The Pivot: Business Gold or Baloney

August 15, 2012

Let’s think about the belief that services will cure revenue problems. Straight away, services can be lucrative. Check out the revenues from McKinsey, BCG, or Bainie Mr. Romney.

The question is, “Can a company anchored in services become a hardware company?” And the flip side, “Can a hardware company become a services company?” These questions highlight the latest in business baloney: The pivot. The idea is that a company can go in a different direction, pay its debts, maintain its existing revenues, and generate large flows of new revenues. The pot of gold at the end of the rainbow is a children’s book metaphor for this strategic vision.

Google is doing the pivot. First, there was the purchase price of $12 billion and change. Then there was the $200 million plus operating loss mentioned in the most recent Google quarterly report. Today (August 13, 2012) I read “Google to Cut 4,000 Motorola Mobility Jobs, Take $275 Million Charge.” The core of the news story is like the refrain of a sad Sinatra tune:

Motorola Mobility has lost money in fourteen of the last sixteen quarters and in its latest quarter reported an operating loss of $233 million on revenue of $1.25 billion. “These changes are designed to return Motorola’s mobile devices unit to profitability,” Google said in a filing with the U.S. Securities and Exchange Commission. Google has “grand plans.” The task is to keep the ad revenues pumped up as the company invests in new revenue opportunities such as Motorola hardware, legal experts to deal with the copious supply of litigation, and tactical moves which seem to target Amazon, Apple, Microsoft, and other companies with possible monopolistic business models.

Will firing people and the possible sale of deadwood make the pivot work?
Given enough money and time, my view is that Google may succeed. The race
is on for Google. The three reasons I have identified include:

The click pattern difference between desktop Google searching and mobile device Google searching. To sum up what I understand is the “new wisdom”, mobile clicks are growing but deliver less bang for the advertisers’ buck. Desktop searches are not growing as they once did. Advertisers get less bang for their buck. My simple conclusion is that Google will have to find ways to work around these revenue producing online behaviors. But isn’t down down?

Second, like Amazon, Google has a cost control problem. Google is making cuts in services, buying companies to get a jump start or head start in certain application spaces, and investing in gee whiz technology in hopes of getting operational costs to flatten. My view? Good luck with that. Companies like Amazon and Google need increased revenue to keep pace with technology costs. In my experience, technology costs just keep on going up no matter what a manager does to contain them. The solution is to cap the budget and fall behind or keep spending until the business model collapses. (Example: Convera.)

Third, the bets on the future are predicated on the fact that the Internet is nothing more than a communications and information utility. The ubiquity opens the door to a cuteness and convenience thermonuclear war. Witness the efforts of Facebook and Google to co-opt the other company’s territory. The problem is that when cuteness and convenience become important, the tech companies may find themselves at the mercy of the experts in these disciplines. Google is making nice with the entertainment industry. Facebook cooperates with US government agencies. The problem for Facebook and Google  is that the specialists in cuteness and convenience have more monetization options that the technology companies. One buys a mobile phone or runs a Web search. A child nags to go to the new Disney movie, get the coloring book, and have the Mickey Mouse T shirt. Facebook and Google give these cute items away. Disney and other experts in cuteness and convenience sell them, year in, year out, generation after generation.

Let’s assume that Google or another online company pivots into a new sector? In my view, four actions are taken.

First, the revenue cost algorithm spits out negatives. Even when an online company creates a new revenue stream within its core competency, our data suggest that in more than 95 percent of the cases, the revenue is at best two thirds of the core product’s revenue. Even more troubling, the new play is a flop. You can verify our data by checking out the outstanding decision to pay $10 billion for Autonomy. Not only has EDS screwed up HP’s clever Excel spreadsheets, but Autonomy is pulling onto the scenic Red Ink Highway. Just watch the data unfold or contact me to get a fast forward look at the future of this SAP-flavored deal. Actions: cut staff, sell off as much as possible, and think new thoughts.

Second, competitors learn from the Hindenburg event. The notion that me too is a silly business tactic is wrong. Me too allows a company to get the equivalent of an unfiltered YouTube video to avoid a disaster. When you shove Mentos in a carbonated beverage, a YouTube video can keep your shirt dry. Maybe. The bold adventure of Google in the hardware mobile telco business is going to be an educational event of the first order. Whether success or failure results, the sector is going to leave some outfits much stronger, open doors for competitors now not on the radar, and pump more potential burger flippers into the ranks of the job seekers.

Third, regulators will regulate. Appreciate that regulating after an event of a certain size does little to keep competition healthy. Regulation will definitely add to the cost burden of the newcomers. The incumbents are probably going to pay a penalty, but the regulations will be designed to deal with a “barn burned; horses gone” events. Higher costs and more friction are a natural consequence.

Fourth, shareholders can get frisky. Poor old Yahoo and Hewlett Packard have demonstrated that even lackluster Boards of Directors can be shaken and stirred. Sorry, James Bond. Fooling around with older rich people can add excitement to a senior manager’s life.

My take on the Google Motorola Mobility deal and, by extension, the HP deal for Autonomy is that neither will work out as planned. The pivot or as IBM’s ringmaster pointed out, “Even elephants can dance.” Well, one dancing elephant does not mean that the others can do much more than emit subsonic meows and trample the unsuspecting.

More specifically, we are now tracking several possible disruptions.

For Google, the legal hassles may derail the Motorola “play”. The Apple-Samsung legal matter is about Google. A decision in favor of Apple maymake life more difficult for Google. If Google wins, the senior management of Google will move forward unimpeded with its pivot. When the turn iscomplete, there are the cute and convenience dudes. Dilemma? Not to the inner circle at Google. Reality does not intrude upon the wizards in my opinion.

For HP, the search and content marketing world is like the “Land of the Lost.” The HP way is going to have to embrace open source and make money by keeping existing Autonomy companies happy with a service which works as the customers’ requirements state. Paying $10 billion for a well-seasoned and smoked search and retrieval system may have been a stretch. I see write offs and maybe a divesture in the future.

For me, the “pivot” is similar to the 1980s fascination with “synergy”. Mostly baloney. But when one has to cook up a dissertation for a degree in business, metaphors are one path to success. Have at it, gentle reader.

Stephen E Arnold, August 15, 2012

Sponsored by Seavey Iditaride, Seward, Alaska

 

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