Hans Hoffmann's Blog

There has been a lot said and written already about new Microsoft CEO Satya Nadella and what needs to be done at Microsoft. He has only been on the job for a few weeks and there may be questions of me and what do I think of this hiring.  I am going to avoid that subject as I don’t see the value and I think it is better to think about the future at Microsoft and what Satya will need to accomplish in his first year.  There are a number of areas where Microsoft is focused moving forward, which were outlined recently at the financial analysts’ meeting.  The four pillars that have been defined as the future strategy for Microsoft are Mobility, Cloud, Social Media and Big Data. In order to succeed in these areas it is my view that each area will need different thinking and expanded thinking. In a perfect world Satya will read this and come seek my advice, but I am afraid that world does not exist, so to my loyal readers of five here are my thoughts and I welcome your feedback.

Mobility is that area that has come up first time and time again.  I think it is also the first area Microsoft go to when addressing their shortcomings in recent years.  In Kevin Turners Financial Analysts meeting presentation it was apparent that any type of good news around Windows Phone and Surface would be shared.  Bottom line though as we all know Microsoft missed the industry boat and I have written numerous blogs about how Microsoft lost mobile and the developers.  My horror upon hearing Steve Ballmer saying “the industry needs a third ecosystem”.  In looking at KT’s presentation one thing sticks out, which is the industry for mobile devices will continue to grow through 2017.   My suggestion to Satya is do not look too directly at the numbers and what the opportunity is but what it could be.  If we have learned anything over the past ten years in the industry is moving incredibly fast and the velocity at which it is moving will only increase.  To say, “we want to capture x % market share by 2017”, may put a number to a goal but in the end I believe will lead you to defeat.  I defer to Sun Tzu and “The Art of War” – “When confronted by superior numbers you need to change the battlefield”.  Thus it is with mobility and as we look forward where we are in three to five years may be a much different landscape than we have today.  It very well may not be smartphones and tablets.  The challenge for Satya Nadella will be finding the next “big thing” and getting in front of it.  My belief is the problem with today’s handheld devices is just that, they are handheld.  Mobility will stretch beyond the handheld to wearable and embedded.

The Cloud is everywhere and it is growing.  I think in some ways the term “Cloud” is a bit mislabeled. We think of it as something new as if it had to be built from scratch.  But when I look around the other initiatives at Microsoft they all connect back into the cloud.  Beyond the services companies wish to deliver via the Cloud, it is the information collected and stored in the cloud that make cloud based services interesting.  Today the largest examples of Big Data reside at Yahoo and Google, not surprisingly.  It is east to think of Big Data as pulling data from the cloud, but I also think of it as feeding the cloud.  When I look at Google’s acquisition of Nest all that data our thermostat provides will be fed into the cloud.  Then I have to ask, “how many other devices could feed the cloud? My lawnmower? Television? Washer and Dryer? How many devices are not connected today?  The amount of application services that can be delivered as a cloud app starts to increase as the amount if data being fed to the cloud increases.  My message to Satya would be stop worrying about Amazon and Google, worry about what is next.  Define what is next.  Microsoft could then be the cloud leader.  Then Google and Amazon can worry about Microsoft.

Social was an initiative that initially confused me,  My first thought was Microsoft going to create the next Twitter?  But in looking at what was initially proposed it makes sense to me, Microsoft is viewing Social media from the perspective of the enterprise.  In this arena Microsoft has a lot of assets.  They have SharePoint Services, Yammer, Exchange, Lynch and most importantly they have the default directory service for nearly all Fortune 1000 companies, Active Directory.  All Microsoft would need to make sure of is to provide extensions to these assets to connect outside the corporate firewall to consumer based social media services such as Facebook, Twitter etc and it could own the footprint of social media in the enterprise.  It would then be interesting to extend social media from the enterprise to the consumer, versus the other way around which Microsoft is not well positioned to lead.  Remember Widows stated as a business device that founds its way back to our homes.

