Upstream vs. downstream complementarities in Apple-IBM deal

Despite coverage to the contrary, Tuesday's announcement that IBM will help sell Apple products to enterprise customers is long overdue and merely the latest example of cooperation between the firms spanning more than two decades.

The new thing is that — unlike previous deals — the cooperation announced by Apple CEO Tim Cook and IBM CEO Virginia Rometty reflects downstream complementarities rather than upstream ones.

In their seminal book Co-opetition, Brandenburger and Nalebuff defined complementarity between products X and Y as meaning that if someone bought X, then Y would be more valuable (and vice versa). This basic principle is behind nearly any positive-sum (“win-win”) strategic alliance today.

Yes, Apple’s early successes began to fade when IBM introduced its PC in August 1981, and its 1984 Macintosh introduction was aimed squarely at Big Blue and its user-unfriendly DOS PC. But the two companies have been cooperating far longer than they competed, largely through their cooperation in upstream components.

The big cooperation surprise came not in July 2014 but October 1991. Then Apple CEO John Sculley and IBM President Jack Kuehler announced that Apple would be using PowerPC CPUs based on IBM's proprietary RISC chips (Motorola was the third partner in the alliance).

At the same time, Apple and IBM launched two Silicon Valley-based software joint ventures based on a common rivalry with Microsoft. Taligent nearly killed Apple (and thus helped me find a new career) by siphoning off Apple’s top engineers to work on an operating system that it never shipped. Kaleida was intended to solve CD-ROM scripting challenges, but was swept aside by the emergence of Java and the commercial Internet.

A few years later — at the depth of Apple’s self-inflicted slide towards irrelevance — IBM helped Apple with problems creating hardware in its fastest-growing and most profitable segment, laptop computers. It sold its unique laptop hard disk to Apple (but not to HP) and also built the 1997 PowerBook 2400c for Apple at its IBM Japan division.

Fast forward to the 21st century. IBM could have begun selling Apple's hardware at any point since it divested its PC division in 2005. This is exactly why the company exited the market segment that it had created 24 years earlier: to get rid of a low-margin commodity hardware business and give it more flexibility to sell higher-margin integration services to large corporations.

The question is: what took them so long? The iPad came out in April 2010 and Steve Jobs has been gone for nearly three years. Ever since the Macintosh (1984) and particularly the LaserWriter (1985), Apple has been making products that would appeal to large companies, but lacked the sales, support and integration capabilities needed to address their customer’s complete requirements. (Only us Mac graybeards remember the 1988 Apple/DEC alliance that was intended to address these problems.)

Today, the two companies are not just looking over their shoulders at Microsoft, but also Google as well. The iPhone and iPad have already been widely adopted in big companies — spawning the IT acronym BYOD — but the new alliance should (like other successful downstream complementaries) generate incremental revenue growth for both parties.

However, there was one glaring omission in the latest Apple-IBM collaboration announcement: cloud computing. Apple has a retail presence with its true believers that is central to its integration strategies, but lacks the scale to compete with the industry leaders, Amazon and Google. IBM is their major competitor as a wholesale supplier, but (unlike Amazon and Google) does not compete with Apple’s retail offerings.

In the long run, Apple will unable to go it alone in cloud computing. We’ve all seen the risks that companies take relying on Amazon (cf. Netflix) or Google (cf. Samsung) as a supplier who is also a competitor. As in the PowerPC days, Apple should not only be leveraging IBM’s scale but working to attract others to its platform as the last honest broker in cloud computing.

After 30 years, is the IBM PC reign ending?

Cross-posted from the IT History Society blog.

Thirty years ago, the International Business Machines company introduced its first general-purpose personal computer, the 5150. (The IBM 5100 and DisplayWriter were also personal computing devices, but most people don’t count them as a first.)

Although I have written about August 1981, I would have forgotten about the anniversary except my friend Tom Pfaeffle linked a BBC article on his Facebook account. Most significantly, the article cited a blog posting by Mark Dean, an IBM executive who was there at the beginning:

It’s amazing to me to think that August 12 marks the 30th anniversary of the IBM Personal Computer. The announcement helped launch a phenomenon that changed the way we work, play and communicate. Little did we expect to create an industry that ultimately peaked at more than 300 million unit sales per year. I’m proud that I was one of a dozen IBM engineers who designed the first machine and was fortunate to have lead subsequent IBM PC designs through the 1980s.

