may the force be with you

Google, Intel, Microsoft, and Yahoo represent the four pillars of personal computing circa 2006, I explained in last week's column. "What about Apple and IBM?" a few dozen of you asked. And it is true that IBM in terms of sales is about the size of these other companies combined. And Apple, well, didn't I just finish a string of 3-4 columns in a row about nothing but Apple? How can I ignore them after that?

Easy.

Just as I wrote last week that Intel was a proxy for AMD, so Microsoft is a proxy for Apple. Go back and read those recent Apple columns and you'll notice the whole point is how Cupertino is planning to steal the market from Redmond. The only way to steal a market is by competing head-to-head, and the only way to compete head-to-head is by being in the same business. Microsoft, you'll recall, is in the platform business. Microsoft will do whatever it takes to defend the Windows platform (by which I mean to defend the Windows monopoly). And just in case that doesn't work, Microsoft wants to monopolize any other platforms that come along.

Well, Apple is no different. Apple is just Microsoft with a sense of style. If Microsoft's business theory is antiquated, then Apple's- - which is for the most part derived from Microsoft's -- ought to be antiquated, too.

The sad truth is that if Microsoft falters and Apple grabs command of the PC standard, Steve Jobs will defend his new standard using precisely the same brutal tools that Bill Gates has been using for the last 20 years. Apple already controls one important platform in iPod/iTunes and their reluctance to license that platform to date or to tolerate any flexibility on pricing shows this rigid -- even monopolistic -- need to control.

Remember what Macintosh programmer Andy Hertzfeld said about this on NerdTV: "Let's say Apple was able to get into the place Microsoft is in, they might do a better job of it, but we still haven't accomplished something. If you just have a different toll keeper. The King is dead, long live the King. I liken it more to the change from a monarchy to a democracy, where every man is king. That's where I'd like to see things go."

If Apple is just a pimped-out Microsoft, then what is IBM? IBM is a disaster-in-the-making. Big Blue as a total enterprise is running primarily on customer inertia and clever advertising, which definitely isn't enough.

Of course they have their Power5 and Cell processors, AIX and DB2, but IBM's customers are now all in big business, which doesn't touch my readers or the PC market very much. And IBM is in trouble. I have lots of friends at IBM and none of them are happy. The company is not going anywhere, but it is also going nowhere, if you know what I mean.

One aspect of IBM's malaise is the disconnect between the traditional public image of the company (basic research, advanced R&D, patents, patents, patents) and the fact that most of their revenue-generating businesses aren't about hardware or software products at all, but services. Why continue to spend all that money if you're mainly just a business/IT consulting company made up of IGS and Price Waterhouse? Why, indeed.

Here's what's happening with IBM. The heart of a company culture can be discovered if you look at the compensation system. IBM's major incentives right now are for signing business and cutting costs. In many IT firms, IBM included, billable hours are important. This results in a system where little is done to improve service efficiency, because doing so would lead to fewer hours and less revenue. Efficiency kills, so at today's IBM it is generally avoided.

Of course laws of both science and business continue to apply, something has to give, costs have to be driven down, so at today's IBM what gives is generally quality.

The result is that an increasing number of customers are unhappy with IBM, signings are harder, so there is less return business. To get that signing incentive, IBM's sales folks are now under-pricing deals. The people who do the actual work are still expected to show a profit though, even if one wasn't designed into the contract in the first place. So to still be profitable, they under-deliver on the contract, and this leads to an even lower quality of service. What I am describing is a death spiral that top IBM management either doesn't see or simply doesn't want to admit.

If IBM had invested in improving services, rather than cutting them to the bone, by now they could own their market. But they didn't. IBM's primary innovation has been to move as many jobs offshore as possible, cutting costs for now, but at a horrible long-term cost to the company.

IBM CEO Sam Palmisano, should he choose to reply to this column, might point to the IBM development center in Austin, Texas, which specifically targets the services business, as an example of what IBM is doing right. It's called the Global Technology Center. Alas, the GTC has spent millions of the company's money, are masters at promoting themselves, but have delivered very little of real value back to the services organization.

Losers.

For IBM maybe it isn't the business theory that's wrong, but just the execution. If I were running the place I'd probably split it into several separate businesses under a holding company. Then I'd invest in the parts of the company that really make money and sell off or kill most of the rest.

Now back to where I thought I was going this week, which is to Google -- that fourth pillar of modern Internet/PC technology. Where Microsoft's theory of business is built around the platform and its domination, Google has built a theory of business that is independent of the platform, and therefore their software runs (or can run) on any platform. The issue around "advertising based revenue" isn't really the key differentiator. What counts is that for Microsoft the platform is the PC while for Google the platform is the Internet and nobody can hope to control the Internet -- not Microsoft OR Google.

