Thursday, August 12, 2010

Cash Cow Disease: The Cognitive Decline of Microsoft and Google

Watching the recent product retraction of Google Wave convinced me that Google is fully infected with the same protracted, end-stage wasting disease that has consumed Microsoft for years: cash cow disease.

Cash cow disease arises when a public company has a small number of products that generate the lion's share of profits, but lacks the discipline to return those profits to the shareholders. The disease can progress for years or even decades, simply because the cash cow products produce enough massive revenues to distract shareholders from the smaller (but still massive) amounts of waste.

For example, with Microsoft, Windows and Office carry the company, roughly speaking, allowing the company to lose billions (that's with a 'b') on failed projects without incurring any serious backlash from stockholders. Without cash cows, Microsoft could not have launched a new cellphone, then canceled it a few weeks later, all while pouring more money into yet another generation of cellphone.

Cash cow disease costs stockholders untold (sometimes actively buried in accounting maneuvers) dollars. Consider Xbox, which consumed billions (that's with a 'b') before eventually turning a profit of millions (that's with an 'm'). If Xbox had been spun into a separate company, then Microsoft stockholders could have kept those billions (with a 'b') and let someone else decide to invest billions in trying to jump into the game console business.

Meanwhile, at Google, the cash cow is search-driven advertising. That allows the company to encourage engineers to waste 20% of their time on "projects", like Google Wave. Just like Microsoft stockholders, Google stockholders are expected to feel happy about the overall company profit margin and not inquire too closely into the massive amount of wastage.

Making Economic Sense

But wait, didn't Xbox eventually turn a profit? Doesn't Microsoft have to search for new sources of revenue? Isn't Google encouraging innovation that could pay off big someday? Am I mislabeling "investment" as "waste"? That's where the "cognitive decline" from the title comes in.

The problem with Microsoft's forays into phones and search, and with Google's forays into phones and operating systems (see a pattern here?) is lack of discipline. When you have a cash cow, you lose the discipline of having to make a good product and pay attention to your customers. Sure, Google and Microsoft can hire the smartest minds in the business -- but cash cow disease keeps that brainpower derailed into projects that don't have to stand the test of the marketplace (new programming language, anyone?).

How did Microsoft manage to acquire a relatively hip and happening company like Danger and turn it into a complete flop of a product launch with the Kin? To oversimplify: by having all the money the world. When your development decisions affect your ability to meet payroll quite directly, you see them in a very different light than when they affect nothing more than perhaps your next annual review or your status in the latest internecine company struggle. The economic discipline of the marketplace is lost for those afflicted with cash cow disease. A CEO can embark on a cellphone project for little better reason than that some obnoxious guy in a black turtleneck is doing well with his own cellphone.

Google offers their own unique twist on cash cow disease. Since their core competency is turning data mining into advertising dollars, they can actually claim that negative profits are the route to success. Thus, they can pay cell makers to adopt Android, and pay (in the past, quite enormous sums) customers to use their shopping cart option. Like pixie dust, potential future advertising revenues can be sprinkled on any revenue-negative scheme to make it look brilliant.

But you shelter yourself from the economic discipline of the marketplace at your own peril. If Google Wave had been a small company that had to actually convince people to pay for the product in order to meet payroll, the revelation that there's no "there" there could have been had in a fraction of the time -- and without costing Google shareholders a dime.

Stifling Innovation

Both Google and Microsoft proclaim themselves innovative companies that love competition. But the net result of cash cow disease is a waste of brainpower, and a decrease in useful innovation. A mere expression of interest by one of these giants in some particular burgeoning market is enough to dry up investment funds for any small company interested in the same market. For every failed Kin, there are multiple Dangers that could have thrived if Microsoft had had the discipline to stick to their Windows/Office knitting and restrict their other ventures to simply investing (rather than ingesting). For every magnificent Google Wave flop, there are multiple innovative new apps that could have been created (by the same people working in smaller companies) if Google had the discipline to focus on its core competency rather than creating and endless parade of "beta" apps.

The brain drain is also significant. Both Microsoft and Google would be significantly more profitable if they cut all the staff currently assigned to non-cash cow projects, but there would also be significantly more developers in the small-company milieu of software. Although lip service is paid in the U.S. to the importance of small companies, small companies are actually discriminated against in important ways. Google and Microsoft can afford H1B lobbyists, patent suites to use as weapons, high-priced legal guns, negotiate tax breaks with local governments, demand infrastructure changes, and great many other things that are impossible for small companies. The smallest companies (sole proprietors, where much true innovation begins) cannot even fully deduct their health care costs as business expenses, the most obvious example of the true (lack of) value the government places on small business.

But cash cow disease even significantly warps the ability of the rest of the market to innovate. Thus, the dream of many small software companies is completely divorced from any thought of actually staying in business and providing a good product at a good price to customers for years. Instead, the dream is to build something as quickly as possible that one of the cash cow companies will be interested in buying, so the founders can "cash out", leaving yet another half-assed product bringing down the property values in the software ghettos of Windows Live or Google Labs.

How long does cash cow disease linger? Just about as long as cash cow revenues sufficiently overshadow the enormous wastage. I can't see any cash cow company ever being motivated to give up their favorite drug any time soon. Neither Google nor Microsoft are close to being called to account, except perhaps in specific instances such as when Ballmer simultaneously plotted both employee layoffs (or was it merely a clever shifting of employees to contractor status to avoid paying them benefits?) and an inexplicable (except possibly as an ego booster) Yahoo! takeover.

