there is much irony here. Linux without IBM's backing and promotion would, I believe, still be a footnote. Microsoft whipped IBM in the OS/2-Windows battle and arguably drove it out of the PC business. Now IBM's attack-by-proxy Linux strategy has set the stage for Microsoft to ultimately lose the operating system war to irrelevance. It is only a matter of time.

Copyright © 2006 Philip Bookman

Technorati: Windows versus Linux Microsoft IBM software competition software strategy open source

Windows Versus Linux Part 2: A Strategy To Compete With Free

This is the second in a series of posts in which I attempt to answer the question, "How do you compete with free?" for the case of Windows versus Linux. In part 1, we reviewed an academic paper that modeled this competition. The model showed that Windows' initial megashare would enable it to survive this competitive threat if Microsoft managed pricing to maintain the megashare and kept strategic defections by large groups from reaching a tipping point. It also showed that piracy could be used as part of the pricing strategy, and that using FUD could be effective for Microsoft in maintaining Windows' megashare.

The megashare insures Windows success because of the network effect of operating systems. The network effect occurs when the value of a product or service is increased based on the number of users. For example, the more people who have phones, the more valuable it is to have a phone.

In the case of a computer operating system, there are myriad components to the network effect. Here are some examples. The more users an operating system has, the more attractive it is for application developers to develop for it; the more people can help each other use it; the more hardware manufacturers make their equipment work with it. The list goes on and on. This is why there is a market bias in favor of a dominant operating system. It sets de facto standards and assures a large, reliable platform for end users and businesses that serve them. The market favors the emergence of a megashare winner.

No one is more aware of the network effects of operating systems than Microsoft, nor is anyone more skillful in exploiting them. Thus its early adoption of the "Windows Everywhere" mantra. The strategies that preserve and build the Windows megashare should, of course, continue, like deep and broad ISV and equipment manufacturer support, developing and encouraging rich Windows-specific applications and broadening the very definition of the OS (i.e. bundling in new functionality). In developing a strategic plan for Microsoft in the Windows versus Linux competition, we focus on those things that are specific to the Linux threat: pricing, using FUD and combating strategic defections.

Here is the Windows strategy for competing with Linux:

• Segment prices to align with varying levels of customer perceived value. The Windows Vista editions and pricing are a start at this, but seem clumsy. They are as confusing and opaque to customers as the myriad and often conflicting versions of Office. Microsoft has to get much more sophisticated about this. The objectives are to make a purchase decision as easy as possible and the price feel reasonable.


• Make Windows appear to be free as much as possible. Defend and extend bundling Windows with new computers. Combat the sale of naked PCs.


• Make upgrading cheaper and easier. Under the assumption that an up-to-date Windows customer is more satisfied and thus more sticky, forego short term revenue in favor of market share and make release upgrades more like an automatic update than the big deal they have become. This implies more frequent and thus less dramatic releases. The announced Vista upgrade pricing is of concern here and appears myopic. Make home consumer upgrades free with OneCare Live subscriptions.


• Seed Windows for free in situations where it would otherwise only be used if pirated. Turn pirates into legitimate customers. There is much creative opportunity here, especially among poor populations. Cede nothing with any chance of volume to Linux.


• Use Linux-specific FUD on a perpetual, ongoing basis. The challenge here is to remain credible year after year and to target different FUD messages to different customer segments. This is already being done in the server market.


• Combat strategic customer Linux adoption. Aim to fully satisfy government concerns about non-proprietary file formats, security, privacy and price. Get ahead of the curve by developing an ongoing program to prevent strategic defections rather than reacting to them. Work on winning the hearts and minds of government decision makers. Leave no stone unturned in this regard, it is the Windows Achilles' heel.

Much like Microsoft needed shock treatment to deal with the Internet, it must be made to believe in its corporate soul that the Linux problem will not go away and is threat number one. Microsoft must become even more committed to the "Windows Everywhere" strategy. It turns out that this may be its only protection against a free competitor.

In our next and final post in this series, we predict what the Windows-Linux Duopoly ultimately means for Microsoft.

Copyright © 2006 Philip Bookman

Technorati: Windows versus Linux Microsoft software competition software strategy open source

Windows Versus Linux Part 1: How Do You Compete With Free?

