Marketing Memos

Just keep reminding yourself that Compaq was an odd deal too.

Today Hewlett Packard palmed Palm for whopping $1.2B, or about 1/10^th of HP’s petty cash.  This was newsworthy for many reasons including the fact that Palm’s struggling handset line will now join HP’s struggling handset line (bet you forgot that HP makes cell phones – so did the rest of the market).  In a world where RIM owns the corporate market, Apple owns the consumer market, Microsoft hasn’t helped HP’s market, and Google/Android are changing the rules of the market, this marriage seems slightly more absurd than half of Hollywood hook-ups.

The deal is not without upside.  First, the market for mobile is not yet saturated.  Especially on the low end, there is plenty of green field. As unlocked handsets become more prevalent and popular, HP can use its retail savvy to shove cell phones into public ears.  I can almost here the cashier at Wal Mart saying “Would you like some printer cartridges with that?”

Interestingly, Todd Bradley is a top executive in HP’s Personal Systems Group and was also a former CEO of Palm.  In announcing the acquisition, Bradley noted that Palm had a lot of intellectual property, some 1,650 patents.  These alone might be worth the acquisition as it allows HP to license and monetize the investment, or choke the life out of competitors.  HP is not immune to litigating, though it is not their forte.

Otherwise the only item Palm brings to the table is a mobile OS, one so innovative and exciting that the market didn’t even bother to yawn.  In an industry where driving component cost down while improving the user experience is 90% of the battle, incorporating the Android OS makes much more sense, as recent mobile market share data shows.  Some speculate that HP wants a private OS to spread across handsets, slates and device types to be named later.  But buying Palm for this is like buying a deceased nag to run the triple crown.

Odds of winning are about the same.

All in all this appears to be an insider deal, were former Palm executives working in HP are overly optimistic about alleged synergies and product potentials.  But as far as technology companies go, HP has successfully merged other entities and made a buck or two.  The Compaq merger worked despite many misgivings (I had my doubts, but the dual brands and economies of scale in standardized PCs let HP take top honors away from Dell).  But HP has had its share of acquisition and partnership failures too (DEC via the Compaq deal is nothing, and outside of HP-UX nobody uses Itanium, much to Intel’s chagrin).

From an outside perspective, the market dynamics look oddly promising.  The smart phone market is growing at nearly a 40% CAGR clip and mobile data is almost the new norm.  But smart phones as a percent of all cell phones are still relative small –around 10% of all handsets according to some 2009 data and projections.  So perhaps HP is merely betting the long game – that by acquiring Palm and getting WebOS in shape, HP can catch the break of the new wave.

The problem is that HP needs to add something that the competition has not or cannot.  Palm has failed, and HP’s mobile bread is currently buttered by Microsoft, who is losing market share faster than Steve Ballmer is losing hair.  Assuming that HP cannot add magic (and, face it, they don’t do that very often), then they will have to compete on price.  Perhaps Palm’s IP combined with Compaq’s mass manufacturing prowess will shove deeply discounted smart phones into the market.  Given the bargains you can get on consumer edition HP and Compaq desktops and laptops at every office supply store on the planet, this might well be where HP is heading.

There is no marketing lesson today.  Just stunned wonder.

UPDATE: Perhaps I spoke too soon.  HTC announced that they are going to run and run hard with Android in an attempt to saturate the smart phone market.  They have a head start and will likely beat HP to the wave crest.  The marketing lesson is that if you see a hot mass market ready for exploiting, so do your competitors.  If they have a faster and cheaper approach than you, expect to lose.

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So, when will Oracle buy Brocade?

Well, they might buy Juniper, Alcatel or maybe even pick-up Nortel on a distress sale, but I’m pretty sure they will jump on Brocade to secure their data center dominance.

Several vendors have been assembling stacks in attempts to become one-stop shopping centers for CTOs.  Cisco shocked many by getting into the server business, HP by buying 3Com, and Oracle buying Sun and not realizing the mess they had gotten themselves into.  IBM is oddly the laggard, evidently content to rake in huge margins on services instead.

But IBM may well buy what Oracle doesn’t.

