It is well known that Warren Buffet is bullish on the railroad industry. But among the top four American railroad companies, Burlington Santa Fe (BNI), Union Pacific (UNP), CSX (CSX) and Norfolk Southern (NSC), he has clear preferences. BNI is no doubt on the top, UP comes as the second, and NSC and CSX are much less favored. Through this article, I will try to provide my understanding of his logic behind his preferences. I will attempt to answer three questions, 1) why does he pick the railroad industry? 2) Why are CSX and NSC less favored? And 3) why is BNI more favored than UP?
To Question 1: Railroad has to be the future of American freight transportation
When we talk about moving freight around without incurring hefty cost, normally there are two options, the trucks and the locomotives. In the old times, thanks to the low energy cost, the advanced highway infrastructure and their point-to-point flexibility, the trucks dominated the shipping market. But now the picture is changing. I believe in the long run, the railroad will become the backbone of American freight transportation network, while the truck companies will be confined to short distance shipping, operating between railroad stations and the customer locations as a support to the national railroad network.
The above statement is based on the following facts and beliefs.
First, railroad is simply a more efficient way to move freight. According to BNI, one intermodal train removes more than 280 long-haul trucks from the nation’s highways.
Second, based on the type of freight (industrial material, agriculture product, coal, etc) , the rail is 2-8 times more fuel efficient than trucks.
Third, Rail is more environment friendly. It emits only 2.6% of the total U.S. green house gas emissions, while trucks, 21%.
Fourth, the progress of information technology helped the railroad companies build more sophisticated train control systems, resulting in increased accuracy, efficiency and flexibility, continuously narrowing the advantage of trucks over railroad.
Fifth, I believe the coming era will be featured by high energy price, which will continue to consolidate rail's cost advantage over the trucks.
Sixth, intensified environment concerns will drive stringent regulations, which will drive up the operation cost for both rail and trucks, but the impact will be a lot more punishing for trucks than for rail, thus the cost advantage of the latter will be further consolidated.
Seventh, under the recession, the cost awareness of the customers makes rail an even more attractive alternative to trucks. This will help rail companies gain market share against trucks, better position themselves to take advantage of opportunities created by the upturn economy, thus further build its dominance over trucks.
To Question 2: For BNI and UNP, The geographic layout of their railway network gives them insurmountable competitive advantage over NSC and CSX
The competitive advantage of BNI and UNP is of a unique type. It has nothing to do with branding, technology superiority or management excellence, but originates from the simple fact that BNI and UNP happen to be the ones that operate the railroad network in Midewest and West America. To be more specific, the advantage lies in the following aspects:
1) Intermodal. For all four companies, intermodal is a significant portion of their revenue. CSX and NSC operate in East America. They connect with ships from the Atlantic ocean, transport shipments originating from or destined for Europe and Latin America. Whereas BNI and UNP connects to the Pacific ports, eventually with Asia and Australia. Now the picture is clear. Across the Pacific ocean, BNI and UNP has China. On one hand, China is the world factory, manufacturing virtually everything required in American daily life, on the other hand, an emerging economic giant, thirsty for all sorts of goods produced from the American land, especially energy and agriculture products. This type of import and export is projected to grow strong for the coming dozens of years, thus offering BNI and UNP vast growth potential.
2) Agriculture. In the past several year, externally, Asian countries need to import grain from the US to feed their people, and internally, America needs corn to make ethanol. The soaring demand for these types of goods created the agricultural boom. The recession slowed things down, but will it change the domestic and international demand pattern of American agricultural products? My answer is No. Again BNI and UNP happen to own the railroads that run through the enormous American farmlands, and there is no means that is more cost effective than trains to move grain, corn or beans. The farmlands now give BNI and UNP another growth opportunity that their two brothers in the east can only dream of.
3) Geography and industrialization. In East America, the territory controlled by CSX and NSC, we see higher industrialization, dense population, numerous big cities, a slew of ports along the Atlantic Ocean, in other words, a well developed environment for all means of transportation to prosper, including trucks, ships and rail. Therefore, for CSX and NSC, in addition to competing with each other, they have to compete with other shipping means, which normally are already mature and well managed. While in the west, Rocky mountain and the desert somewhat confined the industrialization to the strip along the Pacific ocean. It is the vast plain running deep into the heart of the continent. Here we see small population, sparse cities, tiny towns and infinite farmland. It is never preferred means to move the common goods, such as coal or grain, around with trucks, because the volume would be small, the cost would be high, and normally you have to move long distances. In summary, this is an environment where only the rail can manage to survive and prosper. For BNI and UNP, except competing with each other in certain regions, they don't face any other serious challenges.
To Question 3: The black gold gives BNI the edge over UNP
In West America lies one of the largest coal reserve in the world - Power River Basin (PRB). Once it was estimated to have 200 billion short tons. The newly published study revised the number in a shocking manner, claiming 190 billion tons of reserve, about 95% of the original assessment, as economically unrecoverable. So there is only 10 billion tons left, let's accept it for now. In 2008, around 40% of American coal production came from this area, around 450 million tons, and most of them were used for power generation. With 10 billion as the reserve, it is safe to say the supply is guaranteed for at least 10 years.
And for the next 10 year, I believe the amount of coal that the railroad ships out of this area will grow year after year.
First, the growing demand of power generation requires greater coal output.
