Marketing Memos

“Bottoms up” is not just something you say during cocktail hour or at a strip club. It is a market strategy as well, and Google will implement it with a fist full of dollar bills.

News of a Google netbook operating system – Chrome OS by name – has emerged. Targeted for netbooks running ARM and x86 chips, COS centers Google’s Chrome browser as the interface to the world and to Google applications. This latest Linux distro is designed to address the bottom of the commercial computing market (we’ll ignore the One Laptop per Child gizmos that would otherwise win the Barrel Bottom Scraper Award for underpowered PCs).

Scott McNealy understood half the equation when in an over-caffeinated frenzy said “The network is the computer.” Naturally McNealy saw the hardware side of the system, being that he was in the hardware business. But as any technology marketing maven will maintain, it is the apps that sell the hardware.

Google is all about the apps.

Restate McNealy’s maxim for software and you get “The Internet is the app.” Google search is arguably the most popular app on the Internet. Their desktop applications … not so much, but for low-end users they are plenty.

Low-end users like netbook buyers.

Now that Google apps (Docs, Gmail, Maps, etc.) can operate offline, and given that Google’s browser can be tweaked to enhance these offline apps, Google has all the components for customer lock-in or delight, depending on how un-evil Google really is. Non-power users who want a computer for the most mundane uses – people for who Open Office is overkill – could easily exist using Chrome OS, Chrome Browser and G-apps. This is probably 80% of the market.

I’ll take an 80% segment any day.

The open marketing question is “what hardware vendors would ever use COS?” Industry analysts assess the low end Microsoft tax on netbooks to be about $20 a unit when XP is deployed, or about 7% of the cost of the cheapest netbook available today at CompUSA. $20 may not sound like a lot to you or me because it is a one-time cost. Some industry estimators expect 35 million of the little laptops to be built this year. The Microsoft tax would rack-up nearly three quarters of a billion dollars, which is serious money to hardware vendors or anyone outside of the Obama administration.

Smart money is betting that Google will ask only a nominal, fixed partner fee for joining the COS party. Pay a few grand to gain access and your hardware company is alleviated of the Microsoft tax. Assuming that the brand of operating system is irrelevant to the average netbook buyer, netbook builders are looking at a few extra million dollars a year to pad their 201Ks (which were 401Ks before the recession).

Google’s goal then becomes monetizing the user, not the OS. Tech pundits predict that advertising will be Google’s approach. This may well be. The evil half of my brain (which in full disclosure actually occupies more than half my cranium) sees a million ways of inflicting advertising on unwary netbook buyers. Most methods however are intrusive, unwelcome and exactly what Google will not do. Chrome will not force people to endure Google ad pop-ups, or permanently scrolling banners on the top of the screen (besides, netbook screens are too small to waste on banner space).

Brand and first choice in external interactions is where Google gains, advertising revenues following online. Google is creating a 100% Google environment and a go-to brand. When netbook users wake in the morning, their lives will revolve around the Google OS. Add Google browser, add Google desktop applications, add Google search (built into everything), ad nausium. It is a completely interconnected and Internet driven brand. Microsoft came close to this when indoctrinated info workers adopted Microsoft Office atop a Microsoft OS.

It was Microsoft’s overriding strategy that both gives Google opportunity and may require Google to cede it.

The question is if Google must open the OS in order to compete. For all Microsoft’s faults (a list that is slightly longer than War and Peace and a Hugo Chavez speech combined) it understood that the application sells everything else. The network is the computer, the Internet is the app, the app is everything. When there is a market leading application, Microsoft supports it then clones it. Microsoft has always entertained, encouraged and even funded developers to assure that the next great app – whatever it may be – will be under development somewhere. Microsoft always wants the Next Big Thing to run on Windows first.

If Google closes COS, it will enjoy only limited market penetration. People slightly more advanced than monkeys – anyone who has not created permanent couch indentations – will eventually want to do something on their netbook that Google has not provided. Google’s desktop toolbar is not a digital Darwinian ecosystem. Gadgets are insufficient. Google will open COS in order to expand.

Just don’t expect it in version 1.x. Google knows not to invite unnecessary heat, and will keep COS locked while it matures and takes complete ownership of the low end of the market. After that beachhead is secure, they will open, expand and become a serious threat to Microsoft.

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Seems everyone is aiming for the desktop. Some are drifting slowly, trying to grind away Microsoft’s dominance. Others are planning a full frontal assault.

Yes, Larry Ellison is in the latter category.

