Category Archives: Whole company analysis

Big picture, BlackBerry, Whole company analysis

BlackBerry’s unhappy valley

2 Comments

Today, BlackBerry officially launched its latest handset, the BlackBerry Passport. I attended the launch event, because I was keen to see the new, John Chen-led BlackBerry up close and hear what they had to say first hand. So many of the people who read my work are entirely focused on the devices business, and have long since written BlackBerry off as a company because of the performance of its handset business. But my own view is more nuanced. I’ve written about BlackBerry extensively in the past, mostly while with my former employer, Ovum, although one of my earliest posts on this blog was about BlackBerry. But it’s been quite a while, so I thought I’d give an update on my thoughts on the company, using today’s event as a jumping-off point.

BlackBerry was never just about devices

There’s no doubt that BlackBerry has fallen a long way from its peak.  Beating up on the company on this point is fruitless – it’s a fact that it’s a shadow of its former self when it comes to its handset sales, which formed the core of the company’s business for many years. Revenue from devices made up the majority of the company’s revenues very consistently from 2003 to 2013, and for much of that time it made up well over 70% (and sometimes over 80%) of the company’s revenues. Thus, in many people’s minds, BlackBerry is first and foremost a handset company, and given the decline in its fortunes in that area, they assume that it’s done for. The company’s device revenues peaked at around $16.5 billion annually in 2013 but have fallen to under $2 billion annually.

Were BlackBerry to have been simply a handset sales company like HTC or Kyocera, this decline would have been terminal (no pun intended). But BlackBerry has always been more than just a devices company. Even when its revenues were dominated by handsets, it derived a significant proportion from service fees associated with BlackBerry subscriptions. Those were directly tied to the number of BlackBerry devices sold, in that both revenue streams derived from the same source. So, to the extent that the number of BlackBerry devices has plummeted, its service revenues have fallen too, from a peak of over $4 billion per year to under $2.5 billion – not quite as dramatic, but still a fairly sharp decline. However, that business, and BlackBerry’s broader foothold in the enterprise, has been its salvation even as device sales have fallen off a cliff. Continue reading →

Big picture, Microsoft, Whole company analysis

Nadella’s manifesto

2 Comments

Satya Nadella today wrote an email to Microsoft employees, which was simultaneously published on the Microsoft website. We’ve had glimpses and snippets of Nadella’s vision for Microsoft over the past several months, but this is the first time we’ve had the whole thing laid out in clear terms, and it marks something of a strategic break with the Ballmer era.

The most visible sign of this is the dismissal of “Devices and Services” as the descriptor of Microsoft’s strategy and mission. This was the vision Ballmer cooked up in his last couple of years at the company, as he sought to find a way forward for Microsoft in the face of serious threats to its two biggest businesses – productivity and operating systems. It did one thing well: recognized that operating systems would in future be monetized through hardware sales, and that productivity software would be monetized through services. But that was about as far as it went. Neither Ballmer nor anyone else at Microsoft ever really articulated how the two fit together, or how Microsoft would bridge the competing demands of providing the best services on any platform versus providing devices that offered truly differentiated experiences.

I do think the two could have been rationalized, as I’ve written elsewhere. Ultimately, a devices and services strategy properly executed would have meant creating really compelling services and then having Microsoft devices serve as the best possible instantiation of those services. But Microsoft was never really able to articulate that vision, and in the process created some really awkward questions for OEMs about why Microsoft was competing with its partners, first with the Surface and then with the Nokia devices acquisition. The fundamental problem, though, with Devices and Services as a strategy, was that it was never fleshed out, and thus was mostly a description of new business models for its two existing businesses, rather than a true vision for transforming Microsoft. It also never answered the question of what Microsoft was really about, or why it does what it does.

Satya Nadella’s new strategy replaces the Devices and Services pairing with another: Productivity and Platforms. On the surface, that could seem like a startlingly unoriginal vision for the Office and Windows company – more of the same. But drilling into what Nadella actually means by those two things shows that he has a much more expansive vision of what both terms signify, but one that’s rooted in the things Microsoft is good at. That’s a subtler shift, and we have yet to see the full implications of it. But it positions Microsoft as an enabler of its users, both enterprise and consumer, rather than a seller of devices and services, and that’s an important change, because it speaks to potential customers rather than merely to investors.

