Marketing Memos

The phrase “It’s just money” makes less sense when you compare the U.S. dollar and the post-Greek Euro.

PIGS (Portugal, Italy, Greece and Spain) managed to devalue the Euro through some rather reckless mismanagement (a.k.a. government).   The value of the Euro compared to other paper dropped when people weighed the risk of owning one fiat currency as opposed to another.  We can hope that George Soros was holding a pocket full of Euros when the slide started.

As the chart shows (and click on any of the graphics to see bigger, better instances) devaluation can happen instantly.  The same is sure in the technology business.  Aside from intellectual property (IP) protections via patents, there is no safety in innovation.  Creating something usable invites others to do the same.  Today’s glory product is tomorrow’s techno trifle.

Are you listening Steve Jobs?

With smart phones still a small part of the cell market, but one that is growing fast due to falling prices and increasing demand, watchers wager on the ways of Apple, RIM and Google (rumor has it that Microsoft has smart phone software, but it remains obscured by vapors).  When Nielsen – the company that likes to spy on your television watching habits – reported that Google’s Android smart phone operating system was rocketing upwards in sales, and was actually outselling iPhones, the technology world gasped in unison.  They passed out at RIM given stagnant sales, declining potential, and the poor taste Nielsen had in releasing their study the same week that Rim released a new phone and OS that offered nothing new.

(Before going much further, we must note that the numbers Nielsen proffered were through Q2 of 2010, which preceded Apple offering the iPhone 4.  Since the market anticipated i4, and slowed buying of iPhones in expectation of the new device, the numbers are somewhat skewed against Apple in the interim.  However, trends are trends and that is where this story is going).

From this jumble of numbers we see (as vividly portrayed on the chart we lifted from The Register) that Android is rising rapidly against everybody.  Aside from some added Google goodies, one cannot claim that Android is fantastically better than iOS.  Indeed, given the tight integration between iPhones and iEverythingElse, one could deride Android.  Yet its rise in popularity is eclipsing iPhones in current sales, and in less than a year Android has risen from obscurity to having half the market share that Apple enjoys.

iPhones have been devalued.

In all markets, things drift toward commoditization.  In high tech they race to that condition.  When differentiation between products is diminished, companies that win tend to have lower price, better overall value, and make their money on more than the core product (why do you think Coke sells merchandise).  Software is where devaluation to commodity status occurs most rapidly in tech, and it occurs when other motivations beside core product profit margins exist.  Linux developers don’t have a profit motive and thus changed the server operating system market forever.  Google isn’t interested in profiting from mobile phone operating systems either – they have better ways of making money and dislike being eviscerated by commodity products (hardware).

The differentiation between smart phones – in terms of core functionality – will disappear.  They all will sync with Outlook and Exchange, they all will have cameras, they all will play music, tether, have GPS navigation, Bluetooth to your dashboard, cook your breakfast, double on keyboards and wax your back … by next Thursday.  Thus price, selection and availability become key factors for buyers.  Techno lust drops to third place at best.

This is where Apple and RIM are missing the mark.  Apple is Soviet in its approach, insisting on top-down control of everything, including hardware, channels, and apps that locate new internal organs for Steve Jobs.  RIM rested on its laurels in the corporate email addiction market, and watched this thin differentiator evaporate without creating new business functionality to keep it ahead of competitors.

Google mimicked the Microsoft model.

Microsoft is huge because they purposefully let other people profit from their products.  They could have been a hardware company, and had the same success Apple did in the desktop market, which was a fraction of Microsoft’s.  Instead Microsoft worked with hardware vendors (who Microsoft knew would commoditize themselves) and made Windows ubiquitous, much to the gastric discomfort of IT support teams everywhere.  Google is taking the same approach with Android, allowing hardware vendors to make Android ubiquitous.  The primary difference is that Microsoft made money on every instance of Windows aside from the 99 out of 100 copies distributed in China.  Google is making their profit on the back side.  Front, back … irrelevant.  The issue is that Google is encouraging every hardware maker – HTC, Motorola, Samsung, Sony Ericsson, LG – and every cellular carrier to make Android available to everyone, driving prices down to commodity levels.

