Wow! That is Original!

The Kaizer Edition put forth the above slide show that I found amusing. While granted, it was the most original complaint I have seen in some time, however the underlying problem is not original.

Caveat emptor! Buyer beware! Every fad in business is a boon for those that are selling it. Look at the recent fads in accounting alone such as Economic Value Added or Activity Based Costing. Both are reasonable methods and can be applied but do they add value at the end of the day? This is a debate for another day. However, the people that profit most from the methods are the people involved in selling the methods.

Social media is now a booming business for consultants and service providers. These advisers are doing for social media what Stern Stewart & Co. did for EVA. In the end you must know what you are buying and have very specific measurable goals. With any consultant or adviser, you must know better than the adviser what you need from them. If not, you will loose money as the adviser will not be sufficiently targeted to the specific problem at hand.

Yesterday, I eluded to the fact that Microsoft is not rejuvenating its business and wishes to buy Yahoo to expand its revenue. Today, in an article published in PC World, Gartner Analysts Michael Silver and Neil MacDonald have announced the death of Microsoft’s cash cow, the Windows operating system.

For much of the ’90s and up until Windows XP, most users, home and business, looked forward to the newest Windows release. The newest release of Windows would spur buying from corporations and home users alike wishing to get the new advantages offered by newest Microsoft release. For the most part, users have found that Windows XP can meet all their computing needs. It is reasonably stable, has a huge library of free and for-purchase applications and can run fairly quickly on any computer. Innovation has moved from the operating system to the internet where people are now constrained by the speed of their WiFi card and internet connection hardware. The operating system has become irrelevant.

Obviously, Microsoft knows their competative advantage is waining as they have launched a few products such as Microsoft Office Live which is a software-as-a-service model. It is giving away its development tools especially to students in hopes that it will sell the servers on which the development tools require to run business applications. Microsoft is a distant third in internet search and does not own many notable Internet 2.0 properties. Although Apple has seen its “cool” factor drive up its share of the market, the real product that will eliminate Microsoft’s advantages will be Linux, specifically Ubuntu.

Strategy theory tells us that a firm has a competitive advantage if its product is rare and expensive to duplicate. Microsoft’s competitive advantage is being eroded by linux. Operating system software is becoming a commodity. Operating systems are not offering the value they wanted.

Granted, Microsoft’s monopoly and the operating system market will remain some time to come. The direct question is why should Microsoft by Yahoo? I content that it would be smarter for Microsoft to use its cash to build new business units. It must return to the entrepreneurial attitude it had in the mid-19 80s. I do suspect that Microsoft will never have a product like the operating system that will be as pervasive.

The comedy which has become the public merger dance of Yahoo and Microsoft is quite amusing. At first, I could see some benefits for Microsoft to acquire Yahoo but Yahoo’s actions in the past couple of weeks have made me doubt my initial impression.

It is no secret that Microsoft is desperate make up for its mistake of not getting into the search / portal business some years ago. However, the M&A activity brings up the question of organic verse inorganic growth. Which is better to create long term sustainable business?

If Microsoft buys Yahoo, will the whole be stronger than its parts? I doubt that will be the case especially now that Yahoo’s leadership has taken such steps to poison the pot. Even if kept as two distinct business units, which would be financially short-sighted, there are too many culture clashes involved. I contend that Microsoft would be weakened by acquiring Yahoo. It would destroy value in both organisations and leave Microsoft no closer to its goal of having new revenue streams.

Microsoft should take its cash and get back to basics which is inventing software solutions. Microsoft’s engineers invented AJAX which Google then employed to create many applications that have become staples. If I were in Balmer’s shoes, I would be looking to get rid of the dead wood and re-invergate the culture of Microsoft that has become overly bureaucratic according to my friends who work both in Redmond and Charlotte. Microsoft needs to be “cool” again and no company that it buys will give it that culture.

Our economy works on the belief that every person or organisation operating in the market has enough information to access their exposure to risk. The current liquidity crisis that has happened in the United States and has spread to Europe is a direct result of the lack of information or the avoidance of it. Either analysts did not do the proper research or more than likely, managers were comfortable taking bigger risks than their shareholders wished them to assume.

