Ballmer Resigning – Next?

Steve Ballmer announced he would be retiring as CEO of Microsoft within the next 12 months.  This extended timing, rather than immediately, shows clear the Board is ready for him to go but there is nobody ready to replace him. 

The big question is, who would want Ballmer's job?   It will be very tough to make Microsoft an industry leader again.  What would his replacement propose to do?  The fuse for a turnaround is short, and the options faint.

Microsoft has been on a downhill trajectory for at least 4 years.  Although the company has introduced innovations in gaming (xBox and Kinect) as well as on-line (games and Bing), those divisions perpetually lose money.  Stiff competitors Sony, Nintendo and Google have made these forays intellectually  interesting, but of no value for investors or customers.  The end-game for Microsoft has remained Windows – and as PC sales decline that's very bad news.

Microsoft viability has been firmly tied to Windows and Office sales.  Historically these have been unassailable products, creating over 100% of the profits at Microsoft (covering losses in other divisions.) But, these products have lost growth, and relevancy. Windows 8 and Office 365 are product nobody really cares about, while they keep looking for updates from Apple, Google, Amazon and Samsung.

The market started going mobile 10 years ago.  As Apple and Google promoted increased mobility, Microsoft tried to defend & extend its PC stronghold.  It was a classic business inflection point in the making.  Everyone knew at some point mobile devices would be more important than PCs.  But most industry insiders (including Microsoft) kept thinking it would be later rather than sooner. 

They were wrong.  The shift came a lot faster than expected.  Like in sailboat racing, suddenly the wind was taken out of Microsoft's sails as competitors shot to the lead in customer interest.  While people were excited for new smartphones and tablets, Microsoft tried to re-engineer its historical product as an extension into the new market.

Windows 8 tablets and Surface tablets were ill-fated from the beginning.  They did not appeal to the huge installed base of Windows customers, because changes like touch screens and tiles simply were too expensive and too behaviorally different.  And they offered no advantage for people to switch that had already started buying iOS and Android products.  Not to mention an app availability about 10% of the market leaders.  Simply put, investing in Windows 8 and its own tablet was like adding bricks to a downhill runaway truck (end-of-life for PCs) – it sped up the time to an inevitable crash. 

And spending money on poorly thought out investments like the Barnes & Noble Nook merely demonstrated Microsoft had money to burn, rather than a strategy for competing.  Skype cost some $8B, but how has that helped Microsoft become more competive?  It's not just an overspending on internal projects that failed to achieve any market success, but a series of wasted investments in bad acquisitions that showed Microsoft had no idea how it was going to regain industry leadership in a changing marketplace going more mobile and into the cloud every month.

Now the situation is pretty dire, and now is the time for Microsoft to give up on its defend and extend strategy for Windows/Office.  Customers are openly uninterested in new laptops running Windows 8.  And Win 8.1 will not change this lackadaisical attitude.  Nobody is interested in Windows 8 phones, or tablets.  This has left companies in the Microsoft ecosystem like HP, Dell and Nokia gasping for air as sales tumble, profits evaporate and customers flock to new solutions from Apple and Samsung.  Instead of seeking out an update to Office for a new PC, people are using much lighter (and cheaper) cloud services from Amazon and office solutions like Google docs.  And most of those old add-on product sales, like printers and servers, are disappearing into the cloud and mobile displays.

So now, after being forced to write off Surface and report a  horrible quarter, the Board has pushed Ballmer out the door.  Pretty remarkable.  But, incredibly late.  Just like the leaders at RIM stayed too long, leaving the company with no future options as Blackberry sales plummeted, Ballmer is taking leave as sales, profits and cash flow are taking a turn for the worst.  And only months after a reorganization that simply made the whole situation a lot more confusing for not only investors, but internal managers and employees.

Microsoft has a big cash hoard, but how long will that last?  As its distribution system falters, and sales drop, the costs will rapidly catch up with cash flow.  Big layoffs are a certainty; think half the workforce in 2 years. Equally certain are sales of divisions (who can buy xBox market share and turn it competitively profitable?) or shut-downs (how long will Bing stay alive when it is utterly unnecessary and expensive to maintain?) 

But, there is a better option.  Without the cash from
Windows/Office, you can't keep much of the rest of Microsoft walking. So
now is the time to cut investments in Windows/Office and put money into the
best things Microsoft has going – primarily Kinect and cloud services.  A radical restructuring of its spending and investments.

