
Cash Cow Disease: The Cognitive Decline of Microsoft and Google - rbanffy
http://ronburk.blogspot.com/2010/08/cash-cow-disease-cognitive-decline-of.html
======
btilly
Some articles make you stupider for having read them. This is one of them. It
is full of nice sounding misinformation that you'd be better off forgetting.

The original purpose of the XBox was to kill the profit margins on Sony's cash
cow, the playstation. It succeeded in that, and Sony is no longer threatening
Microsoft across a range of areas. This was a wise strategic move, and profit
was not the main motive.

According to Google's Q3 release, Google's annualized run rate on mobile is
over a billion dollars. Android is a disproportionate share of that. Android
is not a waste of resources for Google. It is a profit center.

As for Wave, it was a great experiment. It didn't work out. But lots of ideas
from Wave are showing up in docs. I think it was a worthwhile risk to take,
and Google learned something from it.

The one thing that I agree with the article on is that Microsoft's mobile
strategy is severely broken. But the reasons for it are more complex than
simply saying that Microsoft has a bunch of cash.

And now I'm going to try to forget having read that article.

~~~
foobarbazoo
_The original purpose of the XBox was to kill the profit margins on Sony's
cash cow, the playstation. It succeeded in that, and Sony is no longer
threatening Microsoft across a range of areas. This was a wise strategic move,
and profit was not the main motive._

If you think that btilly is not describing and then praising wealth
destruction in that quote about Microsoft's Xbox business, please downvote
this comment. Thanks.

HOW TO DESTROY WEALTH:

When I spend $100 on materials and labor, and I can -- at best -- sell the
result to you for $80, $20 of wealth is destroyed. Why? Because the original
$100 came from the creation of wealth equal to that, and I transformed that
$100 into something that is now only worth $80. Literally, wealth was
destroyed.

If you'd like a more concrete analogy, what Microsoft did is a lot like taking
a a 1 carat diamond and smashing it into diamond dust. Only the arrangement of
matter has changed, but in terms of wealth, the diamond dust is worth far less
than the sparkling 1 carat diamond.

It's the same with the $100. As a $100 bill, it is worth exactly $100.
Microsoft took that $100 and spend it on labor and materials. The matter in
the world stayed the same. But the new arrangement of matter (an Xbox) was
only worth $80 to the world. Microsoft destroyed $20 in wealth to the world.

This, in a nutshell, is what Microsoft did with the Xbox. Sony was doing
something the world wanted with the Playstation. They were literally spending
$100 and getting $120 in value out of it. That's what wealth creation looks
like.

Microsoft did the opposite. Even worse, they did so in order to make it
impossible for Sony to create wealth, too. In my book, reducing the wealth of
the world for something so stupid, so small, as to "eliminate competition" is
about the worst sin a business can do.

The literally billions of dollars of wealth destroyed at both Sony and
Microsoft by the behavior of Microsoft has hurt the world in enumerable ways.
For all we know, had the money been returned to shareholders, we may have made
more progress on green energy. Or food production. Or water purification. Or
cancer research. Or any of the other things we could have done instead of
destroying wealth.

That is why the OP is so off base. And why the rest of you should upvote my
comment like crazy. Wealth destruction is bad, full stop.

~~~
zoomzoom
It is not praising wealth destruction, it is praising competition. The market
is not a zero-sum game where Sony's loss is everyone's loss.

------
raganwald
Putting my investor hat on here:

Cash cow businesses have a cash flow that they either return to investors or
reinvest themselves. The _only_ metric for success reinvesting the cash flow
is whether the company's stock grows at a higher rate than investors could
obtain for themselves if they invested the dividends in the market.

Microsoft has consistently failed this test. It doesn't matter whether their
investments are purported to be defensive to protect their main businesses or
offensive to develop new sources of cash flow.

Defending Windows from competition, for example, is only useful to the extent
that it helps the company's stock grow. If the stock does not grow, it would
be better to preside over a gradual decline while throwing off as much cash as
possible so that investors could invest the remaining dwindling cash flow in
better companies.

Google is an entirely different animal because their stock is much more
attractive to investors. As long as their stock continues to grow, management
are able to get away with much more "wasteful" attempts to get lightning to
strike again. But the moment its stock plateaus, they will be subject to the
same merciless metric from me, namely can they establish that they can manage
the company's stock price such that reinvesting cash is superior to giving it
to shareholders to invest for themselves.

~~~
3am
This is just back of the envelope, but 24 years ago Microsoft's [EDIT: split-
adjusted] stock price was .10. With today's price at $28, that is an
annualized rate of return of a little over 26%, which should exclude the $5.79
they've distributed in regular and special dividends since they instituted
their policy in 2004.

Also, the criteria for investing money you've described is baffling. I thought
return on invested capital was based on earnings, not stock price.

I think you are confusing sentiment with fundamentals.