This is the first in a series of posts in which I attempt to answer the question, "How do you compete with free?" for the case of Windows versus Linux.

Microsoft must defend Windows against all strategic threats, at all costs. It has a formidable arsenal of strategic defenses it can employ and experience using them, having crushed or contained all prior competitive threats to its core strategic products, Windows and Office. However, Linux presents a unique threat because of its price. The classic defensive strategies may not work.

Let's start by framing the discussion. The very way I pose the question "How do you compete with free?" contains an important assumption. It assumes that, to the customer, the essential factual difference between Linux and Windows is price. I believe that all of the other benefits and deficits attributed to either product, to the extent that they exist, could be neutralized in fact, though not necessarily in perception, over a reasonable time frame. These differences have been and will, I am sure, continue to be hotly debated, but not in this discussion. My position is that they are largely subjective, often ideological, and do not ultimately influence the outcome of the competition over the long term.

I also know that this issue is immensely complicated. Consider just one of the complexities, that there are at least three very different platform segments involved: servers, personal computers and handheld devices. I am going to make some sweeping simplifying assumptions to reduce this complexity, that I believe do not compromise my conclusions.

The classic competitive strategies carry an implicit assumption, that both parties to the competition are motivated by the pursuit of profit. This creates a certain symmetry to classical competition. Windows versus Linux is an asymmetrical competition, in which one party, Microsoft, seeks to maximize profit over the long term, and the other party does not. Put another way, Microsoft's profit motive is a constraint on them in this competition.

How do you model this asymmetrical competition? Ramon Casadesus-Masanell and Pankaj Ghemawat of Harvard Business School addressed this in 2003 in a paper entitled Dynamic Mixed Duopoly: A Model Motivated by Linux vs. Windows. They developed an economic mathematical model of the Windows-Linux competition. It addresses the situation in which one party seeks to maximize profit and the other offers its product essentially for free. It makes the following assumptions:

• Both parties have sufficient resources to compete head-to-head in spite of the differences in how the resources are funded


• The value of an operating system is strongly influenced by its installed base because of the network effect of operating systems


• Linux has benefits to customers over Windows that go beyond price due to its development model

The model predicts that Windows can in fact compete successfully with Linux because of the vast initial Windows market share. I am going to use the term "megashare" to refer to this, meaning "a huge share of a huge market."

Here are the key findings from this model for Microsoft:

• Initial megashare trumps free. Windows wins so long as Microsoft properly manages Windows pricing and development costs and prevents strategic defections from reaching critical mass. The initial Windows megashare gives it an overwhelming, sustainable network effect advantage.


• Strategic defections can trump initial megashare. If enough large organizations (and, by extension, populations) make strategic commitments to adopting Linux, a tipping point can be reached in which Linux forces Windows out of the market.
  
• Total long-term profit is maximized by pricing to defend the megashare. In fact, the pursuit of short-term profit can sabotage the future of the megashare.


• Give it away to those who won't pay anyway. Increased Windows piracy among those who would only use a free OS (who would never pay for it) reduces downward pressure on Windows prices by strengthening the megashare without reducing revenue.


• FUD favors the megashare holder. Use of the classic FUD defense (spread fear, uncertainty and doubt) by Microsoft can mitigate price pressure. On the other hand, Microsoft can always neutralize opposing FUD by reducing prices.

If you are unfamiliar with the term "network effect" stay tuned, we will delve into this in the next post in this series. We will also suggest a strategic Windows versus Linux plan for Microsoft that builds on the Dynamic Mixed Duopoly model.

Copyright © 2006 Philip Bookman

Technorati: Windows versus Linux Microsoft software competition software strategy open source

Oracle's Unsubtle Strategy

There is nothing subtle about Oracle Corporation founder and CEO Larry Ellison. From the phallic towers of the Oracle campus he built in Redwood Shores to his world's largest private yacht Rising Star to his competition for the America's Cup, Ellison's is in-your-face clear in word and deed. It should come as no surprise, then, that the company that made him, albeit briefly, the world's richest man, is unsubtle in its strategy of aggressive, head-to-head competition.

