Cash Cow Disease: The Cognitive Decline of Microsoft and Google

http://ronburk.blogspot.com/2010/08/cash-cow-disease-cognitive-decline-of.html

by rbanffy • 16 years ago

94 84 16 years ago

ronburk.blogspot.com

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.

m1044• 16 years ago

I believe you just inadvertently proved the author's point. The cash cow products allow the insanity to continue, which wastes the potential of the employees and resources. The "cognitive decline" that the author mentions is the rationalization that allows this wasteful process to continue.

Poor, short-sighted leadership is the root cause of cash cow disease, not the profit itself.

rbanffy3• 16 years ago

> 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.

kenjackson9• 16 years ago

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.

shanked• 16 years ago

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

silvajoao• 16 years ago

On the other hand, Apple didn't have a cash-cow before the iPod, if you regard it as their first cash-cow after Jobs' return.

And going from there to iTunes, to merging the iPod and mobile phone everyone carries around, to arriving at the iPhone and iOS, and then to expand the screen size to build the iPad doesn't represent huge deviations from their core business.

Ping might fit within what the OP describes though.

alextp• 16 years ago

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.

evilmushroom2• 16 years ago

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.

mmt2• 16 years ago

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.

evilmushroom2• 16 years ago

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.

sukuriant2• 16 years ago

What's useful innovation? How do you know it is useful innovation? How long does it take until you discover it's not, if it isn't? What about if it is?

Was the pitch line of Twitter good enough for you to consider it 'useful' before it became what it is?

gvb• 16 years ago

The author is advocating giving the profits to shareholders rather than investing in innovation. He phrases his "spin off" comment as "let someone else invest in innovation."

Cash cow disease costs _stockholders_ untold (sometimes actively buried in accounting maneuvers) dollars. Consider Xbox, which consumed billions (that's with a 'b') before eventually turning a profit of millions (that's with an 'm'). If Xbox had been spun into a separate company, then Microsoft _stockholders_ could have kept those billions (with a 'b') and let _someone else_ decide to invest billions in trying to jump into the game console business.

(emphasis mine).

crander• 16 years ago

You cannot discuss innovation without discussing Christensen's Innovators Dilemma and disruptive innovation.

The market incumbent strives upmarket and creates a performance oversupply (a surplus of features in excess of customer demand) which opens space below for a downmarket competitor to disrupt upmarket.

madmaze2• 16 years ago

I completely agree with @evilmushroom and strongly disagree with the article. Especially about the "That allows the company to encourage engineers to waste 20% of their time on "projects", like Google Wave."

Maybe I was the one user that really enjoyed using wave, it is a great collaboration tool if you have between 2 and 8 people working on one thing. We wrote entire(60+pages) of design documents in wave. Its also a great note taking tool since for example in class, especially if you have many people working together on the same set of notes.

And now to get to the "20% of wasted time", this time is NOT wasted. It is an investment in the companies ability to innovate and also in their employees themselves. Without time to spend on other projects, one starves the creative mind, which is bad for the individual and especially bad for the company as a whole.

uriel• 16 years ago

Google Wave sucked, and was a stupid idea on way too many levels to list (the concept, the technology, and the interface to begin with).

But Wave was not a 20% project, and that is probably one of the reasons it flopped, it got over hyped and over engineered in ways that would never have happened if it had been a 20% project.

eitland2• 16 years ago

Disagree strongly.

That said, I do not totally agree with the article. Last time I tried out duckduckgo and blekko, google was still better. Googles word processing and spreadsheets are getting better, and the android phones seems to be the only alternative in the iphone class right now.

p_nathan• 16 years ago

Agreed. The author seems to have a very bean-counter attitude towards things; I think he is saying, if it's not immediately making money, or can't be shown to be immediately making money, axe it!

Real innovation is so radical there is no business case for it until you create demand for it.

eitland2• 16 years ago

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...

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

yuhong• 16 years ago

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

jk• 16 years ago

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

unshift2• 16 years ago

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.

foobarbazoo4• 16 years ago

"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.

unshift2• 16 years ago

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.

gammarator• 16 years ago

If you're Google shareholder and think they don't return a large enough dividend, you can sell your shares.

The market will fix the issue better than lectures.

SeanDav• 16 years ago

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.

btilly7• 16 years ago

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.

joakin• 16 years ago

I thought that this was one insightful article, but after reading your comment I see that not everything is as this person is trying to make us see.

There is no black and white, and not every decision/project can be put in the same sack (even though lots of em are the result of what the article says)

foobarbazoo4• 16 years ago

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• 16 years ago

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.

endtime2• 16 years ago

btilly's not praising anything, and (s)he's not describing wealth destruction. You may want to take your own advice.

foobarbazoo4• 16 years ago

Anyone know why I'm not getting more downvotes? Lots of people have upvoted replies to my comment that disagree with me, and I'm assuming they also downvoted my comment.

Is the downvoting on some kind of logarithmic scale? I've lost something like 27 karma points, so clearly something is happening. Any ideas?

UDPATE: I suppose it could be that people can't read it anymore, and so the downvotes have stopped. Hard to say. My karma has started creeping back up though.

raganwald6• 16 years ago

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.