Big Data is probably the most recent industry “buzz” and in many ways the hardest to decipher and crack.  For many Big Data is Hadoop.  Yes we can collect large amounts of unstructured data today.  However our ability to make use of that data is still rather difficult.  As noted earlier I view Big Data and Cloud as going hand in hand.  The cloud will be fed increasing amounts of data that companies will try to decipher and put into actionable services.  If I had a concern based on what I have read so far from Microsoft is there seems to be an attempt to put Big Data into products, such as SQL Server and Excel.  I would warn Satya against looking at this through the prism of what exists today and look beyond to what services can be delivered tomorrow.  Data is growing on the web and growing fast.  Every day we create 2.5 Quintilian bytes of data.  the web houses a yottabyte.  A company’s ability to harness and make accessible that data can be the determining factor between great success and failure.

One challenge Satya will have is the Microsoft Board of Directors.  It will be an interesting mix and if there is one concern is that it may be too involved.  You will have Bill Gates and Steve Ballmer, who frankly wear Microsoft on their sleeve.  They will need to lie low and let Satya put his imprint on the company, they will need to let him make mistakes and not scrutinize him too much should he want to veer Microsoft in a different direction, which I know many outside onlookers hope he does do.  You have ValueAct, a large activist investment firm, getting a seat on the board and by early indicators favor an enterprise focus for Microsoft.   Will Satya appeal to this view or does he have a fundamentally different one?  Finally you have John Thompson who is the new Chairman of the Board.  With Steve and Bill on the board is he just an emperor with no clothes?  In the meantime it is important for Satya to not let these board dynamics distract him.  Boards are always distracting, but in Satya’s case it seems they are unique and unfortunate.  In the end however Satya just needs to be Satya and the board needs to trust in their decision to appoint him CEO.  In the end Satay needs to let his own instincts guide him.

Company Size and agility will be a focus and one that is much discussed.  Microsoft is huge and it feels bloated.  Maybe ValueAct will get its was and split the company into consumer and enterprise (if indeed that is what ValeuAct desires).  Like any large company Microsoft has had to develop processes to oversee the business as it grew.  The Jack Welch philosophy of “kill your brother”  was tried and failed.  I do not believe as much out of Jack Welch, but  trying to implement something that worked at GE but was not designed for Microsoft.  Satya has already said he wants to tear down barriers to doing business at Microsoft.  The challenge will be sifting through thousands of suggestion as to how best to do that.  Building a big company is easy when compared to how to make it agile and nimble.

Despite all these challenges and opportunities, Satya Nadella is inheriting a great company.  On the outside Steve Ballmer has been routinely criticized for his mistakes and missteps, but numbers do not lie and Microsoft grew into a company that earned over $77 billion as of June 30th, 2013.    Microsoft has available in cash nearly $77 billion .  All under Steve’s watch and that cannot be taken away from him.  Microsoft has some great assets in Windows, Office, Enterprise business, and the Xbox.  Probably only Tim Cook as Apple has had this type of luxury in taking on a CEO role.  One advantage Satya has visa vi Tim Cook is he is a decade removed from a legend, Bill Gates. It is like the old saying in sports, “you don’t want to be the guy who replaces the legendary coach, but the guy who replaces the guy who replaced the legendary coach”.   The one thing that needs to happen is time.  Satya needs time to make his imprint on the culture of Microsoft and the landscape of technology.  The former will take time and the latter will require Satya to make some big bets.  The tools are there to make great change, as big as a struggle as it seemed to be to hire a new CEO, its hard to believe so few really wanted the job.  Here is to Satya on what will be his greatest life’s adventure.

Good Night and Good Luck

Hans Henrik Hoffmann March 10, 2014

Like many when you see a fairly new company like Facebook pay $19 billion for a company, you have to wonder why? Are these giant corporate takeovers not reserved for the older corporate giants of the industry like Google (who was reported to also have been bidding for Whatapp) or Microsoft? Companies with billions of dollars just sitting around collecting interest.  In the new corporate world things change quickly and age means nothing. However when you look at WhatApp and what it does and where Facebook plays this acquisition starts to make a lot of sense.  The potential revenue numbers are large and the business model seems to fit nicely into what Facebook is becoming:  A provider of mobile application services.

