Ballmer: RCA Is Our Role Model
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News Analysis. The ever effervescent and positive salesman Steve Ballmer was energetic but not optomistic today. Microsoft's CEO was Mr. Doom and Gloom speaking to Wall Street analysts today. |
Twice a year, Microsoft gives Wall Street the big bear hug—during a July gathering on the Redmond campus and during winter in New York. Unlike past meetings, Microsoft's CEO and CFO Chris Liddell could offer little hope for the immediate future. Microsoft's reasoning for the midyear meeting is to update on any changes since the summer gathering.
"The most significant thing that's changed since last July is the state of the economy," Chris told financial analysts. The economy negatively affected fiscal second-quarter results, ended Dec. 31.
"Our results weren't bad," but it's the "shape of the results that is most significant," Chris said. He explained that Microsoft performed fairly well until "the second half of the second quarter." He got right to what I'm sure most of the analysts wanted to hear about. In October, when Microsoft released fiscal first-quarter results, Chris offered cautious but optimistic guidance. In January, when announcing fiscal second-quarter results, he recounted a serious sales drop-off occurring in December; Microsoft has stopped giving future guidance.
"We expect conditions to remain difficult at least through the second half of this fiscal year," Chris warned. "Deteriorating PC sales" would primarily affect the Client division and also the Business division. He warned that the IT spending cycle is "admittedly slowing." The Server and Tools division is more insulated from the downturn, as about two-thirds of revenue comes from annuity licensing contracts. But slowing server sales would negatively affect the other one-third of the business. While not as bad as PC sales, servers are a "negative environment" for the second half of the fiscal year, Chris said.
"Overall picture: A difficult economy for the second half of this [fiscal] year." With that cheery statement and a quick recap of expense reductions, Chris turned the meeting over to Steve.
Steve explained how Microsoft is trying to figure out what happens next and what to do about it. The company has looked at previous downturns, even reading corporate annual reports from the late 1920s and early 1930s. "What were those guys saying? What was going on?" he yelled. He used RCA—"God rest them in peace"—as a model of downturn-to-recovery success.
"[RCA] became our role model," Steve said, because the company kept investing in research and development even during the Great Depression. "Post Depression they dominated TV technology because they really were the only guys who invested."
Steve identified four major "deleveragings" that led to economic downturns: 1820, 1873, 1929 and today. The earlier three economic meltdowns say much about the seriousness Steve sees for the current crisis. There have been at least four recessions during my lifetime. If none of those were bad enough to make the list, then there surely is trouble ahead.
Microsoft has got its weaknesses, but research and planning isn't among them. I wonder how many other American companies are looking to the past for answers about the future. It's truly commendable that Microsoft is doing its homework here.
Steve called the current crisis an "economic reset. It's not a recession in which you recover, but rather a bunch of money comes out of the economy and it resets over a period of time to a new level and then productivity and, sort of, innovation can then again drive economic growth."
He continued: "You don't beat it. You manage in this environment. You don't think about it as shorter term. You think about it as a reset that may take several years to fully reset." During that process, companies must decide what to invest in, "what's important." He observed, based on earnings reports, that companies are unable to cut costs fast enough "in any industry to maintain the profits of yesteryear." Companies must ask "what the business reset looks like to go along with the economic reset."
I'm no economist, but Steve's reasoning makes sense to me. I was walking around the local mall last night and observed several more stores had gone out of business. As I walked by different clothing stores, I considered how the business models had been during the boom and how they'll need to change for the future. Many different manufacturers, technology providers among them, fairly frequently release new products. There are release cycles everywhere—for autos, computers, dresses, shoes, swimsuits, TVs, etc., etc. A new line comes in and a new one goes, often on quarterly cycles.
Those release cycles will have to shorten, dramatically. It's OK to bring in the new when people are buying. But the inventory piles up when people aren't spending. I thought to myself: If I were, say, the GAP, I would release fewer new clothes cycles, but increase the in-store marketing and online, print and TV advertising about what I do have. Let the advertising make what I've already got in the stores look new and fresh. Marketing is cheaper than cost of manufacturing, distribution and inventory management.
