Sunday, October 22, 2006

When Not to Listen to Consultants


Apple Should License the Mac to Dell


That’s the headline in an email which recently hit my inbox, and I am not making it up.

The email came from a consulting firm (Gartner Invest) that provides its insights, at a price, to the outside world.

The purported logic behind this notion—that the world’s foremost consumer-empowering computer maker on the planet (to whit, Apple) should let the world’s foremost shover-of-cheap-boxes-out-the-door (to whit, Dell) slap its now-sorry name on a box filled with the former’s crown jewels—is summarized in the email as follows:

We [Gartner Invest] do not think that AAPL can significantly increase market share with the current retail distribution and product pricing strategy. However, with the right partner, we think AAPL could grow Macintosh market share to 10%, 15% or even 20%. DELL makes sense as… a distributor of technology largely created by INTC. In many ways, DELL exists to sell INTC's ideas, and today, INTC's best idea is AAPL’s Macintosh.


For what it’s worth, I happen to think Gartner Invest’s basic idea does—in theory—make a modest theoretical amount of theoretical sense.

The basic idea being that if Apple really wants its slick, user-friendly, digitally-fluent operating system to take its rightful place alongside the non-slick, user-defying, digitally-deficient-but-monopoly-enjoying counterpart provided by Microsoft, Apple can jump-start the market-share gains by shucking the Apple-Only manufacturing model and licensing the operating system to a third-party—in this case Dell—that could churn out low-cost “Apple Inside” boxes to the masses who otherwise can't afford the extra bucks Apple’s tightly integrated, lower-volume, higher-cost model now requires.

In theory, what Dell brings to the table is a low-cost manufacturing and distribution system that would vastly accelerate what appears to some observers—myself included—to be an unstoppable gain in market share Apple will enjoy at Microsoft’s expense as the iPod generation matures into Mac-buying college students, engineers, artists, businesspersons, entrepreneurs, housewives, househusbands, and just general digitally-oriented human beings.

Of course, this is a “theory,” and the chief problem with “theories” is they are frequently put forth by people whose well-being does not depend on the actual real-world success of those theories.

I’m sure there’s a Warren Buffett maxim covering this topic, but what instead comes to mind is a book title once proposed by Comedian Steven Wright:

“Freud: The story of insane old man with way too much influence.”

Now, the theory in this case comes not from Sigmund Freud but from a special breed of theoreticians—technology consultants—whose specialty is something called “White Papers.”

For those not familiar with “White Papers,” they are grand, future-looking, acronym-crammed, flight-of-fancy strategy pieces that excite people whose job it is to read them but otherwise cause the casual reader’s eyes to roll up into the back of the head moments before he or she swallows his or her tongue and passes out on the floor.

In fact, I have argued before (see Bill's Hideaway at
http://jeffmatthewsisnotmakingthisup.blogspot.com/2005/03/bills-hideaway.html) that the main source of Microsoft’s current problems stem from the fact that Bill Gates spends two weeks each year reading White Papers alone in a cabin by a lake thinking great thoughts about technology instead of hanging around a Starbucks watching how people actually use technology.

Since it is entrepreneurs—Gates included, at least during the early days of the PC—who actually accomplish things such as, oh, say, Google or the iPod or YouTube, as opposed to theoreticians; and since entrepreneurs are therefore by definition always—without exception—too busy actually accomplishing things to be writing “White Papers” about what other people should be doing, the value of “White Papers” has never been entirely clear to me.

Microsoft has, in the course of the last decade, accomplished (in the realm of cool new technology) the following:

1. Acquired (for $400 million) Hotmail, the pioneering free email service now dying a slow death at the hands of competing free email services that actually work well, such as Google Mail, which cost—I’m guessing—maybe a couple million bucks worth of programmers’ time to create.

2. Acquired (for $425 million) Web TV Networks, which according to a press release at the time “delivers the Net to ordinary TVs.” Unfortunately, the world almost immediately went precisely 180 degrees the opposite way—seeking delivery of ordinary TV to the Net. Which is precisely why Google bought YouTube for $1.6 billion this month.

3. Lost the paid-search market to Google and Yahoo! by letting Yahoo! buy paid-search pioneer Overture out from under its nose. Overture’s largest customer at the time was none other than…Microsoft.

4. Missed out on downloadable music—this is not a flourish or exaggeration—almost entirely.

Whether or not each of these four major failures are due strictly to White Papers alone, I think it's fair to conclude the following:


White Papers = Bad Ideas. Case closed.

Now, consultants as a class are not entirely to blame here.

First of all, the “White Papers” Gates reads are actually prepared by Microsoft people, not outside consultants.

Second, there are cases in which consultants have in fact added tremendous value to a company—and no, I am not making that up.

The example that comes most readily to mind is when Best Buy turned from a typical commission-driven electronics retailer into a Wall Street Fave some years back after bringing in some smart-alecks from McKinsey & Company (or maybe it was Bain), whose first piece of advice was to stop using music compact disks as a loss-leader, which helped boost margins overnight, and otherwise re-engineered the company into the Best Buy that dominates electronics retailing today.

In fact, consultants exist for the good and for the bad, and in this case what we are considering is a recommendation that Apple start licensing Mac hardware to other computer companies—specifically Dell. So let's consider it.

For starters, this is not a new idea. Wall Street’s Finest have been calling on Apple to “open” the Mac system for years, particularly throughout Microsoft’s ascent to the top of the computer software pyramid thanks to its own hardware-free model.

Furthermore, Apple tried it already, and Steve Jobs—like a nervous parent who instantly regrets dropping off an only child at a child care center run by ex-cons—quickly backed out of the program.

