All That Cash
A History Lesson. In World War I, England went to war with
Germany in order to preserve the English way of life. They won, but
in the process, that pre-war way of life was utterly destroyed.
If there is a war in the business applications space between Microsoft
and SAP, et al. (see the 8/6/2002 issue of Short Takes), we can be
pretty sure that the old way of life will also disappear, no matter
who "wins." In the last issue, we laid out one way that Microsoft can
change the rules—by changing perceptions about price.
In this issue, we extend that discussion and describe other ways that
Microsoft can attack the friendly, comfortable, highly profitable
way of life of the large business application vendors.
We begin with a history lesson. In the 1980s, IBM introduced a new
version of its System 3xx line called the AS/400. This box was enormously
successful. It was able to displace lower-end mainframes and compete
quite effectively with mini-computers. The success was due to a combination
of strategies:
- KISS. This machine was and is really easy to set up and run.
Last time we checked (several years ago), several hundred thousand
small and medium-sized businesses had bought it.
- IBM sold hardware, software, and consulting as a turnkey solution.
And they provided financing.
- IBM welcomed resellers.
- IBM encouraged and even resold the development by other companies
of application software for the AS/400 platform.
- IBM standardized data management, programming languages, telecommunications,
file access, and the operating system.
- IBM created new applications or bought other applications to
bolster its product line.
In that era, IBM's competitors sold openness and flexibility. If
you wanted an HP 9000, you could pick Unix as your operating system,
QAD as your manufacturing solution, etc. This worked, but even in
the heyday of the minicomputer, the stodgy, old-fashioned AS/400
sold well, especially in Europe and Asia.
Simple, Turnkey Solutions from Microsoft? Can Microsoft's enterprise
application business
do roughly the same thing and grab market share equivalent to the
AS/400's?
Clearly, the demand is there. Mid-market and small companies would like to have turnkey
solutions, financing, standardization, simplicity, and bundling of multiple functions. For this
kind of offering, use the "crazy" test. Would you be crazy if you didn't want it? The answer
is yes.
There is no such offering in the enterprise application market today.
Compare, for instance, with Oracle's applications for the mid-market. These
probably come the closest to being a turnkey solution. Every bit of core functionality
is available. It's integrated. You can buy it all on a CD (including the database),
but pay only for what you use.
But it's just software. Believe me, there's a long, long distance between getting a CD and getting the
stuff up, running, and working. You need hardware. You need consultants. You need lots
of ancillary software. And you need to do a fair amount of work yourself, understanding
the system, setting it up so it can model your business, making decisions about what features
to deploy, etc.
Mind you, Microsoft doesn't have a simple turnkey solution, either. Essentially, if
you buy Solomon and FRx, or Great Plains eEnterprise and FRx, you get something roughly
equivalent to what Oracle offers—somewhat less functionality (depending
on the buyer), but somewhat more simplicity. At bottom, you have the same hardware,
software, integrator, and management problems.
But they are, gradually, beginning to provide the elements of a turnkey solution.
Microsoft's turnkey strategy.
What did the AS/400 do? It was simple to install and manage. It combined
functions that
had been separate. It acted as a platform for other applications. It gave rise
to an ecosystem of resellers and developers. And IBM financed the purchase.
How is Microsoft doing? So far, it's not particularly
simple to install and manage, except (as noted
in the previous article) on the backs of the channel partners, and only for
users who are not
hypercritical. But in all other areas, they are making their moves.
You saw, for instance, that Microsoft was beginning to combine functions when they
announced e-connectivity functionality for the applications very soon after they
bought Great Plains. Compare for simplicity and straightforwardness with mySAP.com, which
SAP is using as a wedge to drive upgrades and relicensing.
What about platform? Theoretically, acting as a platform was always
part of the .NET strategy. But it is becoming more than theoretic.
We learned recently that Microsoft is now approaching small software
developers, often people with a niche product in an already competitive
area like SCM, and asking them to act as channel partners.