~~~
raganwald
The last time I looked, 24 years was far too long a period to examine the
performance as the stock has had a reverse hockey-stick profile for quite some
time.

------
evilmushroom
This article is poorly thought out. He accuses Google of stifling innovation,
then he spouts this gem:

"Meanwhile, at Google, the cash cow is search-driven advertising. That allows
the company to encourage engineers to waste 20% of their time on "projects",
like Google Wave."

Apparently he thinks that a) A company should only stick to its core product.
(and some how this is innovation) b) If a company experiments it is "waste"
and crushes other smaller companies stifling innovation (which is why twitter
got crushed... oh wait)

Waste of my time reading this.

~~~
mmt
The key here isn't innovation, but _useful_ innovation.

 _But the net result of cash cow disease is a waste of brainpower, and a
decrease in useful innovation._

From what I can tell, there isn't as much of a contradiction as you imply, and
the author is merely advocating a spin-off technique for investing in non-core
innovation.

~~~
evilmushroom
And what of the "unuseful successful innovation"?

1) Android is growing like wildfire-- contributes over a billion to revenue
last year it was claimed.

2) Google App Engine serves over a billion page load a day.

3) Google Apps? I love it--

etc etc.

Spin-off is a technique, but I don't think it's the only way to go.

~~~
mattmanser
The point the article is making is that if Google hadn't entered those
markets, someone else would have and done it a lot better.

Who's going to seriously invest in an online word processor or spreadsheet
with Google apps squatting on the territory? Just MS.

Google apps is still pretty basic and they're not operating under commercial
conditions, which means potentially the customer is not getting what they
actually want.

I think in some ways he's wrong, not operating under commercial pressures is
not necessarily a bad thing, but Google and Microsoft have recently been
extremely weak on following through on promising technology, abandoning
projects instead of pivoting.

But in Google's case it can be especially toxic, it's then difficult for
others to enter those markets as suddenly there's a free competitor. That's
not healthy and on that I agree with the author.

~~~
kenjackson
_But in Google's case it can be especially toxic, it's then difficult for
others to enter those markets as suddenly there's a free competitor. That's
not healthy and on that I agree with the author._

But isn't this the grave we've dug for ourselves (as software developers)?
We've pivoted the whole market so that software has no intrinsic value on its
own?

Look at WordLens for example. Mindblowing technology. If you could only get it
in a standalone piece of HW the markup would purely be a function of the HW
cost. As it is, they started pricing at $5. And as ridiculously cheap that is
I can see people saying, "Why isn't it 99 cents?"

At this point the horse is out of the barn. The value of your product is no
longer the utility of the product, but rather how well advertisers can
leverage your audience.

Although that makes me think, there's great advertising angles with WordLens
since you know what words/signs people are looking at. I freaking went to
sleep thinking about that product... sorry for the tanget. :-)

~~~
mattmanser
I don't really agree with you here, the size of the biggest market they can go
after, anyone who takes foreign vacations, is so massive that $5 is fine.

By keeping the cost lowish, they're discouraging immediate competition, but
can still make a large profit if they market it right. And that video
certainly looks like the right marketing to me!

~~~
kenjackson
I'm sure they'll make plenty of money, no disagreement there. My point is that
I don't think they can charge much more than $5. Consumers just don't value
software enough to pay that amount. The people that complain about a $10 app
w/ this functionality will have no problem paying an extra $20,000 for the top
line package on a new car. Or $20 for a T-Shirt. Or will pay an extra $2,000
to upgrade to 1st class on that foreign vacation.

For most people software has the value of a Happy Meal prize.