A text message is based on a technology called Short Message Service (SMS).  It was basically created in the early days of the wireless industry to allow users to send short text message via their phone.  On the surface it would seem  to have been a pretty un-dramatic service.  Though in the early days it was a pretty big deal.  I even admit it reminded me of a text service in Microsoft DOS called “NetSend” which allowed a networked PC to send a simple text message to another PC.  The difference was that the telecommunications carriers who provided the SMS service were able to monetize that services in a big way.  It is projected that each year over 8 trillion text messages are sent which amount to over $110 billion in revenue.  In short this apparently crude service is ingrained in global culture and is very big money.  It is rather amazing that it has grown and lasted as long as it has.  However with new services and device,s there are what appear to be storm clouds ahead for SMS.

What is interesting about this very large piece of pie is no one carrier can say they own ten percent of the global market.  They may have large share in their local market, but not global.  The reason is quite simple: government regulations.  Companies like AT&T and Verizon carry a lot of sensitive information (Edward Snowden aside) that no regulatory body would ever allow global consolidation in this industry.  It is an issue of national security.  So despite the large numbers SMS today is very fragmented by carrier.  That is why companies are now looking at something called “over the top”.  With the advent of smartphones and mobile internet applications and services it is now possible to get apps that provide a SMS type service but bypass the traditional Telco networks to deliver the service.  In short use the internet to carry these services, once it’s one the web it is open game.

So why does Facebook need to get into this space?  Because at its core Facebook is a mobile company. If we take a look at the numbers above one can tell if Facebook, even at a reduced cost to end users, if they were able garner a ten percent market share it would mean billions of dollars to the bottom line for Facebook. This is the advantage of internet based mobile services as they are not tied to a carrier network, so therefore not subject to the same scrutiny by government regulatory bodies. WhatsApp is not the only provider of this type of internet based service.  There are several other companies making a name for themselves such as WeChat, KaKao Talk and Line.  The marketplace for this type of service is coming alive and is growing rapidly.

In the deal WhatsApp gets access to over 1 billion Facebook users and pretty much every smart phone loaded with the Facebook app will be able to now load and/or include WhatsApp.  This could be a disruptive force for the wireless industry as SMS revenues that once were banked upon could slow down and maybe even start to retreat.  This is where the Telco’s are guilty of resting on their laurels,  Having spent time at a telco I can say this type of long-term big picture thinking is not in their DNA.  The Telco’s are not innovator above the network layer.  There one bit of credit of late has been, and they may not have liked the terms Steve Jobs provided, but they understood the much larger market opportunity and ceded control to Apple, which led to similar terms for Google.  In short it was , “Telco’s you provide the network and voice and data plans, but everything riding over the top let us handle”. Yes indeed let us handle the innovation, just give us a pipe to innovate through.

I believe text messaging is here to stay but what is becoming increasingly apparent is that it will morph into something different – it may be WhatsApp, but it may be something else.  With the current ad campaigns to stop teens from texting while driving (as well as my sister-in-law) , I think you will see voice commands become increasingly important in this realm.  Facebook could invest in creating an enhanced voice command service like that for WhatsApp.  In would be a game changer.  Voice Command to me is like touch screen.  Touch screen had been around for a while prior to the iPhone, but the iPhone made it cool and usable.  I believe we are close to having elegant voice control systems, not the crap you have to go through when making a doctor’s appointment or pay a phone bill.

My hope for this acquisition is that Facebook is not only looking at the current disruption it could create in the marketplace, but looking at ways of  innovating on top of this exciting platform in new and different ways.  The tech industry is definitely a risk reward game.  The bigger the risk, the greater the reward.  There is no question Facebook is taking a great risk so early on in its life as a public company, however as detailed, the numbers add up to a great reward.  More importantly this can happen in a disruptive manner that will change the landscape of what has been a relatively stagnant space for twenty years.  In the automotive space that is a short lifespan, but in technology it verges on ancient.  Finally is all these dealings I have been greatly impressed with Facebook founder and CEO Mark Zuckerberg.  He has a calm sense about him in these dealings and is able to rationalize the purpose of eth acquisition in simplistic and understandable terms.  In many ways he reminds me of a young Bill Gates, minus the cheeseburgers and temper.