What areas are those and why do we we think that spending billions with a "b" on Xbox to kill Sony's profits was a more effective defence of those areas than spending those same or fewer billions with a "b" making those areas more competitive?

And more importantly, are any of these areas Sony threatened actual cash cow businesses like Windows or Office?

kenjackson9• 16 years ago

It was really one area. The TV in the living room. MS feared that Sony would end up winning that with the PlayStation and then use their consumer electronics arm to have an integration stranglehold on the living room.

You have to remember that this started back in 2000 (or so). Nobody had a clear vision of Netflix or Roku or Hulu.

I don't think they ever worried that Sony would take Office, but I think the fear was that they would move computing to appliances and take Windows revenue... now that fear is the iPad will do it.

btilly7• 16 years ago

And more importantly, are any of these areas Sony threatened actual cash cow businesses like Windows or Office?

Yes. Microsoft thought that Windows in the consumer marketplace was threatened.

Here was the theory that both companies had then (and maybe still have). A digital convergence between media and computers is inevitable. Whoever controls that platform will see a large growth in business. Whichever gets replaced will see a large drop in business. One of the keys to winding up in control of that platform was to get richer content for your platform. The key to that was to deliver a DRM system that Hollywood liked.

With that in mind take another look at Sony's WebTV, Microsoft's Media Center, the Blu-ray vs HD DVD war, and moves towards DRM from both companies over the last decade. The battle so far has been a draw. WebTV failed to dent the PC market place. Blu-ray won. Consumers don't like DRM, but a certain amount of it has been shoved down our throats anyways.

Incidentally I believe that Sony still thinks this could happen, and this is one reason that they are involved in the Google TV platform.

c23• 16 years ago

If anything MS mis-calculated with XBOX, thinking Sony was the threat in 2000, but the real threat was Apple. Now it's 2010 and the money is not in the living room (and it never was really), it's in mobile.

InclinedPlane• 16 years ago

A false dichotomy, it's in both. Home entertainment in the form of music, tv, and video games is a massive industry. Just because mobile is new and hot doesn't mean it defines the extent of the known business universe. Ignoring a multi-billion dollar market for the sake of intellectual simplicity is the epitome of zealotry.

twp• 16 years ago

> 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.

You make this sweeping statement but do not explain it beyond suggesting that a couple of details may be incorrect. Please provide justification that the central argument of the article is incorrect.

btilly7• 16 years ago

A couple of details??

Go read the article carefully. The "details" I criticized include every significant supporting example offered. The fact that the article got them all wrong should make you suspicious of the grandiose reasoning that they were meant to support.

In short there is no evidence that having cash makes companies stupid. Companies with cash should be doing a certain amount of experimentations with it. They should experiment with projects outside of their core area. And the fact that it isn't obvious to you why they are doing something doesn't mean that they don't have a good reason to do it.

barrkel• 16 years ago

I believe the over-investment in consoles (by MS and others, but amped up in large part because of MS) has largely killed the PC gaming market, and the death of the PC gaming market is what's killing Windows in the consumer computing space; it's the last major "sticky" item keeping people back from switching platforms. And where the consumers go, businesses will soon follow.

raganwald6• 16 years ago

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.

Sherlock• 16 years ago

When i put my manager hat it turns into a nighmare.

If you, hypotetically, are managing a cash cow business, your first mission as a manager is to protect that business. You have to develop long term relationships with clients, spot early all the competition, grow organically your main business and control costs so you don't end in jail when the bad times arrive.

Here comes the first problem. Usually, in the business sense, innovation isn't something 100% new, is something 10-30% new. You know, the car still have 4 wheels but now it comes with a sensor that makes parking easier. The problem appears when your innovations start to compete with your main product. To compatibilize that stuff (think the way MS killed the IE team) requieres very large amounts of quality managment, something that is as scarce as high quality programmers. Think politics (hey, that is MY business!), incentives (you told me to control costs, else I would have done that!) or resistance to change (that will be a failure, it will make us look bad in front of X and Y), etc.

The proposition of the author is one of the classics propositions to sterilize change: to spin off. Make the change independent from the current managers, let them suffer their rigidity... but it may not be the better business decision to spin off somthing that will compete with yourself in 80% of the business.

The article just tries to (mis)analize a management problem without relevant expertise in management and from an investment point of view, and commits the usual mistakes that inexperienced managers make to a level that is doesn't even spark the usual insighful analysis from a engineering POV from the HN crowd.

kenjackson9• 16 years ago

Given their stock buybacks and dividends they may just be doing that...

3am• 16 years ago

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.

raganwald6• 16 years ago

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.

known• 16 years ago

I think Obama should focus on creating overseas jobs for Americans.

david_p• 16 years ago

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.

Aloisius• 16 years ago

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.

kenjackson9• 16 years ago

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.

danshapiro• 16 years ago

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

gawker• 16 years ago

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.

stretchwithme• 16 years ago

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.

AndrewHampton• 16 years ago

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• 16 years ago

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.

Cash Cow Disease: The Cognitive Decline of Microsoft and Google

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