------
RodgerTheGreat
I think this article is a little off-base. Having money and a less than dire
need to survive does not automatically stifle innovation. Microsoft has an
enormous amount of management overhead and process that grinds brilliant
engineers and their output into a fine paste. They have cannibalistic internal
competition for resources and teams are actively discouraged from sharing code
and cooperating. You might argue that their war chest allows this insanity to
continue, but it's not the root of the issue.

~~~
rbanffy
> Having money and a less than dire need to survive does not automatically
> stifle innovation

No, but it makes space for the kind of complacency that stifles it. Also,
having a successful product that's your cash cow makes it hard for you to
develop the next-generation product that will kill it, specially if it does so
by generating lower revenue.

Having huge amounts of cash also help you to make very bad product decisions.
In order to learn what it learned with Wave, did Google really have to create
such a monstrous flop? Couldn't it be a private beta or an internal tool?
Couldn't it be a private beta? As for the original Xbox, I am not sure the
only reason for its existence was to hurt Sony. It's very nice to say "we
intended it to fail" years after you release a second-generation product.
Microsoft was into games before, with Sega (the Saturn ran a version of
WinCE). Did Microsoft really have to release the Kin?

But I agree with you on one thing: Microsoft is the Grand Master of using
vaporware and half-assed products to damage the competition. Why would anyone
consider the date Courier was "shown" be days before what was suspected to be
the date Apple would announce its tablet? I also disagree with the article
when it considers Google's 20% time a waste. Neither them nor we know what is
the Next Great Thing that will make search-driven ads obsolete. They, like us,
have no idea. That's why they encourage creative people to shoot in all
directions: because one will eventually hit something big.

And yes, as of December 2010, he is wrong about Android. It's a huge success
and telcos, AFAIK, pay Google a fair amount to use it (although open-source,
you pay for some apps like Gmail and contacts and to use the Android and
Google trademarks). I am not sure whether he would sound better in August.

If Wave has any pressure to be a successful application, it would have been
integrated with plain old SMTP e-mail, and would possibly be eating Gmail's
lunch by now.

~~~
kenjackson
_Did Microsoft really have to release the Kin?_

Word is they did. Apparently they had some contractual obligation to do so.

And I don't think they intend for XBox to fail, but the goal wasn't to make
profit in of itself, but rather to block and clear the way for their own
living room initiative.

 _Why would anyone consider the date Courier was "shown" be days before what
was suspected to be the date Apple would announce its tablet?_

Huh? Courier was first shown in 2009. Way before the iPad was announced. If
anything MS cleard the field for the iPad by announcing they were killing the
Courier project.

~~~
rbanffy
> Huh? Courier was first shown in 2009. Way before the iPad was announced.

It was shown days before an Apple event. Rumors at the time pointed to Apple
releasing its tablet at that event. They didn't and watching the rushed CGI
video of a concept that would never become a product being released right
before a non-event was priceless.

> If anything MS cleard the field for the iPad

I wouldn't hold my breath

~~~
kenjackson
I took a look at the time line and you appear to have improperly recollected.
The Courier leak happened 9/22/2009. The Apple event was 9/9/2009. By the time
the Courier leak occurred everyone was already speculating the Apple Tablet
was coming out in February as Apple's September event had long passed with no
mention of a tablet. See this Mashable story:

<http://mashable.com/2009/09/22/microsoft-courier/>

MS cancels the Courier on April 29th -- the same month the iPad came out (and
actually a day before the launch of the 3G version).

There doesn't seem to be a FUD play at all here, except in the eyes of the
most ardent consipracy theorists. RBanffy? :-)

~~~
rbanffy
There was an Apple product announcement on October 20th 2009. That's when they
announced the new LED-backlit Macbooks, the Magic Mouse and a new line of
iMacs. By the time the Courier video was shown, there was a lot of speculation
on what would Apple announce that October.

As for the September 9th event, it was disappointing. Lots of people expected
a "one more thing" moment with what would become the iPad.

So, it was right after an Apple event and right before a couple product
announcements from Apple.

------
eitland
One of Microsofts bigger problem might be that improving anything might break
their stranglehold on consumers and other companies.

See <http://news.ycombinator.com/item?id=1991950> /
[http://www.reddit.com/r/IAmA/comments/ej32l/we_are_the_hotma...](http://www.reddit.com/r/IAmA/comments/ej32l/we_are_the_hotmail_development_team_lets_talk/c18gp4r?context=1)

where the hotmail team seemingly can't understand the reason why someone would
need IMAP support when ActiveSync exists

~~~
yuhong
Yea, MS's vendor lock-in is old and well-known and part of why MS was
considered evil.

------
SeanDav
Disagree with this article. There was a rather good article on hacker news a
few weeks ago which made a lot more sense as a reason for Microsoft/Google/et
al dropping projects. Wish I could remember the name so I could link to it.

The essence though is that the Googles of this world have completely different
sets of requirements to the startups of this world. Additionally the public
has expectation of the Googles that are vastly different to their expectation
on smaller, younger company's. This is not Google or Microsoft screwing up,
but rather dropping products that don't meet their requirements or what they
perceive are the requirements of the public/customers.

I am no fanboi, almost the opposite in fact as far as Microsoft is concerned,
but I do respect the power of these companies to lead and to innovate.