Oracle, born in 1977, grew up as the relational database company. Ellison grew it with relentlessly focus on being number one in this market, which he arguably created, crushing all competitors except IBM and Microsoft. The strategy was brutal, no-holds-barred competition, from features-and-functions to sales tactics. In fact, Oracle was a textbook software product driven company, pursuing license revenue, skewing resources to sales and engineering, and creating a priestly cult of devoted user acolytes known as Oracle DBAs (DataBase Administrators).

In the early 90s, Oracle began adding a second pillar to its foundation, entering the business applications market. After all, archrival Bill Gates, the more enduring holder of the richest man crown, had two strategic product lines, Windows and Office, but poor Larry had only the Oracle RDBMS. It turns out that Ellison found business applications boring, tedious stuff, and paid little attention to the development effort. This changed in 1998, when Oracle's then president Ray Lane, persuaded him that something had to be done. Oracle's business application product line was an uninspiring, loose collection of weak applications the sales force could not sell. Ellison decided to take the helm of business applications development himself.

In two years, a re-architected suite of business applications was released -- prematurely. With over 5,000 known bugs, it was an embarrassing disaster. Ellison had used the "compile-ship-debug" approach that he had used 20 years earlier. There followed a couple of years of frantic debugging while customers fumed. Talk about boring! There had to be a way to fix this that was more fun.

And there was. Oracle, which had largely gotten to be database king by growing organically and eschewing major acquisitions, changed its strategy. It boldly made an aggressive offer to acquire business applications rival PeopleSoft. In the aftermath of the dot-com bust, the price was right and plotting strategy and tactics for this blockbuster deal got Ellison's competitive juices flowing again. When the Justice Department lost its antitrust action to block the deal, the way was paved for an acquisition spree that is nowhere near over. Ellison has been clear: Oracle intends to consolidate the business applications market. He has the money. He has the will. He has discovered he likes doing it.

Ellison now has business applications leader SAP in his sights. He has turned the enterprise business applications market into a two horse race. Oracle has had several strong quarters in a row. It is executing the complex integration of its acquisitions superbly. Forget the business applications stumbles of the past. Expect the same aggressive head-to-head, in-your-face competitive tactics going forward that worked in the database market, with a new twist: Ellison has discovered that you can buy big chunks of the puzzle pieces instead of building them.

Copyright © 2006 Philip Bookman

Technorati: Oracle Larry Ellison Strategic Planning

Tribble Traffic

Do you remember tribbles? They are the cute little purring fur balls Captain Kirk and his crew encountered in the Star Trek episode "The Trouble with Tribbles." It seems the rascally space trader Cyrano Jones thinks they are a gold mine. They multiply at a prodigious rate with little cost, since they eat almost anything. So he can produce them in vast quantities on the cheap. They are adorable, so everyone will want one. He's gonna be rich!

Uhura takes one to the Enterprise. Soon they overrun the ship. It seems they are born pregnant and reproduce asexually. And rapidly. Cute wears off fast when these fluff balls start filling every nook and cranny of the ship. Scotty finally has to beam them all into space to get rid of them.

Tribbles are, I fear, a lot like the traffic many of the new crop of Internet companies attract. Just because traffic may be cute, cheap to attract and create a nice buzz, it does not mean it is worth anything. This is tribble traffic.

When the entrepreneurs who build these companies finally figure out how to monetize their ideas, they often find they are trapped by tribble traffic. They discover that they can build a viable business model around only a subset of their users. The problem is that they cannot just beam the rest of the traffic into space. They cannot segment the valued traffic without alienating most all of their users. They similarly cannot capture enough demographic information to segment their traffic for advertisers without user rebellion. The tribble traffic is increasingly costly to serve due to diseconomies of scale. They must often finally sell to a big, well established concern, which can afford to dump the tribbles, reframe the proven concept and reap its value.

Tribble traffic is one root cause of The Three Curses of Internet Success. One reader described the outcome of this as "bigger companies using these small companies in place of in-house R&D." I agree. These Startups in Wonderland are becoming the experimental labs for established companies.

While Internet entrepreneurs should not be compared to that scoundrel Cyrano Jones, they should be aware of the trouble with tribbles.