The other major implication of all this is a refocused Microsoft, one which sees “dual users” (a term that Microsoft uses to describe what others have called “prosumers”) as its target market. It’s in some ways an admission of defeat in the broader consumer market, and a statement that it’s going to focus on the narrower segment of people who see “getting things done” as a major reason to buy a personal device or use a consumer service. There certainly is a substantial segment of the population that views getting things done as important when selecting a device vendor or online service, but I suspect it’s a minority.

The other challenge is that, as Microsoft has been broadly absent from the smartphone and tablet markets for the last several years, people have found plenty of other ways to get things done without Microsoft’s help. Given its slow response to the demand for Office on the iPad, for example, it now faces much more of an uphill battle than it would have done had it embraced that opportunity before many alternatives moved in to fill the void. The same applies to many other domains where Microsoft has lost a step over the last few years.

Where Microsoft seems much better placed is in the broader platforms business, beyond traditional device-based operating systems, in what Nadella calls “Cloud OS” in his email. Microsoft was the only one of the big three consumer technology companies to split its developer conference keynote into two, and it did it to focus almost entirely on this opportunity in the second part. With Azure at the center, Microsoft is building a truly device- and platform-independent set of cloud services and infrastructure for developers, and doing well at it. But this revenue stream today is a small fraction of Microsoft’s overall revenues, at a couple of billion dollars a quarter across both its Enterprise and Cloud services businesses. Cloud Services itself – which also includes Enterprise Office 365 revenues – is smaller than Microsoft’s online advertising revenue, though growing much more quickly.

One upshot of all this is that we may be looking at a smaller Microsoft over time.  Last quarter, Microsoft’s revenues actually shrank year on year for the first time in a couple of years. If Microsoft yields much of the consumer market to competitors while focusing on a narrower segment, it could see revenue declines in some historical areas along with smaller growth in the new areas it’s successful in. But once it crosses the chasm from its historical highs to a new, refocused business, it should be set for better growth again. At least Nadella seems to be seeing Microsoft’s strengths and weaknesses clearly and taking steps to reshape the company in the right mold. There are also hints towards the end of the email about efficiency, streamlining and flattening in the organization, which could be read innocuously as having the same team operate more efficiently but could also be seen as an indication that some cuts may be coming.

Lastly, it’s interesting to see the word “privacy” pop up four times in the email, and particularly interesting in the context of the fact that it was never uttered during the keynotes at Build (security was mentioned, in the context of the enterprise). This was a recurring theme at Apple’s WWDC, and although Microsoft’s Scroogled campaigns arguably haven’t been that effective, there seems to be a sense at both Apple and Microsoft that privacy can be an effective competitive vector against Google if done right.

Nadella still hasn’t given us many specifics in terms of what this will all mean for new products and services at Microsoft. But he has now at least given us the framework for thinking about where Microsoft might go next, and how it sees its mission in the world. That’s going to give the company some valuable direction and focus following several years of seeming a bit lost. But as with any strategy, the devil is in the execution, and we’ve seen very little of how Nadella will deliver on that yet.

Apple, Big picture, Developer events, iMessage, Messaging, Whole company analysis, WWDC, WWDC 2014

What “winning” means for Apple

13 Comments

I posted a tweet yesterday that seemed to hit a nerve with people, and so I thought I’d expand on my thinking a bit here. What I actually posted was two related tweets, though it was the second that seemed to resonate – the first was merely context:

There were at least two articles that prompted my tweet, but the main one was this one from Ellis Hamburger at the Verge. Both took a tack that I felt fundamentally misunderstood what Apple does and how it does it, but there was one particular section of piece on the Verge that sums up the mentality here very well, so I’ll use that as the jumping off point:

But today, communications are a commodity, and it’s hard (if not impossible) to survive in the long-run as an app that only works on one platform. A dozen messaging apps are sweeping the globe, and all of them work whether you have an iPhone, Android, Mac, or PC. Apple’s Messages app, and the iMessage platform therein, only work if your friends and family use Apple products. In the United States, where iPhone market share is highest of almost any country, iMessage’s thin ice is harder to perceive. The United States is one of the only countries where no one messaging app reigns king, but elsewhere markets are dominated by one messaging app or another, all of which have similar features and work on all platforms.

A single-platform messaging app cannot win. Despite its tasteful new feature additions, however derivative they may be, Apple is playing on borrowed time. If Apple is determined to stay single-platform, it’s going to take more than new features to save its messaging ambitions.