Let’s ignore applications, if for no other reason than to give Larry Ellison a reason to panic and read this blog.  The major components of the data center infrastructure stack include servers, storage, operating systems, management suites and networking.  HP has all of the above, and wedding ProCurve, 3Com and Openview will possibly put them ahead of Cisco as a favored network gear vendor.  Cisco has most of the stack sans storage, though not many folks are jumping through hoops over Cisco’s server solutions.  Oracle is missing the networking piece almost entirely, and given their new market position for servers and storage, not having data center networking gear seems to be a hole in their whole.

Whole product definition that is.

This is a rather gaping gulf for a company that, upon completing the Sun acquisition, said they were the 1960’s IBM of the new millennia.  Given how their competitors are maneuvering, Oracle will eventually need to get into the networking gear business, though they likely will focus only on data center bit pipes.  As with SPARC and x64 systems, Oracle is optimizing gear for the huge database and application servers many enterprises need.

So the question is which network hardware vendor has an adequate product suite for Oracle and can be had for a good price. Many alternatives are simply too big or have too many non-data center products to sooth Ellison’s digestion.  Juniper has a market cap equal to Oracle’s cash, so they are out.  Nortel could be had on the cheap though they remain radio active and have a lot of telco products that Oracle wouldn’t need or want.  Extreme isn’t, lacking core technologies essential for mega servers.  That leaves Alcatel and Brocade, with Alcatel being twice as expensive mainly because it is holding a lot of cash.

So Brocade has the best product line and price match.  With most of that nasty little backdating scandal is behind them, they don’t present unreasonable risk. The only real question is if IBM will move before Oracle or the other way around.

Market trends and marketing go hand-in-paw.  The trend in IT is consolidation, at least in the hardware space.  Some of the big boys (Cisco, HP, Oracle) are attempting to offer solid stacks.  This trend cannot be ignored, and the eventual winners will be those who offer something beyond hardware.  After all, in an x64 and Ethernet world, raw horsepower differentiation is disappearing.  Other factors, such as service, support and reputation will sway buyers (and herein, HP may have a great advantage since nearly everybody believes they make unbreakable hardware).

The wild card – as always – is Oracle.  They dominate the application space, and since hardware only exists to run applications, this factor cannot be ignored.  Early Sun integration shows an Oracle propensity for optimizing the stack between components.  It remains to be seen how obscene application-to-hardware optimization might become.  Aside from lower prices (which means lower margins, which means an instant veto from Larry) application/hardware optimization becomes a core hardware differentiator.

If When Oracle buys a network gear vendor, we may see the largest new barrier to entry for anyone in the enterprise IT space since IBM dominated everything.  Innovators and start-ups will need to find ways of making their products a strategic add-on to HP, Cisco, Oracle product lines with acquisition exit strategies.  The days of enterprise IT IPOs may be behind us, though the future of corporate venture capital is looking mighty good.

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Listening to Hugo Chavez or Steve Jobs is becoming eerily similar.

Dictators have some common but not commonly endearing traits.  They tend toward being monomaniacal, focused fiercely on their perception of order.  Anything or anyone that denies the beauty of their utopian vision challenges authority, and can later be found swinging from trees without needing to use their arms or legs.

Jobs is trying to string-up Adobe, and in the end might make Apple look like Il Duce on his last day.

For folks fond of the Silicon Valley geek gladiators – visionary founders who see business as war and as life – the latest rattling of cyber sabers comes from Apple and Adobe, with Apple’s insistence that Adobe Flash be banished from Jobs’ walled garden of iEverything.  Certain slurs have been sounded, including an odd instance by Jobs proclaiming that Adobe Flash was bug ridden.

Jobs is obviously not a Windows user, for he does not know the true meaning of “buggy.”

Such bogus blusters are convenient covers for real issues.  Flash currently commands a huge share of the Rich Internet Application (RIA) market by virtual of antediluvian virtualization.  Long ago, Flash did what people wanted, which was to add value to surfing the web while eliminating cross platform/browser/religious sectarianism.  Want to watch videos cute kittens or suicidal teenagers on motorcycles, or listen to the latest excuse for music coming out of Nashville on the web, regardless of if you are on a PC, Mac, Linux, minis, odd ducks, occasional mainframes, virtual desktops or smart phone?  Adobe Flash made it happen by bundling it for free into everything.

Except iPhones and iPads.