Copyright © 2006 Philip Bookman

How Will Tomorrow's Tech Company Builders Raise Capital?

The high tech ecosystem is awash with company starters, those entrepreneurs and venture capitalists who know how to start and flip companies (sorry, I meant to say "develop innovative technology startups and create early liquidity events"). But I think there is something special about what I call the company builders, who start and build companies over decades. Bill Gates, Larry Ellison, Steve Jobs (his sabbatical notwithstanding), Scott Cook, Scott McNealy and Michael Dell bring something special and important to our industry. The company builders found and grow iconic companies, each with a unique character, vision and personality. They are, through their personal forcefulness and perseverance, able to build enduring companies that are truly different and pioneering. Their companies innovate their own way, create wealth for millions and instigate major changes in our economy and society. They build companies with soul, the ones we all love to talk about, the ones that often inspire, through love or hate, the next generation to play in our game.

The concern I want to discuss today is that the machine that provided the capital needed by such company builders to reach critical mass is broken. Unless we repair it or replace it, a vital force that has driven economic development may be lost.

The capital raising model which has been finely tuned over the last few decades is simple: angel investors, then venture capitalists, then IPO. The devil is surely in the details, and there are many variations on the theme, but the key element that has broken is the IPO market.

The IPO market is pretty much closed to tech startups. The hangover from the dot-com bubble has made investors and investment bankers highly skeptical and risk averse regarding tech IPOs. The IPO bar now requires demonstrated revenue, cash flow and profit beyond the reach of most early stage tech companies and beyond the patience horizon of most venture capitalists. This is exacerbated by the public company penalty, that is, the added cost of operating a public company versus a private company, which has increased dramatically and disproportionately for smaller, growing companies than for large ones. Sarbanes-Oxley is but one contributor to this penalty. Going public has become a prohibitively expensive ambition for most startups.

The rise of private equity funding seems unlikely to replace the public capital markets for company builders. These are at their core driven by financial considerations with an emphasis on "professional management." Visionary company founders and builders with multi-decade time horizons and private equity financiers do not make good bedfellows.

Given the limited patience of VCs and the closed nature of the IPO market, it appears that today's tech entrepreneur needs to plan on being acquired as an exit strategy. Company builders appear to be excluded from the game. We cannot afford this loss.

Copyright © 2006 Philip Bookman

Technorati: software finance software investing software venture capital software entrepreneurs company building

Memo to Michael Dell 3

First, exploding batteries. Then, exploding financial statements. I know you have a lot on your plate. But while you handle these tactical issues, please consider your retail distribution strategy, which is much more important in the long run than these headline-grabbing speed bumps.

Yesterday, the Senior Vice President of your Home and Small Business Group, Ro Parra, told the press that Dell planned to open a New York store next year, based on the model of your pilot store in Dallas. "We will consider more once we get the concept tight, once we prove out the model." He added that Dell would not sell its products in big-box electronics retailers. "That's not us," he said. "It is unlikely you will see our PCs in Best Buy."

Why not?

Dell needs to learn how to run its own retail stores like my lawn needs more crabgrass. It is fine to have your own store if you are hip like Apple and can make it a destination. Of all your many virtues, hipness is not one of them. Reliable and economical, yes, but not hip. The big-box electronics retailers are exactly where you should be. Get into lots of them. Best Buy and Costco and Office Depot. You need retail saturation and volume fast, not boutiques rolled out at a leisurely pace.

Support these retailers by focusing on brand advertising that extends your old "Easy as Dell" theme to the consumer who wants to see it, talk to a salesperson about it, take it right home and use it. Advertise simple product choices with simple names that convey ease and reliability. Think "computer as appliance." Back this with execution. Keep your costs down and your product and customer service quality high. Stick to Dell's traditions. Stay with what has made Dell great. Just add the distribution channel that extends your reach to today's home and small business consumer.

Your CEO Kevin Rollins said that Dell was "reevaluating every element of the business model. We want to do things more effectively." He called it Dell 2.0. That is fine, but choose wisely what you change. Preserve your core, it is who you are. Do not give up on being the low-price leader in brand name computers.

Become great at retail distribution.

