Mad Dog 21/21: Phoenix Envy
November 12, 2018 Hesh Wiener
IBM is understandably concerned that its annual revenue, likely to be about $80 billion this year, is 25 percent less than it was in 2011, when it reached nearly $107 billion. The company’s revenue increased during the first two quarters of 2018 after falling every quarter for five and a half years, but its falling fortunes have discouraged customers, employees, and investors. Apple, the largest technology company in the world, boasts revenue that is three times that of IBM. It nearly failed in 1997, but Microsoft helped it rise from its own ashes like the Phoenix.
The way Microsoft saved Apple may provide clues to IBM. Basically, Apple got three key boosts: $150 million for a bloc of nonvoting shares, a five-year commitment by Microsoft to provide Office software for the Mac family of computers, and a patent licensing agreement that has kept the two companies from batting each other due to overlapping developments. In return, Microsoft got relief from an annoying intellectual property suit filed by Apple. Apple had claimed that Microsoft had copied the look and feel of its software. The suit compounded the costly legal headache Microsoft faced as it battled browser developer Netscape for influence and simultaneously tried to fend off government attacks on its behavior in the browser wars.
In the end, both Apple and Microsoft got a lot of what they wanted. Each was able to embark on an improved course, and today, along with Google, Amazon, and a few other tech powerhouses, they enjoy strong positions in the technology segment.
Key to the Apple resurrection was the leadership of Steve Jobs. It was Jobs more than the Apple company that enabled Apple to reverse a number of bad decisions made by John Sculley, who had been backed by the Apple board of directors. Tossed out of Apple, Jobs was exiled to the computer company Next, where he shaped the development of some very attractive technologies. When Apple’s board, facing the demise of the company, brought Jobs back, they had little choice but to accept Jobs’ demands, including the ingestion of Next and its software.
When Jobs returned, he not only repaired or replaced portions of Apple that were in severe difficulty. He reinvigorated the company’s development groups, eventually leading Apple to invent and then regularly improve its iconic products: the iPod, the Mac, the iPad, and above all else the iPhone. Jobs was not alone. Apple had a superior team of engineers, scientists, designers, and programmers. But it had top notch people when Jobs was elsewhere, and they did not bring Apple success. Jobs more than any other executive at Apple has been credited with inspiring, motivating, and guiding the company’s technical talent.
IBM’s top executive, Ginny Rometty, has the same role today as Jobs had in the late 1990s. During her tenure as IBM’s boss, which began in 2012, she has done a very good job updating the strategy put in place by Big Blue’s outstanding former chief executives, Lou Gerstner and his protégé, Sam Palmisano. But the culture of IBM is much more resistant to change than was Apple’s in 1997. In addition, Steve Jobs understood his limitations. He complemented his own palette of gifts with the skills of an extraordinary second in command, Tim Cook. Cook kept a low profile until Jobs was severely ill, at which time he became quite visible. He quietly but effectively orchestrated the manufacturing and distribution arrangements that enabled Apple to grow into the powerhouse it is today.
IBM, by contrast, has been effective at shedding operations it feels are inconsistent with Rometty’s new goals, but not nearly as good at creating new products and organizing the business structures it takes to make the products winners in the relentlessly competitive world of technology goods and services.
On the contrary, IBM doesn’t seem to have the kinds of offerings that might become the enterprise market’s equivalent of the iPhone or iPad. Watson, the most prominent brand developed by IBM under Rometty, isn’t sharply focused. It is not offered by example in many locations where prospective customers can experience its capabilities. It can’t be defined in a relatively simple way. In short, Watson is not like the iPod, iPad, and iPhone made available for inspection and of course purchase in Apple stores. Watson got a lot of exposure in 2011 when it became a champion player of the television game Jeopardy. Now, that achievement seems quite old and, for lack of a follow-on achievement, quite stale. Since that time, IBM has not found a way to put in the hands of customers and prospects a Watson example that can serve as an invitation and introduction.