The only encouraging note is that cash cow disease amplifies chaotic churn of quick and dirty software (soon, we'll all have our own "app stores"!) in the marketplace, leaving swathes of opportunities untouched. But these swathes are in areas that require slow and careful development, not quick and dirty. Few dare to tread there; we live in a world where long-term software development is overwhelmingly rejected.

73 comments:

Kathryn said...

Are you saying that Android is a lousy phone OS? I disagree. Are they still paying people to take their phones? I'd be surprised. It's a popular platform, even if it's so fragmented that a lot of people don't realize that they have Android phones.

Anonymous said...

This is idiotic, ill-thought jibberish.

Anonymous said...

Great write up. (Wish there was less or none of the 'that's with a b' and 'that's with a m' stuff. We are reading this not listening to this.)

euromix said...

It feels like you are jealous of something.

Chris said...

Apple suffers from the same disease. Instead of focusing on building their Mac PCs, they started building music players, phones and tablets....

Misha Sobolev said...

Let's take'em one by one:

- wasting shareholders' money: yes, it is true. GM has done this for years and had to be bailed out with taxpayers money. This however has nothing to do with Microsoft or Google specifically and all with the public company structure where "agents" - management and the Board - are far removed and not fully controlled by "principals" - the shareholders who are too numerous, unorganized, unsophisticated to exert any sort of control.
- stiffing innovation - not so sure that the presence of cash cows automatically means no innovation. There is obviously pressure to maintain status quo and not to disturb the "cow", however that shouldn't stop innovating around it. After all, iPod didn't prevent iPhone didn't prevent iPad.

As Apple has shown - even the huge public company with very successful products can stay lean, innovative and cutting edge. It just takes a paranoid and visionary CEO who can instill the right culture and focus on awesomeness, not on next quarter numbers. Then shareholders will be well taken care of.

Misha Sobolev
Founder
http://www.ctosonthemove.com

red dave said...

Very interesting post. Thanks.

CVavra said...

Your analysis is too market driven.
There are more important things than profit, things like research and development, things like market pioneering, and employee satisfaction.Yeah, maybe google wave didn't change the world, but at least it had a chance, and the people that developed it believed in it. This made a lot of talented people happy to work on projects they were NOT interested. It also gave people a chance at a new communications medium. Blue sky research is important, and the ideas of smart individuals within companies should not be ignored.

Judy Shapiro said...

I agree -- the bureaucratic weight of milking a cash cow stifles growth. I have gone on record as believing that Google should "break themselves up" before they become to weighty to move anywhere interesting.

Judy Shapiro

Soumik Ganguly said...

Excellent, and I am sure this thing has plagued companies across the world, and thanks for bringing this up to everyone's notice in this way.

Anonymous said...

Have to disagree on your insight into Google.. What you see as brain drain, or wastes of talent, I see as try everything and anything and see what works. Release minimum products see if there is anything that will work, and iterate fast. Cutting staff on non cash cows, where does the innovation come from then or R&D efforts, in a big company like Google.

Chan said...

You are right about the cash cow disease and this disease sets in quickly as the time taken to build high-valued companies is rapidly reducing. It took few decades for Microsoft to become a giant whereas it's less than a decade for Google and few years for Facebook. And, could take shorter to go into oblivion(MySpace). At the same time, Android seems a very strategic move with world revolving around Mobile. Imagine Google being at the mercy of Apple, RIM and Nokia to enable Google search on their phones. That's a massive risk to ignore.

billnapier said...

tl;dr summary:

companies that make a lot of money should stop trying to innovate and find new markets. They should be happy with what they have and let others do the innovation.

my comment:

Companies that aren't out looking for a new revenue stream don't have very happy shareholders, regardless of size. What happens when your original revenue stream dries up and you don't have another one to keep the company afloat?

And part of this looking is going to include failing. Better to try and fail, then to not try at all.

Anonymous said...

Your argument seems based on the idea that the only useful ideas and products are those that turn a direct and immediate profit. That is very short-sighted and is exactly what most companies tend to do so claiming that they don't seems strange.

I believe the idea you propose, only feed immediate revenue generating projects, is exactly why computer science and many other technical fields are stuck. x86, ring a bell? what about the state of software and security (non-existent)? why hasn't security improved?

These are hard problems with poor existing solutions and the only way we'll progress is by milking the cows to feed the children while making sure the milk isn't infected with "big company malaise."

Farhan Ahmad said...

This is an interesting explanation of what happens to big companies, and something that I partly agree with. The question remains: is there a solution to this problem?

Anonymous said...

typo in 2nd last para: inexplicable -> explicable.

Fred Zimmerman said...

There are good reasons why big companies try hard to diversify. As you note, there are also good reasons why they usually fail. It's a natural process.

Anonymous said...

*inexplicable

Anonymous said...

>>How long does cash cow disease linger?

Read the Innovator's Dilemma for a discussion on how long market incumbents can live off a cash cow. The answer is disruptive technology shifts destroy these companies.

Simon Cavalletto said...

Near the end, where you write "explicable", from context I think you might actually mean "inexplicable".

-Simon

Anonymous said...

new programming language, anyone?

C# is doing just fine, actually.

It was definitely a big step up from C++ Win32 code and has kept improving. I'm not seeng the "decline".

Anonymous said...

I guess Google and Microsoft should only be so lucky as Palm to experience the full unbridled market sans resources? Then their investors would then be much happier?

Anonymous said...

new programming language, anyone?

C# is doing just fine, actually.

Funny, it didn't occur to me that he was referring to C#; I was thinking he meant Go.

