Last week saw a lot of speculation regarding Microsoft’s possible acquisition of Nokia’s mobile devices business. The rumor was quashed by Stephen Elop speaking at the All Things D conference who denied there had been any discussion with Microsoft regarding an acquisition. Case closed then? Maybe not.
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Intel’s ARMageddon
In ten years we’re going to recognize this week as the moment Intel ceded its leadership position in the global chip business. Microsoft’s decision to embrace ARM signaled more than a desire to take on Apple’s iPad – we are witnessing the end of the ‘WinTel’ era and the emergence of ‘ARMDows’ – a seismic shift in the IT industry is about to take place.Continue reading →
Sinofsky’s Power Play
At CES yesterday we may just have witnessed the first public exposure of an internal power play for the future leadership of Microsoft.Continue reading →
Why Sarah Friar is Wrong About Microsoft’s 2011 Growth Prospects
Goldman Sachs’ analyst Sara Friar is at it again. Continue reading →
Five Things Politicians Need to Understand About Data Centers
The Office of Governor Bob McDonnell of Virginia issued a press release today trumpetting their success in convincing Microsoft to build its latest Gen4 Data Center in the state. Given huge gulf between the real long-term local economic benefit of a data center like this and the content of the press release I am left to conclude that either A) The Governor really does not understand the economics of these things or B) He really does understand the true economic impact and the press release is a cynical attempt to fool the voters.
For other politicians who might be tempted to spend tax payers money to secure the locations of a data center here are some things you really do need to understand:
- Today’s modern global data centers do not create any meaningful number of jobs. Modern global data centers are remotely operated which means that even the few jobs that are created are not high skilled software or computer engineering roles. The type of jobs created tend to be in the building maintenance, HVAC, electrical engineering and security domains.
- There’s a high price to be paid for securing relatively few jobs. The fifty number touted by Virginia sounds about right. However, from the Governor’s press release, it sounds like at least $6.9 Million of direct incentives and probably an unspecified amount of long-term commercial property tax exemptions were used to secure those 50 jobs. Is that a good rate of return?
- When a technology company says they will invest $499 Million in building a new data center that does not mean they are investing $499 Million in your state. Far from it. Most of that cost will be in the computing infrastructure, communications, and other electrical machinery. That equipment is by and large not built in the state where the data center will be located. In fact a lot of it will be sourced from outside the country creating jobs and employment elsewhere, but not in your state.
- Modern data centers are ‘Shells’ of a building. Microsoft’s Gen 4 data centers employ pre-assembled container ‘Lego Blocks’ which are rolled onto a concrete slab and plugged into power, cooling and data pipes. If they could get away without building anything other than the concrete slab and HVAC containment buildings they would and in years to come they will. This all means that very few construction jobs will be created and certainly not any that require significant new up-skilling of your labor force.
- On a positive note a modern global data center is one of the most dense power consumption facilities around. That is why many sites are selected based on access to hydro-power where the cost of energy and distribution challenges can be kept to a minimum. It is possible that the location of a major global data center in Virginia will create the downstream need to upgrade the state’s electricity distribution and generation infrastructure. Being forced to do this obviously creates ancillary benefits for other company’s but again at what price?
Politicians really do need to understand the reality of these things. It is far too easy to give away the tax payers money today on the assumption of major downstream economic benefits tomorrow. In the case of data centers those benefits are likely to be few and far between.
Why Its Time to Break Up Microsoft
Microsoft posted a record quarterly profit of $4.5B on record revenue of $16.04B after the markets closed yesterday. The EPS of 51 cents blew away analysts consensus forecasts of 46 cents for the quarter. Any other company announcing a financial performance of this magnitude would have seen its shares pop in after hours trading; not Microsoft. Of course that may change when the market open today but it is a telling marker of investor sentiment towards the company.