What’s grabbing the attention is Dean’s claim that we’re already in the post-PC era:

It may be odd for me to say this, but I’m also proud IBM decided to leave the personal computer business in 2005, selling our PC division to Lenovo. While many in the tech industry questioned IBM’s decision to exit the business at the time, it’s now clear that our company was in the vanguard of the post-PC era.

I, personally, have moved beyond the PC as well. My primary computer now is a tablet. When I helped design the PC, I didn’t think I’d live long enough to witness its decline. But, while PCs will continue to be much-used devices, they’re no longer at the leading edge of computing. They’re going the way of the vacuum tube, typewriter, vinyl records, CRT and incandescent light bulbs.

The remainder of the posting goes on to discuss IBM’s success in the “post-PC era” and his own career trajectory from IBM Research to become CTO for IBM’s Middle East and Africa operations in Dubai.

I wonder if the claims of the post-PC era are a bit premature. I own a tablet too, but I’m writing this on a (Mac) personal computer because it has a bigger screen and a keyboard. It’s possible that we’re heading to the post-Windows, post-Mac era — one where the personal computers have a slightly different form factor but a new (smartphone or tablet) OS.

Still, as Tim Bresnahan and Shane Greenstein established in the late 20th century, computing platforms decline (or die) only when replaced another platform. So the idea that the PC will be replaced by something new is nothing new, but just another round of Schumpeterian revolution that claimed minicomputers and workstations — not to mention the mainframe businesses of the BUNCH.

Perils of diversification

Thursday was the first of my honors student presentations to their industry sponsors. This team — Kevin Dines, David Hsu, Clifford Jung and Vanessa Silveira — gave the concluding presentation of their three-month consulting project to researchers at IBM’s Almaden Research Center.

The student project was to find an eventual market for a research project by the PhD researchers. To do so, their project required interviewing government agencies and associated private firms such as real estate developers and urban planning consultants.

When for their project they contacted the various consultants on behalf of — large and small — the initial reaction was almost always “IBM is a potential competitor.” The scientists were amused at this, but if you put “urban planning consulting” into Google, you get an IBM-sponsored link:

I think IBMers would see the company as a supplier of IT and integration services to these consultants. However, as a multinational that increasingly supplies everything to everyone, it’s understandable that existing firms would worry that sharing information would enable further diversification or forward integration.

Oracle has spent the last 20 years buying some downstream customers and competing with others. Its market footprint in databases — approaching an monopsony — allows it to dictate terms or at least force these customer-partners to the table, even for big companies like HP, IBM or SAP.

Still, it makes sense that seeing everything as your potential market would cause everyone to see you as a potential competitor. This is not a risk of diversification we normally teach in strategy, although it’s commonly mentioned as a risk for upstream or downstream diversification.

Aside: as with my previous visits to ARC, the facility strikes me as a gorgeous site where the employees are as well treated as anywhere in any company in the world. As I tell my students, it’s always best to work for a high-margin company.

Note: This was ready to post Thursday afternoon, but posting was delayed due to Google’s 20-hour failure in running Blogger.

Commodity companies, commodity budgets

The WSJ Wednesday posted an interesting article (and also snippets of video) from its interview with IBM CEO Sam Palmisano. The videotape

The article reported:

Palmisano said he doesn't worry about companies such as H-P that have slashed their investments in core technologies and need to make expensive acquisitions to keep up.

"H-P used to be a very inventive company," Mr. Palmisano said in an interview at a Wall Street Journal event on Tuesday. IBM would never have paid what H-P did to buy data-storage provider 3PAR Inc., he said. "[H-P] had no choice," said Mr. Palmisano. "Hurd cut out all the research and development."

Unfortunately, the WSJ doesn’t actually share the video of Palmisano making these points. However, in the opening part of the video clip, Palmisano says:

If you look at the core business of a Dell or HP, it’s an electronics distribution channel for Microsoft, Intel, and storage guys and everybody else. There's nothing wrong with that, we just don’t focus on it as much.