------
shanked
According to the author, Apple should have never developed the iPod, iPhone,
or iPad....

~~~
alextp
Actually Apple until recently didn't have a cash cow per se. When the iPod was
first developed Apple was making very little money, and broadening its product
base was a good strategy.

I think the main popular tech giant that seems to avoid most of the
consequences of the cash cow disease is Apple. Even though they are turning a
profit comparable to microsoft's, you don't see nearly as many spin-offs or
research departments or other leakages. Pretty much the only things that come
out of Apple are its top-of-the-line products.

While this is scary for someone who would one day like to work in an
industrial reaearch lab, they certainly seem to know how to make money.

------
kenjackson
The article has the classic issue of a strong degree of selection bias. While
MS and Google don't drop hit songs every release, the fact of the matter is
neither does every startup.

MS and Google effectively become angel investors in startups of their
choosing. This seems like a rational way to spend the money. And given that
Apple is dominating the consumer market, giving money back to shareholders
indirectly means funding Apple.

------
jk
Well.. nice thoughts. But didn't gmail start off in one of those "wasted" 20%
of time?

------
AndrewHampton
From the original article:

 _Meanwhile, at Google, the cash cow is search-driven advertising. That allows
the company to encourage engineers to waste 20% of their time on "projects"_

If I remember correctly, didn't Paul Buchheit create Gmail and AdSense on his
20% time?

------
vlucas
This has to be one of the worst articles I have read in a long time. While
it's true that companies exist to profit their shareholders, sometimes the
best way to do that is to withhold immediate current revenue for the hope of
even large future revenues by re-investing it in other products to move the
company forward.

Google's 20% time is one of the best things Google has even done, and many
profitable projects have already come out of it - GMail and AdSense to name
two.

------
david_p
Failed experiments is what makes science go forward.

How can people who make a profits of innovation (yes, the shareholders he is
talking about) ignore so much on the process that leads to innovation ?

This is why I believe there is a problem with the stock market : people who
buy stocks don't have a clue, they just want to gather profits.

This only lead to shortsighted investment, pushing management to take
"actions" to reassure clueless shareholders like him.

------
gawker
I don't understand how there's a title called "Making Economic Sense" yet for
the most part monetary benefit is the main subject while social benefit is
nowhere to be seen. There are claims that the 20% of employee time is being
wasted? Would that not make an employee's work-life that much happier? It also
seems the article preaches that almost every decision that Microsoft or Google
makes cannot fail.

------
unshift
this guy is an idiot. the whole point of other products, 20% time,
diversification, etc. are to not only create other cash cows but allow
tolerance for a product's growth/earnings to slow down. ever hear of "don't
put all your eggs in one basket"?

the simple fact is, when you have a cash cow, you got extremely lucky. it's
really hard to duplicate that so you do your best to support it and keep it
going by creating an ecosystem around it and expanding it wherever you can.
see: gmail, google webmaster tools, MS SQL server and friends, and so forth.

his real gripe seems to be, though he may not realize it, that companies
aren't operated as short-running events that generate a burst of money for
shareholders and then fizzle out and die. he doesn't seem to like the long-
haul approach that has kept e.g. MS in business for 30 years.

~~~
foobarbazoo
"the simple fact is, when you have a cash cow, you got extremely lucky"

And here we have yet another comment purporting to argue against the article,
and inadvertently proving it's main thesis.

Google should _give the profits back to shareholders_ instead of trying to
duplicate or continue what you yourself agree was success that was "extremely
lucky".

The author isn't expecting lightning to strike twice at Google, and thinks
they should put the money back in the marketplace where it can be spent
wisely.

~~~
unshift
when you have a cash cow you can either take the money and run, or reinvest
and try to milk it for all it's worth. sometimes the former is the best idea,
sometimes the latter works out well. MS, google, apple, facebook, etc. are all
examples of the latter. which completely goes against the premise of the
article -- google wouldn't be google if they didn't have a wide breadth of
products and would have likely gotten bought out if their only concern was a
quick return on investment money.

------
Aloisius
He did get one thing right. Google starves the valley of engineers (as does
Facebook). Their starting salaries are now so high for even straight-out-of-
college grads that it actually harms startups.

------
danshapiro
Applying this article's advice retroactively - HP should be producing
oscilloscopes, Sony should be producing cassette players, and 3M should be
producing... rocks.

------
stretchwithme
Maybe Google should go further with its 20% time concept and let people who
want to work on ideas of their choosing for months at a time instead of just
part time.

------
known
I think Obama should focus on creating _overseas_ jobs for Americans.