In my view its one more indication that the company’s true value is being overshadowed by a ‘Crisis of Perception.’ Investors see Microsoft as a vision-less consumer company struggling to compete with Apple and Google while in actuality its an innovation machine transforming the world of enterprise IT. You only have to look at numbers like the unearned revenue line (A proxy for new long term annuity contract signings with enterprise customers) to see just how much an enterprise machine the company is. That number grew 20% in FY’10!
Of course the lack of pop in the stock is likely relate to the fact that the company continued to pour cash into its search and mobile phone efforts as well as the other loss-making consumer focused on-line properties.
In my view it is time to stop the pretense that Microsoft can become a ‘Cool’ high growth and highly profitable consumer products company. The enterprise DNA of the company just isn’t going to mutate quickly enough to let that happen in any reasonable period of time. In my opinion the situation requires radical surgery. This would include spinning off XBox into a separate games focused company, merging the consumer on-line assets with Yahoo to give them scale in a competitive race with Google and finally ditching the phone business.
Yes I did say get out of the phone business. Here’s my prediction: Windows Phone 7 will be the ‘Zune’ to Apple’s iPhone and Google’s Android i.e. cool competitive technology with no chance of building the scale required to compete with those other platforms. It’s time to stop wasting money on phone which could be better leveraged elsewhere in the product portfolio.
A slimmed down Microsoft that was entirely focused on delivering the worlds best enterprise business platforms might not be ‘Cool’ but it would be a lot more interesting for both customers and shareholders. The development teams would regain the focus and investment dollars they need to extend their competitive advantages in this market and the move to achieving and maintaining leadership in cloud services would be accelerated. The change would also address the ‘Perception’ issues which are overshadowing investors opinions about the stock. Without the consumer business ‘Boat anchor’ the company could increase R&D spending in its core business AND return substantially more to share-holders in the form of dividend payments. Turning Microsoft into a dividend paying machine is one sure way to move the stock.
If the board and executive team really do recognize their responsibility to maximize value for shareholders then its time for them to focus the company on what it does really well; building the world’s best enterprise software and cloud services. Unfortunately stories about new attempts to re-brand the company just reinforce the view that senior leadership is missing the point and is intent on continuing the long march to irrelevance. If that’s the case then maybe it really is time for new management.
Why Regulators Need to Mandate Open Data Protocols in the Cloud
TechCrunch’s article about Intuit’s decision to shut down Quicken OnLine and not let users migrate their data to the new service Mint.com is an outstanding example of the emerging problem of ‘Data Lock-In’ and an issue which regulators need to get ahead of before its too late.
As the market for ‘Cloud’ services takes off we’re going to witness an explosion of new services whose value proposition is based on managing some aspects of the consumers life on-line. The big buckets already are life-centric services such as health and fitness, personal finances and of course managing you social graph. The expanding roster of new services will be accompanied by an equally large number of failures. That is the natural order of things in new markets. Not all new entrants will find a business model which works or is sustainable over the long term. Regulators need to start thinking about the consumer protection regimes that need to be put in place as this happens.
I was struck by some of the debate surrounding the Intuit issue by the number of folks who think its not a big deal because Quicken On-Line is a ‘Free’ service. That could not be further off the mark. One of the challenges for any new entrant in the crowded market for ‘Cloud’ services will be figuring out how to make their service as ‘Sticky’ as possible. After having invested a great deal to acquire new customers you want to make sure its not easy for them to leave or switch to a competitors service (Ever wonder why its incredibly difficult to dump you mobile provider? It’s called ‘Churn’ and ‘ARPU’)
One way to build ‘Stickiness’ is to ensure that new customers have to invest a significant amount of personal effort to extract the full benefits of the service. In Quicken Online’s case that was the time required to upload banking information and months and months of entering individual financial transactions. Making it easy for customers to export their data from the service would undermine ‘Stickiness’ and therefore increase the likely hood that customers might switch to a competitor’s services. In the highly competitive ‘Cloud’ service market it will be very tempting to find ways to bind users to services by making it difficult for them to take their data and run.