The ecosystem is actually more problematic. Microsoft does have
30,000 channel partners. But no matter how many there are, they
are not necessarily a channel for an enterprise application. Unless
Microsoft provides far more enabling than they have so far promised,
the Mickys of the world won't be able to install a satisfactory
solution. (There are, of course, some Solomon and Great Plains channel
partners who are excellent, just not 30,000 of them.)
Still, that doesn't stop them from making moves. Though I know of
no cases, the kinds of small application consulting companies that
put in Baan or even SSA must surely be asking Microsoft about partnerships.
And there is nothing, except history, stopping Microsoft from
buying them or locking them in in other ways.
Which brings us to financing.
All That Cash.
In Microsoft's recent 10-K: "Cash and short-term investments totaled $38.23 billion
as of December 31, 2001. Cash flow from operations was $6.95 billion in the first
six months of fiscal 2002, an increase of $1.08 billion from the first
six months of the prior year." Microsoft, who has never paid dividends, is
in the rare situation where it may need to either pay a dividend,
buy back more of its stock or start a financing arm.
We're betting on the latter.
A financing arm doesn't do when it's financing products that cost
$249. But business applications? Not only can it make money by itself,
it can help sell the applications (and all the other .NET components).
By offering convenience and easy money to small and mid-sized businesses,
Microsoft can control what customers will buy (i.e., all-Microsoft,
you can be sure) and how they'll connect their businesses to the
Internet. The best distribution strategy for .Net is to get the
small to mid-sized business world to embrace it.
Will customers and VAR's support this?
Absolutely! Many resellers would benefit from having Microsoft
finance their customers' purchases and integration fees.
Look, too, at the long-term control over the market
that this would promote. If Microsoft limits variations in its solutions,
promulgates standards through its resellers,
and stands behind its offerings, easy financing will eventually allow
it to create a de facto Microsoft standard in these applications analogous
to what the AS/400 had.
Can Microsoft do it? If they spend enough money, certainly.
But it would be unbelievably expensive. The makeover on the products
required to make them far more turnkey than they are now (install
them the way you install XP would be the eventual goal) wouldn't
be a quick visit to a 5th Avenue salon. It would be more like plastic
surgury, with an organ transplant or two thrown in. The financing
would be expensive, and while the products don't run well (relative
to the ideal) and aren't simple, the support costs and risks of
unhappy customers are enormous.
What to Look For, What to Do? To see whether Microsoft is adopting this strategy, look at the product(s)
carefully and watch the announcements carefully. The more they are
bundling in solutions, the simpler the product is to use and install,
the lower the cost of implementation and integration, the more highly
integrated with other Microsoft tools, the closer Microsoft will get.
If they are adopting this strategy, and it seems to be working, who
will benefit and who will be hurt?
The most obvious victims will be software companies that need the
mid-market or are focused on the mid-market who don't have much
cash. They will need to respond to a turnkey message with one of
their own, and that will require resources.
Beyond that—and this is the idea we started with—the
victims include apps companies whose products are simply not as
simple, easy-to-install, easy-to-integrate, and comprehensive as
the Microsoft products will pretend to be. Lots of money will have
to be spent on improvements, and lots of little profit centers will
disappear. Investment in backfill and repair R&D is not terribly
productive, so during this time ROI will go down.
The most obvious beneficiaries are niche business application
companies that can
be swallowed up or otherwise persuaded to adopt the .NET platform. Microsoft
may have to encourage these companies, either by buying them or subsidizing them
in order to accelerate their own development. If so, it will be an odd
reversal, since Microsoft has such a long history of stifling innovation in
areas where it wants to play.
Other beneficiaries may include consulting companies or other companies
with intellectual capital in this area. (Like B2B Analysts?) Microsoft may
simply have to spend some money to grab the capital.
And finally, look at successful companies that provide services that can be
part of the bundle. Brian suggests that Microsoft
may want to look at PayChex. This publicly traded firm
handles the payroll processing of a significant number of
small to mid-size businesses. It would be a nice
complementary service to this customer base.
The cross-selling opportunities could be significant.
The PeopleSoft conference has snuck up on us,
and there's a lot of other news, so we're going to
hold off on the third in the Microsoft series
until sometime this fall.
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