The slow motion mob is of course Linux. Nearly a decade ago I was helping SuSE peddle the first competent Linux desktop distro. The Microsoft hurdle was steeper then than now, and we knew advising CIOs to conduct forced march migrations was folly. But CIOs were interested in researching alternatives, clearly disgruntled at being held captive by Bill Gates and his nerdy desperados.

We advised a piece meal approach. Since our study of CIO attitudes concerning Linux showed that they wanted their IT staffs to be Linux literate, we suggested migrating just IT to Linux desktops (sans Microsoft support teams who both needed Windows on their PCs, but would also attempt CIO assassinations if they were forced to use anything else). This way all developers, administrators and support teams would be become intimate with Linux in very personal ways. Once IT staffs achieved guru status, CIOs could plot expanding Linux desktops to other end users (transactional users first, power users and stodgy CIOs last).

It seems this is about as far as they got. On average firms deploying desktop Linux at all have done so to 20% of their staffs (some very aggressive firms have hit the 80% mark, which likely skews the results upward). These numbers suggest that where Linux desktops were taken seriously, the IT staff and some transactional users have been given a Microsoft alternative. Technologically speaking, that could have been done a decade ago. Thus it appears that migration momentum may have choked at that threshold.

Which is where Larry Ellison enters the picture, eye patch on and cutlass raised in the air. In buying Sun, Larry bought Java. Java is the closest thing to ubiquitous following Windows, Flash and lying politicians. This includes JavaFX, the Java solution for Rich Internet Applications (RIA). Given growing demand for Internet based applications and server-side application hosting, and given the inherent restrictions of stateless XHTML (AJAX not withstanding), RIA is an important piece of the puzzle.

Just ask Adobe, who is currently Flexing its muscles in that market.

Newsworthy then are Ellison’s Java plans, which included ‘suggesting’ to the Open Office crew to use JavaFX as the interface for future editions of the leading Microsoft Office alternative. Larry ‘suggested’ this approach in much the same way as Pol Pot suggested people become farmers and join the Communist Party. If executed well, employing JavaFX in Open Office would make the application suite richer, more flexible, more usable, runnable from the web and executable on smart phones … all in ways that Google Docs are not.

Ellison wasn’t kidding when he said that Java was “the single most important software asset we have ever acquired.” It gives him competitive keys to the desktop.

And it is proprietary, just like Microsoft or Adobe.

For all the thunderous press that the “opening” of Java received, many key components are still owned and controlled by Sun Oracle. Plans Sun may have had to open JavaFX are likely now being nailed to a cross. Larry loves it when Open Source from third parties hammers the competition, but has shown only occasional desire to let Oracle code be opened itself. JavaFX – as a tool for driving a wedge between Microsoft’s application suite dominance and thus its desktop OS dominance – may well be a key technology in charge a market landscape, and thus worth protecting.

Though I bet Larry might release JavaFX if Adobe Flex takes too much of a lead.

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Once in a great while you see a company doing what would be sane in other markets, but might be a Herculean improbability in their own.

Yes, this has to do with the Linux market.

Specifically this has to do with the embedded Linux market, a realm so fragmented that ‘chaos’ is too polite a description. It is also one of Linux’s silent success stories. Odds are that you are within five feet of one or more devices that have embedded Linux inside. Glancing about my office I count three (a printer, a router, and a cell phone, though I suspect the hub and print server at Linux-based as well).

The embedded Linux market is fragmented along several vectors. The primary vector of discord is the application. Router makers and printer makers and cell phone makers have different interest and needs with embedded Linux. A while back my neighbors at Wind River were toying with the notion of creating an online community where users in the different markets could share innovations in a non-competitive environment, but that initiative seems to have fallen in the gutter.

Now MontaVista wants to do the opposite.

Ignoring for a moment the unfortunate aspect of having the word ‘vista’ in their corporate name, the folks at MontaVista have decided that the proper approach to the market is to offer embedded Linux packages tailored to different market segments. They are not tackling the relative industries (routers, printers, cell phones, etc.). MontaVista is segmenting their embedded Linux offering by CPU/platform – Atom, PowerQUICC II Pro, PowerQUICC III, TI OMAP35x, etc.

Unlike the x86 server market, where use variations between box vendors are relatively limited, the chip market for embedded Linux is highly fractured. The differences are allegedly significant enough that loading a Linux distro down with cross platform packages is a burden to the buyers. MontaVista claims that many in the market buy an embedded Linux package and then customize it to their platform before using in production.

Which seems very odd given that the use of Linux Inside is typically for the more primitive functions.

MontaVista is segmenting their product to match the chip-based segment of the market. Now segmentation is a Good Thing^TM for marketers to do. What I find curious is that the assembly of a Linux package by CPU is a significant segmentation vector and that it has taken this long for a vendor to segment accordingly.

