Marketing Memos

I gave a talk on Marketing Technology in Troubled Times at the recent Software Business conference in San Francisco. Seems that the topic is popular as I have been invited to give the same presentation via webinars in December to the B2B Power Exchange and the Long Island & Manhattan Software CEO Roundtables.

Nothing like a little economic panic to perk people up.

Should we panic? Nobody knows for sure. The devil himself, Alan Greenspan — a man destined to take majority blame for the current crisis — called his economic quagmire “an event that occurs once in 100 years”. The last event of this scale was of course the Great Depression, which by all accounts wasn’t so great for the people who lived through it. Just ask the recently departed Mr. Terkel (click to buy the book Hard Times).

The worst case scenario is that this will be a long a nasty recession. Using the Great depression as a guide, we see a four year decline in GNP (called GDP in modern times) and another four years to get the GNP back to pre-crash levels. But this is the worst case America has ever encountered. So much is different today that such a simple comparison is inappropriate.

This is especially true for the technology industry which not only rebounds before the rest of the economy but may well be a tool for launching the rebound itself. Innovation occurs in times of crisis and nobody innovates more than the American tech sector.

One big change in the current mess is that governments around the globe massively intervened in the financial markets. This likely kept the world from plummeting off the financial cliff but at the cost of trillions of dollars, yen, rubles and shekels being printed. Inflation follows when countries expand their currencies so rapidly. The $700 billion dollar bailout of U.S. financial markets raised the national debt 10% overnight. Never before has such a spike occurred and the effects will not be felt for a few fiscal quarters.

Another difference between the great Depression and today is that we live in a global economy which spreads risk and pain across a larger number of people and economies. The Great Depression lasted a long time because there was no rapid movement of income and business around the planet. Some of the recent shock has been absorbed by investors from Dubai to Dublin to Dongguan. This spreading of risk and pain will shorten the recovery time.

But still … the Big One lasted for eight years (four if you use the start of GDP growth as the official end of a recession). The average U.S. recession only lasts 17 months. That’s a three- to six-fold increase time to market recovery.

Signs of woe in the technology business have already appeared. Analyst groups — who are overly optimistic by nature and design — have scaled back all expectations. The chip market is now forecasted to rise a mere 1% in 2009. Given that analyst groups project higher than reality normally permits, and that we are in the earliest phases of this global market pullback, I expect chip market shrinkage. Polls of CIOs show that a full 50% have already frozen or reduced their budgets and those planning increases are expending their budgets a mere 1-3%, just enough to replace some old PCs. Consumer tech spending has to fall as people face foreclosures, layoffs, and choosing between an iPhone and a Big Mac.

My gloomy prognostications beg the question who will survive and grow in the tech business during this recession? Vendors who will thrive include:

• Security and fraud prevention- theft rises during recessions
• Optimization tools - helping businesses pinch pennies
• New advantage vendors - people who provide stunning new ways of making/saving money
• Corporate competitive shopping - extending competitive price/quote into enterprises
• Companies with cash … and lots of it - continuing R&D and M&A

Most interesting to me is fraud prevention. Recent reports about Microsoft disabling PCs in China that were running illegal copies of Windows shows a coming correction in vendor attitudes. Estimates run as high 36% of all software being pirated and vendor losing more than $40 billion (the latter of which I think is a gross under estimate). The tech industry has long accepted this rate of loss as a cost of doing business, but in an economic environment where new purchases will slow, forcing thieves to pay for what they have stolen is a relatively cheap way to boost revenues. At Software Business I met representatives of New Momentum, a company specializing in fraud, theft and brand protection. They are seeing an up-tick in interest due to the worsening economic situation.

What should you do to weather the downturn and survive a likely period of strong inflation? You’ll have to attend one of the webinars I listed at the beginning of this post.

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A smart(ass) marketing professionals can find opportunity in adverse situations. So in an effort to atone for my occasional (perpetual) jabs at Microsoft and Vista, I offer the following observations of two bad realities that Microsoft can leverage for future success.

First off is a news story that likely increased Steve Balmer’s scotch intake. Sales reports concerning Microsoft’s “client revenues” (i.e., operating systems) are dismal with Vista being the worst of their offerings. Despite being the defacto OS on nearly every new laptop and desktop sold domestically, client revenues grew a measly 2% in the last quarter. This dismal sales rate occurs despite PC sales being up as much as 12%.

Many factors are responsible for this. Naked hostility to Vista is one. Asians adopting Linux is a growing threat to Microsoft. People opting for the cheaper and more resource-friendly XP is another factor.

Theft is a problem too. Or at least it was.

Microsoft is raising the wrath of certain Chinese PC users who have taken full advantage of that country’s nonexistent intellectual property (IP) enforcement. These folks happily buy illegally burned copies of Windows from street vendors for about $1 a copy, barely more than the cost of CD duplication. So Microsoft has activated “Genuine Advantage” control mechanisms, which are an advantage only to Microsoft. The validation engine inside of Windows disables computers with unlicensed copies of Windows.

Some Chinese computer users are ticked. One enraged thief with limited cognitive capabilities said “Microsoft has no right to control my hardware without my agreement,” missing entirely that his computer now works exactly as it should when there is no licensed operating system installed. Another ex-PC users astutely noted “If the price of genuine software was lower than the fake one, who would buy the fake one?”

It is tough to sell software for less than a buck a copy, but Microsoft is trying to leverage China’s demand by lowering prices on their software. They dropped the price of Vista in China to $73. I’ve used Vista and by my estimation that price is about $74 too high (someone needs to compensate me for all the extra hardware I had to buy).