To his credit, reporter Spencer Ante quantifies the impact of HP’s brutal budget cuts as part of its shift from innovator to low-cost commodity player:

Mr. [Mark] Hurd cut H-P's research and development budget to $2.8 billion, or 2.5% of H-P's revenue, in its last fiscal year from $3.5 billion, or 4% of revenue, in 2005, when he took over as CEO. Under Mr. Palmisano, IBM has continued to invest about 6% of its revenue in R&D, including $5.8 billion last year.

Alas, the interview also retreads old ground as Palmisano calls PCs a dying industry. His comments are classic sour grapes: IBM dumped PCs because it proved itself unable to compete in that business, while HP has become the market leader. (Neither HP nor IBM has made a transition from PCs to smartphones or tablets, but unlike IBM HP has a plausible entree with its Palm acquisition.)
If the article is interesting and informative, the video snippets are neither. It’s painful to watch the actual news (i.e. comments by a leading tech exec) with insipid commentary by WSJ staffers.

If the WSJ is going to produce video clips, they need to learn PBS production values and hire some broadcasting professionals. Its AllThings D spinoff has done a great job packaging interviews from its annual conference, so perhaps it can provide the WSJ with necessary expertise.

IBM buying SPSS, but why now?

IBM is spending $1.2b to buy Chicago-based SPSS, one of the three major statistics and data mining software companies. The cash offer is a 42% premium to its previous close and 2.6x anticipated revenues.

Most academics know SPSS for its eponymous statistics software that is the standard for psychologists and other social scientists. Its main rivals in this area are SAS Institute — used by high-end data miners — and StataCorp, the favorite of economists. On a personal note, I dumped SPSS in 1996 when they abandoned the Mac (causing me to establish the MacStats web page), switching to Stata which I found more intuitive and easier to use.

SPSS has been following SAS into the data analytics segment for business since that’s a much bigger market than selling scientists statistics software. Personally, I think SAS is a tough competitor since they created this market and with 2008 revenues of $2.2b, are 5x as big as SPSS. More importantly, the privately held Cary, NC company has an admirable corporate culture that Google once studied to understand how to motivate and empower technical professionals.

IBM has a mixed record on software. They have a very successful software arm, and so (unlike Intel spending $884m to buy WindRiver) they understand the creation and sale of software. On the other hand, IBM’s largest software acquisition, spending $3.5b in 1995 to buy Lotus Development (instead of Apple) that turned out to be a declining business.

SPSS will have formidable competitors. SAS has rejected acquisition feelers with CEO/founder Jim Goodnight growling that “IBM and SAP acquire because they're so stagnant they're unable to grow themselves.”

More seriously, SPSS has a major open source competitor that’s gaining favor here among Silicon Valley dataminers (including at Google). The R software package was begun in 1996 as an open source knock-off to S from Bell Labs, and with nearly 2000 donated extensions, has the most vibrant third party community of any data analytics package. The popularity of the R platform has exploded in the past 4 or 5 years, and certainly SPSS must be feeling the competition.

So is this another example of IBM (as with Lotus) buying a software business too late? Or (also as with Lotus) is the value of integrating and aggregating the SPSS solutions with its other software and services create a value for the SPSS software that would not be available to a stand-alone company?

Sun runs into IBM's arms

The Wall Street Journal and the New York Times reports this morning that IBM is in talks to buy Sun Microsystems. Since the end of the dot-com bubble, the once-great company has fallen on hard times.

Sun twice was able to pull off a really clever positioning. First, they were the king of open — the leader of the Unix-based open systems movement. Unlike their competitors, they didn’t dabble in Unix but bet the whole company on it — and were particularly effective in using it to beat the once-great Apollo into waiting arms of HP. (This is the subject of a well-known academic paper by Raghu Garud and Arun Kumaraswamy). They also once had a large standardization organization, headed by my friend Carl Cargill, that played the standards game as well as anyone.