Kinect is an incredible product.  It has found multiple applications Microsoft fails to capitalize upon.  Kinect has the possibility of becoming the centerpiece for managing how we connect to data, how we store data, how we find data.  It can bring together our smartphone, tablet and historical laptop worlds – and possibly even connect this to traditional TV and radio.  It can be the centerpiece for two-way communications (think telephone or skype via all your devices.)  Coupled with the right hardware, it can leapfrog iTV (which we still are waiting to see) and Cisco simultaneously. 

In cloud services it will take a lot to compete with leaders Amazon, IBM, Apple and Google.  They have made big investments, and are far in front.  But, this is the bread-and-butter market for Microsoft.  Millions of small businesses that want easy to use BYOD (bring your own device) environment, and easy access to data, documents and functionality for IT, like guaranteed data back-up and uptime, and user functionality like all those apps.  These customers have relied on Microsoft for these kind of services for years, and would enjoy a services provider with an off-the-shelf product they can implement easily and cheaply that supports all their needs.  Expensive to develop, but a growing market where Microsoft has a chance to leapfrog competitors.

As for Bing, give it to Yahoo – if Marissa Mayer will take it.  Stop the bloodletting and get out of a market where Microsoft has never succeeded.  Bing is core to Yahoo's business.  If you can trade for some Yahoo stock, go for it.  Let Yahoo figure out how to sell content and ads, while Microsoft refocuses on the new platform for 2017; from the user to the infrastructure services.

Strong leaders have their benefits.  But, when they don't understand market shifts, and spend far too long trying to defend & extend past markets, they can put their organizations in terrible jeopardy of total failure.  Ballmer leaves no with clear replacement, nor with any vision in place for leapfrogging competitors and revitalizing Microsoft. 

So it is imperative the new leader provide this kind of new thinking.  There are trends developing that create future scenarios where Microsoft can once again be a market leader.  And it will be the role of the new CEO to identify that vision and point Microsoft's investments in the right direction to regain viability by changing the game on the current winners.

 

Be Really Glad Bezos Bought The Washington Post

Jeff Bezos, founder of Amazon worth $25.2B just paid $250 million to become sole owner of The Washington Post. 

Some think the recent rash of of billionaires buying newspapers is simply rich folks buying themselves trophies.  Probably true in some instances – and that benefits no one.  Just look at how Sam Zell ruined The Chicago Tribune and Los Angeles Times.  Or Rupert Murdoch's less than stellar performance owning The Wall Street Journal.  It's hard to be excited about a financially astute commodities manager, like John Henry, buying The Boston Globe – as it has all the earmarks of someone simply jumping in where angels fear to tread.

These companies lost their way long ago.  For decades they defined themselves as newspaper companies.  They linked everything about what they did to printing a daily paper.  The service they provided, which was a mix of hard news and entertainment reporting, was lost in the productization of that service into a print deliverable. 

So when people started to look for news and entertainment on-line, these companies chose to ignore the trend.  They continued to believe that readers would always want the product – the paper – rather than the service. And they allowed themselves to remain fixated on old processes and outdated business models long after the market shifted.

The leaders ignored the fact that advertisers could obtain much more directed placement at targets, at far lower cost, on-line than through the broad-based, general ads placed in newspapers.  And that consumers could get a much faster, and cheaper, sale via eBay, CraigsList or Vehix.com than via overpriced classified ads. 

Newspaper leadership kept trying to defend their "core" business of collecting news for daily publication in a paper format.  They kept trying to defend their local advertising base.  Even though every month more people abandoned them for an on-line format.  Not one major newspaper headmast made a strong commitment to go on-line.  None tried to be #1 in news dissemination via the web, or take a leadership role in associating ad placement with news and entertainment. 

They could have addressed the market shift, and changed their approach and delivery.  But they did not.

Money manager Mr. Henry has done a good job of turning the Boston Red Sox into a profitable institution.  But there is nothing in common between the Red Sox, for which you can grow the fan base, bring people to the ballpark and sell viewing rights, and The Boston Globe.  The former is unique.  The latter is obsolete.  Yes, the New York Times company paid $1.1B for the Globe in 1993, but that doesn't mean it's worth $70M today.  Given its revenue and cost structure, as a newspaper it is probably worth nothing.

But, we all still want news.  Nobody wants the information infrastructure collecting what we need to know to crumble.  Nobody wants journalism to die.  But it is unreasonable to expect business people to keep investing in newspapers just to fulfill a public good.  Even Mr. Zell abandoned that idea. 

Thus, we need the news, as a service, to be transformed into a new, profitable enterprise.  Somehow these organizations have to abandon the old ways of doing things, including print and paper distribution, and transform to meet modern needs.  The 6 year revenue slide at Washington Post has to stop, and instead of thinking about survival company leadership needs to focus on how to thrive with a new, profitable business model.

