“Don’t go against cash!” Why not?
May 13th, 2008A conversation with a friend last night prompted me to write this post. We were having a surprisingly serious conversation over at the Bitter End waiting for Oz Noy to set up (for those of you into avant-garde music, he’s a sick guitar player) about the demise of Microsoft. I told him that Microsoft has been dead to me for five years already and his response was: “don’t go against cash!”.
Actually, “Don’t go against cash” is such well established motto that it has become a wild card in business conversations. I never understood it though: to me a sound business model supersedes cash. Of course, cash and a good business model are tightly related, and cash is in most instances the tangible proof of a prosperous business. Makes sense but only to a certain point…
Cash heavy companies usually combine strong profits and high market cap valuation. In other words, the market trusts that they will keep making money – actually what investors value most is a company’s ability to predict profits (a whole other discussion). For business as usual, this is a great way to look at a company, screen out underperformers, and reward rock stars.
Clayton Christensen from HBS explains it best in his Innovator’s Dilemma that this very process rewarding market leaders is at the core of the inability for incumbents to bring to market radical innovations (disruptive innovations in Christensen’s terms) or perform business model shifts.
In the context of a disruptive market (defined as a change of paradigm due to social, policy or technology shift), cash actually stands in the way of a company’s very ability to change gear to survive.
Back to Microsoft. Here is a company that has everything to succeed: money, talent, unparalleled customer base, and an incredible wealth of projects whether developed internally or acquired from promising startups. Yet, they have been falling behind Google pretty much on every initiative where the two compete (maybe with the exception of IM). Why is that?
When MS launches a new project, they have to answer two questions before it hits the market: 1- is this compatible other MS products? 2- how does this project impact MS’ business model?
The first question results in a painful and lengthy development cycle, explaining the fact that they often lag behind. It also contributes cluttering a new product with bells and whistles before the core concept can even be tested by the market. See Google Labs for a very different way to launch new products.
The second question has a much deeper impact on Microsoft’s sustainability as it leads to most initiatives being shelved before getting released. Microsoft operates and makes money through a licensing model. New projects that don’t serve that model will be deprioritized and those undermining it will be killed.
Google without the same legacy can launch into bold new projects, offering free apps like Google docs, progressively making MS offerings (from Windows to the office suite) less and less relevant.
Meanwhile, Microsoft is stuck between a rock and a hard place, unable to compete on the same turf with Google without putting their whole revenue model on the line, thus getting penalized by the investment community, thus stripped from their cash.