Krishna Venkatraman said...

This article makes the most asinine assertions.

1) Ron Burk's seems to suggest that a company should at most have 1 or 2 products viz. those that are cash cows. In other words diversification as a product strategy according to Ron is no good to share holders and therefore should not be undertaken. So, when a disruptive technology comes along and wipes out the cash cow, the shareholders stop getting anything since the company had not diversified. Ridiculous strategy!

2) Products are not born cash cows. It takes time to build a cash cow. So Ron Burk would apply his impeccable logic and kill a product that was on its way to becoming a cash cow simply because it wasn't a cash cow. Circular reasoning to say the least.

As one of the anonymous posters said, I don't know who Ron Burk is but this post is idiotic, ill-thought gibberish.

Anonymous said...

This is a very insightful article.. and dead-accurate.

Anonymous said...

Didn't Yahoo focus only on their cash cow product? Look where they are now, shareholders must be thrilled.

Anonymous said...

I am hilarious late to this party (hat tip P. Kedrosky), but I think you have great ideas. I wouldn't say you have a completely thought plan, but this is a great push. I would imagine that there should be some room for fat that allows GOOG/MS/APPL to play around without becoming an empire that lets crappy stuff be made because they can pay for it.

I also think this speaks to the current malaise in our political economy. We have made a point of giving way too much latitude to people and entities with notable successes in the past and not enough latitude to those who might be productive in the future. I dream that VC/tech/entrepreneurship will figure out that the current corporatist model is BAD for them and do to it what the industrialists did to the old plantation model.

JimDesu said...

I've contemplating Google recently, as they're the only company out there that advertises categories of jobs for application, but not for any specific job, as if the privilege of working there outranks what one actually does... and it turns out that it does! Just like you said, they're busy inventing new programming languages and doing cellphones, and squandering their shareholder's investments -- a public company is a vehicle for value generation (I mean wealth, not money), not a playground for geek-chic projects. (Needless to say, I decided not to apply.)

Max said...

The critical flaw in your argument is the way you characterize shareholders. Shareholders are people like anyone else - they have eyes, ears and brains! They are responsible for themselves, and for the decisions they make. That means *they* are responsible, ultimately, for knowing whether or not a particular stock is a good investment. Nobody forced them to buy Microsoft or Google stock (or to by anything from anyone, for that matter).

So if a particular shareholder thinks that a stock is a bad deal, he's always free to do something else with his money. And there are a *lot* of things that he can do with it (even with all of the barriers that today's regulations put in his way.)

Anonymous said...

An interesting, albeit incorrect, analogy.

Anonymous said...

Are you also thus ruling out GMail, it being a project from the 20% time ?

http://www.scottberkun.com/blog/2008/thoughts-on-googles-20-time/

patrick01 said...

Interesting Article. Would be better if it included how and why Apple has avoided the disease. Better management? Luck? ......?

Justin Chase said...

Google had a FAIL therefore they are diseased!!

Orrrrr, maybe this whole blog post is an economics FAIL.

marypcb said...

so is this why Wall Street looks at Microsoft's most successful year and gives it no stock bump to speak of? Because Microsoft was supposed to stick with what it had and do no preparation for the future? Think this says more about Wall Street than Microsoft and that view obscures your interesting point - that success brings its own problems.

Everything Google does in all areas of its business (apart from possibly Google Apps in enterprise and government, and it may apply there too) is designed to either put Google ads in front of more searchers on more platforms or to give the Google search engine more training data in order to improve the search engine that puts ads in front of searchers (like getting the contract to machine translate for the European Patent Office).

Gmail, Picasa, translation, using Google Maps on phones to gather locations for Google Maps – they all get more data for Google to crunch. Their business model is transforming the information of the world into a source of targeted ads. Is it still cross-subsidy and over-diversification when it’s a company strategy?

Anonymous said...

Your analysis of 20% is severely one-sided. You pick one famous unpopular 20% project which failed, but discount the hundreds or thousands of 20% projects which contribute to Google's revenue stream.

Individual employee innovation isn't "innovation that could pay off big someday". It's solving real problems and helping them do well today. A little thought would have shown that the vast majority of 20% projects are not huge new systems which attempt to combine email, wikis, and social networking.

It's also subject, internally, to the same market forces you claim you wish it was exposed to. Why do you think the only example you have of a publicly released 20% project is one made from a team in Australia? (What do you think all the Google programmers in California do?)

Or consider that, for all of Wave's faults, it matches almost exactly the actual needs of a programmer working at Google. Even if it was never publicly released, it could have been a huge time-saver internally. Should Costco stop using forklifts to unload trucks, simply because the forklifts themselves aren't a cash cow?

Even as a public service, the problems with Wave were numerous, but demonstrate that Google is still willing to take risks. Every new big thing starts out as some little crazy thing. How else do you get to the next cash cow? Do you think advertising in web search engines is going to sustain Google forever? Should they run a tight ship, doing only web advertising, until it runs dry, and then pack up and go home, despite all of the talent and infrastructure they've accumulated? I'm not sure what your alternative proposal here is.

BTW, what does "new programming language, anyone?" mean? Both Microsoft and Google spend a ton on developing new and better programming languages, examples of the "long-term software development" you hope for. Again, maybe they're not good languages, but at least they're trying.

It's also not clear what "A CEO can embark on a cellphone project for little better reason than that some obnoxious guy in a black turtleneck is doing well with his own cellphone" means. Google bought Android years before Apple announced the first iPhone. I don't know if Android was a good idea or a bad idea, business- or technology-wise, and later versions have obviously been influenced by the design of the iPhone, but the initial decision to make a phone can't have been Apple jealousy, unless Google also had a time machine in 2005.

poke said...