Which erases top-line revenues for Apple, RIM and Microsoft.  Several marketing strategy lessons can be found herein.

Force devaluation: Competing toe-to-toe with established players is a rough game.  Finding an alternate way to make money and accelerating commoditization changes the rules of the game and leaves competitors gasping.

Everything is a commodity: Maybe not today, but eventually.  It is great to be in a market before commoditization occurs, but once it does, you need to either play on price or avoid the market entirely.

Catching up is bad: RIMs answer to their declining smart phone fortunes is at best parity (or parody if you find similar sadness with the now missing Palm).  When the market is running far ahead of you, being equal means falling behind at a slower pace.  You have to bring something new to the market, which Rim didn’t.  People buy value, not features.  When your features only equal those in competing products, you failed to create value worth buying.

UPDATE: On 2010-08-24, Dell launched a $99 smartphone running Android (granted, this is subsidized by AT&T, but the no-contract price is $299).  This begins the drive downward, putting something as smart as Android in every pocket.

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You would think IBM might learn from their own experience.

Organizational structure is strategic by nature.  How an organization is arranged influences other strategy, such as marketing and product development, and thus a whole host of daily activities and tactical initiatives.  Who your boss is and what her objectives are determine what you will do, such as replacing her coffee with decaf in order to encourage afternoon naps and thus allow you to get some real work done.

IBM almost went bankrupt due to their organizational structure, as their former president and resident cookie monster Lou Gerstner confided in his book Who Says Elephants Can’t Dance? Given their early and dominant lead in mainframe computers, IBM developed an organization structure that made the mainframe the center of their universe.  Everything IBM did evolved to support sales of mainframes.  When the minicomputer revolution ignited and UNIX (the original computer virus) escaped its petri dish, IBM’s intellectual inbreeding disallowed agility.  Their organization structure –software was subservient to hardware – made even suggesting alternatives heresy.  Though Gerstner did many things to disable IBM’s dementia, the single most important one was to decentralize and make all IBM divisions profit centers.

Nothing like sinking or swimming on your own to make you dog paddle furiously.

Recent IBM news should thus be disheartening to investors.  Organizational shuffling has merged software and hardware units together, with software being the overlord (and if a forced marriage was wise, software should be the top given market trends toward commoditization of hardware).  Two services divisions – technology and business – have also become conjoined twins, with tech services being the bigger brother in that particular carnival sideshow. In a statement almost copied from every start-up’s venture capital pitch, IBM’s CEO said “There are logical synergies across our services units, including the increasing value of leveraging our intellectual property in business process management and transformation projects for our clients.”

Stockholder should be scared when a CEO’s press release is littered with cliché buzzwords like ‘synergies’, ‘leveraging’ and ‘transformation.’

Granted, these internal mergers are not completely reflective of the old IBM.  There is no plainly visible central altar on which every blue suit must sacrifice chickens and Lenovo laptops.  Yet CEO Sam Palmisano has started the slow march away from decentralized entrepreneurialism to central planning … and we all know how well that worked for the Soviet Union (“Who?” asks the intern with authentic confusion).  Decentralization worked for IBM as a means to prevent going belly-up, and it worked for Hewlett-Packard before the Fiorina error, so Uncle Sam Palmisano’s decisions appears demented.

How an organization is arranged influences other strategy, such as marketing and product development, and thus a whole host of daily activities and tactical initiatives.  IBM’s recently released zEnterprise system, though not the hallmark of utter innovation, shows that hardware still matters.  Putting IBM’s systems and technology group under bit twiddlers means that hardware innovation will be limited to the needs of IBM’s software (instead of the entire software universe, which despite IBM’s thinking, is larger than Armonk city limits).  Product design is reflective of product marketing, and if hardware product marketing labors for people who peddle DB2, Lotus and Cognos, then there may well be very little IBM hardware innovation.