Critics of Apple may gripe that it, too, has been less inventive than it was in the past. The company has not fielded any important new gadgets since the iPhone, and it hasn’t got a lot of people jumping at its efforts to penetrate the television and multimedia appliance field. Its iPhone boasts Siri, a voice-activated AI service that competes with Amazon’s Alexa, Google’s voice system and the runt of that litter, Microsoft’s Cortana audio assistant. Siri is widely used because it is a feature of the popular iPhone, but it is not so appealing that it has been cited as a stimulus of customer migration to iPhone; Android phone users seem perfectly happy to stay with Android and the Okay Google voice response system. Nevertheless, Google’s voice system has similarly failed as a migration magnet. For now, Google and Apple AI voice systems are at a standoff. Voice command support is one important example of the way Apple, by repeatedly refreshing its products, has managed to keep its customers happy and to increase product sales year after year.
IBM continually develops and deploys enhancements to its technologies, but it is for the most part unable to make the kind of market impact frequently achieved by other top technology companies, notably Apple but also Google, Microsoft, Amazon, Facebook, Twitter, and others. A key reason is that IBM has not found a way to connect its innovative efforts, such as Watson, to the many people that its offerings might affect. Even when IBM’s efforts alter a common, recurring experience, such as credit transaction processing, Big Blue is unable to get the notice, let alone acclaim, that it might. By contrast, the same audience is generally familiar with at least two or three AI voice response systems, uses one of the map and navigation systems that both directly address end user needs and also underlie apps that add value and utility to location data.
When IBM began promoting Watson as a Jeopardy contender, it looked like there would soon be some kind of Big Blue breakthrough. IBM seemed poised to regain the widespread familiarity it had long ago achieved (and abandoned) as a result of its success making typewriters. The IBM typewriter enjoyed ubiquity, and the company impressed the public with superior maintenance services and an army of dignified personnel in suit and tie. When IBM positioned the PC as the successor to the typewriter, it managed to lose the cachet it had formerly held. IBM never controlled the PC; instead that power was lost to a number of software vendors. Ultimately, the cultural role of the typewriter ended up largely in the hands of Microsoft, at least until the Internet along with search and browsing technologies put Google in the driver’s seat.
IBM’s corporate imagination failed, and the company lost the valuable social and economic mindshare it had enjoyed during the typewriter era. But then, for reasons that have never emerged, Big Blue achieved the extraordinary with Watson playing Jeopardy. IBM became alluring again, enjoying a bit of the magic it had once taken for granted. The company’s management saw that its Watson publicity stunt could be a springboard, a way to propel itself into new activities, renewed vitality and, if it could execute as well as it could dream, a way to renew growth and improved profitably.
The company studied itself and determined that some of its ongoing operations and other endeavors it could undertake might give it fresh opportunities. It called this set of activities “strategic imperatives.” And it not only gave them emphasis, it broke out these portions of its empire as it produced financial reports and various projections. The areas of effort it called strategic included cloud computing, analytic software and services, mobile information technology and security. Large legacy activities, including the manufacture of hardware and the provision of tradition services, remained important and contributed quite a bit to the company’s intake and income, but were seen as aspects of IBM that would be unlikely to provide the dynamic impact expected to come from “strategic imperatives.”
Now it turns out that some legacy activities, particularly mainframe sales, are currently giving IBM a big financial lift. Some of the things stimulated by the ongoing mainframe upgrade cycle include software and services that are strategic. At IBM, with its vast heritage of customer relationships and technologies, just about every significant movement includes both old and new. Moreover, it is still unclear whether IBM could ever untangle the legacy stuff from the strategic, and it is not at all obvious why IBM might want to do this. It would not surprise some observers if IBM reflected on the way its embracing strategic imperatives was positioned as an antithesis to the company’s legacy operations, ultimately finding a way to promote what it believes are emerging fields of opportunity without denigrating continuing legacy activities. If it doesn’t rethink the way it presents itself, it may risk its relationship with large, long-term customers whose recurring investments in IBM’s proprietary legacy systems still help pay the rent. IBM might have to acknowledge that its future may arise from the ashes of its prior legacy successes, with or without Watson as a midwife.