Marketing Memos

Are ponytails about to go out of vogue at Sun?

Despite impressions, I don’t actually enjoy thumping Sun and its current management. I’m not nearly mean spirited enough to take pleasure in such meaningless potshots. But Sun’s varied strategies (if I may misuse the word) have never made sense and never mapped well to long-term trends. And some Sun decisions — like changing their stock symbol to “java” - are just plain dumb.

These decisions show in Sun’s share price. The market votes with dollars and the dollars are flowing out from Sun, both in revenues and stock.

Sun announced more losses and at a free fall velocity that would make Newton rethink his calculations. Analysts had forecast a loss of around a penny a share and Sun in fact lost 25-35 times that much. It is the third quarter in which Sun earnings fell below analyst estimates, a rate of loss that made all analyst simultaneously suck air.

Sun suffers because they either don’t read market tea leafs well, or on the few occasions in which they do, they get overly excited about their discoveries. Sun’s few market innovations revolve around making proprietary monster multi-threading CPUs which in turn create monster monolithic servers. Trouble is the industry has and is showing a growing preference for clusters, clouds and virtualization … using standards. Sun zigged left as the market slowly and predictably drifted right.

Silicon Strategies Marketing was contacted by Sun earlier this year and we discussed their Sun Ray thin clients. The thin client concept has been around for ages but never gained traction. I advised Sun that over the long term thin clients were a losing market because standardization and competition constantly drove down desktop/laptop prices, open source was reducing the cost of applications, PC’s were commodities whereas Sun’s thin clients had proprietary elements, and that CIOs already had significant infrastructure management investments and thus a high switching cost. Sisyphus has an easier job than selling Sun Rays.

Sun lost their collective minds when they did discover growing markets and hot products. In relatively short order Sun overpaid for StorageTek and MySQL. Storage is indeed a hot market as we humans collectively continue to horde bits. But Sun dumped $4.1 billion on the acquisition, a price that exceeds Sun’s current quarterly revenues by about 25%. At the time Schwartz said Sun would be “a consolidator in the industry” which showed an utter incomprehension about the market and the dynamics of storage. Too many players, too many options for storage, capacity/price competition out of control. Zeus would have a tough time consolidating the storage business.

Then Sun acquired MySQL, the dominate force in free database software and the only company in modern times to make Larry Ellison rethink his career options. Sun dumped about another billion on MySQL, a company that makes free software — there’s a revenue enhancer for you. Since tangent income is all anyone can hope to make on Open Source, Sun was paying a billion dollars for name recognition and a comparatively tiny $50 million revenue stream. Assuming flat revenue growth (a state Sun wishes they could achieve) that is a 20 year ROI.

And then comes a recession. Personally I love recessions. The marketing strategy consulting business picks-up when the economy goes south. For Sun this the recession will a boat anchor tossed to a drowning man. Their hardware is not price competitive in an era of bargain hunters, and their famous software (Java and MySQL) are free, which will indirectly create more support-oriented costs for Sun as more of IT scavenges for cost cutting opportunities.

No, I don’t like hammering Sun and their management. But Lord they make it so easy on me.

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Is desperation the right word to apply to Microsoft?

I avoid using terms of human psychology to describe an entire corporation, but desperation may be accurate. If a person or organization ignores basic principles, and instead chases odd and tangent opportunities, they do so in order to fool themselves, avoiding painful realities and hard work.

Which explains why Microsoft wants to bribe you to use their search engine.

Having failed to produce a competitive solution against Google, Microsoft wants to pay people to use their search engine. In a scheme slightly more complex than the U.S. tax code, Microsoft will reward customers when they buy a product located through LiveSearch. Retailers benefit because they only have to cough-up money to Microsoft when something is actually sold to a consumer (pay per acquisition) and not for the mere lead (pay per click). The system is an affiliate program for sellers.

To make all this work, retailers need to contract with Microsoft. To their credit, Microsoft lined up an impressive array of top-shelf retailers like eBay, Barnes & Noble.com, Overstock.com, Sears, and others.

And it will succeed as well as the iWon search engine (what, you aren’t using iWon?).

Microsoft ignores why people use search engines to begin with, which is to intelligently discover things. When they search for products, these products fall into two broad categories: commodity and specialty. Microsoft’s scheme doesn’t work for specialty products because the customer is often searching for special features from (typically) small vendors.

