I can live for two months on a good compliment.
Mark Twain
Creative Destruction, Anti-Trust,
Dysfunctional Business Policies:
A Few Comments
Plus ça change, plus c’est la même chose. Bill Gates, the co-founder and long-time CEO, is a brilliant businessman. And then again, maybe not so brilliant. The basics of the PC revolution are well-known, but let me provide this overview. IBM was in a position to launch the PC revolution by the turn of the 1980's; it faced a couple of obstacles: myopic anti-trust regulators were counter-productively scrutinizing IBM's business practices because of its market dominance, particularly with mainframe computing. (We would see this"day late and a dollar short" government intervention nonsense play out time and again: remember the long-distance price wars between AT&T and MCI? Concerns over local phone service consolidation? AOL's dominance as an ISP? The Sirius-XM Radio merger? Intel vs. AMD? When will these dysfunctional megalomaniac regulators ever learn?)
To be sure, IBM had to face internal bureaucratic battles: if businesses can buy cheap expensive computing power, will they continue to buy our expensive Big Iron along with our lucrative cash cow annual maintenance payment agreements? (Short response (not necessarily comprehensive): lowering the cost of computing drives up its demand: more applications and related hardware become feasible; interfacing applications are inevitable; mainframe computing has certain scalability advantages, "one-stop-shop-computing" systems and services could help companies manage the emerging complexity, and one could stimulate new mainframe sales with improved productivity advances and functionality and/or attractive pricing.)
Microsoft happened to be at the right place at the right time: despite the emergence of the competing Apple platform, IBM had initially contacted Gates about licensing a variation of BASIC, a easy-to-use computing language which Gates was marketing for emerging microcomputer platforms. IBM, looking to acquire an existing platform versus write its own operating system, initially contacted Digital Research over its then leading microcomputer CP/M platform, but negotiations fell through. IBM made a deal with Microsoft to supply a PC operating system. Microsoft, not disclosing its IBM deal, acquired licensing rights for QDOS, a CP/M-like operating system, from Seattle Computer Products at nominal cost. Microsoft then convinced IBM to allow it to license MS-DOS separately from PC-DOS to alternative hardware providers (no doubt noting how how compatible hardware suppliers would alleviate anti-trust concerns and customer worries about single vendor dependence and capacity; lower hardware prices across the platform's vendors would drive market share.)
Apple, which similarly licensed key technology from Xerox, had jumped to an early lead but had made some major blunders, despite its cool technology and operating system: it failed to develop an effective strategy for marketing to businesses, and it maintained exclusive control over its lucrative high-margin hardware business. Among other things, employees who learned PC skills at work wanted to transfer these skills at home. IBM and Microsoft convinced hundreds, thousands of software entrepreneurs to build applications on the newly emerging platform, rapid price drops drove the PC platform boom, and Microsoft and IBM never looked back. Apple ended up with a mere single-digit market market of fanatical users.
An interesting thing is to note that Microsoft seemed/seems to have a classic management vulnerability: "not invented here" syndrome. (There are a few notable exceptions: e.g., the ill-fated acquisition of Intuit (once again, irrational federal anti-trust meddling at play) and there is Visio, which I had licensed long before the merger.) I wrote my dissertation using Samna (eventually Lotus Ami Pro). (I'll never forget the week lost when all of a sudden the dual floppy drives went haywire and my files were trashed in the process. I've always maintained multiple copies of my work files.)When UWM's business school allowed me to request my own PC software, I selected a couple of little known products: Microsoft Word for DOS and an early version of Windows. In the 1980's there were packages like Word Perfect, Lotus 1-2-3, dBase, and Harvard Graphics. It really wasn't until the introduction of Windows 3.0 (and higher RAM capacity and more powerful CPU's in new PC's) when Microsoft launched its related key office applications; the competition basically threw on a Windows interface versus design intelligently for the platform (I can recall buying a Lotus Suite for Windows at a bargain price before Microsoft Office became a juggernaut.) Perhaps Microsoft made attempts to buy out some of its application competitors whom wanted too high a price, but I suspect Bill Gates wanted a standard look and feel to his product lines and perhaps was worried about damaging his brand. My employers in the mid-90's did some marketing research work for Microsoft at Home; I administered relevant databases, but they were a small client of ours.