I think you're exactly right. It's amazing how quickly Google developed a bad product culture. It did it almost exactly the same way as Microsoft - focusing on hiring smart people and acquiring/competing with other successful companies rather than focusing on products/consumers - but managed to get there much faster (presumably because of the "we can always make money from ads" excuse you identify). I don't think I've ever seen a company as irrational in the market place as Google. They operate like Sun in its dying days.

Anonymous said...

Your analysis of 20% is severely one-sided. You pick one famous unpopular 20% project which failed, but discount the hundreds or thousands of 20% projects which contribute to Google's revenue stream.

Individual employee innovation isn't "innovation that could pay off big someday". It's solving real problems and helping them do well today. A little thought would have shown that the vast majority of 20% projects are not huge new systems which attempt to combine email, wikis, and social networking.

It's also subject, internally, to the same market forces you claim you wish it was exposed to. Why do you think the only example you have of a publicly released 20% project is one made from a team in Australia? (What do you think all the Google programmers in California do?)

Or consider that Wave matches the daily needs of a Google programmer almost perfectly. Even if it was never released, it could have been a huge time-saver. Should Costco not have forklifts to unload trucks, simply because the forklifts themselves aren't a cash cow?

The problems with Wave were numerous, but it at least shows Google is still willing to take risks. Every new big thing starts out as some little crazy thing. How else do you get to the next cash cow? Do you think advertising in web search engines is going to sustain Google forever? Should they run a tight ship, doing only web advertising, until it runs dry, and then pack up and go home, despite all of the talent and infrastructure they've accumulated? I'm not sure what your alternative proposal here is.

BTW, what does "new programming language, anyone?" mean?

It's also not clear what "A CEO can embark on a cellphone project for little better reason than that some obnoxious guy in a black turtleneck is doing well with his own cellphone" means. Google bought Android years before Apple announced the first iPhone. I don't know if Android was a good idea or a bad idea, and later versions have obviously been influenced by the design of the iPhone, but the decision to make a phone can't have been Apple jealousy, unless Google also had a time machine in 2005.

Anonymous said...

Your analysis of 20% is severely one-sided. You pick one famous unpopular 20% project which failed, but discount the hundreds or thousands of 20% projects which contribute to Google's revenue stream.

Individual employee innovation isn't "innovation that could pay off big someday". It's solving real problems and helping them do well today. A little thought would have shown that the vast majority of 20% projects are not huge new systems which attempt to combine email, wikis, and social networking.

It's also subject, internally, to the same market forces you claim you wish it was exposed to. Why do you think the only example you have of a publicly released 20% project is one made from a team in Australia? (What do you think all the Google programmers in California do?)

Or consider that Wave matches the daily needs of a Google programmer almost perfectly. Even if it was never released, it could have been a huge time-saver. Should Costco not have forklifts to unload trucks, simply because the forklifts themselves aren't a cash cow?

The problems with Wave were numerous, but it at least shows Google is still willing to take risks. Every new big thing starts out as some little crazy thing. How else do you get to the next cash cow? Do you think advertising in web search engines is going to sustain Google forever? Should they run a tight ship, doing only web advertising, until it runs dry, and then pack up and go home, despite all of the talent and infrastructure they've accumulated? I'm not sure what your alternative proposal here is.

BTW, what does "new programming language, anyone?" mean?

It's also not clear what "A CEO can embark on a cellphone project for little better reason than that some obnoxious guy in a black turtleneck is doing well with his own cellphone" means. Google bought Android years before Apple announced the first iPhone. I don't know if Android was a good idea or a bad idea, and later versions have obviously been influenced by the design of the iPhone, but the decision to make a phone can't have been Apple jealousy, unless Google also had a time machine in 2005.

orcmid said...

It is fascinating to me how perfectly polarized on opposites so many of the comments are here.

It is true that a cash cow can afford to experiment and explore in ways that a startup or small business might not be able to approach. But is it actually done well when the economic relationships to performance are so cockeyed?

As a participant observer in the computer industry for over 50 years, I find these symptoms all too familiar. The entropy death of cash cows is a bit like watching a bright new star decline into red gianthood in a remarkable short time.

At the day-to-day level, what is evident to me as a persistent Microsoft adopter is the apparent loss of IQ in the way products fail, new versions are worse than their predecessors, too many products and their support structures appear to be operated in completely different fiefdoms with no concern for the significance of the brand, and products end up being abandoned independent of their success with adopters (but perhaps not enough success in proportion to the attention required of the cash cow).

It is too easy to speculate what the root cause might be, although it is easy to recognize a lack of consistency of purpose and a purpose that focuses on the contribution that products make being what adopters reward by their customer loyalty and purchase power.

My simple smell test is the inability of microsoft.com support-offering web pages to persist and be found in the same place some time later. It is uncanny how quickly material becomes lost and forums be replaced, as if the company has no memory and expects us to quietly accept its amnesia as our own.

Tom Bolton said...

Fascinating piece.

The thing you left out which I'd love to read is how one can tell the difference between undisciplined forays into new territory and real innovation before (or after) the fact (success or failure) from an outside perspective. That is, how would one recognize a company is coming down with cash cow disease before the disease is too far along to properly cure?

You obviously believe MS and Google have the disease. Does Apple? What about Apple TV (Apple's "hobby")? How do you distinguish between the two.

Anonymous said...