Which is when HP, Oracle and Dell will pounce.

The marketing lesson herein is really a management lesson.  People don’t do what you tell them, they do what you watch.  Every bureaucracy is designed to watch what employees do with some end goal in mind.  IBM’s consolidations causes employees to be watched over an artificial hierarchy of product group priorities instead of markets.  When markets matter less than internal organization, then the end will be near … again.

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Market advantages are like puppy love.  They don’t last.

Every product and service may have an advantage, and it is your competitors’ job to make that advantage disappear.  In early markets everyone tries to out-invent the other fellow, and they continue this until there are a handful of nearly identical offerings that end-up competing on price and +1 differentiators.

This includes Bangalore.

As much as techies will hate this, we have to admit that programmer time is nearly a commodity.  All other things being equal, a Java programmer in San Jose is no more or less valuable than one in Bangalore.  Yet San Jose is the 91^st most expensive place to live and Bangalore is much further down the list at 165.  Thus, the commodity that is a Java programmer has price as a key differentiator, with the Indian working for less.  Cheap labor is why Silicon Valley companies have been willing to deal with twelve hour time zone differences, cultural misalignment and accents so think that old Scottish men are intelligible by comparison.

Until now.

Like any other hot product, price rises with demand.  The demand for cheap Indian IT laborers caused a demand/supply imbalance.  This caused the price of Indian programmers to rise, often at 25% a year.  Cumulatively this has caught-up with the Indians whose success is beginning to price them out of the market.

Which is where Ireland and Mexico enter the arena.

India is now outsourcing to Ireland.  An Indian IT integrator and development shop is opening offices in Belfast to exploit the local advantage, namely workers with culture and language similar to the local buyers.  Whatever relative price advantage Indian IT once had is rapidly vanishing, resulting in on-shoring.  Granted, in this instance there will be some degree of cross breeding, with low-level and non-critical tasks still being performed in India.  Yet the desire of an Indian firm to recruit locals for IT work in markets like financial services shows there is no permanent economic advantage in price.

The same story is told differently by our friends NearSoft.  They do what many Indian IT companies do – they cut code for less.  However, NearSoft sells against Indian disadvantages, bragging about more closely aligned cultures and being in the same hemisphere as their customers.  In other words they sell all the benefits of offshoring to India without any of the head-throbbing pain.

Marketing strategy has to do largely with creating real or imagined “expected outcomes” from using a product or service.  India had one clear advantage, which was price.  With the expected outcome of Indian outsourcing (less cost but worth the hassle) going away, so is India’s advantage.  Since programmers are commodities, there is nothing that India can do to change this, so they are eliminating their disadvantages in the market by buggering Belfast. All the while Mexico tries to capitalize on those same disadvantages.

Competing on price is never a long-term strategy.  Your prices will rise, your competitors prices will fall, or someone will devise better features.  Since genetically mutating Java programmers is frowned upon, there are few ways of improving the product, thus India’s price position will inevitably erode.  Always invent, even if it is just a +1 feature.  Invention, be it new products, new markets, new segments or new features is the key to creating new value.

Until everyone clones what you did and drives you to commodity status.

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“Linux, the original computer virus.”

That line used to be said of UNIX, but no single flavor of UNIX ever spread across so many platforms and onto so many handsets.  Those handsets, the oft predicted unified communications solution, are the new OS battleground.  In a relatively short time we have seen:

• Google issue Android and, with partners Motorola and Verizon, shook Steve Jobs so bad he nearly busted a spleen (but I hear he can buy replacement parts easily enough)
• Flush from that success, Motorola decides that owning a Linux distro might be a good long-term option and buys Azingo
• Intel bought Wind River, the leader in embedded operating systems, and one who was grooming the embedded Linux market, including handsets, a chip target high on Intel’s priority list
• HP, unhappy that Apple iPads beat them to the Slate market, and seemingly unhappy with Microsoft’s offerings for slab devices, buys Palm to own WebOS and thus bring down the cost of cranking-out hPads (and produce a device that does not require rebooting every other minute)
• And, of course, RIM created and maintains the BlackBerry OS, which has proven to be so addictive that the FDA has considered regulating it