This leaves commodity products, which creates a problem with Microsoft’s rebate plan. An iPod is exactly the same regardless of it you buy it from Circuit City, Best Buy, and Jersey Frank’s “fell of the back of a truck” Emporium. When the product is identical between retailers, there are only a few significant differentiators, namely price and trust in the retailer. Take it from me, don’t trust Frank.

Which is why a lot of people skip product searches and run straight to Amazon.com, a company that has a solid customer service history and regularly has the best price available.

There have been several studies of search habits for consumers. People use search to:

1. Learn more about the originally desired product.
2. Discover competing products.
3. Find the best deal for the selected product.

Quality of results drives all three items. The quality of search results will most rapidly educate a consumer about the product. A few extra keywords will lead a consumer to competing products and a wealth of comparison sites and customer reviews. And adding the phrase “price compare” after the product name will lead a customer to the best price, typically through many price comparison sites like Price Grabber.

Microsoft is ignoring the fundamental need of the customer. Applying what is essentially a rewards program to search does not improve search, where Google is the master. Instead of adding value where users need and want said value, Microsoft is desperately chasing nothing.

LiveSearch, the next iWon.

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Carly Fiorina’s time at Hewlett Packard and Louis Gerstner time at IBM proved that decentralized management of product lines in a large company is the only sane management strategy.

Lou took an ailing and heavily centralized IBM, and saved it from extinction by decentralizing its product categories. Carly took a healthy, decentralized HP and tried to kill it through heavy centralization.

Now AOL, the perennial poster child for developmentally disabled technology, has seen the light and is decentralizing (while some of their executives face jail time) .

AOL — which lost the ISP wars by failing to add value in broadband, and whose Time Warner appendage lost the portal wars by failing to provide appetizing content — is now decentralizing their content components to the point of debranding — jettisoning the AOL name. Given the tarnished AOL brand image, debranding their targeted web properties is essential lest the fractured pieces of the empire carry the lingering stench of failure.

AOL is creating new — and re-branding old — web properties that are largely devoid of any reference to the centralized AOL moniker. By making each web property (product) a separately branded entity, each site can create its own identity and appeal to highly targeted markets. This amplifies the appeal of each, making the properties stronger.

(This is a lesson Yahoo may take to heart - weakness in one business may create a weak brand image for all other components. Hence Yahoo’s reluctance to be acquired by Microsoft lest Yahoo products suffer even more brand debasement.)

Herein is where branding in large organizations is problematic. If one or more products/divisions are strong, there is the potential for that brand strength to carry into the other divisions. For example, HP’s strength in printers has led many people to buy their often unreliable laptops.

But the reverse is true. I used to manage large HP data centers, and had problems with their proprietary MPE operating system — for a while it crashed too frequently for mission-critical work. During that period I rushed to visit a relative in intensive care, and I was not happy to see her hooked-up to a number of HP medical monitoring devices. The weakened MPE brand created in me a negative prejudice for their medical products.

In web properties — where the subject matters presented on a web site may be audience specific (say teenage boys vs. geriatric women) — decentralized branding is essential. Contrary to common belief, segregating the brands does not eliminate potential synergies.

Take SourceForce.com (formerly VA Software) who has a number of technology industry web sites, on which they sell a ton of advertising. They reap significant synergies from different web properties that have at best sporadic cross traffic. The branding needs for their IT manager’s web site is very different than their Linux junkie web site.

Take two of AOLs newly branded properties — Asylum, a site for young men, and WalletPop, a site devoted to personal finance (a topic with which young men are largely unfamiliar). Pulling both of those under the torn AOL umbrella would do neither property any favors. But allow each to tailor the entire brand to their members is favorable … and thus smart.

The marketing issue here is multifaceted. First, you must decide if there is any real cross-over between the product areas. If so, a unified brand might do you some good. If there is no cross-over, then odds are the unified branding will not help in the slightest and may actually hurt.

Second, does the parent brand offer any specific advantage? HP has a strong overall technology brand, and it generally helps all of their product categories. AOL does not, and thus the AOL brand may hurt the individual web products.

Finally, top management has to have the strength to let go. Decentralizing and allowing subordinates make both strategic and tactical decisions about the decentralized products and brands takes guts. But the bigger and more diverse your company is, the more important decentralising will become.

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