Therein lay Apple’s finest error (aside from the Newton).  As any performer will attest, you give the audience what they want.  Putting Snoop Dogg on stage at a cotillion is an error.  So is creating an information/media device that does not deliver information/media.  Since so much of the world’s content is and will for the foreseeable future remain in Flash, and since Adobe is not sitting still in extending Flash for ever better uses, banning it from hardware is inane.  It goes directly against what the audience (market) wants and thus gives them the motivation to consider alternate venues.

With any other outfit, this action would be inexplicable.  In Apples case the motivations are clear and the outcome could be disastrous.

Apple makes money on media (I hear they are in the hardware business too).  Apple has sold 10 billion files on iTunes, mainly for $1 each.  Assuming Apple gets a tiny sliver of that, we are still talking an amount of money large enough to impress everyone outside of congress.  Songs are just the tip of the digital goods iceberg.  iPads are book reading, movie watching, photo snarfing gizmos, and each content category has a very profitable backend.  The Internet changed the cost of delivery equation, improving music margins, books bonuses and video valuations.

Content is King, but Jobs wants the crown.

To control content, Jobs must own the means of distribution.  Hence, pesky interlopers like Flash must be eliminated.  Flash connects the content provider directly with the content consumer, cutting Apple out of the loop, which for someone who sold 10 billion songs is clearly unacceptable.  Thus Apple acolytes are assaulting Adobe.  You can have the cool new gizmo, but you can’t have Flash.

Unless Google makes the cool new gizmo.

This is where business models make or break empires.  Apple is heading down the IBM-like highway to Hoboken (which is like Hell, but without the ambiance).  Before Gerstner rescued IBM from itself, they had the monomaniacal mindset: everything was for the Grand Scheme with the marvelous mainframe in the center of all that was virtually holy.  Any IBMer who dared deny the sanctity of VM/CMS was banished to field sales, or to tech support for cardinal sins.  IBM was less than a year from bankruptcy thanks to their inflexibility concerning what the market wanted.

They preached to the pulpit – they didn’t play to the congregation, much less the heathens.

Now Jobs and Company are worshiping at the same altar, and the heretics at Google and the old priests at Microsoft are ready to exorcize a snake from the garden.  Microsoft has a tablet in ready mode, and by stealing (again) some Apple innovations, will serve the market with something cheaper … and with Flash.  Google is porting Android to tablets and will indirectly offer even cheaper options than Microsoft (because Google makes their money through service, not software) … and the GooglePad will have Flash.  Fifteen years of content will continue to flow everywhere, including Google and Microsoft pads.

But not to iDevices.

The marketing issue at hand is never to deny your market.  Apple will eventually suffer if they keep content from customers.  After all, we own gizmos to achieve things, be it making phone calls, watching movies, playing games, or impressing the cute red head at the bar.  Fail in this fundamental mission and the market will eventually turn to vendors that deliver.  Flash is only one instance where Apples “our way or else” mentality will be its undoing.

Erecting barriers never works in the long run.  Walled gardens are more wall than garden, as everyone who escaped AOL will attest.

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The mighty fall, upstarts rise, and nothing is guaranteed.

Comscore published their periodic post of positioning between portable platform providers (tell me when you get sick of my constant alliteration … it won’t stop me, but I do like the feedback).  Of interest are instances where major players are advancing, retreating, or showing signs of stagnation.  In Comscore’s latest totable techno tout sheet we see:

RIM:        42.1% rising slowly (+1.3)
Apple:      25.4% stagnant (-0.1)
Microsoft:  15.1% falling fast (-4.0)
Google:     9.0% and rising fast (+5.2)
Palm:       5.4% and sinking (-1.8)

Most noteworthy and yet most predictable is Microsoft’s plummeting while everyone else is either growing or staying steady.  Microsoft’s mobile operating system has been derided, insulted, defamed and dismissed by many, for sound reasons.  Unlike competing platforms, one routinely needs to buy a new handset whenever Microsoft releases a new OS (I say this with my tongue buried deeply into my cheek given that I carried a Windows Mobile 4 phone for seven years, much to the chagrin of my carrier).  A friend of mine who works for Microsoft complains he has to reboot his smartphone hourly.  Rumors have it that Windows Mobile 7 will fix all that … just the way Vista fixed XP security issues and with the same smooth migration path available from XP to Windows 7 desktop.