The Mac piggybacked on the Apple ][ cash cow.

The iPod piggybacked on the Mac cash cow.

The iPhone piggybacked on the iPod cash cow.

Windows piggybacked on the DOS cash cow.

Office piggybacked on the Windows cash cow.

If you stick to creating one product your company and stock will be worth nothing once the customers have moved on to other things.

AOL, Real, ICQ, Hotbot, Altavista...

Anonymous said...

I'm not convinced. You start your argument from a fairly standard economic standpoint (all the side projects feeding off of the cash cows hurt investors because the money that goes into failed side projects didn't instead go to the investors); pretty straightforward. However, when it comes time to address the "but they're looking for the next big thing" defense, things get rougher; the claim is that Microsoft and Google lack discipline, and the way to get discipline is to need immediate success in order to remain solvent, but this entirely fails to explain how the "obnoxious guy in a black turtleneck" managed to get his company to make a successful phone funded by its two cash cows (the Mac and the iPod, at the time). This might come down to the idea that Google and Microsoft have Cash Cow Disease and Apple doesn't, but then you just push the issue back into "what exactly is cash cow disease?"

It gets worse in the Stifling Innovation section—we're suddenly transitioning from a standard economic argument ("the shareholders would be better off if…") into a public-good argument! If the highly-talented individuals at these companies not working on cash cows were released into the market we might well see an upsurge in small companies in the field—but why would Google or Microsoft want that? Most of them will fail, as small companies are wont to do, but the few that succeed—and the even fewer that find a wildly successful Next Big Thing—will do so independently from Google and Microsoft, when otherwise some fraction of them would have instead failed (assuming for the sake of argument that the Cash Cow Disease premise is correct) but the other fraction would have succeeded—but while already being owned by the company! They're then neither a competitor nor a high-priced acquisition, they're a new cash cow already inside the company! Is the premise of this section that we should enact legislation to force the return of these individuals to the market? If not, it looks like a pretty simple bet with high chance of small downside in exchange for a low chance of large upside (and the reduction of a small chance of high downside—if the Next Big Thing comes from your side projects division, you won't be trying to compete with it in the market when it shows up).

So yeah. Argument needs work.

Anonymous said...

I'm not convinced. You start your argument from a fairly standard economic standpoint (all the side projects feeding off of the cash cows hurt investors because the money that goes into failed side projects didn't instead go to the investors); pretty straightforward. However, when it comes time to address the "but they're looking for the next big thing" defense, things get rougher; the claim is that Microsoft and Google lack discipline, and the way to get discipline is to need immediate success in order to remain solvent, but this entirely fails to explain how the "obnoxious guy in a black turtleneck" managed to get his company to make a successful phone funded by its two cash cows (the Mac and the iPod, at the time). This might come down to the idea that Google and Microsoft have Cash Cow Disease and Apple doesn't, but then you just push the issue back into "what exactly is cash cow disease?"

It gets worse in the Stifling Innovation section—we're suddenly transitioning from a standard economic argument ("the shareholders would be better off if…") into a public-good argument! If the highly-talented individuals at these companies not working on cash cows were released into the market we might well see an upsurge in small companies in the field—but why would Google or Microsoft want that? Most of them will fail, as small companies are wont to do, but the few that succeed—and the even fewer that find a wildly successful Next Big Thing—will do so independently from Google and Microsoft, when otherwise some fraction of them would have instead failed (assuming for the sake of argument that the Cash Cow Disease premise is correct) but the other fraction would have succeeded—but while already being owned by the company! They're then neither a competitor nor a high-priced acquisition, they're a new cash cow already inside the company! Is the premise of this section that we should enact legislation to force the return of these individuals to the market? If not, it looks like a pretty simple bet with high chance of small downside in exchange for a low chance of large upside (and the reduction of a small chance of high downside—if the Next Big Thing comes from your side projects division, you won't be trying to compete with it in the market when it shows up).

So yeah. Argument needs work.

Jens Alfke said...

Wave was not a 20% project, it was a full-time venture by the creators of Google Maps. GMail did start as a 20% project, and it's done pretty well.

People have a ridiculous misunderstanding of 20% projects. The vast majority are either contributions to other team's existing projects, internal tools, or very small-scale experiments.

Horace the Grump said...

Lots of comments have called this post rubbish, but I think there are some kernels of truth in there.

Point 1 - There is nothing more dangerous to shareholder wealth than management with cash burning a hole in its pocket.

Point 2 - People often confuse luck for skill and think that the can extend their success in one field into another. Combine with Point 1 above and you have a pretty volatile mix.

Point 3 - It is likely that projects that Microsoft/Google and others have 'announced' have caused funding for smaller companies with similar projects to find their funding fall over. That's the nature of investors; you can't fight the big guys.

But that is not the whole story as far as innovation is concerned; in fact it is a very small part.

Interesting post though. And don't bash a guy for putting up an idea. Your just jealous you can't think of anything interesting to say...

(yet another) steeeve said...

I've seen this for years, but never seen it better expressed. Particularly insightful is the opportunity cost--the great products not developed by small focused companies because the large CCD companies are rolling around with ridiculous levels of resources. As a customer/user, you're really better off with a company that makes its payroll and its profits off of you--a company that NEEDS you. Instead we see products/services driven by the internal politics of behemoths.

I once thought that giving a product away to kill competitors was supposed to be illegal monopolistic behavior, in fact. (It was when Standard Oil sold below production cost.)

Android may be the best thing ever (or not), but since when do OSes have to be given away to succeed? That's just CCD making sure that no innovative startups can compete.