Second, currently the fuel types for power generation include petroleum, renewables, nuclear, natural gas and coal. For renewables, there is still a long way to go before they become reliable and significant sources for power generation. For nuclear, there is always the key concern about safety. For petroleum and natural gas, they are turning too expensive, and there is no chance for the trend to reverse considering the worldwide demand will only go intensified. So coal somewhat becomes the only option. I see power generations will rely more and more on coal, which adds further demand for the output from this area.
Third, coal from this area has extremely low sulfur content. Thus, many coal-fired power plants in the U.S. buy PRB coal to blend with other coal with higher sulfur content to meet the environmental regulations. We foresee the environmental regulation will become stricter, which may become another contributor to the higher demand of PRB coal.
Now comes the last and the key question. Who has the privilege to move the PRB coal? Checking the railroad network map, you will find BNI almost has exclusive coverage in the area. In 2008, 22% of BNI's revenue was from coal, and now it seems this big chunk of revenue is not only guaranteed, but also guaranteed to grow. Therefore, right here, lies the ultimate advantage of BNI over UNP.
Sunday, April 26, 2009
Wednesday, April 15, 2009
MasterCard (MA): Long Term Risks
There are many articles discussing the future of the big two of the credit companies, Visa and MasterCard, and the majority expressed very positive views. In summary, the long case is built upon the following points:
1) The trend to go plastic. There are more and more people making payments by swiping the plastic cards instead of writing checks or using cash. This is a trend across the world, not only limited to the US.
2) The international market. The plastic cards in Asian and Latin American countries just started to gain popularity, which presents great growth opportunities for both companies.
3) They are not directly exposed to consumer credit risks. Both companies operate a payment network that connect the consumer, the merchant, the consumer's bank and the merchant's bank. They earn profits by charging the corresponding transaction fees, not from the interest from the credit issued to the customers. As a result, the credit crisis didn't have direct impact on their business.
4) Economic downturn caused the consumers to cut expenses, which doesn't necessarily indicate the number of payment card transactions will decline. The lost transactions in the luxury stores may be well offset by the increased volume in everyday life spending, such as groceries and gasoline.
I agree with the analysis. I think both companies operate a beautiful business model with extremely high entry barrier and great growth potential. The bear market actually presented us the rare chance to buy in at a sale price. However, there is no companies running without risks. This article is going to discuss some of the potential issues with both companies, focusing on MA. As a long term investor, I believe these are items we need to keep monitoring over time.
Bank consolidation, store cards and rebate: dangerous trend?
In MA's 10K, it describes its payment system as a 'four-party' system that involves the cardholder, the merchant, the issuer (the card holder's bank) and the acquirer (the merchant's bank). Here is a good example how the system works.
'For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer's merchant account provider.' (source: http://en.wikipedia.org/wiki/Interchange_fee)
In this model, it seems the acquirer is the role with the least importance, simply sitting behind the merchant to pocket some easy money. The issuer is the one with strongest motives, as it gets the majority of the pie. The merchant is the one with the most resistance. It is forced to raise the price of its merchandise without seeing the profit flowing into its account. The card holder is another key. His decision to use a plastic card instead of cash or check initiates the entire money flow. In addition, his decision to use whose card (which bank), and what type of card (Visa or MasterCard) decides who gets the money. Furthermore, the collective preference for the plastic cards among cardholders put the pressure on the merchants, somewhat forcing the latter to play the card game. Therefore, in MA's business model, the issuer, the merchant and the cardholder are the keys to its success and future growth.
All three groups display certain trend that we need to be aware of.
1) The banks: the collapse of the Wall Street reshuffled the entire financial industry and the banking system has undergone rapid consolidations in recent years. In 2008, 30% of MA's revenue came from the 5 largest customers, and now with fewer banks remaining and each one growing larger in size, we may see the shares of MA's revenue controlled by these banks grow bigger accordingly. As MA can't afford to lose any of these customers, they will gain more leverage over MA, capable of negotiating certain profit away from MA, thus squeeze the margin.
2) The merchant: for a long time, there have been the discussions, the controversies and the lawsuits about the interchange fee. In theory, the advance of technologies should have reduced the cost to process the payment transactions, but in reality, the proportion of the money landed in the banks' pocket went up. To be fair, I don't think the banks can justify such fat profit, and this will eventually be addressed and corrected. However, for MA or VISA, this is not necessarily a negative trend. First, the proportion of the payment distributed to MA and VISA is already minimal. It may go lower, but I doubt would be significant. Second, certainly it will demotivate the banks, but on the other hand, more merchants should become willingly to participate in the 'fairer' system, which actually will translate into more revenue for MA and VISA.
Actually the trend that bears negative indications to MA or VISA is the store card.
Nowadays, it is common to see merchants making efforts to avoid the interchange fees. The bigger players such as WalMart, Amazon, Lowe's, Macy's, etc, offer the store cards. Normally the program combines the issuer bank and acquirer bank into one, and provides incentives to the consumers to use the card by offering sales events exclusively to the card members. There are many variations in the practice, but one thing in common, MasterCard or Visa is left out of the picture.
In my opinion, the store card system is an efficient payment system that can challenge MA or Visa. I am not sure how this system will evolve, but a bold speculation, think about WalMart, Macy's and Lowe's form a coalition and negotiate one deal with one bank, say, JP Morgan, and issue one common card. This one bank will handle the entire transaction cycle between the card holders and the merchants. I see many reasons that MA and V should feel seriously threatened.