Copyright © 2006 Philip Bookman

Technorati: Dell

Skype Hype Syndrome

Meg Whitman is one of my favorite CEOs, so it pains me to see her with what appears to now be a chronic case of Skype Hype Syndrome. In the acute phase of this delusional illness, Skype Hype causes the patient to feel compelled to dole out billions of dollars for a random collection of Internet traffic for no apparent reason. If allowed to progress to a chronic state, the patient is unable to either cut losses or refocus on her core business. Both phases of the illness are accompanied by constantly mumbling, "Synergy, synergy, synergy."

Skype, the Internet telephone network pioneer, is a poster child for The Three Curses of Internet Success. Cursed with success without revenue, success without profits and success without barriers to entry, the Skypers correctly followed our prescription for such a business: "First mover or not, there is no substitute for a credible business plan that spells out a scalable business model that includes revenue and profit. Failing that, the plan should be for more of a proof-of-concept business model and to be acquired as an early exit strategy." Getting a couple of billion dollars from eBay with a potential kicker of a billion or so more was a rare coup. AOL at least had revenue and profit when Time Warner went off the deep end.

This Skype reality is soberly spelled out in the Business Week article, Skype Goes for Broke. Well after the eBay acquisition, they are still cursed with success. Henry Gomez, Skype's North America GM says of a recent price promotion, "It's really about turbocharging our growth and solidifying our market position here before others catch on." Yes, that's it! Under eBay, Skype seeks even more success without revenue or profit, before others catch on and emulate their success. What clever folks eBay's Skype managers are!

If you do not buy my Skype Hype Syndrome diagnosis, perhaps you subscribe to the more common theory for eBay's Skype acquisition, that is was caused by a different paranoid delusion. This theory comes in various formulations, but they net down to this: eBay believes it is strategically threatened by any large community of Internet traffic. Thus it had to take out Skype, and that is just the beginning. If true then eBay is doomed, because it cannot mount a strategic defense against Google, Yahoo, Microsoft, Amazon, YouTube, Baidu, Facebook, Flickr, Wikipedia, Vonage and on and on. The Internet is going to generate oodles of high traffic companies in the future. A little paranoia may be a healthy thing, but this fear is irrational because eBay has successfully erected too many impressive barriers to entry to feel so randomly threatened.

Nope, it has to be Skype Hype Syndrome. That sounds cool. It fits eBay's image.

Get well, Meg.

Copyright © 2006 Philip Bookman

Technorati: Skype eBay

Startups in Wonderland

"When I use a word"' Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean -- neither more nor less."
"The question is," said Alice, "whether you can make words mean so many different things."
"The question is," said Humpty Dumpty, "which is to be master -- that's all."

Internet entrepreneurs and investors often seem to be speaking different languages. One reason for this is that they frequently have a disconnect about the meaning of startup. Our communication would improve if we acknowledge that startups are really experiments that fall into three categories: Technology Experiment, Application Experiment and Business Model Experiment. Each category attracts different entrepreneurs and investors.

Technology Experiment Startup
The purpose of a technology experiment startup is to see if a technology idea actually works. This is what the hackers who want to try something because "it would be so cool if it worked" tend to be up to.

Technology experimenters are often willing to instantly drop an experiment if it does not pan out, and try some other interesting idea. They may do this just because they lose interest. They are tinkerers.

The technology experimenter may or may not have any idea about practical uses for the technology. There is certainly no business plan.

To the extent that these startups are even quasi-businesses, they have an immense failure rate. Investing in these ventures is pretty much an oxymoron. Think gift or donation. Technology experiments sometimes morph into application experiments. Just don't count on it.

Application Experiment Startup
The purpose of an application experiment startup is to attempt to solve a specific customer problem or fill a specific customer need with a particular application design. This usually means trying to get something out there fast so the experimenter can see how users respond. Ideally, a feedback loop develops, with rapid refinement of the solution.

Early on, these startups often do not have customers so much as users. Business plans, should they exist, are vague at best about revenue. The application experimenter is often content to discover if and how the application can be monetized once they generate sufficient traffic.

These startups have a high failure rate. Even if they generate a lot of buzz and traffic, they often succumb to The Three Curses of Internet Success.

Investors in application experiments are angel investors, and should be willing to lose their investment without regret. Most venture capitalists should not get into the game unless and until an application experiment looks like a business model experiment.