Ron said...

I disagree with this:

"Apple suffers from the same disease. Instead of focusing on building their Mac PCs, they started building music players, phones and tablets...."

Apple is big enough to have cash cow disease but seems sufficiently disciplined that each new product and line becomes another cash cow.

First, the Mac. Then, iPod, iTunes Store, iPhone, iPad, all of which make tones of money for Apple.

It wasn't cash cow 'disease.' It was the Mac cash cow that allowed Apple the freedom to create and integrate new products and services. iPod, iTunes, iPhone, iPad, and Mac. All highly profitable. What other competing company has that many legs?

Microsoft? Windows and Office.
Google? Advertising.
Apple? Mac, iPod, iTunes, iPhone, iPad, Software.

More companies should have Apple's disease.

John said...

Are you really arguing that Android hasn't played a role in greatly expanding the use of smartphones, thus also increasing mobile advertising opportunities which will create revenue for Google? Maybe the reason they can spread "pixie dust" of ad revenue on everything is because in some cases, the dust is real.

The Apple example of a company that wandered from its core mission and found new relevance and massive financial success - straight to shareholders' pockets - is a good one, but perhaps rare.

It's hard to believe that a company that doesn't do any of the kind of blue-sky off the farm projects that Google spends a lot of time on can remain innovative. In a recent podcast discussion of this very topic, a couple of writers from The Economist speculated that some of this may serve as a way for Google to attract top talent - the most creative people will want to work there because they can spend time on entirely new things, and if 1 in 100 turns into the next cash cow, the company wins.

While there's obviously the potential for all this to get out of control, if you're arguing that this is happening at Google or that they're not taking care of their shareholders with this approach, you've got a pretty tough case to make, given the company's success - and the faith in them that is reflected in their stock market performance.

Hamranhansenhansen said...

> Apple suffers from the same disease. Instead
> of focusing on building their Mac PCs, they
> started building music players, phones and
> tablets....

Apple's iPods, iPhones, and iPads are profitable in their own right and in fact bring in more profit than the Mac. Even iTunes, which could be a loss leader because it sells devices, is profitable. A key part of the argument here is wasting time on unprofitable products. The last unprofitable product Apple had was Power Mac G4 Cube and they killed it even though the Mac as a whole was profitable.

You have to be careful of falling into the trap of thinking that what is true for Microsoft is true for Apple, because they are opposites.

Apple also engages in the long-term software development the author says is rare. iOS is 7 years old even though it has only been public for 3.5 years, OS X is almost 25 years old, and includes Unix that is older than that. Mac OS is almost 30 years old. Even Logic Pro, which Apple bought about 8 years ago, is almost 25 years old. iTunes and the rest of iLife are over 10 years old, QuickTime is almost 20.

So in fact, Apple is the very opposite of the unprofitable products and short-term software vendor that this article calls out.

Dave said...

I think your article does make some interesting points. Microsoft should plead guilty as charged.

However, I think Google has the capacity to innovate. Some of their products like Google Maps, Google Voice, and Google Earth are impressive. Their decision to monetize via advertising rather than direct sales to consumers is also innovative.

Every high-tech company should be thinking in terms of today's breadwinner(s) and tomorrow's breadwinner(s). Nothing lasts forever.

Anonymous said...

What Burk is saying is that "Cash Cow Disease" is negating the process of natural selection in business. A project like Xbox would have been cashiered long ago, as soon as it became clear the ROI would be negative and Microsoft would never recoup their initial development costs. Having a "Cash Cow" puts off those normal business decisions that smaller more nimble companies do face.

Those who want to apply CCD to Apple, as they have a huge cash hoard are missing the full point. Apple, while having this cash hoard has never relied upon it, to prop up unsustainable business lines. The iPod was cashflow positive from the day it launched, Same with the iPhone and the iPad. Apple is a big company with a big cash hoard that operates like a small company.

Anonymous said...

Err.. ever heard of innovator's dilemma? Google/MSFT are just trying (and rarely succeeding) in staying ahead of it...

Anonymous said...

meh. the issue with Microsoft is that they left developers in the dust of the creation of "dot net" and its bloated city. they killed off developers and they created "partners". Sorry, but developers and SALES PEOPLE are two different beasts.

If Microsoft AND Apple (to a large degree) want to survive against Google and many other start-ups, yet to emerge, they'll have to join together. And I am not talking about a joint-venture....

Anonymous said...

Wow. A very seriously flawed - gibberish - that's the apt word. It sounds like yet another "I will write because I can" article from Apple smitten blogger. (Sorry Ron Burk - I don't know if you are otherwise fabulous but just were having a bad day but I must get that out of my system.)

So essentially the author is saying that companies must have a crystal ball which it can use to predict the future 100% accurately and then invest only in projects that will succeed in the future, while making their employees slog on those projects until they fall asleep on their keyboards.

Then the author seems to assume that if a project does not generate teh shine and gloss equivalent to that of Apple iPhone - it's all a waste. The author assumes incorrectly that Microsoft did not learn anything from Kin, did not generate any assets from it, Google Wave also was utter waste - no code was written, the Engineers learned nothing from it and nor was the code given to Apache Foundation for further experimentation and they can't do anything with it to make is successful. Once it fails, the chapter is closed as far as the author is concerned.

There may not be a ostensible Cash Cow Disease but there definitely is a STD here - Simplified Thinking Disease. History is ripe with failed projects that Engineers tolled on which were reworked or later re-introduced at right time to make them hugely successful. (If Babbage worked at a corporation that sold milk, his computing related inventions in 1822 would be a mere "waste" for the author.)