So here's the point: a dozen years after being the preeminent player with a de facto monopoly on PC operating systems and key office suite applications, one of the most desired employers of choice in the high tech industry, Microsoft is like a legacy pharmaceutical without a blockbuster drug in its pipeline. It's become like Michael Jordan ill-advisedly coming out of retirement, tarnishing his triumphant exit on the heels of yet another NBA championship, at one point for the unworthy hapless DC franchise, going up for and missing his legendary dunk shot, to crowd jeers. Its long dominant Internet Explorer, which banished Netscape Navigator, in some surveys has been losing market share and market leadership at the expense of Google Chrome. It has struggled to compete and remain relevant in cellphone operating systems, video game consoles, and Internet searches.
Apple arose from its niche product status, with a mere sliver of Microsoft revenue, to pound out one consumer digital home run product after the other: iPod, iPhone, iPad, etc., Google similarly came from nowhere to do the same in other products or services. Microsoft, despite a lucrative cash cow business in Windows and Office licensing fees, was caught flat-footed playing catch up. Sometimes playing from behind worked as in the case of PC applications and Internet browsers, but it's been a long while since Microsoft has had a compelling new product apart from its cash cow businesses.
What went wrong? Vanity Fair has a current article out that contains hints: dysfunctional employment policies that suppress innovation, focus on short-term results and a winners/losers employee evaluation process. (If I'm not mistaken, GE has a similar evaluation process. I also remember a similar scenario back in an economics class where the instructor said in advance (to a class of 30 students), "I have a quota of 2 A's for the course." I never did that as a professor: to me, grade assignment was a function of student performance and my expectations: I could give all A's or no A's. The specified evaluation scheme is arbitrary and promotes dysfunctional office politics (e.g., sabotage of a fellow worker, crony relationships with raters, etc.) Yes, competition is the way of the free market, but an organization is not the free market.)
The article describes how Bill Gates personally gave a thumbs down to an innovative e-reader because it didn't conform to the Windows look and feel. In another example, it mentioned how Microsoft executives ignored employee use of a competitor's messenger software. The problem is that executive judgment can be a poor surrogate for the market, and they have a vested stake in the outcome (e.g., cannibalized sales).
It's a shame; Bill Gates forgot where he came from. Microsoft never expressed an interest in hiring me; I think they have blown some opportunities. Let me give an example: pop singer Donny Osmond's career seemed to disappear before his prime, typecast as an entertainer. In 1989, fearing rejection of a single under his own name, Osmond released his song "Soldier of Love" anonymously, and the single shot up the charts. Similarly, Microsoft could create a mystery brand and release the product under the brand; after buzz and sales reach a critical mass; Microsoft does the big reveal. Or Microsoft builds a cutting edge brand that it calls, say, "Microsoft 2.0". (I could picture an ad of Bill and Melinda sitting at home with their kids, and they notice the kids are playing with some cool new device and ask where they got it from...) If nothing else, Microsoft could become a venture capitalist, seeding employee-based startups.
Bureaucracies are bureaucracies, whether in Big Business or Big Government (the main difference is that government uses force to obtain its ill-gotten revenues). Big Business fears creative destruction from free market competition; Big Government fears revolution.
Worrisome Economic Signs:
Not Just Europe, the US, But BRIC
The June 2012 numbers are out (8.2% unemployment and 80,000 new jobs), and we saw yet another suboptimal jobs report, tracking below new entrants to the labor force. According to the Washington Post (my edits):
The June jobs report confirmed evidence of an unhappy long-term trend: Hiring is slumping for a third straight year. For the April-June quarter, the economy added an average of 75,000 jobs a month — one-third the pace in the first quarter. And for the first six months of 2012, employers added an average of 150,000 jobs a month. That’s fewer than the 161,000 average for the first half of 2011.