After that, Sun rode the dot-com wave better than anyone. If you were a VC-backed Internet startup in the 1990s, the first check with the VC money was to buy the Sun server so that you’d have something to deploy a production-quality 7/24 service. However, Intel spent hundreds of millions to create OSDL and target Sun’s core business with commodity Lintel boxes, and today such servers are more than adequate for most commercial purposes.

So with both the end of Internet growth and the commodization of Unix by Linux, Sun has been casting about for a third strategy. For almost a decade, Sun has been ambivalent about the open source tide that is ending its proprietary (if open standard) source of software differentiation.

It’s made big gambles (like a $1b on buying MySQL) to become more entrepreneurial and more aligned to open source, but the large established bureaucracy has rejected such outside influences. Despite ongoing layoffs, collapsing share prices and predictions of eventual failure, CEO Jonathan Schwartz has been no more effective than founder Scott McNealy at fundamentally transforming Sun into a lean, mean fighting machine.

The WSJ reports that the core turnaround strategy has changed:

In recent months, Sun has approached a number of large tech companies in the hopes of being acquired, said people familiar with the matter. The world's largest tech company, Hewlett-Packard Co., declined the offer, said a person briefed on the matter. A spokesman for Dell Inc., the world's third-largest server maker, declined to comment.

IBM seems like a good fit for Sun: if anyone has been able in the past decade to run an effective large IT company, IBM has. And now that Sun is a shell of their former greatness, most of the antitrust issues should be gone.

There is the question of East Coast vs. West Coast culture, but this does not seem like an example of such a disaster (as in my study of Linkabit’s 1980 acquisition). IBM is more innovation oriented than most East Coast firms, and Sun more bureaucratic than most West Coast firms.

IBM acquiring Apple in the 1990s would have been a disaster (but fortunately the self-serving Apple executives got greedy and demanded twice the price, paving the way for the Jobs II era).

Now Sun is in play, with its shares up 60% today. Its customers will reassured if it gets acquired and survives, and spooked if there are signs that the deal is going to fall through — leaving no other obvious edngame.

Apple to make ARM chips for iPhone?

Forbes dissects the management change announced Tuesday at Apple’s iPhone division, concluding that Apple plans to make its own iPhone processor chips. It’s interesting speculation.

What we know for sure is that Tony Fadell — the founder of iPod engineering who Fortune calls “The man who made the iPod” — is stepping down as head of SVP for the iPod division. (Fadell replaced Nextie and Friend-of-Steve Jon Rubinstein. Update 10pm: Fadell is being paid $300K/year to stay around as a “special advisor.” I’d guess he either left before Apple was ready — legitimate “personal reasons” — or they want to pay to keep him from working for others.)

Fadell is being replaced by Mark Papermaster, VP for blade server development at IBM. Apparently IBM is suing to enforce a non-compete, and original speculation (before his appointment to head iPod/iPhone R&D) was that he was being hired to make OS X-based Xserve boxes.

Now that Papermaster’s new role is out, pundits point to his earlier role as a PowerPC microprocessor architect. Last June, CEO Steve Jobs said the ex-PA Semi engineers are making “system-on-chips for iPhones and iPods.”

Brian Caulfied of Forbes claims that the tea leaves all point in one direction: Papermaster’s CPU expertise, the purchase of PA Semi, its sourcing of ARM-based processors from cellphone rival Samsung, the availability of ARM reference designs and fabs to make them.

Caulfied has put 2+2 together, but right now it’s not clear if he has come up with 3 or 4 or 6. ZDNet wonders whether Apple wants Papermaster to run Freescale, which seems even more improbable. Still, PA Semi was purchased for some reason, and competing with Intel in laptop CPUs is not among them.

Once upon a time, I claimed that Apple’s iPod and iPhone were an example of open innovation: Apple sourcing outside rather than using its 1990s-era NIH.

It appears I was wrong: open innovation (sourcing outside components) was an entry strategy for the iPod and iPhone, but the goal was always vertical integration. With iTunes, iTunes Music Service, OS X on the iPhone and now the new mystery chip, Apple will be more vertically integrated than it ever was on the Apple II or Macintosh.