Good Night and Good Luck

Hans Henrik Hoffmann March 4, 2014

There has been a lot written about this in the past week and I guess I have a few comments and observations to make about this. Like any big acquisition there is a positive and a negative, though in this case the positives outweigh the negatives by quite a bit.  Google has not really owned Motorola for that long.  They acquired the original company in a $13 billion deal that was completed in June 2012.  But as was written then and is being written now , it was never the handset division Google was after it was the patents. In selling to Lenovo, Google is only getting rid of the extra fat it did not want.  So before all you math whizzes go up in arms as to why sell for $2.9 billion, what you paid $13 billion for the real question is what is the value of the piece Google is keeping?  I don’t believe that Google was ever that committed to building their own handsets, so selling off the division has a whole lot of benefits

What does Lenovo get?  My simple question is what has taken a PC manufacturer so long to do this?  The PC business is declining and in need of new revenue streams.  For years now it has been rumored that Dell might make one, but it has been stuck in rumor land for some time.  It seems like most PC manufacturers have been focused on creating a better tablets, but have never been that interested in building a smartphone.  Maybe it is out of fear of having to work with carriers.  The only desktop company that I think has tackled this is Apple.  the others have just sat idly by, waiting for something to happen.  If seems all PC manufacturers should be trying to get into this game and enhance their portfolio’s. Since Lenevo was formed over ten years ago they have taken a leadership role in the industry and positioned a Chinese company in a global leadership position in the tech world.

Google is getting a strong partner.  By selling the Motorola devices division they can lock a strong partner into supporting the Android OS, not to mention an increase in search revenues.  It also gets them out of the awkward position of manufacturing and competing against their partners, namely Samsung.   Lenovo has the marketing strength to effectively promote these new smartphones and make a serious run at generating some market penetration.  Beyond this Google will strengthen a partnership that will lead to new Chromebooks and Android Devices.  As noted earlier Lenovo is a global tech company but by doing this deal Google just positioned itself well for access into the gigantic Chinese market.  Lenovo can navigate Chinese bureaucracy in a way western companies will never be able to.  Many pundits will focus on the fact the Google is perceived to be losing a lot of money on the deal, as hey “bought high and sold low”.  I disagree as in my view Google has always been good at evaluating their portfolio and cutting losses early.  Google is good at making hard cutting decisions when it comes to the future.

This is bad news for Apple as it just got another major competitor and as much work as they have done to get into China, they will be challenged by Lenovo.  Not that Apple is not used to this.  They have always been a company with a “we will do it alone” mentality.  But as they try to extend their global reach they will be challenged by lower end, lower cost devices, primarily lead by Google’s Android partners.  Apple is primarily a North America and European play, based on its high barrier to entry.  The Android world continues to challenge and improve.  I don’t care ho which you are if you can get an equal device for less you will likely go that route.  On top of that the consumer market everyone wants to get into, China, now had a strong local player.  Just like in the US where we see ads that say, “Buy American” will Lenovo play the “Buy Chinese” card?  Patriotism is always a strong hand to play, Lenovo would be foolish not to play that hand.

Another loser in this deal is Microsoft who are struggling to make Windows phone relevant and will not have a big competitor in a channel they usually own.  Lenovo will, at least in the short-term, be in no hurry to launch a new smartphone with the Windows 8 OS.  Microsoft has been entering new territory the past several years as the OS market they have so rightly owned is beginning to fragment as there are OS choices with applications on the market.  I can also see that Lenovo will have an opportunity to enter emerging markets with a low-cost Android smart phone.  Though I will admit if Microsoft plays their cards right with the Nokia acquisition they are better positioned to win in this space as Nokia has a strong presence in emerging markets.  It is just a question of getting the pricing right to move consumers from old mobile devices to newer smartphones.

On eth surface there will be those that consider this a failed endeavor by Google, but the handset piece was always a side-show to what the real deal was about which was patents.  Google was way behind in this category and needed protection from companies like Microsoft and Apple who have huge patent portfolios.  If Lenovo proves successful then Google will make its money back from the mobile search revenue it will receive from each device sold, bit just phones and tablets but potentially laptops as well if Lenovo becomes a strong supporter of Chromebooks and Android based laptops.  In my opinion any money lost in the short run will be more than made up in the long run.

Good Night and Good Luck

Hans Henrik Hoffmann, February 5, 2014