Business and consumer spending is falling too fast. Businesses must reset their business models and cut expenses. Shorter cycles with more supporting advertising for what's there works.
By the way, this is what Apple does today. Its product refresh cycles are much shorter than most other computer or hardware technology companies, The iPhone is a great example. Apple released 8GB and 16GB iPhone 3G models in July. There has been no refresh, but lots of advertising supporting the handsets. Each new round of ads touts new features; the iPhone is new again.
The way I see it, companies should lengthen release cycles now while doing what Steve plans for Microsoft: Invest in research and development for future products. The time to innovate, to reinvent, is when other companies retract their businesses and, likely as a result, decline.
[Please send your tips or rumors to watchtips at live.com.]
Comments (14)
Well, no wonder! Some quoted excerpts from en.wikipedia.org/wiki/RCA
Ballmer must be alluding to the government's grant of a monopoly to GE via its subsidiary, RCA, as support of the need for continued government grants to Microsoft for their monopoly?
"During World War I the U.S. Navy suppressed patents of the major companies involved with radio in the United States to facilitate the war effort. All production of radio equipment was allocated for either the army or the navy. The U.S. Navy sought to maintain a government monopoly of wireless radio; however, the wartime command system over radio was to eventually end by the tabling of the maintenance of government control by the U.S. Congress in 1918. The rejection of government monopoly did not prevent the Navy from creating a national radio system.[3] On April 8, 1919, U.S. Navy Captain Stanford C. Hooper and Admiral W. H. G. Bullard met with General Electric Company executives to ask that they not sell their Alexanderson alternators to the Marconi companies. The premise of the Navy's proposal was that if GE created an American owned radio company, then the Navy would secure a commercial monopoly of long-distance radio communication. This marked the beginning of negotiations by which GE would buy American Marconi, a foreign owned company, and organize what would become the Radio Corporation of America."
And might Ballmer be alluding to the fall of Microsoft once Bill Gates steps aside, just as RCA stumbled and fell after David Sarnoff died?
"In many ways the story of RCA is the story of David Sarnoff. His drive and business acumen led to RCA becoming one of the largest companies in the world, successfully turning it into a conglomerate during the era of their success. However, in 1970, at 79 years old, Sarnoff retired and was succeeded by his son Robert. David Sarnoff died the next year; by some accounts, much of RCA's success died with him."
Posted by Philosopher | February 24, 2009 1:48 PM
The RCA logic breaks down quickly. MS has already been spending heavily. It's the results that in many cases haven't been forthcoming. Also, main competitors like Apple and Google aren't going to change what they have been doing, namely spending less but getting better results. This seems like a convenient excuse for MS to continue ignoring the need to make strategic changes and lagging behind others in cutting costs. Overall, I thought it was very disappointing.
Posted by Paul | February 24, 2009 3:03 PM
Ballmer inserts his foot yet again. The RCA analogy fits with Microsoft's past behavior though. RCA was a corporate bully that trashed intellectual property rights whenever it suited their needs. They bought political influence and used it to stifle competition in radio and television for decades.
I'm sure Ballmer had some other analogies in mind when he compared Microsoft to RCA, but damn, can someone please screen this guy's public comments to avoid these gaffes? Maybe someone who knows a bit of history?
Posted by Fred | February 24, 2009 3:12 PM
"I'm sure Ballmer had some other analogies in mind when he compared Microsoft to RCA"
He didn't compare MS to RCA. And he was explicit about what he saw in RCA that he thought had relevance for MS and others, as Joe has reported. Reading really is a critical skill. Right up there with thinking.
Posted by Paul | February 24, 2009 3:18 PM
Stop the fanboy B.S. Paul. Ballmer compared Microsoft's emphasis on R&D spending into the recent economic downturn with RCA, his "role model", and their similar strategy in the 1930s. He conveniently left out the parts about the political "investments" by RCA and their ongoing theft of IP from hapless inventors and other small companies.
