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.