Consumers need to be educated about the dangers of ‘Data Lock-In’ so that they increasingly demand Open Data Access (ODA) from ‘Cloud’ service providers. I think its also about time that government regulators started thinking about mandating ODA for all service providers. These regulations would be a natural extension of existing privacy regulations by enshrining the principle that personal information of any sort belongs to the consumer, not the provider, and the consumer has the right to take that data with them when they leave a service. This would be a direct analog to ‘Number Portability’ requirements in the mobile telephony sector. Service providers would be required to ensure that all consumer owned data can be exported from their service using open standard formats and protocols.
Such a regulatory requirement would protect consumers of the sort of mess now faced by Inuit’s customers. It would also force service providers to focus on broader value proposition of their service rather than relying on ‘Data Lock-In’ as a competitive lever. This focus on ‘Functional’ competition would be a great thing for consumers and the market.
Fix for iPad ‘Error 14’
[Updated with Windows 7 File location]
The update of my iPad to version 3.2.1 of iOS failed last night. iTunes reported that an ‘Error 14’ had occured (Not very helpful) Subsequent attempts at un-docking and re-docking resulted in iTunes trying and failing to restore the device. Here’s how I fixed the problem.
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Do Home PCs Have a Negative Impact on Student Achievement?
The answer to that question is a big yes if you believe the results of a large study carried out by Professors Malamud of the University of Chicago and his collaborator, Cristian Pop-Eleches of the University of Columbia. This is not the first time that research has pointed to PCs in the home having a negative effect on student academic achievement. I read about the study last month but was prompted to comment on it by Randall Stross’ very interesting article in the NY Times this week.
The basic finding of these multiple studies is that student academic achievement declines after the introduction of a PC and broadband connection in their home. Disturbingly, the impact is most pronounced with children living in lower income homes i.e. the very group you would intuitively think would benefit most.
In my opinion, while the effect may be real (The sample sizes are very large and across multiple geographies) the conclusions being drawn are dangerously wrong.
To accept the findings of the study you also have to accept the logical counter conclusion that low income students would be better off academically if they were not distracted by having an Internet connected PC at home. Every fiber of my body tells me that this conclusion cannot be correct.
Having wrestled with this contradiction since reading about the study back in May I have arrived at my own conclusions. The problem with the study findings is bound up in what is being measured i.e. academic achievement.
We live in a society and increasingly face a future where the PC and the Internet have become the basic tools of economic value creation. In the 17th century you needed to know how to join wood or bend iron. Today you need to know how to access and interpret information, how to draw you own conclusions, how to synthesize new ideas and how to communicate those ideas to an increasingly distributed set of collaborators.
In my opinion the conclusions being drawn from this study say far more about foundational problems in our academic system; what is taught and how we assess student’s readiness to enter a 21st century workforce. It is largely the case (Exceptions do exist) that the public K-12 system is still designed to turn out workers for a 19th century industrial economy. We teach kids how to learn facts, be able to follow instruction and to respect authority. If you are lucky enough to come from a middle or upper income family you can of course obtain a much more progressive and technology enabled education in the private sector.
What these studies tell us is that the affected students got worse at doing standardized tests. I would ask so what? We already know that family income level has a profound effect on standardized testing scores which impacts the long term economic potential of children from these environments. The problem isn’t the kids or the PC the problem is an education system which is has an inbuilt biased against them.
That standardized testing has become the single determinant of academic achievement borders on the criminal. When I hire talent for my business I am not interested in their standardized test scores. I want to know if they can think creatively, solve problems, communicate their ideas effectively and are smart enough to know that life is about learning all the time. These studies do not tell us anything about how access to PCs and the Internet might possibly improve or develop these skills. It might just be the case that collaborative problem solving with a network of friends on FaceBook is a far more valuable economic life skill than leraning to remember the who was the 33rd President of the United States.
I really do believe that these studies are dangerous. The danger is that they will become an impediment to programs which are focused on closing a very important digital divide that exists between rich and poor families and between rich and poor nations. I can’t help believing that a similar research project in the 17th century would have found that having a hammer, saw, wood and nails in the home was distracting children from their religious studies. Pause for a second before you conclude that this is a ridiculous analogy.