RCA was certainly a powerful corporation and technology leader, and I'm sure those are the characteristics of RCA that Ballmer wanted to associate with his tenure as CEO of Microsoft. As a MSFT shareholder I see the results of Ballmer's reign a bit differently.
Posted by Fred | February 24, 2009 4:02 PM
The RCA analogy is just that an analogy. Regardless who their customer was they invested. Like a gov't contractor Microsoft has a pretty steady revenue stream.
What is more interesting is the "reset" reference. That's exactly what it is. The only problem is that while we have reset the wealth meter, we have not reset the debt meter. Don't know how to do this, but it would make a huge difference.
Posted by Mike | February 24, 2009 6:52 PM
As I recall, RCA was wiped out by the Japanese, with a radically different business model (lower-margin, lower-power transistorized electronics). It chose not to adapt to the new economic realities, and paid the price with extinction.
Microsoft's "Japan" is Open Source. Again, it is refusing to adapt to the realities of the new business model (give away the software, charge for support). Guess what price it's going to pay...
Posted by Lawrence D'Oliveiro | February 24, 2009 9:03 PM
Ballmer isn't copying RCA. We know who he's REALLY copying, but of course he can't admit it.
When Fortune asked about managing through the economic downturn:
"We've had one of these before, when the dot-com bubble burst. What I told our company was that we were just going to invest our way through the downturn, that we weren't going to lay off people, that we'd taken a tremendous amount of effort to get them into Apple in the first place -- the last thing we were going to do is lay them off. And we were going to keep funding. In fact we were going to up our R&D budget so that we would be ahead of our competitors when the downturn was over. And that's exactly what we did. And it worked. And that's exactly what we'll do this time."
- Apple CEO Steve Jobs
Posted by Tom | February 24, 2009 11:00 PM
"Microsoft's "Japan" is Open Source. Again, it is refusing to adapt to the realities of the new business model (give away the software, charge for support). Guess what price it's going to pay..."
That is why Ballmer keeps talking about a "reset" - the days of them charging full rate for a commodity OS are over. Maybe he does understand and accept their fate, but he is trying to hide it from the shareholders?
Posted by billybob | February 25, 2009 6:59 AM
Ballmer becomes CEO, MSFT trades in the mid $30s.
Today MSFT trades at $16 & change.
Thanks Mr. Ballmer, great job, brilliant strategy, wonderful execution.
Posted by Ed T | February 25, 2009 10:45 AM
Ethics aside, Gates was (is) a brilliant financial mind and an extraordinary business visionary with an unwavering commitment to customers, and unbounded generosity to employees. In return, the employees rewarded Gates with as much effort and vision as they could muster (tainted only by inexperience but certainly not by lack of trying), and the customers rewarded Gates with a willingly-donated monopoly.
Ethics aside, Ballmer treats his customers with contempt at worst, and as inconsequential at best. He treats his employees like dirt, willing to spend $10 million to an actor in a stupid and ineffective advertisement, but unwilling to pay a fired employee a few hundred extra dollars (that he committed to when he fired them), even though that employee likely contributed INFINITELY more to Microsoft that that stupid actor.
In return, the market will also give Ballmer his just rewards. It may take time, but his reward will come. "The mills of God grind slowly, but they grind exceeding small."
Posted by Philosopher | February 25, 2009 1:28 PM
Fred, stop the troll bs and learn how to read. Ballmer did not compare MS to RCA. He did say that studying the Great Depression led them to focus on RCA and take lessons from how it handled that period, specifically it's focus on continued R&D investment. As Joe reported.
Posted by Paul | February 25, 2009 1:37 PM
@Ed T :
"Ballmer becomes CEO, MSFT trades in the mid $30s."
High 50's actually. Even worse.
Posted by Paul | February 25, 2009 1:45 PM
I remember RCA as spending most of it's time in courts disputing new patents and ideas and circuts by garage inventors. It DeForrest around 20 years to defend his inventing the vacuum tube.
By the 50's, RCA had by various methods such as out spending inventors in court, 99% of all TV circuts.
AKA 80s MS.
Posted by Walter | February 25, 2009 2:25 PM