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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I just saw the first Microsoft advertisement with Jerry Seinfeld and Bill Gates. My predictions were spot-on. They tried to be funny, futuristic and hip. They failed completely, unless not mentioning Vista is considered a success.

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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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Has Microsoft lost its bearings?

This is more than idle speculation. Their recent failures, when placed side-by-side, showing an interesting pattern and a prescription for peril.

The two mistakes are Vista and Yahoo, and together they show a company that has forsaken its core missions and failing to defend their position, in part by chasing things other than what made them great (well … big) to begin with.

Microsoft’s mission was to make the end-user computing experience standard and bearable. It doesn’t matter if we are discussing MS-DOS, Windows, Office, or Internet Explorer. Long ago Microsoft rightly concluded that the user was important, that computing power was going personal, and that they should dominate the market.

They also were once a paranoid pack of profiteers and found ways of beating competition back to the point that various governments around the world intervened to prevent a desktop monopoly.  They have lost that edge.

In recent years, Microsoft has been chasing other dreams. MP3 players, web properties, cell phones, cash registers (POS terminals), advertising, game boxes, and more. It could be argued that each of these is an end-user computing point. But each is a detachment from where Microsoft’s buttered bread — the desktop.

Resources and attention diverted to other products caused a lack of attention to be paid to the desktop arena. While Microsoft was failing to deliver with Vista, it was also failing to see how Linux would become the de facto operating system for the next generation of users in developing countries. Microsoft created nothing new or  useful for the established market while forfeiting the emerging market.

They were too busy chasing Jerry.

Dismayed by their own lackluster performance in the portal and search arenas, Microsoft sought to buy position through buying Yahoo. Though there may be interesting, undisclosed synergies in the MicroHoo marriage, the mere transfer of assets added nothing to their market, that being the desktop.

Imagine for a moment that instead of birthing the bloated Vista, Microsoft had worked diligently on making XP more Internet aware — that their operating system knew how to make the most of a global network of computers without the need to muck-about in a web browser … that all web 2.0 technologies became an active part of the desktop experience, delivering intelligence to any/all desktop application — Microsoft’s or anyone else’s — providing that those applications ran on Windows.

This would be sticking to their vision, which is now walleyed.

It is too late to salvage Vista’s reputation, and it might well be worth working on XP+. It is too late to salvage the Yahoo deal (unless Jerry buckles) and might well be worth making the cellphone, Xbox, and PC collaborate. It might well be worth getting legal copies of XP onto every laptop flooding into Asia, Russia, and Latin America.

It might be better for Balmer to stick to his knitting.

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“Sometimes you have to get their attention first,” said the old farmer, who had just whacked his mule in the forehead with a two-by-four. The mule, a little stunned, nonetheless quit being ornery and started pulling the plow.

Perhaps Dell has some mule blood in it.

Dell is discovering what green marketeers discover in about their forth year of their careers — namely that service is a product. Like all products, quality and suitability to the needs of the customers determines success. Given that technology is complex and that no technology user can last long without support, it becomes a critical differentiator for long-term financial success.

(A snide aside: If you want a glaringly good example of lousy customer service, just talk to anyone that uses web hosting from 1and1.com, a company that routinely explores the depths of customer disregard. The horror stories about 1and1.com technical support would make Steven King flinch.)

Your customers are at their most vulnerable state, and often suffering from some degree of frustration, when they call for support. Support then becomes as important (if not more important) than the core product itself.

Dell discovered this the hard way.

Once lauded for the customer care, Dell slid down the slippery slope of cutting customer service in order to cut cost. All they really cut was their own throat, as the Internet all but exploded with tales of Dell’s horrific support services.

Then Michael Dell came back, allegedly kicked some corporate butts, and things are turning around throughout their services groups.

Most interesting in recent news was Dell’s attempt to be flexible in their services offering. Like most vendors, Dell offered “boxes of services” — predefined and rigid sets of tiered services. Often customers found themselves with too few options, either buying less service than they needed but which they could afford, or paying for services they did not need in order to get the few they did. This is the norm in the industry, but not optimal for customers. It is however simple to conceive, model, price, explain and sell.

In other words, it is the product of lazy marketing staffs.

Dell is breaking that model, and this will likely put them ahead of competitors by engendering more profitable service contracts and much happier customers.

Within their new system (which is for SMBs and Enterprises — not consumers), customers will be able to buy specific support modules instead of the typical gold/silver/bronze medal style of support packages. Since every organization differs in terms of the complexity of their IT infrastructure and the scope of their in-house IT talent, their need for services becomes highly individual as well. Some companies may need to get Linux support while others may have kernel hackers on staff. Others may have exotic storage requirements while others do quote nicely with simple NAS.

Dell is making sure everyone gets what they need, and not buying what they don’t.

Marketing has two stakes in this game. First, creating products that people want is key to getting customers in the door to begin with. Service is part of the whole product definition. Define the right service offering and you make the whole product easier to buy.

Perhaps more importantly is that service is central to customer satisfaction. It is well documented that high customer satisfaction leads to repeat sales (more money), positive word-of-mouth (more sales) which brings in even more customers (more money). Failing to provide the right services, and provide them well, has the opposite effect.

Welcome back Michael. You get it.

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