Which means it may not be a prime vector for segmenting.

Over at Wind River, they segment based the category of final product in which their Linux will be embedded. There are Wind River Linux distros for automotive devices, networking gear, consumer products as well as several medical and military specs. Instinctively this seems to be the more rational segmentation model. Consumer devices need user interface packages (image a G-Phone without the G-UI). Networking gear doesn’t need fancy UIs, but it does need routing and network security functions that a consumer device might not.

The method to MontaVista’s madness may be in their new Integration Platform (sigh, another use for the acronym IP). Akin to SuSE’s openBuild system, the goal is to provide customers with ways of safely and sanely customizing MontaVista’s core distro. This saves buyers the pain of finding, including and removing parts of a Linux distro to make it work for the intended application.

Here is a contrast in market approaches: Wind River has both a general purpose distro and a string of special builds for different industries. MontaVista has a general distro with some reconfiguration for different CPUs and with a tool to tailor the distro to your specific needs.

Which approach is better?

I’ll have to give the short-term nod to Wind River. Business in competitive markets moves fast. Wind River provides products pre-configured for various industries, and yet which can still be tweaked by the customer (or by Wind River) if there is some exotic need. This helps customer get their products to market faster and possibly cheaper. If Wind River were to engineer an openSuse/MontaVista-IP type system for customization, then they would be hitting on all cylinders.

The marketing lesson herein is that segmentation is always driven by the customer base, not the convenience of the vendor. Segmenting by industry is a natural for many technology vendors, but it may not be the viable for your products. There are two primary goals in segmenting, which we’ll be happy to explain once we land you as a client. Your segmentation model must meet these goals. If you don’t then you will embed your company into the ground.

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Is Linux making Sun see Red?

Stock prices reflect mass consensus of where the economy – macro or micro – is heading.  Silicon Valley watchers woke to discover that the market capitalization of Sun and Linux vendor Red Hat were about equal.  Though matched market caps are not meaningful in and of themselves, the trend lines that have brought parties to parity caused more than a few folks to portend the a new dawn (and no, I refuse to make the obligatory ‘Setting Sun’ joke).

People invest in businesses from which they expect a return, and when the mass consensus – the wisdom of the crowd if you will – drops your share price to liquidation-level expectations, you may indeed be facing a corporate dirt nap.

The market is largely on fat software/support margins.  I bet the same way.  Software it wonderfully portable (any Internet connection), well differentiated (even among Linux distributions) and has fat margins.  Hardware is not as portable (though stock in UPS is a good play), increasingly commoditized (x86/64 servers abound) and thus has crumbling margins.  To make real money in hardware these days, you have to ship a lot of iron.

But investors also buy and sell faith in execution.  Businesses with clear, narrow and well executed market focus tend to do well.  Diversification is OK, but within the context of serving one or two markets.  Red Hat is very focused on enterprise Linux, almost to the extent of ignoring embedded and desktop Linux.  Sun is all over the place, trying in one breath to be server company, and Open Source software company, a storage company, and a chip company.

They are actually a schizophrenic company with a 77.4% share price drop in the last 12 months.  They are doing worse than most banks and brokerages.

The real measure of what the market thinks about Sun and Red Hat can be found in one pair of numbers – their cash/share and price/share.  A price per share well above horded cash shows how much wealth investors believe the company will generate.  If the price per share equals the cash per share, then investors see zero value in the company’s operations.

Red Hat’s stock is trading for 3.6 times cash.  Sun is selling for cash plus spare change.

What is Red Hat doing well?  Turn to the checklist presented in the book In Search of Excellence and you’ll see that Red Hat has covered most, if not all, of the eight items that define and excellent company.  Sun has not, but most seriously has forsaken the principle of “sticking to the knitting – staying with the business that you know.”  They have moved in too many directions too quickly without any unifying theme based on their expertise.  They appear to chase market tangents (storage one day, Open Source databases the next) without creating a singular compelling reason for customers to buy and investors to invest.

For Sun to survive they will need to solidify their holdings into meaningful solution sets that drive some form of unique value which they can monetize (giving away software is not a viable monetization scheme).  They need to quit chasing icons and fads and start delivering a real value proposition.  They need a brand.  Something on which buyers and investors can anchor their hopes and trust.  They need a leader who can marshal Sun’s strengths and has the guts to trash its weaknesses.  Sun needs a maniac warrior with a Napoleon complex and market blood lust.

Larry Ellison has $10 billion in cash lying around and has occasionally talked about getting into the hardware business.  The difference between Sun’s cash- and price-per-share totals $170 million.  Larry could snatch up Sun without wincing and get his chief database competitor MySQL as part of the deal.  With Sun’s massive multi-threading monster chip, Oracle would have a database server combo that might be unbeatable.