Business Model Experiment Startup
The purpose of a business model experiment is to see if a management team can make their business plan work. The business plan ideally spells out a complete business model and makes a persuasive case that the model can work (sustainably make money or produce a liquidity event) in the real world.

While carrying high risk, this is the most likely experiment to result in a going concern. This is the model suitable for most venture capital investment.

Copyright © 2006 Philip Bookman

The Three Curses of Internet Success

From the rise of the Internet in the 1990s, through the dot-com bubble and continuing today in the Web 2.0 era, hotshot Internet technology companies are frequently cursed with success. The three curses are Success Without Revenue, Success Without Profits and Success Without Barriers to Entry. These curses led to the Web 1.0 bubble bursting, and could scuttle the dreams of many in Web 2.0.

Curse 1: Success Without Revenue
Success Without Revenue is mainly associated with a first-mover, land-grab mentality. The belief is that you must grab the traffic now and can figure out how to monetize it later. This certainly can happen, as exemplified by Google and Yahoo, but it is very difficult to accomplish.

Curse 2: Success Without Profits
Success Without Profits is caused by a number of things, most often the cost of scaling up all aspects of the business without being able to realize economies of scale. In fact, it involves discovering that there are diseconomies of scale. The relatively low costs of starting a web venture based on a clever idea often mask the true cost structure required to operate an industrial strength business.

Curse 3: Success Without Barriers to Entry
Barriers to Entry can make start up costs in a market so high that new entrants are discouraged. Internet technology has made the traditional barriers vary hard to achieve. Consider these classic barriers:

• Owning scarce resources


• Owning exclusive operating licenses


• Achieving economies of scale


• Setting expectation for a large advertising presence


• Creating high exit costs for potential competitors


• Creating high switching costs for customers


• Achieving exclusive control of channels


• Owning key intellectual property rights

The world-flattening forces Tom Friedman has popularized have impacted no businesses more than those that are Internet technology based. No surprise here, since the enabling Internet technologies provide the underpinnings of most of the flatteners. These forces have made effectively erecting any of the above barriers exceedingly difficult.

The result of not putting up barriers to entry is that a successful idea attracts lots of competitors who learn much from the first mover. This tends to fragment and commoditize the market, reinforcing Curse 1 and Curse 2.

The best defense against the three curses is to avoid first mover status. In fact, it is often best to avoid early mover status. This may seem sacrilegious, but smart later entrants tend to do better. Do you remember Excite, Lycos, Alta Vista and Infoseek? Something about pioneers and arrows in their backs…

First mover or not, there is no substitute for a credible business plan that spells out a scalable business model that includes revenue and profit. Failing that, the plan should be for more of a proof-of-concept business model and to be acquired as an early exit strategy.

Copyright © 2006 Philip Bookman

Goggle and Yahoo: Future Amazons?

Continuing from yesterday, a reader asked, "Would Google or Yahoo ever get into the web superstore business, since they really exist to monetize search?"

Let's look at Google first. Google monetizes search through advertising. They do not sell merchandise and are unlikely to do so, because it would put them into competition with their advertisers and undercut their overarching strategy.

Yahoo is not so easy to nail down. In search, Yahoo's 20% market share based on usage is a distant second to Google and is declining. Yahoo CFO Susan Decker said recently, "We don't think it's reasonable to assume we're going to gain a lot of share from Google. It's not our goal to be number one in Internet search. We would be very happy to maintain our market share." However, they have been increasing their search advertising revenue, as both the size of the total market and Yahoo's search ad sales effectiveness have increased. So they face the same inhibition Google does: if they sell merchandise, they risk competing with their advertisers.

Search, however, is but one dimension of Yahoo's multifaceted strategy. Yahoo is an-all-things-to-all-people megaportal with the soul of a media company. As CEO Terry Semel has said, their goal is to "provide our users and advertisers with richer and more relevant experiences" than any other portal. "Yahoo reaches 73% of all Internet users in the U.S. in any given month, which speaks to the breadth of our product suite. Yahoo reaches more people in more ways than any other company on the web." What was left unsaid is that Yahoo will attempt to monetize these visits any and every way it can, be it by advertising, subscriptions or other fees.