Google’s rise up the ranks is also predictable given market dynamics.  A certain sector of every technology market wants portability, not wishing to be tied to any vendor.  With Microsoft unable to provide stability, features or upgrades, with RIM being perfectly proprietary and with Apple … well, being Apple and iPhones being the center of a walled garden that rivals Eden … the Android OS was an obvious choice for free range geeks.  Given that Android 2.x is well crafted, that Google added some excellent back-end features, that HTC seems to adore the OS, and that Verizon promoted Droids to death, Google’s rising fortunes are to be expected.  My prediction is that they will continue this pace for a least a few more years, perhaps to a market dominance point.

Most interesting from a market dynamics perspective are RIM and Apple.  Being the big dog and specializing mainly in email junkie codependence, RIM has less growth opportunity than the other vendors.  Yes, they remain competitive, but the core of their market advantage – being perpetually plugged into email pipelines – is not well protected.  All smartphones can do email, and people who do not need spam pushed down into their handsets at all hours do not need Crackberrys.  Thus, the market share upside for RIM is capped given their current whole product strategy.

Apple, however, is oddly immobile.  For all the iHype, iPhones are now stuck.  A unique and perverse set of market forces are at play, conspiring to keep iPhones at their current position.  First, the anti-lock-in crowd wouldn’t own an iPhone even if Steve Jobs was included as a toy prize (if his personal fortune was part of the deal, there might be room for negotiation).  As other vendors provide similar or even superior features, iPhone cachet will fade.  Take the Nokia 5800 Navigator for example, which is arguably a better utilitarian handset for a fraction of the price.  Unless you are an app addict, the iPhone offers no stellar competitive advantage.  Finally, the financials of iPhones, and most higher-end handsets, are driving the unlocked market, which is oddly where Android is well positioned.  It is no wonder that Apple is slightly declining in market share and will stay sluggish until they launch across all major carriers.

Let’s not bother discussing Palm … it is too painful.

Since we do discuss strategy at Marketing Memos, what we are witnessing here are some common strategic marketing moves and mistakes by the various parties.

Trends: One trend in the smartphone market is toward unlocking handsets.  It is an inevitable trend that will affect handset makers and carriers alike (get ready to abandon mandatory data plans AT&T and Verizon – those days are numbered).  When there is a trend you can either ride the trend, fight it, or pray that you maintain your market share.  Apple and RIM are fighting it, Google is riding it, and Microsoft has bigger problems.  One point for Google.

Saturation: Though we are not their yet, the smart phone market (at least in North America) is rapidly saturating.  Chasm theory tell us that within a couple of years, only late adopters and laggards will be left.  Selling to slowpokes (all other things being equal) requires dropping prices or finding mass market plus-one features others overlooked.  Again, Google is altering the landscape by basically giving away the OS, and having it developed with Open Source efficiencies.  This starts the downward price spiral and makes retailing unlocked handsets even more practical.  Two points for Google.

Faddism: All fads die, and if one doesn’t, then it is not a fad (kinda like food and nookie – they never go out of style).  Handsets provide utility, be it playing games, watching videos or posting onto Facebook.  I hear you can even make telephone calls with some handsets.  Once all features desired by all major market segments are available on all mobile OSes, we will achieve a commodity state in handsets.  There is now a horse race to see who can capture the greatest lasting mindshare of the most market segments.  Apple has the fanboys, RIM has road warriors, Microsoft has lost, and Google own the technoids though their eyes are set upon the broad consumer market.  Since Google will make their money tangently via advertising, since their app market will help to create the whole product, and since they are driving down the retail price of unlocked handsets, I would wager that Google will quickly surpass Apple in total market share.  Three points for Google.

Sure, there are some wildcards to play.  Nokia bought Navteq and now bundles GPS software and maps on their phones, reducing you gizmo collection by one.  For all the jokes, the latest Symbian OS works well, the tactile feedback screen it more usable by broader audience, and Ovi Maps is an interesting value add.  Google requires you buy wireless data to use GPS.  Nokia says you can ignore data because the maps are built in.

The marketing lesson is that markets change, and you must always beware of change agents with different business plans than you have.  Apple, RIM and Microsoft want to make money on software and hardware.  Google wants to make money by owning the experiences of everybody and feeding their advertising engine as a byproduct. This eliminates their software profit motive and thus creates a direct threat to the three top competitors.

If you see a familiar but desperate looking face on a street corner giving away handsets, be sure to say hello to Balmer for me.

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