Many analysts think the economy is growing at a sluggish annual rate of less than 2 percent. For the unemployment rate to fall under 8 percent [by election day] would require an average monthly gain of 219,000 jobs from July through October, according to calculations by Hamilton Place.Whereas a number of economists see silver linings in the reports, and I'm an optimist by nature, we'll probably see American exporters report stagnant numbers this quarter, and we recently saw both American and Chinese manufacturing report subpar numbers for June, in the former case for the first time in 3 years.
The Goldman-created moniker BRIC (Brazil, Russia, India, China) describes a grouping of rapidly growing economies; however, they are beginning to slow down, in part due to slumping exports to Europe and the US. A number of recent investment advisories have questioned short-term prospects for each country: Brazil, Russia, and India.
China has the largest economy of the group, and its voracious appetite for raw materials has boosted the economies of resource-rich countries like Australia and various countries in South America and Africa. But growth forecasts have been cut (with the slowest growth in over 20 years), imports and exports are stagnant, business loans are down, and interest rates have been cut (signaling the Chinese are concerned more about growth than inflation). Trefor Moss of Foreign Policy recently published a widely cited post: "5 Signs of the Chinese Economic Apocalypse":
- The Chinese "stimulus" is over and provinces and cities are now facing their day of reckoning. (And yet Obama still wants to out-socialize the Communists... So much for central planning. Go figure.)
- Chinese migrant workers find that work is harder to come by, and we are already seeing some social unrest.
- Chinese millionaires are cutting back buying luxury goods, are diversifying their holdings outside China, and over half are contemplating leaving China, hardly a sign of confidence in what is routinely conceded to becoming the world's largest economy over the coming generation.
- Coal prices are dropping and coal imports are slumping. I'm sure Obama would attribute it to Chinese leadership in green technology; others may think that the Chinese are displacing coal use with cheap natural gas, as in US fracturing approaches. Actually Chinese businesses and families are cutting back on air conditioning and other uses of electric power to mitigate energy costs.
- Vegetable sales have been affected by a continuing string of food safety issues, with many consumers growing their own vegetables. The Chinese government has purchased pork to manipulate slumping prices, sinking below feed costs. Egg prices are shooting through the roof. Yet the high liberals, like Barack Obama, insist on pointing out how government regulations cure food safety problems, and economic protectionist measures like tariffs and import quotas, "buy American" policies, subsidies, etc. "protect" the consumer (from paying lower free market prices...)
A good start?
- caps on federal employee compensation levels, pegged to comparable private sector occupational compensation (pay AND benefits, minus economic value of relevant job security), immediate freezes in higher-level government employment, promotions and compensation, early retirement packages after 20 years of combined federal service, mandatory minimal employee contributions for benefits consistent over the private sector average, deferred pension payments pegged to social security age criteria, no pensions for new workers, conversion of government employment to limited-term (e.g., 4-year) contracts, and competitive merit-based renewal contract quotas; vesting in any eligible pension participation after 5 years of service, in (years-of-service/20) percentage of 20-year pension payment based on inflation-adjusted average annual compensation.
- federal projects subject to a minimum eligible internal rate of return and competitive bidding; 15% across-the-board cuts in hourly contractor charges
- flat domestic business income rate (no deductions) of 20%, territorial tax policies (no taxes on foreign business earnings), streamlined taxes and regulations, with flattened rates, capped cumulative credits/deductions and real cuts in relevant regulatory staffing
- more balanced taxes of consumption (e.g., VAT) vs. income
- inflation adjustments/deductions for interest and capital gain income
- across-the-board spending cuts (say, 8% in nominal dollar terms), including for higher-income entitlement spending; means-tested COLA adjustments for federal transfer payments
- decentralized, deregulated authority for federal social spending
- increased sales and/or leases of federal properties
- banking reform capping government guarantees at 50% of relevant deposits, flood insurance, mortgage values, etc.; a minimum 20% down payment to be eligible for any government recovery; limitations on Federal Reserve interest setting below historic interest rate levels and/or COLA adjustments or similar interest manipulation through bond transactions, restriction of money supply growth to relevant monetarist rules and targets and limits and full disclosure of foreign bank-related activities
Tom Petty and the Heartbreakers, "It's Good To Be King"