Does Economic Growth Require a Growing Population?
The UK’s Royal Society has just announced a major new research project on the implications of population growth. The study is to be headed by the Nobel Laureate, Sir John Sulston. As the RI points out populations studies is quite a cyclical area of research. The ’60s and ’70s were a boom time for the field with less focus being given the the subject in the ’80s and ’90s. The fact that the topic is moving back up the political agenda probably has much to do with the intersection of population on two key policy issues; economic growth and climate change.
The political debate about population growth has being going on for nearly three hundred years. Thomas Malthus, seen as the father of demography, clearly held the view that exponential population growth would outstrip improvements in agricultural production, condemning economies to a permanent state of subsistence. Adam Smith on the other hand believed that economic growth and improvements in people’s socioeconomic circumstances would reduce fertility rates over time.
There’s a prima facie case supporting Smith’s assertions. The fertility rate of many of the world’s most developed economies (Much of Europe, UK, Japan etc. but notably not the United States due in large part to the impacts of immigration) has tumbled over the last forty years. That decline has mirrored a period of massive economic growth and rising living standards in these countries. The ‘Baby boom’ has become the ‘Baby bust’ with very significant implications for affected geographies. As the demographic mix inverts there are fewer and fewer younger workers able to carry the social cost of the rising number of elderly in the population.
Interestingly, even though the total global population is still growing the rate of growth has in decline since the mid-sixties. There is a diversity of research which shows that fertility rate has an inverse relationship with factors like educational level (Particularly in Women) and income level. If the RI study is to be useful in guiding policy makers then it needs to deliver some definitive research on which factors really do impact fertility rates, and in what manner.
There is a perspective (One I do not subscribe to) that a growing global population is required to sustain the needed levels of economic growth. The argument is put forward that continued growth in the production of manufactured goods will require and expanding workforce to make those goods. This gets to the heart of one of my personal interests regarding the impact of technology on economic growth. I would argue that the opposite scenario is more likely i.e. that even an increasing supply of manufactured goods will requires less, not more workers over time.
The number of workers now employed in building cars in the most advanced and automated factories today is diminishingly small compared to just thirty years ago. With continued advances in robotics, process control technology and information systems this trend is likely to continue. Fifty years from now its likely that many factories will ingest raw materials at one end and spit out finished good at the other with very few human workers required in-between.
To date this trend has been countered by the relative ease with which manufacturing facilities can be trans-located into low wage economies. However, the very act of introducing manufacturing into low wage economies has the effect of raising living standards and worker expectations which in turn leads to demands to higher wages. When combined with worker shortages this can place a significant upward pressure on wages undermining the location’s original cost advantage. China is now witnessing this phenomenon with many manufacturers now looking to move to other lower wage cost East Asian economies. In my view this will over time lead to a leveling of the global wage cost ‘Playing field’. As we reach that point the pressure to innovate in manufacturing automation will become extreme because that will be the only way to avoid being caught between the ‘Pin factory’ and the ‘Invisible hand’. As global manufacturing competition shifts from trying to find the lowest wage economy to finding the cheapest way to manufacture through automation we will see a dramatic reduction in the global manufacturing work force.
The challenges with this scenario are daunting. If there is truly a correlation between rising income levels and declining fertility rates then a long period of technology lead efficiency improvements in manufacturing and its concomitant positive impact on economic output should correlate with a continued slowing of the global population growth rate. If the point is reached where global population growth rate becomes negative then you enter into the potentially ‘Utopian’ situation where a smaller and smaller global population shares an ever growing economic pie. Alternatively, if the global manufacturing work force continues to shrink due to automation while the population continues to grow and those lost manufacturing jobs can not be more than offset by growth in services sector employment then you have a political time-bomb on your hands.
I seriously hope the RI study will look at the the correlation of population dynamics and economic growth and will factor in the role that technology will play on both sides of the equation. The likely impact of climate change on these issues I will leave for another post.