And that's why we all should be glad Jeff Bezos bought The Washington Post.  As head of Amazon.com  The Harvard Business Review ranked him the second best performing CEO of the last decade.  CNNMoney.com named him Business Person of the Year 2012, and called him "the ultimate disruptor."

By not doing what everyone else did, breaking all the rules of traditional retail, Mr. Bezos built Amazon.com into a $61B general merchandise retailer in 20 years.  When publishers refused to create electronic books he led Amazon into competing with its suppliers by becoming a publisher.  When Microsoft wouldn't produce an e-reader, retailer and publisher Amazon.com jumped into the intensely competitive world of personal electroncs creating and launching Kindle.  And then upped the stakes against competitors by enhancing that into Kindle Fire.  And when traditional IT suppliers like HP and Dell were slow to help small (or any) business move toward cloud computing Amazon launched its own network services to help the market shift.

Mr. Bezos' language regarding his intentions post acquisition are quite telling, "change… is essential… with or without new ownership….need to invent…need to experiment." 

And that is exactly what the news industry needs today.  Today's leaders are HuffingtonPost.com, Marketwatch.com and other web sites with wildly different business models than traditional paper media.  WaPo success will require transforming a dying company, tied to an old success formula, into a trend-aligned organization that give people what they want, when they want it, at a profit.

And it's hard to think of someone better experienced, or skilled, than Jeff Bezos to provide that kind of leadership.  With just a little imagination we can imagine some rapid moves:

• distribution of all content via Kindle style eReaders, rather than print.  Along with dramatically increasing the cost of paper subscriptions and daily paper delivery
• Instead of a "one size fits all" general purpose daily paper, packaging news into more fitting targeted products.  Sports stories on sports sites.  Business stories on business sites.  Deeper, longer stories into ebooks available for $.99 purchase.  And repackaging of stories that cover longer time spans into electronic short-books for purchase.
• Packaging content into Facebook locations for targeted readers.  Tying ads into these social media sites, and promoting ad sales for small, local businesses to the Facebook sites.
• Or creating an ala carte approach to buying various news and entertainment in an iTunes or Netflix style environment (or on those sites)
• Robustly attracting readers via connecting content with social media, including Twitter, to meet modern needs for immediacy, headline knowledge and links to deeper stories — with sales of ads onto social media
• Tying electronic coupons, and buy-it-now capabilities to ads linked to appropriate content
• Retargeting advertising sales from general purpose to targeted delivery at specific readers, with robust packages of on-line coupons, links to specials and fast, impulse purchase capability
• Increased use of bloggers and ad hoc writers to supplement staff in order to offer opinions and insights quickly, but at lower cost.
• Changes in compensation linked to page views and readership, just as revenue is linked to same.

We've watched a raft of newspapers and magazines disappear. This has not been a failure of journalism, but rather a failure of business leaders to address shifting markets and transform old organizations to meet modern needs.  It's not a quality problem, but rather a failure of strategy to adapt to shifting markets.  And that's a lesson every business leaders needs to note, because today, as I wrote in April, 2012, every company has to behave like a tech company!

Doing more of the same, cutting costs and rich egos won't fix a newspaper.  Only the willingness to experiment and find new solutions which transform these organizations into something very different, well beyond print, will work.  Let's hope Mr. Bezos brings the same zest for addressing these challenges and aligning with market needs he brought to Amazon.  To a large extent, the future of news and "freedom of the press" may well depend upon it.

 

Will Living Wage Trend Kill or Make McDonald’s and Walmart?

Horatio Alger wrote books in the 1800s about young poor boys who became wealthy via clean living and hard work.  Americans loved the idea that anyone can become rich, and loved those stories.  We love them as much today as then, clinging to the non-rich roots of successes like Steve Jobs.

Unfortunately, such possibilities have been growing tougher in America.  Today U.S. income inequality is among the highest in the world, while income mobility is among the lowest.  You are more likely to go from rags to riches in France or Germany than the USA.  Net/net – in current circumstances your most important decision is who will be your parents, because if you are born rich you will likely live a rich life, while if  you are born poor you'll probably die poor.

Organizations like Occupy Wall Street have tried to bring the problem of inequality and jobs to the face of America – with mixed results.  But the truth is that 80% of Americans will face poverty and unemployment in their lifetimes.  And the biggest growth in poverty, declining marriage rates and single mother households all belong to white Americans today.  These poverty related issues are no longer tied to skin color or immigration they way they once were.