The real world of course doesn't work like that - no one has a crystal ball, so there is some amount of throwing at the wall and seeing what sticks involved to learn new things, make existing things better etc. Modern corporations are not your traditional mills that need discipline to the deliver x number of goods in y hours or they would go bust. It's not a zero sum game. For the modern cutting edge corporations, the only thing that matters most is having the brilliant people try - without the burden of having to predict success or failure. They are dealing with unknowns - which means sometimes they will make forward progress and sometimes they will stall. The better people they have and the better they treat them - greater are the chances of great things coming out of the corporation which it can then monetize.

Some examples are even factually incorrect - Google makes profits from their Android OS group as a separate unit. And Android saved another US corporation - Motorola!

And then there is also the well proven problem with not taking risks - if companies stop investing and taking risks - you would never see the search engine, the most successful consumer OS, the reinvention of the smart phone etc. Those risks and failures need to be digested in order to push the world forward.

Darren Kopp said...

you do realize gmail was a 20% time project right?

John Whittet said...

At the core of this article, Ron, I think you have a good point. Which is that at companies like Google and Microsoft (and others) there are projects that are ill-managed and poorly thought out. Projects which would have quickly failed initial tests and been abandoned, or re-worked intelligently if they were designed to stand on their own two feet. But are allowed to continue and bleed because they're being sheltered from various realities by, among other things, mountains of cash from a big, successful business.

If you took all the engineers working on Wave and fired them, there's a chance that some of them would have formed a company to develop something like Wave (because clearly someone thought it had potential). Then, either it would have been modified to be successful, or it would have failed with little fanfare. High-profile failures are just that: high-profile.

The message here is not that innovation is bad, but that pursuing innovation without discipline is probably worse, as not only are you failing to innovate, but you're tying up resources who could perhaps be innovating successfully given the right environment.

Without the sting of failure and the survival instinct that drives success, releasing a good product is much more difficult.

From a financial standpoint, investors should be thrilled that profits are being re-invested in R&D, but pissed at failed efforts that had little chance of success. Not to mention the seemly laissez-faire attitude towards these failures: if you're going to fail, at least learn from them.

Anonymous said...

> encourage engineers to waste 20% of their time
> on "projects", like Google Wave.

"waste"? Seriously?? Have you any idea how much learning must have come from the effort put into Google Wave, or from other 20% projects that haven't make it as far? And that doesn't even count the increased morale from working on a pet project.

If one doesn't have time to play "what if...?", then how does one know?

Eugene Kim said...

Either you hit a nerve with a lot of your readers, or they have a reading comprehension level of a 3rd grader (no offense, 3rd graders).

Unlike what Chris said above, it seems to me that Apple is actually the exact opposite. Most of their product lines pull their own weight. The earlier Apple TV was a "pet project" that had the very characteristics of the Cash Cow Disease, but after being merged with iOS it seems that Apple is in the process of curing it.

The main difference, it seems, is a company backed strategy for the product in question. With 20% projects, pet projects of VPs in Microsoft, etc, they are merely throwing money at ideas detached from any company strategy or direction. It seems almost like the company is indifferent to the results of an endeavor, if it works it works, if not, whatever. Any company who's survival depended on a project would not have that mentality, and weak ideas would be terminated much earlier than pet projects funded by cash cows.

The end result is a half-hearted wimpy jab at a problem with no real impact instead of a full forced blow of a fist with the entire body behind it.

As dim-witted as Vector in Despicable Me seems, at least he "commits crimes with both direction and magnitude! Oh Yeah!"

Anonymous said...

I think a lot of commenters are missing the point. I think the point the author is trying to make is that to make innovative products, you need more than just smart people.

You need a sense of urgency, focus and support from the top. Having a cash cow naturally inhibits these qualities because there is little risk if your product fails.

Take Chrome OS. It took 1.5 years for the product to be revealed and it still hasn't shipped. If Chrome OS was created by a startup, would they have taken that much time? I doubt it. They would have focused on the absolute minimal features needed and shipped a long time ago. In the time it took them to go to market the market has already changed.

Take Wave for example. If Google was really intereested in changing communication, would they have pulled the plug so quickly? How the product get so complex with no clear value proposition? If wave was a start up idea, I highly doubt that it would have gotten funded.

The author makes some good points. Take it for what it's worth. No point on hamming on semantics.

Anonymous said...

So...Following the logic of the piece, Bell Labs should never have been allowed to exist. Ditto, Xerox Parc. Good thing neither of those loss-leaders ever came-up with anything worthwhile, eh?

whatsthebeef said...

I think the author is being slightly tongue in cheek when suggesting Microsoft should have stuck with office and windows and Google with their search engine. It is clear that other products from these companies is profitable or have helped to promote other products or bind customers in to using their technologies (.Net and android are just some examples) also the importance of growth in technology companies is illustrated in the decline of companies like MySpace.

However I think one of the main points the author is trying to emphasise by using this hyperbole language is the natural selection which would usually take place with technology products is eliminated. The sense of ownership of a product by a company doesn't exist (at the top levels) and the evolution and learning of the big company products is forced. Therefore these products don't always result it in the most efficient use of the so called 'top brains' time and other ventures are stifled.

Ricky said...