Yahoo does sell things that can be delivered online, like they do with Yahoo Music. But there is a compelling reason I do not see Yahoo or Google entering the web superstore business for non-electronically delivered merchandise. Amazon has erected significant barriers to entry to this business. Its massive distribution infrastructure alone presents a formidable barrier, and Jeff Bezos has been consistently willing to up the ante by investing in technology instead of posting profits.

I just cannot envision Google or Yahoo heading off on the costly, risky tangent of large scale retailing of hard goods.

Copyright © 2006 Philip Bookman

Technorati: Google Amazon Yahoo

Why Amazon Needs A9

A reader asks, "Why does Amazon have a search engine? Is this to distract Google and Yahoo from ever getting into the business of being a web superstore? Would Google or Yahoo ever get into that business, since they really exist to monetize search?"

I'll address this in two parts. Today, let's look at the reason for Amazon's A9 venture.

Amazon is the web superstore. Search is essential both as the customer entry point for locating merchandise and so Amazon can recommend merchandise. So search technology is a core competency for Amazon. Their A9 R&D venture is primarily intended to assure that they have focus on all aspects of this technology and maximize its potential to drive sales.

Many web sites now have "search the web" functions on their home page. These are usually powered by Google or one of the other popular search engines. The rather lame result is to send the person you want to have do something on your site off to another site.

Amazon's A9 "search the web" box shows the effective way to do this. They take the search query and do two things with it. First, they analyze it to present you with the most relevant Amazon buying opportunities they can, using their search technology. Second, they use a general search engine (currently MSN, previously Google) to get the usual web search results. This is all presented seamlessly.

Bottom line: Amazon's A9 strategy is to use search to drive sales of its merchandise.

Note also that, were Amazon to want to defend against Google or Yahoo, it would not be with A9. Google, Yahoo and MSN own 85% of the search market, as measured by usage. They effectively pin each other down pouring resources into search. A9 is a nit in that regard.

In a future post, we'll look at whether Google and Yahoo are likely strategic threats to Amazon's web superstore.

Copyright © 2006 Philip Bookman

Technorati: Amazon

Strategic Defense: Alternatives to Attack Strength

Recall our assumption: you want to defend against a strategic competitive threat. This means the competitor must have or potentially have a product or service that may prevent you from reaching your big-picture objectives with a five year horizon.

Let’s look at the best alternatives to the Attack Strength strategy.

Buy Them
There is no more certain way to remove a competitive threat than to buy the threatening company. As a bonus, you may harvest a revenue stream, customers, segment access and expertise, technology and/or key employees. This is commonly called "taking out a competitor." IBM’s recent acquisition of Filenet is a classic example of this strategy.

Buy Them is recommended for companies that are unlikely to have the perseverance to use Attack Strength. Corporate boards in particular usually understand this strategy.

Raise the Bar
This is the standard barriers-to-entry strategy employed against a specific competitor. Ask this question: What can you do that will expand the customer’s definition of your offering in such a way that it will discourage or distract the threatening company from taking the course of action you fear?

Improvements you make to your offering, like breadth-and-depth of features and functions, can be part of this strategy, as can other traditional barriers-to-entry moves, when they are targeted at a specific strategic competitive threat.

The Microsoft Office suite was a 1989 raise-the-bar action by Microsoft to defend its strategic plan for Excel and Word against threats from Lotus 1-2-3 and WordPerfect. Customers began expecting a suite of productivity applications ("1-2-3" was never really much more that "1" but it did give Microsoft the idea). Lotus and WordPerfect responded with all sorts of distracting, resource consuming activities that led to the death of the threats Microsoft feared.

When you Raise the Bar, you attack the competitor's current weakness or create a new one. However, the risk of attacking weakness alone is that you will encourage the competitor to shore up its weakness and thus become a stronger competitor. This is why this strategy is often used along with Attack Strength, which is intended to distract the competitor and divert its resources.