It's safe to say that a lot of Americans are sounding like the famous Howard Beale phrase from the 1976 movie "Network" and starting to say "I'm mad as hell, and I'm not going to take this any more!"

This situation has given birth to a new trend – frequently referred to as the "living wage."  A living wage allows one parent to earn enough money from a single 40 hour per week job to feed, cloth, educate, transport and otherwise lead a decent life for a family of 4.  Today in America this is in the range of $13.50-$15.00 per hour. 

This, of course, should not be confused with the minimum wage which is a federally (or state) mandate to pay a specific minimum hourly wage.  Because the minimum wage is lower than living wage, a movement has been started to match the two numbers – something which would roughly double today's $7.25 federal minimum wage.

This concept would have been heresy just 40 years ago.  America's Chamber of Commerce and other pro-business groups have long attempted to abolish the minimum wage, and have fought hard against any and every increase.

As the income inequality gap has widened popularity has grown for this movement, however, and now 70% of Americans support higher minimum wages, almost 3 times those who don't.  Whether effective or not, this week fast food employees took to old fashioned strikes and picket lines in New York City, Chicago, St. Louis, Milwaukee and Detroit for higher wages. 

Regardless of your opinion about the economics (or politics) of such a move, the trend is definitely building for taking action.

The biggest industries affected by such an increase would be fast food and retail.  And if these companies don't do something to adapt to this trend the results could be pretty severe.

McDonald's is the largest fast food company.  And it definitely does not pay a living wage.  The company recently published for employees a budget for trying to live on a McDonald's income, and it translated into requiring employees work 2 full-time jobs.  Rancor about the posted budget was widespread, as even pro-business folks found it amazing a company could put out such a document while its CEO (and other execs) make many multiples of what most employees earn.

Estimates are that a wage increase to $15/hour for employees would cost McDonald's $8B.  McDonald's showed $10B of Gross Income in 2012, and $8B of Pre-Tax Income.  Obviously, should the living wage movement pass nationally McDonald's investors would see a devastating impact.  Simultaneously, prices would have to increase hurting customers and suppliers would likely be pinched to the point of losses.

Couple this with McDonald's laissez-faire attitude about obesity trends, and you have two big trends that don't bode well for rising returns for shareholders.  Yet, other than opposing regulations and government action on these matters McDonald's has shown no ability to adapt to these rather important, and impactful, trends.  Hoping there will be no legislation is a bad strategy.  Fighting against any change, given the public health and economic situation, is as silly as fighting against regulations on tobacco was in the 1960s.  But so far there has been no proposed adaptation to McDonald's 50 year old success formula offered to investors, employees, customers or legislators.

WalMart is America's largest retailer.  And the most vitriolic opposing higher wages.  Even though a living wage increase would cost customers only $12/year.  When Washington, DC passed a requirement retailers pay a living wage WalMart refused to build and open 4 proposed new stores.  Even though the impact would be only $.46/customer visit (estimated at $12.50/customer/year.) 

It would seem such harsh action, given the small impact, is a bit illogical.  Given that WalMart is already out of step with the trend toward on-line shopping, why would the company want to take such an additional action fighting against a trend that affects not only its profits, but most of its customers — who would benefit from a rise in income and buying power?

In 1914 Henry Ford was suffering from high turnover and a generally unhappy workforce.  He reacted by doubling pay – with his famous "$5 day".  Not only did he reduce turnover, he became the perferred employer in his industry – and rather quickly it became clear that employees who formerly could not afford an automobile were able to now become customers at the new, higher pay scale.  Apparently nobody at WalMart is familiar with this story.  Or they lack the will to apply it.

Fighting trends is expensive. Yet, most leadership teams become stuck defending & extending an old strategy – an old success formula – even after it is out of date.  Most companies don't fail because the leadership is incompetent, but rather because they fail to adapt to trends and changing circumstances.  Long-lived companies are those which build for future scenarios, rather than trying to keep the world from changing by spending on lobbyists, advertising and other efforts to halt (or reverse) a trend.

McDonald's and WalMart (and for that matter Yum Brands, Wendy's, JCPenney, Sears, Best Buy and a whole host of other companies) are largely unwilling to admit that the future is likely to look different than the past.  Will that kill them?  It sure won't help them.  But investors could feel a lot more comfortable (as would employees, suppliers and customers) if they would develop and tell us about their strategies to adapt to changing circumstances.

Are you looking at trends, developing scenarios about the future and figuring out how to adapt in ways that will help you profitably grow?  Or are you stuck defending and extending an old success formula even as markets shift and trends move customers in different directions?