Hans Hoffmann's Blog

It is hard these days not to think about what is going on in the Ukraine and the Crimea. It seems the idea of a land grab has been something we read about in history books, in what is usually in a very negative light.  Most notably the second World War and its aftermath the cold war.  However what is going on in the Ukraine has been something that has been building for the last century.  It places a leader steeped in the history of the Soviet Union, Vladamir Putin against the global onslaught of the digital democracy.  A country wanting to appear strong, to argue on the side of Russian history, but in the eyes of the world to look, quite simply, outdated. With the recent referendum vote it seems almost comical and yet tragic that Russia looks set to get its way, not just in Crimea but eastern Ukraine as well.   However I think that though Putin may be a good student of Russian history he is a bit lost when it comes to current history.

Ukraine has often been called one of the bread baskets of Europe.  The agricultural fertility of the Ukraine is well-known.  It is also the pace where during the early days of collectivization by the Soviets  it led to one of the great genocides of the 20th century.  A genocide that is well  documented by Miron Dolot’s, devastating account in his book “Execution by Hunger”.  As collectivization took hold, people s farms were taken and then as people were indoctrinated with communist philosophy and no possessions they simply starved.  During the era people were removed from Ukraine and sent elsewhere, like the Crimean Tartar’s, many who were told to get on a train and were sent to Uzbekistan.  This happened in nearly every Soviet Republic.  Ukranian’s, Russian’s, Uzbek’s etc..One thing the Soviets understood is if you want to minimize social unrest remove people from their historical roots and distribute the people across Russia’s vast expanses and that way they cannot congregate in mass.  Nor will they inhabit lands they call home.  It was cruel but effective.

President Obama was dumped with an out of the blue global crisis.  It was Harry Truman who was once asked, “What’s the most difficult thing about being President?”  He replied in one word, “Events”. I guess it seemed on the surface that Russia was having its Beijing 2008 Summer Olympics moment at the 2014 Winter Olympics in Sochi.  It was a Russian moment of, “We are here, and part of the modern world”.  But even leading up the Olympics when Russian experts like David Remnick were being interviewed there seemed to be some dark undertones when commenting about today’s Russia.  A sense of wanting not just to be at the table but to be at the head of the table. President Obama now is at the forefront of these events, taking him away from domestic policy, but that seems in line with all two term Presidents.  Congress does not listen as they are in re-election mode.  I think increasingly President Obama will be reacting to global events like the Ukraine.

Since Ukraine declared its independence from the Soviet Union on August 24, 1991, Russia has worked to make sure that it retains a “sphere of influence” over the Republic of Ukraine (and other former Soviet states).  Trying to foster tight relations with its neighbor.  often holding the Ukraine hostage over energy resources.   We saw this take place in the Orange revolution in 2004.  In what appeared to be a victory by Victor Yanukovych over Victor Yushchenko, was found to be a corrupt and rigged election.  This after his supporter, Vladimir Putin had already sent his congratulations to Mr. Yanukovych.  Yushenko won in the run off however this did not lead to brighter days in the Ukraine.  Consequently several years later Yanukovych would return to power .  the problem all along the way has not been if the left or the right is in power, but empty promises made in the face of wide-spread government corruption.  In the case of Yanukovych we discover a leader building himself a palatial place while average Ukrainians try to eek out a living.

If anything we as a country can learn something from this,  it is history is a powerful influence in many parts of the world, China, Japan, Europe, the Middle East etc.  It is something that we may claim to understand but we really do not.  We failed in Vietnam largely because we did not understand the link of Vietnam and China (Read former Defense Secretary Robert McNamara’s “In Retrospect:  the Tragedy’s and lessons of Vietnam”).  President Clinton failed to understand the depth of history and its emotion in his failed Middle East peace talks.  We are still a very young country with a lack of depth to our history.  I know 238 years may seem like a lot but when you consider my home state of Washington’s history just passed 100 years, holistically we do not have a lot of depth.

Putin came to power towards the end of the Clinton Administration.  He was a throwback to “old” Russia following the barrel of vodka man, Boris Yeltsin.  As we know Putin may be the last of the Russian leaders to have strong KGB ties.  He was 36 yrs old when the Soviet Union ceased to exist. Seemingly lacking in personality to the west but oozing with the strength of his nationalistic identity.   Following up on the previous paragraph Putin will play history to, what he feels is his advantage, but seemingly failing to realize that the current world history has global safeguards that did not exist before.  For now he is an immensely popular leader in Russia, but I feel there are clouds on his horizon

If there is a card to play it is the oldest and safest card we have which is economic sanctions.  Russia desperately wants respect but it cannot happen without financial means.  This is what fundamentally led to the collapse of the Soviet Union.  If Russia  is anyway shut off from participating in the free worlds global economics it will be hurt.  The only real card Russia has to play is the oil card, but with America’s growing domestic oil industry, the threat to the US is not as great as it used to be, however Europe may be different, as they are more dependant on foreign oil..  Along the lines of the Sochi Olympics, Russia is hosting the 2018 World Cup.  However FIFA is a heavily euro-centric governing body for soccer and it would not surprise me to them receive tremendous pressure to “cancel” Russia and replace with England, Spain or the United States.  This would be a last resort, but would have a crippling effect on Russia’s current and future domestic economy.  It would also be a significant blow to  Russia’s pride

As much as Putin wants to rely on Russia’s rich history to justify his end means, the last point is a powerful one.  It is not just the United States that controls this, but it is truly a global effort.  Russia has a strong economy, but it is the eight largest economy on the planet, behind the US and China and even behind Brazil.  The 7 countries ahead of Russia could easily shut out Russia and the global economy may face a blip, but the Russian economy would be devastated.  For all those dooms dayers, anti-Obama, anti-global integration, the US is getting weak etc..keep in mind the strongest hand to play still resides in the US Capitol, the group of 8 (soon to be 7) and the ability to control the monetary systems.  The ability to influence and build coalitions is still a very strong hand to play.  The combined GDP of the US and European Union is $32 trillion add in China’s $8 trillion and Japans $6 trillion, you have $45 trillion compared to Russia’s $2 trillion.  In the current world of global economics Putin can be as popular as he wants in the short-term, because in the long-term the Russian people will feel the economic impact  of global isolation.  The rest of the world will hardly notice that Russia is missing or choosing not to participate in the vast global wealth that is being created.

It is easy to get emotional in the heat of the moment.  But you need to know the cards you are playing and for all Putin’s desire to drive a wedge between the US and Europe, he keeps failing to realize that the wedge that unites Europe and the United States is Russia.  For all his talk of Russian history he does not seem a very good student of Russia’s history with Europe.  Russia is an outsider in these relations and in reality Putin is playing with cards he does not have.  In the short run he will appear strong but in the long run he will only hurt Russia and its people.  How that plays out is for the Russian people to decide, but then again if Putin understands Russian history we will just rule with an iron hand, which Russia seems to always to revert to throughout its storied history.

 

Good Night and Good Luck

Hans Henrik Hoffmann April 1, 2014

 

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