Spread FUD
Sowing fear, uncertainty and doubt has been a part of the high-tech business landscape since IBM perfected it during the 1960s and 70s. It involves sending a consistent message that bad things may happen if you buy from the competitor but you are safe buying from us. While FUD as a tactic is often broadly targeted, as epitomized in the then popular aphorism, "No one ever got fired for buying from IBM," the FUD defensive strategy is aimed at a specific strategic threat. For example, Microsoft spreads FUD about Linux, such as concerns about legal risks to customers and total-cost-of ownership, to protect Windows.

Freeze-the-market is a FUD technique. It involves pre-announcing a product or service. The offering may be quite real or may never actually become available (vaporware}. It works when you are credible and the pre-announced offering raises concerns in the minds of decision makers that not waiting for it might be a serious mistake. It is used so often now that examples abound. The most skilled practitioners of FUD actually do ultimately release the product or service, but without some of its most FUD inspiring features. Does the word Vista come to mind?

Using FUD is cheap, as in "talk is cheap." However, trying FUD and failing can be a bad sign when it has previously worked for you, as when IBM's failed "A Better DOS than DOS, a better Windows than Windows" FUD campaign for OS/2 signaled the passing of the baton from IBM to Microsoft and IBM’s ultimate exit from the PC business entirely.

Turn The Lawyers Loose
Sue the competitor for something, like IP infringement, or get the government to take action against them. Even when successful legally, this rarely produces the desired strategic results and usually signals the start of a death spiral in those who employ it. Examples include SCO's suit against IBM, and the 1998 federal antitrust action against Microsoft instigated by Netscape.

Copyright © 2006 Philip Bookman

Attack Strength Strategy: When to Use It

Attack Strength is a strategy to defend against a strategic competitive threat. When should you consider employing the Attack Strength strategy? There are three gating criteria.

There must first be a strategic competitive threat. This means the competitor must have or potentially have a product or service that may prevent you from reaching your big-picture objectives with a five year horizon. Five years is generally the high-tech strategic planning horizon. Less, and you may well be dealing with a tactical threat, which means a different response is called for. More, and you are probably dreaming, not planning.

The threat does not have to be a current or announced product or service, it may only be a potential threat. For example, Apple's OS X is a potential threat to Windows because Apple might decide to make it available on generic Wintel compatible hardware. Sony Playstation is a potential threat to Windows because it may evolve from a game console to a web browsing appliance.

The threat is usually that the competitor may cause you to miss strategic revenue, profit and/or market-share objectives. Yes, strategic again! The long-term time horizon and big-picture view are what we are dealing with here. For example, Microsoft will defend Windows at all costs, but a threat to its mouse revenue is unlikely to evoke more than tactical response.

The second test for using Attack Strength is that you want its intended outcome. The outcome of a well executed Attack Strength strategy is to make the competitor defend against your attack, diverting money, resources and executive attention away from their threat against you. Microsoft attacks iPod/iTunes with Zune to focus Apple on defending iPod/iTunes instead of competing with Windows with OS X.

Why would you not want the outcome of Attack Strength? You do not want it if the likely result is for the competitor to become even more of a strategic threat. For example, I believe that Dell's entry into the printer market, a classic Attack Strength move against HP, has backfired because HP was strategically committed to competing with Dell computers regardless. If anything, it only served to focus HP's troops more on Dell.

The third criterion for employing Attack Strength is that you have the money, resources, time and focus to execute a long-term response. This is not a quick fix. Do not use Attack Strength if you are not committed to it for the duration if necessary. It will not work and may cause more harm than good if it is abandoned before it has killed the threat. Since some threats never die, this means quite a commitment. Many companies do not have the ability to stick with this strategy.

Oracle's aborted and perhaps ill-conceived Network Computer ploy was an attempt to attack the PC and thus attack Windows, diverting Microsoft resources away from SQL Server, which threatened Oracle's database empire. The attack failed because Oracle could not or would not stay the course.

Assuming the above three tests are passed, you should consider using Attack Strength. You should also consider the alternatives, the subject for a future post.

Here are some examples of the Attack Strength strategy:

Microsoft versus Apple: Why Microsoft Needs Zune
Google versus Microsoft: Google Bamboozles Microsoft
Microsoft versus Sony: Why Microsoft Needs Xbox
IBM versus Microsoft: IBM and Microsoft: Attack By Proxy

Copyright © 2006 Philip Bookman