To suggest that Apple is trying to “win” in the messaging wars is equivalent to suggesting that iTunes was an attempt to “win” in the music-playing software wars. Neither is the case. The first thing to understand about Apple is that it’s motivated first and foremost by creating the best possible experience on Apple devices. This imperative drove Steve Jobs to the extent that he made poor business decisions early on in his time at Apple, ultimately leading to his ouster. He was so fixated with this objective that he lost sight of others and ultimately of what it would take to keep Apple in business as a public company, a lesson he learned the hard way and ultimately brought back to Apple when he returned. But that has always been the fundamental motivation for Apple’s senior leaders above all else.

That motivation leads to one of the other defining characteristics of Apple as a company: the tight integration of hardware, software and services. Apple has never been about creating cross-platform services. To those of you who may wish to point out that Apple has long had iTunes on Windows, I direct you to this quote from Walter Isaacson’s 2011 book on Steve Jobs:

We put iTunes on Windows in order to sell more iPods. But I don’t see an advantage of putting our music app on Android, except to make Android users happy. And I don’t want to make Android users happy.

Apple’s only significant cross-platform move was still a move to make Apple devices more compelling – the simple fact is that an iPod was not a standalone device, and it needed iTunes to be at all useful. Given the Mac’s very low share of the global PC market, releasing iTunes for Windows was an obvious strategic imperative. But it was done with one objective in mind – making the iPod a compelling device for a larger number of users, and yes, selling more iPods as a result.

What both the pieces I linked to above ignore is that everything Apple does is part of an ecosystem, and that’s exactly why people buy its products. Ever since the iPod and iTunes launched, Apple has been in the business of connecting its devices together in a way that adds value to each of them. The iPod added value to the Mac by providing a portable music player for your iTunes music, and iTunes on the Mac added value to the iPod by providing the conduit through which you obtained music to put on your device. When Apple released iTunes, it wasn’t competing in the music-playing software market anymore than iMessage is Apple’s attempt to compete in the messaging market. Both products were software Apple developed to add more value to its hardware products, and should not be seen as products in their own right.

When the whole rationale for Apple’s software is to add value to its hardware products, the idea of providing cross-platform software or services becomes inimical. To the extent that Apple software or services are available on non-Apple devices, they cease to provide meaningful differentiation for Apple products. By contrast, making Apple-exclusive software and services available on various different Apple hardware products adds significant value, and providing tighter integration between those devices through software and services adds even more. Hence the focus on these things at WWDC on Monday. To suggest that Apple needs to make its Messages product (or any other product) cross-platform in order to succeed is to get things exactly backwards – Apple doesn’t make hardware to be successful in messaging; it makes a messaging product to be successful in hardware.

This makes its Beats acquisition particularly interesting, since the Beats music streaming service is cross-platform today. But I suspect that the product we eventually see from Apple which integrates Beats’ streaming and curation technology will go back to being Apple-only. If there’s any strategic rationale to Apple spending so much money to stay at the forefront of the music business, it’s to make the iPhone the best device for music, and not to create a broad-based music subscription service.

All of this is part of a broader trend in the consumer technology space, which is that the most successful companies are competing in a different way, by combining hardware, software, content, communications (and in some cases connectivity) in integrated ways which create compelling end-to-end experiences for consumers. I see the same flawed logic among people criticizing Amazon’s entry to the smartphone market on the basis that no-one makes money in smartphones. If Amazon is entering the smartphone market, it’s not to make money on smartphones, but to drive buyers to spend more money with Amazon as a whole, across digital content and e-commerce. Amazon and Apple each have a core business that makes the bulk of their money, and their entry into adjacent spaces is intended to reinforce the core business, often at break-even or even negative margins. Google is the archetype of this model, providing many services for free, all of them funded by advertising and especially search advertising. It provides those services not out of the kindness of its heart but in order to increase the appeal of the Google ecosystem and to gather data that helps with its other businesses.

Apple isn’t fighting the messaging war. To the extent it’s fighting a war at all, it’s fighting an ecosystem war, and so far it’s winning. Is Apple’s tightly-integrated model the only way to be successful in the consumer technology market? Not at all, though it certainly seems to be the way to generate the best margins. There’s always going to be room and demand for other models too, and both Microsoft and Google have benefited greatly in market share terms from taking a less integrated approach. But to imply that Apple’s approach is ultimately doomed is to ignore what’s made it so successful over the past several decades, and the model it needs to continue to pursue to remain successful.

