AAPL vs MSFT -what happened to best-of-breed?

During my time at the Kellogg School, I took a class on competitive strategy.  One of the quintessential strategy cases explored the battle between Apple and Microsoft for the computer market.  At the time, Apple had less then 3% of the market and the company was heading for obscurity, or worse.

Today, Apple's market cap passed that of its long time rival.  Twelve years ago the conventional wisdom held that the PC OEM model and the Wintel (Windows/Intel) platform allowed for a greater rate of innovation and a cost curve that Apple could never match.  In hindsight, this argument seems farcical.

At that time, strategy orthodoxy encouraged companies to specialize at the component level - chips, operating systems, applications, assembly - and that specialized best-of-breed vendors would outperform vertically integrated companies.   In fact, the idea of a company that produced both hardware and software was laughable and a strategy destined for a stale product line, bloated costs, and market share losses.

What happened and why was conventional wisdom so wrong?  The world of best-of-breed has been replaced by a world of vertical integration, whereby the frictions of assembling best-of-breed components are driving people to buy pre-integrated systems.  Oracle's acquisition of Sun is based on Jobs' vision of system level selling - hardware, software, peripherals.  Ellison argued that customers want to buy a a solution - not a set of components that are integrated by systems integrators to deliver value.  He argues, why not sell an pre-integrated solution, whereby each layer of the solution is designed to work best with the layer below and above it?

iPod/iTunes - software, computer, device, peripheral

iPad- App Store

Perhaps the insight is that as systems and "solutions" grew more complex - the incremental value of driving down marginal costs on a per component basis was overshadowed by the increase in marginal costs of assembling the components to solve the intended problem - ie listen to music, watch a movie, use an application.

Apple moved from competing on abstract utilities and generic cost per cpu to competing on systems designed to satisfy higher level consumer needs - consume media, produce media, share, network.... Integrated value not only supports much higher prices - compare a Dell laptop to a MacBook Pro - but also much higher level of consumer satisfaction.

Best of breed is dead - long live systems.

The Welfare State Killed Itself

A narrative is emerging across the developed world - General Motors, Greece, Spain, the United Kingdom, federal, state, and municipal pensions....Put simply, the welfare state is no longer able to fund itself.


Defined-benefit pension plans and cradle to grave social systems- that are funded by subsequent generations - are driving massive deficits. Moreover, investors are refusing to finance deficits, forcing gut-wrenching but necessary cuts to the welfare state.


Importantly, the culpability of these cuts lies not with international investors, the IMF...but rather with the politicians, both Republican and Democrat, that ignored years of warnings and continued to enact welfare programs and pensions obligations that were impossible to deliver.  The villains are politicians who insisted it was a "right" to receive benefits that are simply impossible to pay for.


The private sector went through a painful, but necessary migration from defined-benefit to defined-contribution pension plans over the last thirty years.  Moreover, in the US, flexible labor laws allowed companies to restructure and eliminate tens of thousands of jobs that were no longer viable or necessary.


The public sector, however, has simply refused to confront the hard facts that laws and programs enacted for the "public good" - life time teacher tenure, full pensions for public workers, job guarantees - were in fact creating a fiscal monster that is eating an increasingly larger share of government budgets.  


The system is killing itself and its proponents need to move from defending existing programs to taking a vested interest in making changes, as soon as possible, that will make changes, while painful, not disastrously so.

How Creative is Changing and Why the Real-time Web and Analytics Force a Change in How we Think About Creative

Since Widgetbox launched ClickTurn last year, I have become a student and participant of the online ad industry. This post marks the first in a series, where I plan to share my learnings to date.  This post deals with how technology is impacting the very nature of banner ad creative and why that harbors big changes for the industry. 

Over the last fifteen+ years, the banner ad markets has grown into a $20bn global industry.  Despite the industry's scale and size, the nature of today's banner ads remains very unchanged from the very first internet ads - static pictures of products that increasingly fail to capture the interest of consumers nor the nature of today's web.

Banner ads are akin to highway billboards - static combinations of text and images - seeking to encourage the driver/consumer to take the next exit and visit the advertiser's location.  The creative process, therefore, focused on building the "perfect" creative - one that best captured the product, the call to action, and the brand's goals.  Given, that ads were developed for a seasonal or temporal campaign, the creative process sought to build the best possible set of assets and to then pass them onto media planners for distribution to relevant sites and media properties.