Also, and not for nothing, Apple is the leader in bringing digital computing tools to regular consumers—just in time for the digital revolution now upending analog business models from medical radiology to movie distribution. It doesn’t, in my view, need to do anything different to achieve a much bigger share of the PC market than it had during the era of self-contained, spreadsheet-laden desktops besides keep innovating.

Another thing the consultants may have forgotten: Apple doesn’t manufacture its own gear in the first place. Order an iPod from the Apple online store and it comes straight from the Chinese contract manufacturer via Federal Express, not from a distribution center in Cupertino.

Thus, the advantage of sticking another brand name on the theoretically cheaper box isn’t entirely clear: Dell’s operating margin would become Apple’s cost of goods sold.

Finally, even assuming Apple changed its mind about licensing software and decided to partner with a hardware maker like Dell who could, theoretically, get a lower-cost version of the Mac out into the world, why would Steve Jobs want to let Dell’s own deteriorating product quality and no-longer-award-winning customer service turn off as many potential Mac users as it might add?


After all, even if Toyota could sell more cars by licensing the Lexus brand to Chevy, would it ever?


Jeff Matthews
I Am Not Making This Up



P.S. For some laugh-out-loud commentary on the same topic, see Eric Savitz's excellent "Tech Trader" blog in Barron's Online:

http://blogs.barrons.com/techtraderdaily/2006/10/20/gartner-apple-should-license-hardware-to-dell-stick-to-software/

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

8 comments:

BelowTheCrowd said...
This comment has been removed by a blog administrator.
the management said...

It is fairly solid generalisation that people who habitually refer to companies by the ticker symbols of their stocks because they think it looks cool, are rarely worth listening to, whether they are talking about the company or about the stock (assuming that they understand the two are separate entities, which cannot always be assumed)

Jeff Matthews said...

"Below the Crowd" had some great observations on the value of consultants and how the can be motivated to recommend a product...but they were a little strong, even for this site.

I'd love to see him post it again without that word in there.

namazu said...

At least 2 reasons this theoretical idea is worse than it used to be (theoretically): 1) with component costs down and diminishing returns to incremental processing speed, the cost of owning hardware is low enough that more people are willing to pay up for better design; 2) Apple is gaining share right now without taking the associated risks of licensing the operating system.

Aaron Koral said...

to the management:

Isn't it possible that someone refers to companies by ticker symbols only because they like to save time when typing, as opposed to typing out the full name of a company, and still know the difference between the company and its stock? Just asking...

BelowTheCrowd said...

Jeff,

As I don't keep copies of my posts, I can't be sure exactly which word you are referring to, but I think I can guess...

--------------------

I am in the position of having been on both sides of Garter. As a product manager in the software biz, I was a customer of the consulting services they offer to vendors. As IT management on the "buy side," I am and have been a customer of the consulting, advisory and research services they offer to the business customers of the very same vendors. My experience with Gartner, Delphi (who they purchased), Forrester, IDC and the others suggests that none of these companies is impartial, and that any "white papers," speeches at conferences or other materials provided by their analysts must be taken with a huge grain of salt.

The simple truth about all these companies is that they sell services to both sides of every IT transaction and do so in a self-serving manner. The vendors who spend the most on "consulting fees" to Gartner and the others tend to be the ones whose products are most often mentioned and recommended in white papers, speeches, articles and other public information generated by those firms. As a result, you see Gartner analysts go against the interests of their top vendor-clients about as often as you see Wall Street's Finest put "sell" ratings on their companies' investment banking clients.

Had I seen this kind of thing only once or twice, I'd be content to write it off as an abberation, but I've seen it consistently, both as a "buy-side" and a "sell-side" guy in IT.

A good example is the startup software company I worked for shortly before the boom went to bust in 2001. At the time we were one of five companies in our space, the best capitalized of the bunch, and the only one which had development partnerships with two major software companies. We were a bit slower in getting to the market, but arrived with an unparallelled featureset to go along with our strong partnerships and quickly became the #2 in revenues (not that that was saying much).

At one of the first conferences to address our space, the software analyst who claimed to be the leading expert (I'll leave out which of the firms he worked for) didn't even mention us when discussing the competitive landscape. When, during the Q&A, he was asked whether any of the companies in our niche had major software company deals, his response was that "he didn't know of any."

So we did the only thing we couldd. We hired his firm for a "consulting engagement" with us, to "learn how to better position our company." We spent a day or so with that same analyst, showed him some demos (the same ones he could have seen on our website), introduced him to the CEO and a few other key people, and provided him with our own internal "white paper" (it was written by me and two other marketing guys) which outlined our own highly self-promotional view of the market and our company's place in it.

Within a few weeks, the analyst suddenly "discovered" us, published his own "white paper" that seemed eerily similar to the one we had given him and began to mention our name to the press. At the next conference he spoke at, he highlighted us as the "leading company in the field."

Shortly thereafter the bubble popped and I moved back to the tech "buy side," where I have since made regular efforts wean my customers and employers away from overpriced Gartner, Forrester, IDC and similar subscriptions. My feeling is that nobody should pay to read what is essentially other companies' advertising and that it should be read with extreme caution even if it's free.

-btc

VivaldiCO said...

A "white paper" in my experience is an analysis of the pros and cons of a particular proposition -- including, at least as far as a model can tell you, whether the idea is implementable or not -- and concluding with a recommendation. How does that differ from any article in a publication such as this one?

the management said...

Aaron - yep, but that's not the way to bet. Nine times out of ten, they're trying to look cool. In a throwaway email or blog post I might stretch a point, but in a white paper, not so much. I had to slap someone down yesterday for doing this in a context when it really mattered (the stock ticker referred to a holding company, not the subsidiary that we were actually talking about).