The earnings reports from Microsoft and Google followed the pattern of other tech reports from this quarter—a revenue miss offset at least in part by cost reduction. There’s been a tendency for the Street to look at these two misses and declare a common cause—that both Google and Microsoft have failed to come to terms with mobile. Wrong. There is an element of common-cause here, but it’s related to my point yesterday about a tech industry focused on cutting costs rather than adding value. You go after lower costs, and you succeed but bleed yourself out in the process.
Mobile isn’t a fad, but mobile change is an issue only for so long as it’s “changing”. Advertising is surely impacted by mobile, but underneath all the hype the fact is that the biggest force driving mobile advertising differences is the difference between mobile and sedentary behavior. If I’m out-and-about my use of online resources tends to be tactical, reflecting what my current behavior and goals require. If I’m sitting at my desk or on a sofa, I’m grazing. Mobile also presents less real estate on a screen to display something, and my own research says that users who do a search spend less time looking at the results on mobile devices. You can see how this would impact Google, but it’s not clear what Google could do about it.
Microsoft is the same way. Yes, Microsoft missed the boat with phones and tablets, and yes they probably lost quite a bit of money in potential phone/tablet sales. But had Microsoft jumped on tablets and smartphones day one, would that not have reduced Microsoft’s sale of Windows for PCs even faster, hastened the shift to appliances? Might that not have hurt more over time than waiting and losing that market? Maybe, maybe not, but it shows that you can’t look at any given issue in isolation.
The proximate cause of Microsoft’s problems is the same as it was for Intel. As computing technology improves, we can’t absorb the additional horsepower in the same application of the chips (and OSs) that we had. Twice the performance of a laptop, these days, won’t generate instant refresh. The improved price/performance has to be offset by increased volume, but if there’s no need to refresh then volume reduces. Yes, tablets and smartphones are also hurting, but the shift to appliances and the need to increase unit-volume deployment is what’s driving those new gadgets. And at some point, you fill that niche too. So we look to smart watches, smart glasses, smart piercings for our navels, something we can swallow to convey our biologics automatically to our Facebook status…where does it end? In commoditization. You can never hope to automate everything.
For Google the problem is freeness. Global ad spending is never going to be more than a percent or so of global GDP. We cannot fund an industry, an economy on ads. That Google may struggle with mobile advertising isn’t as significant in the long run as the fact that any ad-sponsored business will hit the wall eventually. For years I’ve said that Amazon is the king of the hill in online companies, because it actually sells stuff. Google’s advertising blitz is in some ways lining Amazon’s pockets, because the consumer who relies on Google to find a product is very likely to go to Amazon to buy it. Google gets a few pennies in ad revenue and Amazon gets the whole retail margin. Even if that margin is fairly low, you all know in your hearts that you are not going to spend more on advertising than on actually tendering the product to the buyer.
For Microsoft, there is neither a way of making PCs sell better nor a way to at this point capture the phone/tablet market. For Google, there is neither a way to get significantly more share of online advertising without kicking off regulatory intervention, nor a way of growing that total market fast enough for its current market share to fuel its growth expectations. Google needs to get people to pay for things. Microsoft needs to be thinking about how the collection of technology that’s being linked to each user can be made into a cloud-facilitated and cooperative behavioral support ecosystem.
So why aren’t they? I think there are three reasons. First, the Street doesn’t want to hear long-term, they want hear this-quarter. Sell like hell today and let tomorrow take care of itself. Well, it has. Second, buyers are now conditioned to think in terms of getting free services and seeing reduced cost as the “benefit” of technology. It’s going to be hard to wean them away from that. Third, the online nature of news these days contributes to an instant-gratification cycle. I get all kinds of requests to describe the workings of IMS and evolved packet core in 500 words. I doubt you could even name the components in that space, so how do we introduce these wonderful new technology options that involve a collection of personal devices and a vast new cloud ecosystem? Easier to say the new phone is “cool” or the service is free. This quarter, we’re seeing that these indulgences aren’t free; the price is pretty high.