Given that Google can't practically aspire to control the Internet and Microsoft can't NOT aspire to control it, Google already has a vastly lighter load to carry.

So Microsoft can build software for a handheld or tablet computer, a mobile phone or a TV set-top box and even though the wrapper is different, the feel is always very much the same -- that of a fat PC client. Microsoft can't allow a phone to be a phone because they can't dominate and control a plain old phone unless it is more Windows than phone. That's a problem.

But not for Google, which couldn't care less about the phone OR the content (that's back to Yahoo, again). Google cares about the DATA. There is a key difference here between data and content. Content is stored and retrieved while data is generated. Google is about generating custom data based on applying proprietary algorithms. THAT's their theory of business, no matter how that data is ultimately paid for or by whom.

While Microsoft is trying as hard as they can to avoid the commoditization of their operating system and office suite, that job is getting harder and harder. Like many companies in this sector, Redmond is struggling with converting itself from a company that is vertically-integrated to one this is integrated horizontally.

Huh?

Vertical integration was perfected at Ford's River Rouge Plant, where they built every part of a Model A, including making their own steel from iron ore. The idea was simply that if you controlled the entire production process from top to bottom you could claim all the profit that might have gone to outside suppliers as well as have total control of your business. But what worked for Ford in the 1920s doesn't work as well for Ford today and barely works at all in high tech.

Remember my doom-and-gloom prediction last week for Sun Microsystems? That's based almost entirely on the company's inability to see itself moving from being vertically integrated (doing its own proprietary hardware and software) to competing on a level (that is horizontal) playing field. While that might make them just another PC vendor, don't worry about that happening because Sun would rather die first. And will.

How is Apple any different from Sun? Apple has volume, for one thing, spreading their investment over a far greater number of widgets. Apple has always had vastly higher sales-per-employee than Sun for another thing. This is what allows Apple to succeed in a consumer market Sun could never afford to even enter, at least not seriously. These days much of Apple's system software -- and even some of their applications like Safari -- are based on Open Source foundations that come for free, lowering costs and headcount that much further.

And yet, while Apple is different from Sun in these ways, look where Apple if going for growth -- toward supporting horizontal PC (that is Windows) applications. It's the exception that makes the point.

Google is Microsoft's nightmare, true, but maybe that will all end when Vista ships. Not! PC sales are down overall and Microsoft doesn't usually sell many upgrade licenses. Even if Vista is great, Microsoft isn't going to sell enough licenses to change the company's direction.

Maybe Microsoft's new Internet ad business will turn the tide. Wrong! How many web sites do you visit primarily for the advertising? Not anything from Microsoft to be sure, yet that's essentially what people do with Google - going TO the ads.

And look at those Google ads. Here's the most important key to Google's success: Most Google advertisers don't advertise ANYWHERE else. Its mainly small and medium sized companies whose advertisements the average person would NEVER have seen before the Internet. Google is making a ton of money from people who never advertised before. Heck, Google is making a ton of money from people who never were even in business before. This is not only a fundamental change in how advertising is done; it is a fundamental change in how BUSINESS is done.

I'm counting on Google and eBay to save America.

If Microsoft really wanted to compete -- if they really wanted (or even knew how) to truly defend their turf, here is what they would do. They would throw away Vista and develop a new operating system, one that is simpler, lighter, and more secure -- an OS that would run on any machine now running Windows 2000 or XP. They would price it right, which is to say cheap ($49.95). The associated and trimmed-down version of Office would be priced the same ($49.95). The upgrade market is probably five times bigger than the OEM PC market, so Microsoft needs (but probably doesn't realize it) an OS that will run well on most of the PC installed base. It needs to set the pricing of the OS so that we'll run to the store to get it. Instead of designing products exclusively for new equipment, now it's time for Microsoft to focus on the installed base.

Remember, $49.95 is more than Microsoft gets for an OEM Windows license, and OEM sales will continue simply because computers die and need to be replaced. Microsoft COULD win both ways, but probably won't risk it.

That's a survival strategy for Microsoft. Now here's a failure strategy for Google. While not intending so much to create a platform, Google has done just that. And once you control a platform, the way to best leverage that control is by sharing the platform generously. Google is right now the basis of much Web 2.0 creativity from third-party firms -- every one of which is afraid that they'll be put out of business next month by Google rolling-out its own version of whatever that ISV has built and proved. That's the Microsoft domination model, so why not? Because it poisons the well, that's why not.

It is great for Google to buy-up these little firms making millionaires along the way, but Google's obsession with reinventing the wheel might hurt them over time. I hope they are smart about this, but I fear that they aren't, and that Google's own vertical obsession might hamper their growth.

source:http://www.pbs.org/cringely/pulpit/pulpit20060511.html