Steve Jobs has always had a proprietary view of the ecosystem: we’re creating the value, and we want to capture as much as possible. Although Jobs was forced out of Apple in 1985, this culture lived on for a decade afterward. I experienced it first hand helping HP make color inkjet printers that competed with Apple’s dot matrix printers.

When he Jobs returned to Apple in 1997, he killed Apple’s only authorized cloning experiment, and with it both killed two startup companies and also alienated a Fortune 500 multinational and key Apple supplier (Motorola).

As elsewhere, Jobs is swimming against the tide. In the PC business, IBM went away from vertical integration and made Bill Gates and Andy Grove rich while eventually failing as a PC maker. Many cell phone makers (like HTC and Motorola) are procuring their OS on the open market, but there are two important exceptions: RIM (with its BlackBerry) and Nokia (with its decision to purchase Symbian).

IBM's stand for open standards

Last week, IBM announced that it was going to exit some standards bodies. The policy is the outcome a summer online discussion with various standards experts.

Analysts attribute IBM’s move Anto being upset at Microsoft’s success packing various standards bodies to win approval of OOXML, a less open format than the IBM-Sun ODF alternative. Of course, experts in standardization (including IBM’s) have long know that some Standards Setting Organizations (SSOs) are more open than others — whether in process or outcome. To say that politics influences SSO (or SDO) outcomes is like Claude Rains being shocked to hear there’s gambling in Casablanca.

IBM has published recommendations from its “independent, forward-thinking experts across the globe,” which seem to subsume best practices that have (in some cases) been debated for a decade.

Not surprisingly, the proposals took aim at the impact of patents upon standardization. Carl Cargill of Sun has been complaining about patents in standards for five years, and of course this has been a source of ongoing conflict with the open source community.

Is this more than just a press release? We all assume that IBM is hoping that making a dramatic statement will de-legitimate some standards bodies and thus their influence. But will others follow along?

Also, IBM calls for better standards education and research, but will it give universities any money up to make it happen? Will it start asking for standards education in the bench engineers that it hires?

IBM drops the other shoe

After joining OpenOffice.org last week, today IBM dropped the other shoe: it’s shipping a new product “Symphony” based on OpenOffice. As InfoWorld notes, it’s the same name IBM used in the 1980s for its integrated office suite.

IBM’s effort will help promote its long-standing support for the Open Document Format (ODF). To me, it seems a little like an exit strategy (growth strategy? salvage strategy?) for the increasingly irrelevant Lotus division.

The biggest omission is that Symphony lacks e-mail to compete with Microsoft’s Entourage. How hard would it be to find an open source e-mail client to integrate? The Mozilla Thunderbird project is one such example, and late last month the Qualcomm-sponsored Penelope project released a new skin providing Eudora features to Thunderbird users.

Technorati Tags: IBM, ODF

Enemy of my enemy 3

IBM and Sun haven’t gotten along much in the past decade. After all, Sun’s cofounder (and longtime CEO) Scott McNeily fancied himself the leader of the anti-Microsoft coalition, whereas IBM created Eclipse (get it) to wrest control of Java development away from Sun. (A mission that largely succeeded).

But then Sun has a new CEO, and as Jonathan Schwartz himself crowed last month, on Aug. 16 IBM committed to selling Sun’s Solaris OS to run on IBM hardware. (IBM also announced a less ambitious SOlaris reselling plan two years ago).

Now IBM is supporting another Sun anti-Microsoft effort. After backing the “Open Document Format” of Sun’s OpenOffice (and StarOffice), today IBM joined OpenOffice.org and committed programmers to develop OpenOffice.

Sun, Google, now IBM. Why do I feel that if Microsoft were gone, these three would be at each others’ throats? It reminds me of my high school days, when I got a chance to experience the backstabbing possibilities of European power politics prior to the Great War.

Technorati Tags: Google, IBM, Microsoft, Sun Microsystems

IBM and Joel vs. FSF and Matt

The latest update on the GPLv3 saga is that it has (apparently) been dissed by IBM’s top software honcho, Steve Mills. A lifetime IBM employee, Mills was the subject of a front page article (subscription required) in Monday’s Wall Street Journal:

Increasingly, the public face of International Business Machines Corp. is that of Steve Mills.