Two big changes make the concept of "finished" creative a relic. The first is the rise of the real-time web - Twitter, Facebook YouTube, blog posts, etc.  Brands are no longer investing in "snap shots" of their brand, but rather in conversations with their target audience, whereby the "creative" is the dialog.  The real-time web requires a shift in perspective regarding creative from something that is fixed to something that is programmed by ongoing marketing initiatives.  The brand does not seek solely to craft a static campaign that will live through the season, but rather it is also investing in daily, even  hourly, updates that build on the brand experience.  Creative, therefore, needs to reflect this change in frequency of message and provide a way to reflect the real-time brand in the creative being trafficked.  Creative also needs to reflect the two-way nature of conversations and the ability of the web to amplify said conversations through social sharing.

Since these changes occur each and every day - the traditional and serial process of locking down creative no longer makes sense.  And since these changes are real-time, the creative must become a living asset that can be programmed by the brand's marketing channels.  This is a huge change and means that traditional creative will not work. 

The second key change is analytics and retargeting.  Rather than design the "optimal" creative - brands are leveraging dynamic creative solutions that seek to personalize ads based on retargeting and analytic optimizations.  Again, the traditional creative shop is no longer a credible provider of the solution.  Each ad load can be programmed and "designed" based on observed behavior to date over the life of a campaign, information known about a given web surfer, and other variables.  Ads, therefore, become a set of programmable config options - with the final config of a given ad impression occurring at run-time.  

ClickTurn is working to leverage both trends - the shift from episodic to real-time banner ad marketing and the reality that "perfect" creative is evolutionary and will be a combination of a series of defaults combined with a series of variables that the web at large will program. The real-time nature of such changes means that traditional "locked down" creative will slowly fade away.

Negotiating Via Docs vs Over Coffee

A friend of mine is square in the middle of a financing.  His company is raising money and a prospective new investor is looking to join an existing syndicate.

Today, he called to update me on the process and to run some key issues and terms passed me.  In listening to the process to date, one key issue stood out.  The current and future board members had yet to talk, either by phone or, better yet, in person.  The negotiation, moreover, is taking place via redline markups sent over email.

In our email culture, it is increasingly common to see vast amounts of communication take place electronically - emails, texts, IMs....In many cases, electronic communication is a huge productivity boost and an enabler of commerce and progress.

In getting to a good deal, however, I find it can be problematic.  Rather than send email - which is a terrible medium for conveying intent, logic, context, tone - I highly recommend talking in person.  The social connections built from human contact and dialogue provide the context, trust, body language, tone, and other important "social greases" that foster understanding, collaboration, and common ground.

In summary, important business relations benefit hugely from in-person interaction. Second, deals feel "better" when the key issues are reviewed over coffee rather than over a redlined document delivered by an email server.

What We Can Learn from the UK

The United Kingdom is facing dire financial and structural problems. 


Deficit spending as a percentage of GDP is over 10% and forecast to increase. The future requires cuts to treasured social programs and a need to increase taxes.  


Moreover, the electorate is split - leaving no party the clear winner in elections.  Sound familiar.


However, the British are now forming the first coalition government in over 65 years.  The Conservatives and Liberal Dems formed a power sharing agreement and argued that the crises afflicting that nation calls for collaboration not confrontation, for a focus on national priorities rather than factional differences.


Wow!


I used to believe that democracies are at their best in times of crisis - hard decisions are made and the differences that define us all are put aside to face existential challenges that threaten our way of life and security.


Today, we are facing such crises and existential threats - notably a looming fiscal crisis that makes us look worse than Greece.  And yet, our political leaders are incapable of finding common ground, of meeting in the middle to drive consensus, of putting the national good ahead of politics. It is a sickening indictment on our political system and makes one incredible fearful for our future. 


California is nearly bankrupt - and yet, due to gerrymandering and permanently safe seats our elected leaders are incapable of collaborating and instead rely on petty confrontations that may make partisans feel a brief sense of "victory," but the victories are truly Pyrrhic.



The US is fast approaching "Greek" level debt issues.  Debt is projected to equal 140% of GDP within two decades, while Greece is suffering with debt levels at 110% of GDP.

With respect to Greece...today's NYTimes noted, "Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem. We, the people, are. We have not figured out the kind of government we want. We’re in favor of Medicare, Social Security, good schools, wide highways, a strong military — and low taxes. Dealing with this disconnect will be the central economic issue of the next decade, in Europe, Japan and this country."

At some point the problems will be so acute that financial markets will force our hand, as they did in Greece. Investors will demand a "risk premium" to finance our deficit budgets and we will pay the piper.