Diversifying is not a bad idea when you see the opportunity, trying to ride every horse that's out in the street certainly is. I agree with the Author's mention of the Failure of Microsoft Kin, A product produced in the haste, just to line it up on the shelf with others, without a careful study. When you have investing power like Microsoft, you should only strike the hammer once, but with a strength that could shatter the stiffest iron and When a giant's move goes entirely unnoticed(as with the Kin, majority wouldn't know even if a product like that existed) it should seriously sit back and introspect. Google on the other hand, has certainly introduced some really innovative products(including Android, Street view maps, Chrome and lot more) to the market and i can't really call it infected with so called Cash Cow as every new product has a risk factor associated to it, which is also there when you are driving out on the road.

James Katt said...

I'm glad Apple doesn't have Cash Cow disease. All it does is make money on all of its products. And it makes money from diversifying its products. And it makes tons of money period.

drwilly said...

Having large amounts of cash is a symptom of "cash cow" disease, not the cause. The real problem is clinging too long to a technology that may currently produce cash and not innovating and taking a risk for the future.

Contrast Apple and Microsoft. Microsoft's cash cow is the Windows OS and desktop business software. But as the world moved from the desktop to mobile, MS insistence on using Windows as its mobile OS strategy delayed its smartphone development at least 3 years, before they finally realized they needed a new phone OS. Now they still want to shoehorn the mouse-based Windows desktop OS into a touch-based tablet, which I think, again, will be a failure. If cloud computing is the future, then MS is not at the forefront because it feels it must protect its desktop based Office suite.

In the meanwhile, Apple completely revamped to OS X because they could foresee the flexibility that this new OS would offer in the future. If Apple had clung on to OS 9, they never would have been able to adapt it to use on a smartphone. They switched processors to Intel, when they saw that to be the future. Each generation of iPods have been best sellers, yet Apple takes the risk of redesigning them completely when they think they have a better product. Compare this to Palm who clung too long a design that was once at the forefront and failed to take a risk and innovate.

Maybe all companies succumb to cash cow disease, but Apple has shown that to prevent it. You must, of course, take risks and innovate, but also you have to make the RIGHT choices and not waste that money. Maybe the only cure is a Steve Jobs.

Jake said...

Excellent, insightful article. Clarified my thinking tremendously.
A lot of the commenters here are both dumb and unaware of their dumbness, unfortunately.

Marc said...

Google has a very different model than Apple and Microsoft, and therefore its square peg really won't fit into the round hole of this argument. All of its "products" are really just loss leaders or value add's to further cement their brand and repoint all roads to their advertising. They're not interested in monetizing any aspect of these services, unless it's means bolting on an ad display system.

Anonymous said...

Hindsight is 20/20. It's easy to look at the high-profile flops of Microsoft and Google and label them as excesses, but no major product development is without its share of potentially devastating problems.

As others have pointed out, Apple took huge gambles (and won) with the iPod, the iPhone, and the iPad. But they've also had their share of high-profile flops with products like the Mac Cube, Mac TV, the Pipin, and the Lisa.

I couldn't disagree more strongly with the author; very few tech companies have been able to maintain their cash cow products over the long haul; they are expected to keep innovating.

Anonymous said...

Boy you've really ticked off a bunch of Google fanboys with this post.

Nick Gogerty said...

Ron, as a former hedge fund manager and former chief analyst for Europe's equivalent to the MIT, I would agree whole heartedly with most of your analysis.

Many firms get lucky with an innovation or two and then proceed to keep trying things out without really understanding the key drivers for what makes for good sustainable advantage.

A firm named Doblin.com is one of the few that actually gets innovation drivers and processes, helping firms like apple etc. understand the process behind the outcomes.

Most tech CEO invest in projects like people invest in companies, they hope they can find a big winner with luck. I am actually writing a book on the flawed process of capital allocation at the management and investor level.

Tech firms often treat the excess cash as free option to pursue what ever seems fun and interesting. Dividends or ROI metrics can force discipline on the R&D budget otherwise retained cash becomes a play pile, that disappears rapidly.

Yuhong Bao said...

"I once thought that giving a product away to kill competitors was supposed to be illegal monopolistic behavior, in fact. (It was when Standard Oil sold below production cost.)"
I know.
"Android may be the best thing ever (or not), but since when do OSes have to be given away to succeed? That's just CCD making sure that no innovative startups can compete."
This is not a good example, though. A better example is how MS tried to kill Netscape by giving away IE for free,

Anonymous said...

I find your arguments come from ignorance. "Cash cow disease"! Wouldn't we all like to have that problem? You could find fault with how any one of us attempted to run a company with this "problem" and yes, it is a problem. The simple fact of the matter is there is a need for more R&D in America and should you find yourself with the ability to fund it, THEN BY ALL MEANS FUND IT and don't worry that some people will fault you for it becuase if you do nothing, people will fault you for that too.

Anonymous said...

people think that Apple doesn't have this problem? Apple has failed on many, many things (ever heard of Lisa?). Apple has done the same thing as Microsoft and Google with cash-they're hoarding it. They do not give it back to the shareholders. Please don't insult our intelligence and praise Apple-people have to be called out on Apple's CLOSED system. GOd help you if you ever need to sell business software and you need to deal with Apple.....

Anonymous said...

I can agree, in part.

It's important to remember that Microsoft doesn't merely invest in markets to gain and eventual ROI directly -- some of that investment is defensive of their primary revenue stream.

The XBox is a perfect example. What do you suppose would happen to Microsoft's primary revenue streams, if browsing from the livingroom, on the latest Sony or Nintendo console became overly popular? And if web office products became wortwhile?

Note that the Microsoft XBox 360 does not contain a browser -- I don't believe this is an oversight. Microsoft doesn't want web browsing moving to a competitive forum where its not the dominant player...