Herein lays the opportunity for Microsoft. Globally they should enforce the licensing on XP and not on Vista. In other words they should encourage theft of Vista in the short run, until such time as the suffering masses of humanity have acclimated themselves to the new OS. Once enough people have been forced by circumstances and unconscionable frugality to adopt Vista, then others will reluctantly pay for the operating system in order to achieve compatibility with the rest of the word.

Face it — nobody in their right mind would pay for Vista now, so Microsoft might as well give it away to seed the market.

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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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The mobile handset market tipping point has arrived, and it is a wonderful thing to watch.

In very short order (relatively speaking) the mobile market has seen:

• Google/Android advance a Linux mobile operating system
• Symbian convert to Open Source
• Motorola release Eclipse-based mobile development tools
• Verizon open its network to certifiable devices not sold by Verizon
• Wi-Fi handsets are now commonly sold by network carriers, eliminating some data network revenues

In short, the mobile market has opened up and this trend will accelerate (which is seemingly impossible, but I never bet against an avalanche). Two dominate forces are causing this to happen: competition and customer resentment.

In a rare moment of governmental lucidity, regulatory agencies in charge of frequency allocations made sure that no company could monopolize the cellular industry. This came as a huge surprise to AT&T who is unaccustomed to real competition, and it showed in their perpetual inability to focus on their market mission.

Congress — in an even rarer show of caffeinated consciousness — made your telephone number your property, forcing cellular carriers to release your number if you ever decided to switch to another network. This removed vendor lock-in based on the obvious need human and business continuity through numerical IDs.

Competition required each cellular providers to keep trying new things in order keep their customers happy, and thus keep their customers. Better and simpler service pricing, faster data networks, fancier and heavily subsidized handsets. The technology and markets have evolved so rapidly and brought so much new end-user convenience that many people would rather do without television than their mobile handset.

But there was a weakness in the market induced when the carriers tried to keep customers locked-in. The choice of handsets for any carrier was limited to what they sold and supported. The back room economics of this had to do with the terms of your service contract. The logic (so to speak) went like this:

• To encourage you to subscribe to our services, we’ll sell you a $500 handset for $1.95 (we, the network carrier, eat the $498.05)
• In turn you agree to subscribe to our services for no less than two years, and pay massive fees for an early cancellation
• Don’t worry, we’ll earn enough off of you in two years to more than make-up for this initial loss (unless of course you don’t use your hands free kit, fly your car off a bridge, drown and thus fail to pay your cellular bill on time)
• And if you use some foreign device on our network, don’t expect to get any help from us

The carriers then would write sole-source deals with handset manufacturers for the latest and niftiest new handsets. So if you wanted a SuperCell X400L then you could only get it by subscribing with Honest Earl’s Cheapo Celluar. This limited the number of X400Ls, the number of applications and accessories that worked with it, and thus your choices.

This model is about to break and break hard. As more and more people start carrying these portable computers we call cell phones, they want more functionality which means more applications. Carrier network are not software companies and cannot possibly design every type of application for their set of phones. Thus, customers are a bit disgruntled by the limitations of what handsets run on what networks. What do you mean I have to subscribe to Sprint is I want to play Mega Reversi?

Led by the techie caste, people have started using “unlocked” devices — unsupported devices on carrier networks. The carriers may offer support for unlocked devices, but the end-user success rate has been high enough to spawn a thriving market in unlocked devices. This is in part because the handset manufacturers earn a better margin by selling more directly to the customer and also broaden their markets in the process. Want an AT&T Tilt without the AT&T? Buy an unlocked HTC 8925 and slip in your SIM card from your old Alaska Wireless handset (unwise if you are not in Alaska).

Vendor lock-in was beginning to break, so the rest of the market decided to help the process along. Nokia will gladly sell their handsets to anyone as will HTC. Google wants to make one operating system to cover all cell phones (which has to keep Steve Jobs up at night) and Symbian was released into the wild as Open Source to counter Google. The networks are beginning to see the trend and not fight it.

When competition is assured and customers can collaborate on alternatives, it is better to lead the trend than to be crushed by it. Cellular customers will have the final say and it will eventually be that all devices will work on all networks (tower protocols being the current, and perhaps temporary limit).

Want to make some money? Start thinking about mobile applications. That is where the next next thing will be.

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Who would have thought Oracle would lead the SaaS market.

Not that I hold perfect confidence in the source of these numbers, but a report at venture capital focused SandHill.com shows Oracle at the #1 slot for companies using and considering vendors for SaaS deployments.

In fact, top-shelf companies fill the top shelves of the SaaS vendor list. Oracle, SAP, Microsoft are all players. The early-advantage entry — SalesForce.com — scores a trailing 11% compared to Oracle’s 16% and Microsoft’s 14%.

Sarah Friar — the Goldman Sachs analyst who wrote this report — tells me that the focus of the survey was at the application level. I would have automatically believed her numbers had  databases and infrastructure management tools been included. But focused on applications, Oracle’s dominance caught me by surprise.

This spells bad news for SaaSy start-ups. Mature markets are dominated by an average of three vendors. This is based on some groundbreaking research by General Electric in the 1960’s and my personal market observations. When three vendors together consume 2/3rds or more of a market, that market is definitively saturated.

Though Sarah’s report did not break-down the sources of these market share numbers, we see four competitors taking 53% of the current SaaS market (which may grow as time continues). This is far from saturation point, but the market space is dwindling and the gorillas are starting to beat their chests. This means in certain segments of SaaS, opportunities will begin to shrink — at least in the B2B SaaS space. The consumer space will remain a Wild West frontier for quite a while.

Does this mean you should abandon your SaaS start-up and stash your stock option warrants in the toilet paper dispenser? Not at all. Oracle has to buy somebody. Like Microsoft before them, Oracle is slowly slipping from the innovator caste to that of aggregator, conglomerate and Borg. This is a natural effect of the changes in the B2B technology markets and still remains your best exit strategy.

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