Wouldn't it be wonderful, though, if our leaders took note of the British model of coalition government and left behind the rigid strutures of two party government and formed, what Abe Lincoln so famously did, a Team of Rivals!!!!

The False Comfort of Regulation

The US Government's typical response to man-made and natural disasters is to leap into a frenzy of creating new regulations.  The idea is that with stronger regulation, future disasters will be prevented and the nation as a whole will be made sounder.  The logic makes perfect sense - let's close loopholes, oversights, systemic problems that create pain and suffering.


Unfortunately, we need to only look at how current regulators are performing in order to understand the efficiency and efficacy of future regulations.  Let's start with Bernie Madoff - under the nose of the regulatory body designed to protect investors, the SEC, Bernie Madoff staged a $50 billion fraud.  The SEC received frequent warnings regarding the implausibility of his returns, however, Madoff was not caught until his own sons turned him in.


Regulations create codes of conduct that are supervised by a regulatory body charged with ensuring compliance.  The regulations are only as sound and as effective as the regulators themselves - regulators, moreover, are often ideology aligned with the very people they are tasked with regulating.  They are very poorly compensated relative to the businesses they regulate. Finally, they do not attract the same caliber of talent.


The myopia of regulators can be seen in dramatic fashion looking back at what they missed, however, it is not surprising that brilliant people can cheat the system in ways impossible to police or prevent.


What's the point - the point is that we should all recognize the fallibility of regulation to protect us.  There is a huge amount of legislative effort invested in creating regulations that will almost certainly fail to prevent future disaster.


We can, however, think through incentives.  The cost of moral hazard is very real - if banks, oil companies, car companies, Madoff's investors, can expect the Federal government to backstop their losses then the potential "costs" of their decisions do not factor in their calculations.  I understand that after the Exxon Valdez spill, Congress passed a law limiting future oil-spill related losses to $75m.  This paltry "cost" of a spill creates a huge lack of incentive for oil companies to prevent spills.  Similarly, large companies in the US today know that the Federal government is much more likely to bail them out than to let them fail.


Allowing companies to bear the true costs of their actions is most likely a more effective measure to prevent future pain.  We need to create incentives such that malfeasance and misfeasance is borne by the shareholders of companies responsible.


Simply passing laws does not make it so.

Google, AdMob, and the FTC

The FTC is now considering moving to block the Google-AdMob deal.  The post below lays out my logic on why this is an insane position to even consider and further evidence of government run amok.


As I noted in an earlier blog post, free markets are the most efficient and equitable organizing principle for economic activity. Moreover, government monopolies, command and control resource allocation, and top-down/centralized decision making limit our freedom and destroy value in society. 


Silicon Valley is perhaps the best example of free markets in this country - groups of individuals, free of any government subsidies, direction, or policy, are able to come together, free of labor laws that limit hiring or firing, and pursue their individual utility.  The ideas and the allocation of resources are highly decentralized and the net result is an incredible wealth and productivity machine.  No one orders that we invest in search engines, new chemical entities, iPhone apps - and yet the market somehow magically delivers innovation and value year after year.


I believe that it is better for a million people to make one decision than for one person to make a million decisions - the logic of such a premise is undeniable and yet we routinely expect government decision makers to solve complex issues fairly and optimally. Markets move so quickly - think mobile over the last 24 months - that it is insane to think that the government can truly understand the issues and make a sound decision. Think APPL vs Flash, HTML5, iAd, iPad, Android - the market is moving a billion miles an hour and yet government bureaucrats are expected to understand the pace of change, market dynamics, and decide who can buy whom.


The recent news that the FTC is considering blocking Google's acquisition of AdMob is a powerful example of government regulation run amok.  Let's consider the premise of the FTC's position - because Google is THE player in paid-search, the government is considering blocking their acquisition of AdMob, a leading player in mobile advertising.  This "concern" flies in the face of logic - for one, Apple not Google dominates the mobile Internet, Apple not Google runs a closed system, Apple not Google decides what content can execute on the market leading devices, Apple not Google is working to kill Flash, 3rd party analytics services, non-iAd ad units....


When we consider health care reform, financial industry reform, merger activity - it behooves us to remember that regulators cannot possibly understand - no one can - the complexities at work.


Market competition is the best remedy - think MSFT over the last five years - Apple is kicking their butts....


