Commoditization

Posted: July 13, 2009 in CRM
Tags: , , , , , , , ,

Dan Jenkins, a venerable writer for Sports Illustrated and author of many novels about sport (he wrote Semi-tough, for example), coined one of my all time favorite Texas-isms.  It was a beautiful way of describing something just bordering on impossible.  In one of his books a character says that something is “Tougher than rent and alimony.”  I have long ago lost the context but even today rent and alimony are my acid test of true difficulty.

I never thought it would be possible to exceed rent and alimony for their sheer descriptive power and I believe that time will bear me out.  But to that nifty phrase, I feel compelled to add another idea because it is my observation that there is nothing more difficult than watching a product line commoditize knowing full well that your company must change while being totally unable to.  If nothing else, rent and alimony wins on brevity.

If change was easy in business, then everyone would be doing it but the fact is that it is a Herculean task.  Why else would so many major software companies watch as on-demand technology got better and better while doing nothing or next to nothing to embrace the new delivery model?

I suspect that making the technical argument for change is the easy part of the equation and the hardest part is dealing with shareholders.  As shareholders — and we are all shareholders — we play an interesting game of self-deception.  We intuitively know when change is needed but, nonetheless, we also know that often times, stock in a public company would crater if the market determined that a company’s business model was to suddenly change so that it would make less on purpose.

Far better to let the air out of the balloon in a slow deflation than in a burst.  In a deflation we all play a game of false hope, maybe the balloon will magically re-inflate, maybe we can break even and get our money back — maybe, baby.  In reality it is a one-way trip to exhaustion.  Rather than taking the decisive steps needed to save the company, albeit as a reduced revenue machine, we persevere tinkering with the old products and old business model hoping to forestall the inevitable.  More nimble competitors nibble at our undersides.

There are any number of examples today of companies or even whole industries that could greatly benefit from changing business models despite the negative potential for their share prices.  The first is the newspaper industry.  We are at a silly point in the evolution of news delivery where papers are owned by large corporations that seem to want to protect their business models more than their businesses.

Newspaper readership is in decline in America (though not elsewhere) and parent corporations are nonetheless loath to do anything to change the model of printing the news.  They give away their content on the Web afraid of charging for it despite the evidence that doing so can be profitable (the Wall Street Journal) and that recent surveys show readers are more than willing to pay for content delivered electronically.

I hear the loudest analysts say that electronic content delivery would not replace the revenues from print, but I hear very little about cost reductions in labor, transportation and printing.  There is a solution to this, which is to simply wait until the print news business further deteriorates.  Then some of the largest newspaper corporations might qualify for a federal bailout or the further reduced projected revenues of dying business might balance out with the prospects of the new paradigm.  Conversion would then become a “no-brainer” with no irony intended.

The second example is the software industry and I fear that the American software industry — the jewel in our high-tech crown — might go the way of newspapers.  For despite the fact that we have wonderful examples of forward looking companies like Salesforce.com, NetSuite, RightNow, Google, Facebook and hundreds of others crafting the software paradigm of the twenty-first century we still have too many conventional software companies watching their stock prices.

The conventional companies are big and form the backbone of global computing.  They have names like Oracle, SAP and Microsoft and while some are making good efforts to convert their business models, the tasks are great and some have barely started.  Kudos to Oracle and Microsoft for increasingly offering SaaS solutions.  You can debate whether their solutions go far enough or if they are simply extending the old paradigm but they are making progress.

Microsoft worries me at the operating system and office automation products levels though.  Google’s announcement that it was building a stripped-down operating system that gives small computers just enough functionality to get to the Internet is brilliant though it remains to be seen whether they can deliver.  Microsoft now finds itself on the other side of an equation from its position as the disrupter of mainframe markets.  In the 1980’s we were told that nothing had the power to stop mainframe computing but somehow client-server networks took over.

At risk is Microsoft’s deep penetration in desktop operating systems and office products.  Google has a plan to deliver it all over the Internet — free — which could be a big problem for Redmond.  Of course Google has to deliver but the sheer number of vendors in the SaaS space means that even if Google fails in the attempt, there will be other challengers.  It’s not impossible, but it is rather hard to beat free, so what does Microsoft do?  Wait for the threat to materialize or take action?

The standard playbook says stand pat but as playbooks go it has a disastrous track record.  Time, as they say at Apple, to think different.

So, what did you think?

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s