Come-on Larry.  The time is right.  Get ‘em while they’re down.

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We are about eight years behind schedule.

Around the millennial epoch I helped SuSE whelp the SuSE Linux Enterprise Desktop (SLED), a product that is till on the Novell price list. Growing frustration with Microsoft viruses, continued vendor lock-in and the inherent lower cost of an Open Source desktop were hailed as the beginning of the end of Microsoft’s dominance.

Yeah. I didn’t believe it either.

SuSE arguably had and still has the best alternative to a Microsoft desktop, and considering that it is not Vista, perhaps the best desktop available. But like many good technology solutions it never took the market by storm despite continued frustration with Vista, continued vendor lock-in and the inherent lower cost of an Open Source. Market dynamics and realities stopped SLED’s march.

“The reality is that (the Linux desktop) is a slow, gradual, unstoppable growth,” said my buddy Jeremy White at CodeWeavers, a crew that knows more about Linux desktops than Torvalds. “Emphasis on ‘slow’. Growth is steady, but measured in a fraction of a percent and mainly overseas.”

The reason Linux desktops have never been a big hit with businesses is because no segment of the market sees enough advantage. Technically challenged small businesses have enough to deal with, and can’t even migrate away from Windows 98.

Midsized firms have the technical skills required, but the cost savings do not justify it. With discounts, the combined Microsoft operating system and common office applications cost about $200 a seat. If we assume a business with 500 employees and a four year hard/software life cycle, that is an annual expense of $25,000. This savings would be entirely wiped out by the switch costs and requisite hair plugs for the IT staffers who ripped out their own follicles during the migration effort.

Enterprises simply have too much inertia. They have invested heavily over the years in management infrastructure and IT expertise with Windows. Conversion to a Linux desktop might be profitable, but the scope of the project (not to mention technology territoriality) scares away IT staffs with urgent issues, like installing more network bandwidth so play Gears of War on company time is more enjoyable.

Whatever promise Linux desktops had in the early days were hampered by a premature rush to deploy. One former Novell product manager told me “There were a million dirty little secrets of failure.” Many of the big deployments heralded in the trade press never happened. He noted that lawyers panned early editions of Open Office for the simple lack of strike-through fonts. Forget retraining users when the basic tools were unusable.

But the Linux desktop market is growing, and will (eventually) create a significant dent in Microsoft’s territory … someday. In Asia and in developing countries, Linux is becoming the de facto OS for all computers including desktops. This includes foreign enterprises. Assume that their desktop administrators make $15,000 a year. It is cheaper to have their administrators and support staffs learn GIMP and train all employees than it is to buy copies of Photoshop. Disparity in economics drive differential rates of adoption.

This regionalized momentum will not directly affect industrialized countries, though over time we will have to deal with incoming documents in native Open Office formats. In industrialized countries Linux desktops will be found in the enterprise, but only on techie desks (but then again it was the techies who brought Linux servers into the enterprise, and we see where that led). There will be niche uses, including virtualization controllers and some thin clients.

Yet Linux adoption will grow mainly from consumers. And, yes, I did take my medication this morning.

The tech industry inverted in the new millennia. It used to be that computer technology was designed for business first, and that technology later filtered down to consumers. Now consumers are leading in many fields (laptops, cell phones, etc.) and innovations for consumers later reach the enterprise. How many enterprises are providing Phones or their equivalents to employees? How many will five years from now?

This is where netbooks and cell phones come into play. Devices people use the most set their expectations for usability. Though in their nascent stage, netbooks (which are primarily Linux based) are becoming the tool of choice for many households who now do everything on the web. They use Google Docs, Quicken Online and keep family photos on Flickr. The old concept of a laptop, much less a desktop, is gone. And Linux/Firefox has become the OS/UI with which they are most accustomed.

Then there are cell phones. Android is easing past its growing pains and ready for broader adoption. Palm is resurrecting itself with the Linux-based Pre. Motorola, HTC, Samsung all build Linux handsets. Android and the Pre show Linux can be cooler than Apple. People use their smart phones more than their netbooks. Thus usability levels of expectations are being set by smaller devices that are used more frequently, and over which Microsoft does not have the same leverage as with desktops.

I won’t predict that Linux will rule the end user space (and if I knew this for sure, I would keep it between me and my stock broker). But like life, Linux finds a way. It is the original computer virus, able to infiltrate every hardware platform. It’s only limitations appear to be the imagination of developers … who are smart enough not to tie ribbons around applications.

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