All of us in Silicon Valley should be ALARMED at the value destroying role government plays when they step into the legislate or litigate in hopes of preserving competition, fairness, or some other impossible to define and measure goal.


We are all the beneficiaries of free markets - let's remember that when we vote and let's all let the government know they should not play God in markets that move at a speed and complexity that no one person, let alone a group of smart people, can fathom, understand, or benignly influence!

Mentors

One of life's pleasant surprises is how we continue to keep learning as we age. I am sure my kids think that I know everything and have all the answers.

Each year, I realize how little I do in fact know and how much there is to learn.  We grow via experiences or people who stretch us and help us better understand ourselves, the world at large, and what really matters.

As an executive, I am constantly looking to learn and to expand my understanding of best practices, problem solving, leadership styles, etc. 

Earlier in my career, I could look within my employer's organization to find mentor, role models, and people who could help me improve, stretch, learn.

Now as a start- up CEO, it is harder to rely on internal resources to keep the learning curve steep.

Recently, I asked a long-time CEO and very successful software entrepreneur to serve as a mentor to me.  We meet once every 6-8 weeks and spend time talking about the market, life, in addition to focused conversations around areas of personal growth or challenge.  It is well-known that the world's top athletes use coaches to improve, stretch, and develop.  It is not as common, however, for business people to invest the time and energy in improving through outside mentoring and coaching.

I am very glad that my mentor agreed to spend time with me - it is a gift I plan to repay in years to come both to my mentor and to those who are like me now - self-aware enough to ask for help and hungry enough to use it to improve their game.

Fear and Mindfulness

Omar Hamoui, AdMob's CEO, is featured in this week's Sunday NY Times' Corner Office Segment.

The Corner Office is a weekly segment that interviews CEOs on management techniques, lessons learned, and pearls of wisdom borne from the pressures, trials, and triumphs of CEO-dom.

Omar, in explaining his leadership philosophy and lessons learned, notes

" One was that insecurity is incredibly damaging in a corporate environment. You end up making really poor decisions, a lot of things you do are based on fear, and eventually it will fail. When people are playing defense and they’re primarily focused on their own jobs, it ultimately ends up being a sort of losing strategy....Don’t be afraid. What I mean by that is lots and lots of decisions are made by fear and they’re made by people who think they have more to lose than they actually have to lose."

To Omar, fear is a great inhibitor of potential, leads to poor decision making, and is in some sense self-fulfilling.  

When we are scared, we are overly cautious, tense, defensive, paranoid... the list goes on.  Athletes talk about "playing tight" or "hearing footsteps."  When we are afraid, we begin to doubt ourselves and the stories going on in our head, which are in no way true, become true as our inhibiting behavior and actions prevent us from reaching our goals.

"Manny being Manny" is a pejorative joke, however, it is precisely because Manny Ramirez plays without fear and a seeming indifference to the world that he is so clutch.

There have been many times at Widgetbox when I have been afraid - afraid of not knowing where we were going, how we were going to build a great business, how the board would react to this or that piece of news, how my team was doing, what our competition was doing....I have learned that fear, doubt, and worry are incredibly corrosive to one's self, the harmony of a team, and the energy force that is necessary to achieve.

I have worked very hard to realize that too often I let environmental factors impact by sense of self, mood, energy, etc. For example, think how you react when someone who you don't know smiles at you....ok, now think how you feel when a stranger frowns at you or worse yells at you.  Tiny examples of how we are literally programmed by external and environmental inputs.  Now imagine the market frowning our your product, the board dumping on your product strategy...a bad traffic jam or a delayed flight.

What mindfulness allows is the cognitive ability to intercept external inputs, to consider them, and to avoid the unconscious triggering of each input into a hard wired reaction. Frown = sense of concern. Smile = feeling friendly to someone.

I am working to build a buffer between the environmental inputs I receive all day long and how I react to them - an ability to recognize them for what they are...random inputs that should in no way dominate my reactions to events, people, meetings, etc.  Rather, by building a sense of mindfulness and awareness, the events can be processed for what they are and I can choose how to react to them, how to learn from them, and maintain an ability to project myself to the world at large rather than simply react to the world and let it dictate how I feel.

As Omar notes, fear is an inhibitor - both personally and institutionally.  Tennis players, golfers, CEOs...all share this common view that staying present is vital to success - anxiety related to past mistakes or fear about an imagined future derived from past mistakes can dominate the mind and cripple performance.

Omar's comments spoke to me and the journey I have walked in trying to be mindful, to stay present, and to not let fear and inputs program my outputs.