The interesting twin market dynamics are that every hardware manufacturer wants a slick mobile operating system, and nobody wants to be beholden to a software company.  Apple, HP and Nokia own theirs, Google and Motorola leveraged Open Source for their operating system (OS-OS?) and market leader Nokia did both, buying then outing Symbian.  Microsoft is found … well, it isn’t.  The factors that are driving this market change are:

Cost: Microsoft embedded OSs go for $3-16 per unit.  If you sell a million handsets in a year, that is real money and owning and OS or leveraging a ‘free’ operating system like Linux makes economic sanity.  Given that you can retail a smart phone for under $300, eliminating 5% of the cost of manufacture is a Good Thing™.

Control: For Apple, control is everything (they won’t even cede control of any part of the user experience to Adobe Flash).  Many Windows handset vendors felt they had little control over the user experience, which was largely bad anyway.  Buying an OS or influencing Linux development makes everything possible.

Innovation: If you do not have the ability to alter or extend the OS, then you have limited ability to extend the user experience – just ask anyone who waited an eternity to get copy/paste on an iPhone.  Having access to the OS source code means you can either mandate or influence core functionality.

The customer: People like what they know.  If you create a good daily user experience early in a product relationship, then the customer is more likely to stay with you in future purchases, especially if you have special lock-ins that make switching difficult. Owning or manipulating the OS makes this more likely.

Unclear is if the recent OS buying binge will soon abate.  Some of the alternate handset makers – Samsung, HTC, etc. – who have played the field might see the wall writing and hedge their bets by buying a mobile OS, or become specialists in one or more of the open varieties.  The real question is which strategy will win in the long term.

Don’t bet on Apple.  Walled gardens keep people out as well as in.

Don’t bet on Windows because their partners aren’t.

Don’t bet on WebOS because HP will not have the market breadth to make it a widely known and loved OS (and, as RTE, MPE and HP-UX have shown, operating systems are not HP’s strong suits).

Don’t bet on Motorola/Azingo because Moto is not a software company and lacks the creative energy to enhance Linux.

Place a side wager on Symbian because it is better than most people think and might be a dark horse.

Bet big on Android.  Google is driven, creative, knows how to lead and Linux has the power of an ecstatic developer community.  And being the original computer virus, it will handily port everywhere while stuff like Blackberry OS, iPhone OS and WebOS don’t.  Change often comes from the inspired or frustrated masses and Google can channel that into Android, as can their partners who have the skills and the motivation to make it happen.

UPDATE: A few hours after this blog was posted, a report hit our desk showing that Android OS is now selling faster that iPhone by seven market share points.  Double down?

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Newspapers.  Some say they are going, others think they are gone.  I think they are on the verge of a comeback.

I have a cartoonist friend who is makes a good living drawing web cartoons.  He wishes a fast and speedy death to newspapers, believing that their business model is older and less lovable than Charles Foster Kane.  He sees no reason that any business built on the daily delivery of dead trees should continue.

Some newspapermen reluctantly agree.  I spent part of Sunday afternoon with two reporters for a local newspaper group, which despite the efficiencies of consolidation admit that they live from fiscal quarter to quarter.  They have no idea how they are going to survive.  The cynical observation “Trying to be a first-rate reporter on the average American newspaper is like trying to play Bach’s St. Matthew’s Passion on a ukulele,” may be outdated.  We have to substitute the uke with a kazoo.

Newspapers are failing in our wired and wireless 24-hour news cycle nation.  People are fully accustomed to getting their news, sports updates, and even their comics in an on-demand mode.  Even in the day when afternoon papers existed, news was always several hours old.  This is unacceptable in a world where news happens all the time and has become a form of entertainment for many.  Between major advertisers finding better buyer recruitment online, and with Craig’s List eliminating classified advertising income, there came a huge mismatch between falling revenues and high fixed costs for papers.  Something has to break, and if Chapter 11 filings are any indication, it is the newspapers themselves that are breaking.