3) The consumer: in the past few years, the rebate card gained great popularity. My question is, where does the rebate come from? I know ultimately this drives up the merchandise price, kind of like the consumer pays himself part of the rebate (a hoax, isn't it?). I also understand part of it comes from the merchant, they have to give up a little extra profit if the shoppers simply choose to swipe their rebate cards. Also for the issuer banks, it is a perfect and very rewarding strategy to give up a tiny profit margin to promote the usage of the card, hence bring in larger revenue. But how does this affect MA or VISA? In 2007, MA recorded $332 million rebate as the cost against the $3,335 million fees earned, and in 2008, $357 million against $4,1116 million. I believe, on one side, they are willing to give up some profit to promote their card brand, whereas on the other side, it may be an unwillingly accepted results from negotiations with banks.
We need to monitor how this trend will affect the profit margin of the big two.
Competition with Visa: another AMD vs Intel?
In the electronic payments market, we know that Visa has the controlling market share, around 60%, and MA, around 30%. In addition, MA operates a business model almost identical to Visa, in other words, MA doesn't make any products with real or perceived difference from the Visa. Does this sound disturbing? And familiar? Won't it remind you the competition between AMD and Intel? As AMD can't produce anything significantly different from Intel, it has no resistance if Intel would like to pull it into the price war. With a controlling market share, Intel may still earn profit with a lowered profit margin, but AMD can only post loss. Then how about MA? is it free from this fate or pattern?
My answer is No.
I like MA's 'Priceless' commercials. Time and time again, I was touched or amused. I don't think any marketing campaigns from any other companies can be more successful. But does it make me feel my MasterCard different from my Visa card? adding another fact that I always felt the Visa commercials kind of awkward. The answer is No. In the store, I simply use whatever card that brings back more rebate. In other words, I use the card where the issuer gives up more of their profit and puts it in my pocket. Between Visa and MA, which one can afford giving up more of their profit? The obvious answer is Visa. I believe for any incentive program that MA offers to the banks, Visa can top that, but not the opposite.
Nonetheless, I don't think there is anything really worrisome here - both companies have immense growth space and there is no need for them to engage in any type of price war in the near term. But as an investor, it is a good thing to acknowledge this. Also owing to same reason, I think Visa's stock deserves a multiplier higher than MA.
Competition with American Express and Discover: whose business model is better?
The business model of AXP and DFS differs from the big two in the fact that they issue credit to the cardholders, to a certain extent, they operate as a bank. Then which business model is better? My preference is AXP and DFS.
The stock price of AXP and DFS was punished harsh during this bear market, partly owing to their own management mistakes. However, neither the stock price nor the capability of their management should be used to evaluate their business model. Adding MA itself to the so called four-party payment system, it is actually a five-party system. From the operation perspective, it is far from a lean or efficient process. The numerous interfaces and interchanges are cumbersome, though inevitable, which adds up the cost and inflexibility. On the other hand, the business model of AXP and DFS offers the potential to consolidate the five party system into a three party system, with AXP or DFS operating as a payment system provider, an issuer as well as an acquirer. Each could pocket all the profit that is distributed between three parties under the big two's model. And further, they could extend offers to the merchants or the cardholders with a lot more flexibility and generosity.
In summary, the business model from AXP and DFS actually offers more opportunities, but for the same reason, it demands a more capable management team. In the long term, I believe both companies may have better growth potential than the big two, certainly, the assumption is that they are properly managed.
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1) The trend to go plastic. There are more and more people making payments by swiping the plastic cards instead of writing checks or using cash. This is a trend across the world, not only limited to the US.
2) The international market. The plastic cards in Asian and Latin American countries just started to gain popularity, which presents great growth opportunities for both companies.
3) They are not directly exposed to consumer credit risks. Both companies operate a payment network that connect the consumer, the merchant, the consumer's bank and the merchant's bank. They earn profits by charging the corresponding transaction fees, not from the interest from the credit issued to the customers. As a result, the credit crisis didn't have direct impact on their business.
4) Economic downturn caused the consumers to cut expenses, which doesn't necessarily indicate the number of payment card transactions will decline. The lost transactions in the luxury stores may be well offset by the increased volume in everyday life spending, such as groceries and gasoline.
I agree with the analysis. I think both companies operate a beautiful business model with extremely high entry barrier and great growth potential. The bear market actually presented us the rare chance to buy in at a sale price. However, there is no companies running without risks. This article is going to discuss some of the potential issues with both companies, focusing on MA. As a long term investor, I believe these are items we need to keep monitoring over time.
Bank consolidation, store cards and rebate: dangerous trend?
In MA's 10K, it describes its payment system as a 'four-party' system that involves the cardholder, the merchant, the issuer (the card holder's bank) and the acquirer (the merchant's bank). Here is a good example how the system works.
'For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer's merchant account provider.' (source: http://en.wikipedia.org/wiki/Interchange_fee)
In this model, it seems the acquirer is the role with the least importance, simply sitting behind the merchant to pocket some easy money. The issuer is the one with strongest motives, as it gets the majority of the pie. The merchant is the one with the most resistance. It is forced to raise the price of its merchandise without seeing the profit flowing into its account. The card holder is another key. His decision to use a plastic card instead of cash or check initiates the entire money flow. In addition, his decision to use whose card (which bank), and what type of card (Visa or MasterCard) decides who gets the money. Furthermore, the collective preference for the plastic cards among cardholders put the pressure on the merchants, somewhat forcing the latter to play the card game. Therefore, in MA's business model, the issuer, the merchant and the cardholder are the keys to its success and future growth.
All three groups display certain trend that we need to be aware of.
1) The banks: the collapse of the Wall Street reshuffled the entire financial industry and the banking system has undergone rapid consolidations in recent years. In 2008, 30% of MA's revenue came from the 5 largest customers, and now with fewer banks remaining and each one growing larger in size, we may see the shares of MA's revenue controlled by these banks grow bigger accordingly. As MA can't afford to lose any of these customers, they will gain more leverage over MA, capable of negotiating certain profit away from MA, thus squeeze the margin.
2) The merchant: for a long time, there have been the discussions, the controversies and the lawsuits about the interchange fee. In theory, the advance of technologies should have reduced the cost to process the payment transactions, but in reality, the proportion of the money landed in the banks' pocket went up. To be fair, I don't think the banks can justify such fat profit, and this will eventually be addressed and corrected. However, for MA or VISA, this is not necessarily a negative trend. First, the proportion of the payment distributed to MA and VISA is already minimal. It may go lower, but I doubt would be significant. Second, certainly it will demotivate the banks, but on the other hand, more merchants should become willingly to participate in the 'fairer' system, which actually will translate into more revenue for MA and VISA.
Actually the trend that bears negative indications to MA or VISA is the store card.
Nowadays, it is common to see merchants making efforts to avoid the interchange fees. The bigger players such as WalMart, Amazon, Lowe's, Macy's, etc, offer the store cards. Normally the program combines the issuer bank and acquirer bank into one, and provides incentives to the consumers to use the card by offering sales events exclusively to the card members. There are many variations in the practice, but one thing in common, MasterCard or Visa is left out of the picture.
In my opinion, the store card system is an efficient payment system that can challenge MA or Visa. I am not sure how this system will evolve, but a bold speculation, think about WalMart, Macy's and Lowe's form a coalition and negotiate one deal with one bank, say, JP Morgan, and issue one common card. This one bank will handle the entire transaction cycle between the card holders and the merchants. I see many reasons that MA and V should feel seriously threatened.
3) The consumer: in the past few years, the rebate card gained great popularity. My question is, where does the rebate come from? I know ultimately this drives up the merchandise price, kind of like the consumer pays himself part of the rebate (a hoax, isn't it?). I also understand part of it comes from the merchant, they have to give up a little extra profit if the shoppers simply choose to swipe their rebate cards. Also for the issuer banks, it is a perfect and very rewarding strategy to give up a tiny profit margin to promote the usage of the card, hence bring in larger revenue. But how does this affect MA or VISA? In 2007, MA recorded $332 million rebate as the cost against the $3,335 million fees earned, and in 2008, $357 million against $4,1116 million. I believe, on one side, they are willing to give up some profit to promote their card brand, whereas on the other side, it may be an unwillingly accepted results from negotiations with banks.
We need to monitor how this trend will affect the profit margin of the big two.
Competition with Visa: another AMD vs Intel?
In the electronic payments market, we know that Visa has the controlling market share, around 60%, and MA, around 30%. In addition, MA operates a business model almost identical to Visa, in other words, MA doesn't make any products with real or perceived difference from the Visa. Does this sound disturbing? And familiar? Won't it remind you the competition between AMD and Intel? As AMD can't produce anything significantly different from Intel, it has no resistance if Intel would like to pull it into the price war. With a controlling market share, Intel may still earn profit with a lowered profit margin, but AMD can only post loss. Then how about MA? is it free from this fate or pattern?
My answer is No.
I like MA's 'Priceless' commercials. Time and time again, I was touched or amused. I don't think any marketing campaigns from any other companies can be more successful. But does it make me feel my MasterCard different from my Visa card? adding another fact that I always felt the Visa commercials kind of awkward. The answer is No. In the store, I simply use whatever card that brings back more rebate. In other words, I use the card where the issuer gives up more of their profit and puts it in my pocket. Between Visa and MA, which one can afford giving up more of their profit? The obvious answer is Visa. I believe for any incentive program that MA offers to the banks, Visa can top that, but not the opposite.
Nonetheless, I don't think there is anything really worrisome here - both companies have immense growth space and there is no need for them to engage in any type of price war in the near term. But as an investor, it is a good thing to acknowledge this. Also owing to same reason, I think Visa's stock deserves a multiplier higher than MA.
Competition with American Express and Discover: whose business model is better?
The business model of AXP and DFS differs from the big two in the fact that they issue credit to the cardholders, to a certain extent, they operate as a bank. Then which business model is better? My preference is AXP and DFS.
The stock price of AXP and DFS was punished harsh during this bear market, partly owing to their own management mistakes. However, neither the stock price nor the capability of their management should be used to evaluate their business model. Adding MA itself to the so called four-party payment system, it is actually a five-party system. From the operation perspective, it is far from a lean or efficient process. The numerous interfaces and interchanges are cumbersome, though inevitable, which adds up the cost and inflexibility. On the other hand, the business model of AXP and DFS offers the potential to consolidate the five party system into a three party system, with AXP or DFS operating as a payment system provider, an issuer as well as an acquirer. Each could pocket all the profit that is distributed between three parties under the big two's model. And further, they could extend offers to the merchants or the cardholders with a lot more flexibility and generosity.
In summary, the business model from AXP and DFS actually offers more opportunities, but for the same reason, it demands a more capable management team. In the long term, I believe both companies may have better growth potential than the big two, certainly, the assumption is that they are properly managed.
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Wednesday, April 8, 2009
Microsoft: No Chance to Challenge Google
Note: this is a re-written version of the Microsoft vs Apple: Monopolist vs Innovator (part 3).
Around 10 years ago, in order to dominate the Internet browser market, Microsoft fought hard and virtually killed Netscape. This is an old and well-known story. MSFT abused its monopoly power in the Operating System market to achieve its goal, for which, it almost paid the price with its own existence - just narrowly escaped the fate to be broken up. The reasons that MSFT resorted to these 'extreme' measures were because it believed, first, Internet was the future, and second, Netscape browser had the potential to grow into an Operating System. In other words, MSFT viewed Netscape as a real strategic threat to its core business. Now ten years later, when we revisit the history, we see things that nobody could imagine in the old days. Yes, Internet turned out to be the future and presented immense business opportunities across all industries. And as MSFT expected, it maintained the monopoly control over the software used to surf the internet, but almost pitifully, its achievements never went beyond. The sweetest fruit from the Internet tree was reaped by a company called Google, which started from developing the search engine, something that Microsoft never paid attention until it was too late. From this search engine company comes the threat that MSFT fears the most - a competition OS. This time, it is a lot more real than that from Netscape. Google has the capability, the wealth and more troubling, the vision to build something to compete with Windows.
MSFT's distress and pressure are not something hidden behind the scene. Several months ago, MSFT offered to buy Yahoo for around $40 billion, my opinion, a mutual-destructive move, somewhat out of desperation. Yahoo was well on its track to become a mediocre and forgettable company, while MSFT's involvement may only speed up the process. So I was glad that MSFT backed out, notably, with the help of the stupidity of Yahoo's management (here the stupidity is defined by their IQs as a group of businessmen).
Here comes the key question that this post tries to answer. When the Internet was a wide open space, MSFT couldn't establish itself as anything significant, and now with Google looming huge, having the power to match MSFT toe to toe, what chance does MSFT stand in the Internet/search market? My answer is, none.
First, innovation is the only key that MSFT could use to break into Google's territory, unfortunately, its innovation potential has been exhausted by its internal and external pressure.
In my previous post, Microsoft vs Apple: Monopolist vs Innovator, we discussed why Apple is a company more creative than Microsoft. In summary, it is extremely demanding to develop and maintain Windows OS, which may be the most complex software in human history. This creates the internal pressure on MSFT. Externally, the brain power of its 1 billion users bears unlimited possibilities, posing all sorts of challenges to the software company, such as virus, piracy, hacking, etc. Unfortunately, I don't see any reasons MSFT could avoid addressing any one of these. This environment put MSFT under constant pressure, shaped its culture and gradually turned MSFT into a solid implementer, rather than an innovator.
On the other hand, Google, also as a monopolist, faces much less pressure than MSFT. After all, its product, the search engine, is only an applications sitting on its own servers. Even for the most malicious and capable hacker, there is not much to manipulate from Google's almost blank home page. This is a lot more forgiving operating environment, resulting in an innovation-friendly atmosphere. Actually Google's innovation capability matches well with Apple. For example, AdSense is purely a genius idea; and from GMail, you can easily detect the underlying innovation pattern, very similar to the impression you get from playing with an iPod - relentlessly focusing on the user experience.
If I rank the innovation power of Google as 10, Microsoft is 3. While in the Internet market, pretty much it is all about innovation.
Second, even as a business behemoth, Google cautiously maintains its image as a technology company, but Microsoft is perceived to be a lot more business/profit oriented. While Search is always a technical term, never a marketing term.
I don't think it is exaggerating to say that MSFT won the battle against Netscape, but at the same time completely ruined its image as a technology company. Since then, MSFT grew bigger and stronger, widely perceived to be a business juggernaut or an almighty empire. On the other hand, we saw Google spent billions of dollars to develop many normal as well as 'geeky' applications, then offered them to the public for FREE. Pretty much this is what an enthusiastic dude in the open source community would do.
Somewhat Google became a symbol of the spirit of internet technology, being open, equal and winning by technology superiority. It is even more applauded as it continues upholding the spirit after diving deep into the profit driven business world. As a result, Google created a vast fan base - another similarity with Apple - there are people that simply love Google, instead of toward Microsoft - a have-to choice.
I won't say that Google's intention to maintain itself as a technology company is not genuine, while obviously there is business strategy behind it. By offering all sorts of free applications, it is building itself into a platform for 'everything', thus growing the users' dependencies and personal attachments - another similarity with Apple, and not surprisingly, significantly increased the entry threshold for the competitors.
Talking about search, MSFT feels too clumsy, similar as Yahoo feels too shallow, but Google feels just right, simple, straightforward and a technology savvy. From this perspective, MSFT is doomed.
Third, MSFT has some basic issues to fix.
GMail is original, Yahoo Mail is solid, Hotmail is like a piece of junk. I know it maybe too biased to say this, but that is my true experience. For the past 10 years, I maintained my accounts with both Yahoo and Hotmail, but for the latter, there is always something that don't feel right, something that gets me easily annoyed. Microsoft would like to compete in the Internet field, while in this field, nothing is more basic than an email application. If they couldn't even get this one right, where is the hope?
Another one, we all understand what Google is, what Amazon is, and what eBay is, but does anybody really understand what the heck Windows Live is?
For Google, or Amazon, or eBay, it developed its understanding of the Internet, held onto it and finally found the key and opened the door to the wealth. But MSFT, after struggling for more than 10 years, still an outsider. It simply hasn't figured out the Internet. Maybe the best explanation is that they never had the right people in the right position.
In summary, maybe MSFT doesn't stand much chance against Google in the Internet/search market, but even before considering challenging Google, they have some basic and internal issues to address.
I see a re-organization a must.
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Around 10 years ago, in order to dominate the Internet browser market, Microsoft fought hard and virtually killed Netscape. This is an old and well-known story. MSFT abused its monopoly power in the Operating System market to achieve its goal, for which, it almost paid the price with its own existence - just narrowly escaped the fate to be broken up. The reasons that MSFT resorted to these 'extreme' measures were because it believed, first, Internet was the future, and second, Netscape browser had the potential to grow into an Operating System. In other words, MSFT viewed Netscape as a real strategic threat to its core business. Now ten years later, when we revisit the history, we see things that nobody could imagine in the old days. Yes, Internet turned out to be the future and presented immense business opportunities across all industries. And as MSFT expected, it maintained the monopoly control over the software used to surf the internet, but almost pitifully, its achievements never went beyond. The sweetest fruit from the Internet tree was reaped by a company called Google, which started from developing the search engine, something that Microsoft never paid attention until it was too late. From this search engine company comes the threat that MSFT fears the most - a competition OS. This time, it is a lot more real than that from Netscape. Google has the capability, the wealth and more troubling, the vision to build something to compete with Windows.
MSFT's distress and pressure are not something hidden behind the scene. Several months ago, MSFT offered to buy Yahoo for around $40 billion, my opinion, a mutual-destructive move, somewhat out of desperation. Yahoo was well on its track to become a mediocre and forgettable company, while MSFT's involvement may only speed up the process. So I was glad that MSFT backed out, notably, with the help of the stupidity of Yahoo's management (here the stupidity is defined by their IQs as a group of businessmen).
Here comes the key question that this post tries to answer. When the Internet was a wide open space, MSFT couldn't establish itself as anything significant, and now with Google looming huge, having the power to match MSFT toe to toe, what chance does MSFT stand in the Internet/search market? My answer is, none.
First, innovation is the only key that MSFT could use to break into Google's territory, unfortunately, its innovation potential has been exhausted by its internal and external pressure.
In my previous post, Microsoft vs Apple: Monopolist vs Innovator, we discussed why Apple is a company more creative than Microsoft. In summary, it is extremely demanding to develop and maintain Windows OS, which may be the most complex software in human history. This creates the internal pressure on MSFT. Externally, the brain power of its 1 billion users bears unlimited possibilities, posing all sorts of challenges to the software company, such as virus, piracy, hacking, etc. Unfortunately, I don't see any reasons MSFT could avoid addressing any one of these. This environment put MSFT under constant pressure, shaped its culture and gradually turned MSFT into a solid implementer, rather than an innovator.
On the other hand, Google, also as a monopolist, faces much less pressure than MSFT. After all, its product, the search engine, is only an applications sitting on its own servers. Even for the most malicious and capable hacker, there is not much to manipulate from Google's almost blank home page. This is a lot more forgiving operating environment, resulting in an innovation-friendly atmosphere. Actually Google's innovation capability matches well with Apple. For example, AdSense is purely a genius idea; and from GMail, you can easily detect the underlying innovation pattern, very similar to the impression you get from playing with an iPod - relentlessly focusing on the user experience.
If I rank the innovation power of Google as 10, Microsoft is 3. While in the Internet market, pretty much it is all about innovation.
Second, even as a business behemoth, Google cautiously maintains its image as a technology company, but Microsoft is perceived to be a lot more business/profit oriented. While Search is always a technical term, never a marketing term.
I don't think it is exaggerating to say that MSFT won the battle against Netscape, but at the same time completely ruined its image as a technology company. Since then, MSFT grew bigger and stronger, widely perceived to be a business juggernaut or an almighty empire. On the other hand, we saw Google spent billions of dollars to develop many normal as well as 'geeky' applications, then offered them to the public for FREE. Pretty much this is what an enthusiastic dude in the open source community would do.
Somewhat Google became a symbol of the spirit of internet technology, being open, equal and winning by technology superiority. It is even more applauded as it continues upholding the spirit after diving deep into the profit driven business world. As a result, Google created a vast fan base - another similarity with Apple - there are people that simply love Google, instead of toward Microsoft - a have-to choice.
I won't say that Google's intention to maintain itself as a technology company is not genuine, while obviously there is business strategy behind it. By offering all sorts of free applications, it is building itself into a platform for 'everything', thus growing the users' dependencies and personal attachments - another similarity with Apple, and not surprisingly, significantly increased the entry threshold for the competitors.
Talking about search, MSFT feels too clumsy, similar as Yahoo feels too shallow, but Google feels just right, simple, straightforward and a technology savvy. From this perspective, MSFT is doomed.
Third, MSFT has some basic issues to fix.
GMail is original, Yahoo Mail is solid, Hotmail is like a piece of junk. I know it maybe too biased to say this, but that is my true experience. For the past 10 years, I maintained my accounts with both Yahoo and Hotmail, but for the latter, there is always something that don't feel right, something that gets me easily annoyed. Microsoft would like to compete in the Internet field, while in this field, nothing is more basic than an email application. If they couldn't even get this one right, where is the hope?
Another one, we all understand what Google is, what Amazon is, and what eBay is, but does anybody really understand what the heck Windows Live is?
For Google, or Amazon, or eBay, it developed its understanding of the Internet, held onto it and finally found the key and opened the door to the wealth. But MSFT, after struggling for more than 10 years, still an outsider. It simply hasn't figured out the Internet. Maybe the best explanation is that they never had the right people in the right position.
In summary, maybe MSFT doesn't stand much chance against Google in the Internet/search market, but even before considering challenging Google, they have some basic and internal issues to address.
I see a re-organization a must.
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Sunday, April 5, 2009
Microsoft vs Apple: Monopolist vs Innovator (part 3)
4) Microsoft's chance against Google in the search market
This is a piece about MSFT and AAPL, but I think I have valid reasons to bring Google into the picture. In my opinion, Google is one of the very rare companies that enjoys an MSFT type monopolist position, and at the same time, maintains the AAPL type of innovation. In addition, innovation is the only key that Microsoft could use to break into GOOG's territory.
This is a big topic, here I'd like to share some general thoughts which I will explore further in my future posts.
First, the external pressure from being a search engine monopolist is much less than being Microsoft. GOOG has better control over the usage of its product, after all, it is an application sitting on Google's servers.
Second, Google matches Apple in the innovation power. Apple's innovation is in users' experience, which is the combination of original ideas and brilliant designs. And Google simply manufactures genius ideas, for example, AdSense.
Third, Combining the first and the second point, Google matches Apple in the capability to continue their path towards more innovations - the corresponding mechanism, culture, atmosphere all have been well established.
Fourth, Google spent billions of dollars, developing a lot of normal as well as 'geeky' applications, then offered them to the public for free. There are many reasons behind this, and I believe one of them is that they just have too much money (hehe). Another one, they are building Google into a platform for 'everything', thus growing the users' dependencies, resulting in the increased threshold for the competitors.
Fifth, even after Google turns into a business behemoth, it maintains the image as a technology company (another reason why it developed and distributed those 'geeky' applications), but Microsoft, since the days it fought and killed Netscape, has turned its public image into something like 'it is all about business' . This is another barrier that MSFT has to break. Talking about search, MSFT feels too clumsy, similar as Yahoo feels too shallow, but Google feels just right, simple, capable and a technology savvy.
Sixth, MSFT needs a big break-through in innovation ideas to challenge GOOG. But as mentioned above, its culture is about being a solid implementer, instead of an innovator. As a result, I don't see MSFT making even a dent in Google's market share in the near future.
Seventh, GMail is original, Yahoo Mail is solid, Hotmail is like a piece of junk. Nothing can explain this type of failure and it is a sign how badly Microsoft manages its internet project. Another one, does anybody really understand what the heck Windows Live is? Micorosft's issue in the search market is not something so complicated that can only be explained at a deeper level by factors such as the culture, atmosphere, etc, they have some very basic and obvious problems to address. I see a re-organization a must before there is any hope to turn things around.
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This is a piece about MSFT and AAPL, but I think I have valid reasons to bring Google into the picture. In my opinion, Google is one of the very rare companies that enjoys an MSFT type monopolist position, and at the same time, maintains the AAPL type of innovation. In addition, innovation is the only key that Microsoft could use to break into GOOG's territory.
This is a big topic, here I'd like to share some general thoughts which I will explore further in my future posts.
First, the external pressure from being a search engine monopolist is much less than being Microsoft. GOOG has better control over the usage of its product, after all, it is an application sitting on Google's servers.
Second, Google matches Apple in the innovation power. Apple's innovation is in users' experience, which is the combination of original ideas and brilliant designs. And Google simply manufactures genius ideas, for example, AdSense.
Third, Combining the first and the second point, Google matches Apple in the capability to continue their path towards more innovations - the corresponding mechanism, culture, atmosphere all have been well established.
Fourth, Google spent billions of dollars, developing a lot of normal as well as 'geeky' applications, then offered them to the public for free. There are many reasons behind this, and I believe one of them is that they just have too much money (hehe). Another one, they are building Google into a platform for 'everything', thus growing the users' dependencies, resulting in the increased threshold for the competitors.
Fifth, even after Google turns into a business behemoth, it maintains the image as a technology company (another reason why it developed and distributed those 'geeky' applications), but Microsoft, since the days it fought and killed Netscape, has turned its public image into something like 'it is all about business' . This is another barrier that MSFT has to break. Talking about search, MSFT feels too clumsy, similar as Yahoo feels too shallow, but Google feels just right, simple, capable and a technology savvy.
Sixth, MSFT needs a big break-through in innovation ideas to challenge GOOG. But as mentioned above, its culture is about being a solid implementer, instead of an innovator. As a result, I don't see MSFT making even a dent in Google's market share in the near future.
Seventh, GMail is original, Yahoo Mail is solid, Hotmail is like a piece of junk. Nothing can explain this type of failure and it is a sign how badly Microsoft manages its internet project. Another one, does anybody really understand what the heck Windows Live is? Micorosft's issue in the search market is not something so complicated that can only be explained at a deeper level by factors such as the culture, atmosphere, etc, they have some very basic and obvious problems to address. I see a re-organization a must before there is any hope to turn things around.
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Wednesday, April 1, 2009
Microsoft vs Apple: Monopolist vs Innovator (part 2)
3) Competition pattern between MSFT and AAPL
In the famous PC vs Mac Apple commercial, we laugh at the PC guy that makes a fool out of himself every time. While don't forget the fact, which is not even hidden, that these two dudes are friends. It would be too bold to claim that Microsoft and Apple are friends in the real world, but the relationship between these two is never like that between Intel and AMD.
One simple fact is that it is impossible for MSFT to control 100% of the OS market, and another one, there are always people looking for alternatives when something becomes too popular. These actually guaranteed Apple a niche but very stable market. As it is somewhat out of the reach of MSFT and is relatively small, there is no sign indicating that the OS monopolist is worried or taking serious measures to fight for it. The series of 'I am a PC' commercials from Microsoft, led by Bill Gates himself, reads to me more like taking a high road, focusing on cleaning its own name without initiating attacks to Apple. From the Apple side, it keeps its low-end laptop around $1000, a price tag of a medium/high end PC system, while it could have easily got into a much wider market by releasing laptops between the $600 and $900 price range. My opinion, Apple has three concerns here. The first is to maintain the good margin it has been enjoying all along. The second is to maintain Apple as a somewhat luxury image. And the third, maybe the most important one, Apple would like to increase its market share in a controlled manner, rather than an explosive manner. I believe Apple has the weapon to boost its market share significantly overnight (for example, licensing Mac OS), but I doubt even Apple itself thinks it is ready to handle the consequential issues.
It seems that there is some type of implicit agreements between these two. As long as AAPL doesn't openly license its OS, it will never seriously threaten MSFT. In acknowledgment of this, MSFT has no issues seeing Apple take away some customers who would like to pay a premium to be cool and happy. As a result, we see MSFT in firm control of the overall market, while Apple enjoys a 'care-free' operation environment, as well as good profit and growth opportunities even though it only has a smaller piece of the pie.
With all these said, I have a big NO for the question 'shall Apple license the Mac OS?' It is like Apple is to bet with EVERYTHING it has for something that is doubtful it can handle, and doubtful it wants. Think about the immediately intensified pressure from MSFT and the long-term internal/external pressures similar to that of MSFT (discussed in the previous post), I think Apple is far from being ready. (read the speculated scenario if Apple starts licensing its OS here).
One more topic to cover: MSFT's chance against Google in the search market.
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In the famous PC vs Mac Apple commercial, we laugh at the PC guy that makes a fool out of himself every time. While don't forget the fact, which is not even hidden, that these two dudes are friends. It would be too bold to claim that Microsoft and Apple are friends in the real world, but the relationship between these two is never like that between Intel and AMD.
One simple fact is that it is impossible for MSFT to control 100% of the OS market, and another one, there are always people looking for alternatives when something becomes too popular. These actually guaranteed Apple a niche but very stable market. As it is somewhat out of the reach of MSFT and is relatively small, there is no sign indicating that the OS monopolist is worried or taking serious measures to fight for it. The series of 'I am a PC' commercials from Microsoft, led by Bill Gates himself, reads to me more like taking a high road, focusing on cleaning its own name without initiating attacks to Apple. From the Apple side, it keeps its low-end laptop around $1000, a price tag of a medium/high end PC system, while it could have easily got into a much wider market by releasing laptops between the $600 and $900 price range. My opinion, Apple has three concerns here. The first is to maintain the good margin it has been enjoying all along. The second is to maintain Apple as a somewhat luxury image. And the third, maybe the most important one, Apple would like to increase its market share in a controlled manner, rather than an explosive manner. I believe Apple has the weapon to boost its market share significantly overnight (for example, licensing Mac OS), but I doubt even Apple itself thinks it is ready to handle the consequential issues.
It seems that there is some type of implicit agreements between these two. As long as AAPL doesn't openly license its OS, it will never seriously threaten MSFT. In acknowledgment of this, MSFT has no issues seeing Apple take away some customers who would like to pay a premium to be cool and happy. As a result, we see MSFT in firm control of the overall market, while Apple enjoys a 'care-free' operation environment, as well as good profit and growth opportunities even though it only has a smaller piece of the pie.
With all these said, I have a big NO for the question 'shall Apple license the Mac OS?' It is like Apple is to bet with EVERYTHING it has for something that is doubtful it can handle, and doubtful it wants. Think about the immediately intensified pressure from MSFT and the long-term internal/external pressures similar to that of MSFT (discussed in the previous post), I think Apple is far from being ready. (read the speculated scenario if Apple starts licensing its OS here).
One more topic to cover: MSFT's chance against Google in the search market.
Support my blog by clicking the Ads!
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