The acceptance of risk by the financial managers has played out in the liquidity crisis. In layman’s terms, the banks have seen their assets depreciate thus they cannot sell them, especially the short-term assets which subsequently limits their cash flow. Roger Ehrenberg, of Information Arbitrage, has written an elequent post about the problems of liquidity in the market. He points out the problems of financial institutions trying to recover from the liquidity crisis where the banks have seen their short term assets loose dramatic market value. The banks then have to borrow to keep enough cash in the system and there is where you see the Federal Reserve and the European central banks giving huge sums of money to the banks to keep enough capital circulating in the system. It is a simple reversal of the mantra, by low sell high.

How does all of this come together to hurt the average joe? If banks do not have enough liquid capital to lend because they do not have the cash flow from the sale of their liquid assets, the system will slow. Frank Shostak gives all of the particulars about the mathematical side of the problem. The Guardian gives a bit more simplistic explanation and brings the problem full circle show that long term liquidity problems for banks can lead to banks becoming insolvent. Of course, to much risk and lack of liquidity to keep bad risk from affecting your business operations was the recipe that caused the Northern Rock PLC devaluation in mid-2007.

As an average joe, I do care about the the liquidity of the banking system. As a businessman, I care greatly about the liquidity of the banking system. Banks that become to risk adverse and narrow their portfolio of instruments will reduce their profit and then expect me, the average joe / businessman to make up the profit shortfall. A higher cost of capital is now wanted but will become a reality as banks try to find ways to replace the sub-prime income they have shunned due to the defaulting of high risk borrowers. In the end, someone is going to pay for the bank manager’s poor management and that person either way is going to be me.

The business side of the music industry is undergoing a shift in the way it can collect revenue for its product. Over the past decade, this has been evidenced by falling music media sales. To protect their revenue stream, the RIAA has been litigious in confronting those who use its members intellectual capital for free. I do not fault the RIAA or its members for wishing to protect their intellectual property but they will be doing so to the detriment of their future earnings.

Gone is the day when music was something to be cherished the the medium which held it coveted. The days of record collections or compact disc walls are coming to a close. Technology allows a person to carry every song in their library on one device the size of a business card holder. That intangibility has created a temporary feeling about music. The listener, if no longer pleased with the song, simple deletes it from his device.

I believe that the recording industry must change or become irrelevant however, music labels such as Warner Music are taking interesting steps to protect their decades old business model. Case in point, Warner has hired Bronfman to push forward an agenda to have fees collected from the whole of the United States’ internet user base.  This idea is the quickest way for the recording industry to push away customers and destroy what value they have left.

The original ideas are those by recording artists such as Radiohead and The Charlatans have realised people wish to consume the music experience and the loss leader to attract those customers is free recorded music.  Musicians that continue to hire the recording labels as intermediaries due to their distribution channel abilities will pay a huge percentage of possible income for the peace of mind of having some upfront money.  If the musicians take a bit of the risk and more control of their product, with the proper marketing through social media, they will have more income than by using the model the RIAA is trying to protect.

Of course, the very popular pop music stars will see a drop in revenue because they will have to do more work than they currently do in regards to promotion.  However, I think in general most musicians would have stronger businesses and demand for their music should they move to the emerging business model.
In the end, I know as a consumer, I will not be willing to pay a monthly fee to anyone simply to support a business model which I may or may not choose to patronise.

Recent reports of HBO and Showtime moving to offering free on-line access to its premium shows raises an interesting question. That question is: if you give away your core product and do not have a way to monetize it, how do you remain in business? Advertisement is not the core competence of HBO or Showtime even though both business until are owned by media companies that use an interruption model to raise revenue.

What does HBO and Showtime have to gain by giving away their premium content which people are willing to pay $10 a month to receive in addition to buying the shows on DVD? A possibility is the extension of their products to a new audience which previously was aware of their premium content. The premium content is already free on most peer-to-peer networks so the content is freely available. This move is no way limiting those that are already tarnishing the premuim content business model. Will the experience allow for advertisement?

Content is set to change as technology will for marketers to be much more unique when addressing customers. Digital video recorders and downloadable content will make the interruption model of advertising moot. I contend that marketers will have to work closely with the studios to create stories that have the opportunity for marketing designed into them. This will go way beyond product placement but will become central parts of the plot. In the mean time, logos in the corners of the screens will become even more common as companies sponsor a program. However, the true original marketer will have entertainment that is plot based and high quality that will communicate the marketing message yet be long term.