Mr. Mills heads IBM's rich and acquisition-hungry software unit, which has buoyed results in recent quarters. He frequently represents the company at investor conferences and software-customer gatherings, and his rising profile reflects a new reality at the technology giant.

IBM still gets most of its reputation from its computers and most of its revenue from services, but most of its profit growth comes from software. … On a stand-alone basis, IBM would have had the second-highest revenue of any software company after Microsoft Corp. Software revenue grew 14.4% in the fourth quarter and reached $18.2 billion last year. Software accounts for only 20% of total revenue -- but 40% of earnings. Fast-growing IBM brands include WebSphere, a variety of Internet tools for business, which gained 23% last year; Tivoli, which manages computer systems, up 26%; and Lotus, which makes email software, up 12%.

Last week, the trade journal CRN tried to drag Mills into the ongoing GPLv3 controversy.

"At some point you become so shrill and beyond what's required that you lose the audience and the audience moves on to something else," he said.

"We'll have to see what finally evolves through the [GPL] process, it's going through an update and the Free Software Foundation has a particular view of free software. Free software is a wonderful thing but there's also a business model."

"We think there are other licensing techniques, the Apache license and others are somewhat less onerous. We use them ourselves. We don't use the GPL for reasons of its restrictions," Mills said.

On Tuesday, my friend Matt Asay (co-founder of OSBC and former Novell OSS strategist) slammed Mills:

But IBM's fetish for all things Apache has kept it from seeing open source as a tool that it can monetize directly…

It's not clear what audience Mills is worried about the FSF/GPL losing. After all, the GPL governs over 72% of the projects on Sourceforge. He may well wish that Linux, Alfresco, Jasper Reports, Xen, etc. etc. were Apache-licensed so that he could drop them into his proprietary products and keep to his 20th Century business model. But just because it's comfortable for him doesn't mean that the open source world should capitulate to his whims.

So IBM hasn't figured out what the rest of us know with ever-increasing certitude: it's possible to monetize open source directly. Ironically, it becomes easier the more freedom that imbues the software. Even more ironically, this is so because companies like IBM don't want to touch software that is free - it threatens their proprietary software.

I think highly of IBM, but find its antipathy to the GPL to be silly.

I think highly of IBM too, because its early support for open source made it legitimate for IT buyers around the world. Unlike the one-trick ponies of open source startups (that depend on such things like dual licensing), IBM has the broadest range of open source participation and greatest diversity of open source business models of any company in the world. It creates open source and gives it away (like Jikes), it takes its software to create a new community (Eclipse), it installs and supports (the GPL-licensed) Linux and pays to support the Linux Foundation (née OSDL), and they were the first major corporation to back the Apache Foundation. The list goes on: there is no “IBM” strategy for open source, because no company with 330,000 employees can think with one mind or speak with one voice.

As for Matt’s criticisms, the easiest to knock down is license popularity on SourceForge. The vast majority of software projects on SourceForge are vanity projects, irrelevant to business, consumers or the economy. Comparing SourceForge license choices to those of real software is like comparing the IT choices of bloggers to those of major news organizations.

It’s also silly (as Matt knows) to suggest that IBM has an Apache fetish. IBM, after all, brought us the IBM Public License (which became the Common Public License which became the Eclipse Public License), one of the first licenses derived from the seminal Mozilla Public License. Using the CPL/EPL, IBM created the Eclipse project — the first open source project to really integrate vendor sponsors, a non-profit foundation and the community from day one.

Instead, I think Matt has a GPL fetish. In its most narrow (some would say precise) construction, the term “open source” means any license approved by the OSI that conforms to its Open Source Definition. The Free Software Foundation notwithstanding, there is nothing in the OSD (or the OSI policies) that say that the GPL is any better than the MPL, EPL or even the Apache or BSD licenses.

I think highly of Matt Asay, but his love affair with the GPL is silly.

Graphic credit: Chris Onsted’s Achewood cartoon, via Joey deVilla’s blog

Technorati Tags: compulsory sharing, GPL, open source licenses, IBM