BlackBerry, Earnings, Whole company analysis

What John Chen needs to tell customers (and investors)

4 Comments

Earlier this week, BlackBerry’s CEO John Chen posted a letter to customers. While he provided some sense of his strategy going forward, he unfortunately continues the tradition started by his predecessors of failing to answer the most compelling questions customers (and investors) have:

Is there any reason to believe the atrocious trend in device sales will turn around? If so, what?

Device shipments have now dropped 75% from their peak in 2011, and although it’s possible we’ll see a small blip next quarter from steep discounts on the Z10, the trend is likely to continue downward. Chen needs to explain what, if anything, will cause these same poorly-selling devices to start selling better, or allow any future devices to be more appealing to users. As of right now, there’s no evidence of either of those things, and as such we have to assume shipments will continue dropping, and with them what has historically been the largest chunk of overall revenues.

In the absence of that, is there any reason to believe service revenues won’t follow suit very soon?

Service revenues make up most of the rest of BlackBerry’s overall revenues, which is why some people seem to think it’s the most promising avenue for BlackBerry going forward. But the reality is that these service revenues are directly tied to the installed base of BlackBerry devices, each one of which generates a few dollars every month for the company. But, if device shipments go down dramatically and existing BlackBerry users churn to other platforms, this service revenue will merely lag falling hardware revenues by a few quarters but generally follow the same path. BlackBerry has already stopped reporting subscriber numbers, which started falling late last year, and had dropped from 80 million to 72 million by the time BlackBerry closed the door on that metric.

Continue reading →

Big picture, Whole company analysis

Articles of Faith in tech

2 Comments

Each of the key companies in the consumer tech market has its fans and its detractors – those who believe the company is destined for future success, and those who believe it’s doomed to fail. Some of these beliefs are founded in facts and figures, while others stem from gut feel, emotional investment in a company, or something else entirely. But ultimately backing any one of these companies requires faith that certain things are true.

This has been borne out to me by recent coverage of Amazon, which has focused on its supposed ability to ‘flip a switch’ to shift from breakeven to profitability at some future point. Some of the smarter commentary makes clear that the picture is a little more complex, but it also illustrates just what you have to believe in order to have faith that Amazon will eventually be able to pull off that sort of a transition.

The stories yesterday about Snapchat turning down a $3 billion cash acquisition offer from Facebook also highlighted divergent opinions about whether Evan Spiegel was right. Though most observers seemed to think Spiegel was nuts to turn down an offer, whether you believe that depends on whether you believe in Spiegel’s vision for how high Snapchat’s valuation could go. He – and presumably his investors – have faith that a certain series of events will play out in a certain way, ensuring Snapchat’s eventual profitability and thus an even higher valuation. 

Each company in this market has a similar story that it tells investors, and your view on these companies and their futures ultimately depends on your ability to have faith in those stories. Some of these stories are told explicitly, whereas others are secret (either because the companies are private and have no obligation to share their strategies with the world, or because of some perceived secret sauce they would rather keep to themselves). But ultimately, each tech company has what you might call articles of faith you’re required to sign up to if you want to believe in its long-term success:

Article of faith – n. something that people who support a particular religion or idea believe completely, although it has not been proved

– Macmillan English Dictionary

Let’s look at those articles of faith for some of the most important companies in this space: Continue reading →

Earnings, Microsoft, Office, Steve Ballmer, Structure, Whole company analysis, Windows

Microsoft’s intertwined consumer and enterprise businesses

1 Comment

At the time Steve Ballmer’s retirement was announced, there were calls for Microsoft to be split up into two businesses, serving consumers and enterprises respectively. I believed then, and believe even more strongly now, that this is fundamentally flawed thinking, and the reason is that Microsoft’s consumer and enterprise businesses are deeply intertwined, to a great extent because Microsoft has wanted them to be.

Below is a slide from Microsoft’s 2013 Financial Analyst Day, which is intended to illustrate (in the diagram on the left) Microsoft’s three customer segments:

Microsoft's customer segments, from Financial Analyst Day 2013

Microsoft’s customer segments, from Financial Analyst Day 2013

The reality is that, while Microsoft does serve three audiences, they’re not the ones it shows in that chart, mostly because OEMs aren’t really customers, but channels to reaching either consumers or businesses. In reality, they are: