Wednesday, 7 November 2012

Why Apple doesn't do big business (and IBM doesn't do consumer)

Right, after a brief election-related diversion (actually thought the election nite TV show was a bit dull - if were paying $6bn for it I'd have wanted some better special effects!), back to my series on the Post-PC world. This week I want to think about the yawning gap between enterprise and consumer IT, and how Post-PC devices help to fill it.

A tale of two cities?

It is one of the truisms of the tech business that its impossible to be good at both enterprise and consumer IT.

Not Big Blue's finest hour.
Apple? A behemoth in the consumer world. But even five years into the iPhone era they still barely dent in the enterprise world (and yes I'm including BYOD/Good - more on that later). IBM? The world's biggest IT Services company and the world's second biggest software company. But I can't think of a consumer product from Big Blue since the sold PCs to Lenovo. And even before that their gear didn't exactly set the world on fire <ahem> PC Jr <ahem> PS/1.

Companies that bridge the divide are few and far between. Microsoft has arguably done it with XBox (although if you look at the financials, its still pretty much an enterprise OS and Office company with a tiny games console business bolted onto its arse). Blackberry managed it for a few years by taking its enterprise communications devices to the masses (but look what's happened since...). But by and large the grungy white-collar world of IBM/Oracle/SAP is a very different world from the rainbow polo-necked world which Apple/Facebook/Google live in.

What I want to do is highlight three big differences between the consumer and enterprise IT, and then show how the Post-PC world is bringing them together.

1) Consumer IT = shorter product cycles

Sixty bucks for a roster update? Money for old rope!
Catch me while you can: The standout feature of consumer IT is short product cycles, typically twelve months but sometimes as short as six. There are a couple of reasons for this. First the modern consumer is trained to want "this year's model" (or ideally this season's model) which means older SKUs are quickly deprecated (EA Sports' annual updates are a good example of this). Secondly because consumer tech is a growth category it offers excess economic returns which attract extreme levels of competition (just look at this year's race to have a "flagship" smartphone)

In contrast enterprise IT typically moves in longer product cycles, typically 5-6 years. This reflects the slow-moving and complex nature of an enterprise IT organisation. Windows 7 a great example of this - for many enterprises the Windows 8 launch has come just as they begin their Windows 7 roll-out. Also remember companies like SAP or Oracle make much more money from annual support than upfront licence - they are masters at elongating the 5-6 years product cycle.

What were they thinking??
Built to last vs. built to break: This means that consumer IT products are built to become obsolete. Consumer devices are meant to conk out every 18 months, preferably just as a new model hits the market. This is manifested in a number of ways. The obviously one is lower build quality (arguably one of Nokia's early faults was producing phones like the Nokia 6310i which were too damn durable!). In contrast enterprise devices are mission critical so have to be built to last - the old logic is that if you're IT system is down then you can't open up shop in the morning.

Another way this is done is making devices more closed an appliance like (cf the lack of memory/storage expandability in MacBook Air/Retina Display Macs. After all there's no point building an expansion port into a product that's going to be junked in a few months, especially if you can use that lack of memory/storage/speed to encourage them to buy a new <insert shiny new Apple product here>. Enterprise devices are more open and upgradable e.g. swappable batteries in Blackberrys - one issue about having the iPhone if you are a corporate road warrior is that if you blow through your battery life by 2pm you have a serious workflow issue.

Cutting edge features vs. trailing edge reliability: Another consequence of shorter product cycles is that there's always a rush to include cutting-edge features in an attempt to one-up the competition (even if they're not ready for prime time; Siri anyone?). This means consumer IT is more likely to be at the bleeding edge - a good example I've used before is the "Wing Commander 2 Factor" - how cutting-edge video games drove the increasing power of desktop PCs from 1990-2005.

In contrast enterprise IT tends to have fewer, but more robust features with evolutionary rather than revolutionary products the order of the day. That's not to say that revolutionary disruptions don't happen in enterprise IT world, but what normally happens is that they come from a small start-up rather than from one of the mainstream behemoths (said start-up is usually acquired two months later by Oracle).

2) Solutions versus products

Not just for Christmas... The second important difference between enterprise and consumer IT is that historically consumers have bought a product, whereas for the enterprise you are buying a wider solution which not only includes a device or software CD, but also a maintenance contract and a bunch of systems integration around it. Whereas a consumer device is like buying a puppy for Christmas, an enterprise IT solution is more like having a child (in more ways then one - I'll warrant more than a few corporates still have 18-year old Fortran databases gnashing away in the basement!).

Instant gratification versus product roadmaps: One important consequence of this is that enterprises users need a roadmap. This is one of the biggest reasons why Apple struggles to sell to corporates. An IT manager needs to be able to schedule his deployments months or years in advance. If you've built your IT around a particular product you don't want the risk that your supplier turns around without warning and completely changes its external interface. In contrast consumer IT companies are all about springing a short-term surprise to drive the fashionistas.

This sort of roadmap gives enterprise IT strategists a warm fuzzy feeling. Especially the bit which says "Risk-Free"!

Support matters for enterprise buyers: Similarly enterprise users need a package of lasting, reliable support. Unfortunately consumer devices don't always deliver that. Take the iPad. This device has been much hyped for enterprise adoption but the bald fact is that Apple announced it was dropping support for the original iPad in its iOS6 announcement this June. That's barely two years after the device was released and only 14 months after they stopped selling it. For an enterprise IT buyer that is completely unacceptable (after all it's like to take 14 months to get the damn thing certified for your organisation!).

"Yep we'll buy it. The users will just how to figure out how
it works later. Oh and How much did you say that optional
training contract cost would cost me?"
In enterprises, the buyer is not the end-user: Because a solution is large and complex the purchasing decision is made by the organisation rather than the end-user. This makes purchasing decisions larger and slower and also impacts the product being sold. One think that's pretty obvious that successful consumer devices has simple, attract user interfaces. In contrast for enterprise solutions interfaces are more difficult to use, sometimes horrifically so (three worlds: Blackberry Web Browser). This is partly because enterprise IT is more complex, but also I think because in a big corporate the guy making the purchasing decision is in the IT department, rather than the end-user who has to use the damn thing.

Enterprise IT needs to play ball with the existing stack. For an enterprise buyer you have have the whizziest, sleekest product but if it doesn't play ball with you're existing IT stack its next to useless. Interoperability (and ensuring a new product doesn't bork the existing IT stack) is a critical part of testing. In the consumer world interoperability is become more important (that's the whole point of Apple and Google's eco-system plays), but its nowhere near as much of a deal breaker. You can still sync your iTunes to a Windows PC, or your Android phone to a Mac. Apple hasn't figured out how to block that yet (although once they take Macs to an ARM-based iOS platform I'm sure they will!).

3) Different business models

Upfront sale versus ongoing maintenance: As I mentioned already, SAP and Oracle are masters about getting the customer to buy into not only a product but a whole support package. This has important financial implications as they make much more money over a product's life-cycle from high-margin recurring maintenance (typically about 20% of the initial licence fee) than they do front the initial licence. That's a complete inversion of say a consumer video game where the overwhelming majority of profits is delivered in the first month of sales (before piracy manages to kick in).

Source: Asymco
Volume and fixed cost models: If you sell to standalone consumers you will by definition have a higher volume (of lower value) sales vs. if you sell to a deep-pocketed corporate. This drives consumer businesses more towards the classic high fixed cost/high gross margin business model where if you get above a certain number of sales you can rake in massive products, but if you don't break even your margins plummet (greatest exponent: McDonalds). This is particularly obvious in the smartphone world where Apple and Samsung capture the majority of volume and virtually 100% of industry profits, leaving Nokia, LG and Sony with virtually nothing.

In contrast enterprise IT is much more of an a la carte affair. For example most enterprise software companies should be able to make a decent 20%+ margin, so longer as they are over the initial sales & marketing hump. It's much less a winner-takes-all world.

"We.. are.. the.. ghosts.. of.. IT past. On your left is
ADABAS, the lady on the right is ASE and that's Ms
Fortran and Little Ms Cobol in the middle...."
Enterprise IT is full of zombies: Because because of the short product cycles and lack of ongoing maintenance, when a consumer IT company stop's selling new products their margins go into sharp decline (cf Nokia, RIM). That's very different in enterprise IT where the stickiness of many heavy-duty products and the requirements to pay ongoing maintenance means companies can stay in business (and make good money) for decades after they go into decline. Software is a particularly zombie-friendly zone. German company Software Ag continues to make millions in maintenance from ADABAS, it's 1970's- era database. Sybase was another example of this which parlayed cashflows from its 1980's ASE daabase into smart mobile middleware investments and eventually a $6bn bid from SAP.

Right that's all for today (to be honest I'm still slightly groggy after my election night all-nighter). Hopefully I've outlined some of the contours of why these are like "two nations divided by a common language". What I want to do in my next post is build on this and show how the Post-PC world brings them together, and what companies are poised to succeed (or fail!).

Stay tuned!

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