Sure, many papers have tried to make a move to digital, though their approach has been universally unsound.  Local news web sites do not take advantage of online opportunities.  They fail on many fronts to deliver to what Amazon.com has conditioned people to expect.  Newspaper web sites are little more than static pages with click ads, and enjoy the same roaring financial success that the Kitty Kat Korner blog does.

So it is odd that Steve Jobs, a man who has made life difficult for so many industries, may rescue newspapers.

Not Steve per se, but the whole growing Kindle, iPad, Slate hardware class.  The fact is that people like newspapers, books and other traditional media formats.  They just don’t like the limitations that dead tree delivery requires.  When you can fit all of your semester’s college text books into a manila envelope – by first putting it on a Kindle – then you have fundamentally changed the nature of the media.

Newspapers haven’t figured this out yet.  They are not yet fully aware that they need to make several related yet fundamental changes to their business model in order to thrive in the new digital reality.  It isn’t just going electronic: it is about maximizing the user experience, which is really what product design is always about.  Here are the big steps newspapers need to take in order to survive and stay relevant.

Save the trees: The cost and delay factors of newsprint are no longer viable.  Going to an all electronic distribution system will be a brave new world, but a highly cost effective one.

Instant news updates: Because people have shown a willingness to be wirelessly connected, newspapers need to push news down to the devices on a regular, constant basis (or at least allow a total newspaper download on demand) and that the news be just that – the latest breaking details and updates.  A commuter should have the equivalent of an up-to-the-minute morning paper on their iPad when they leave the office and sit on a subway train.  This alone might make newspaper subscription models viable again.

Targeted advertising (location based too): Advertisers are abandoning newspapers because they have better options.  When you can target ads to desired demographics and measure success, who would want the hit-and-miss of major display advertising in a pulp paper media?  But if an advertiser could target individual newspaper readers, that changes the value proposition.  If you are a 90 year old woman and your newspaper carries ads for motorcycles, either the advertiser wasted their money or you are one cool granny.  Newspapers should be able to deliver their constant news updates with advertising that targets the individual subscriber, so that granny sees ads for walkers and your teenaged son sees the motorcycle ads.  Toss in location based ads and you increase advertiser options.

Customized content: Most of the daily newspaper is waste paper, except in households with a lot of very different people.  I have met men who toss everything but the sports pages, women who only read the human interest section, and news junkies that only scan Section-A. In the modern age it will be viable to send all that content to every reader every hour, but premium content can be delivered on an ala carte basis.  This creates a value-add for newspapers and valuable new content for consumers.

Combined these changes address newspaper costs, enhance newspaper revenues, bring advertisers back to the press, and expands choice and goods to consumers.  Which is why so few papers will take the plunge.  There is a lot to do here, and though it is all a mere matter of software, there are enough moving pieces to be problematic.

There is an open market opportunity here.  Many newspapers have adopted content management systems for their online editions.  Some even use Open Source alternatives.  Extending these systems for reformatting, packaging, customizing and ad-targeting to subscribers is not the ugliest PRD ever written.  But the various disciplines combined are.  With the slate market fragmenting, and with content warlords like Steve Jobs making it tough for anyone wanting not to be imprisoned in walled gardens, the device-side coding will be cumbersome.  Ad targeting with load management is a science and best left to experts.  So it may take an entrepreneur aggregator to make all of this occur.

But, that is why Gawd invented Silicon Valley – to solve these pesky problems.

The marketing lesson here is almost Zen like.  Occasionally the universe pushes you in the right direction.  You just have to be pliable enough to float, like a loose piece of newsprint on the breezes of market momentum.  Instead of fighting to preserve the old model, brave newspapers need to do a complete conversion to the 21^st century and rake in the rewards.

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