Analysis of IT news

Saturday, March 29, 2008

Vision vs. Operations

There are two types of CEOs. The entrepreneurs who run the companies they founded and the professional CEOs who go from one company to another.

The conventional business wisdom is that the former type is good only for the short term as entrepreneurs seldom have what it takes to manage a larger company. But this wisdom is heavily influenced by Venture Capitalists and Wall Street, which means it is biased. The picture is neither black or white. Some entrepreneurs do not scale. But others do.

Famous examples of entrepreneurs who can scale are Steve Jobs or Bill Gates. Apple has indeed been much more successful when run by Jobs than any of the professional CEOs it had between 1985 to 1997. And Bill Gates has successfully led Microsoft to a multi-billion empire.

Granted, these might be exceptions. But "amateur" CEOs enjoy some advantages over their professional counterparts.

For a start, professional CEOs strongest point is operations, NOT vision. They know what to do in an established market when rules are well known but in new markets, as it is often the case in high tech, professional CEOs struggle much more. A perfect illustration is John Sculley, who replaced Steve Jobs at the helm of Apple after a power struggle. In his memoirs he wrote: "Apple was supposed to become a wonderful consumer products company. This was a lunatic plan. High tech could not be designed and sold as a consumer product." In retrospect that statement looks pathetic. But Sculley's behavior is symptomatic of a lot of professional CEOs: he looked at what the market was at the time (that is, machines quite cumbersome to use, not ready for the general public), not what it could become. Entrepreneur CEOs know the industry they're in, are much more likely to make bold moves and have a vision that will help the company strive in high-changing markets. Obviously it doesn't work everytime (everyone can come up with a vision, but not everyone can come up with) but professional CEOs almost by definition don't know how to cope with emerging markets and aren't likely to predict where the market is heading.

The second advantage about entrepreneur CEOs is that they genuinely care about their company's success. If some professional CEOs do care, a lot don't and only focus on their stock options so focus on the short term stock price - and one of the first things they negotiate after their salary is their golden parachutes. A typical example would be Al "chainsaw" Dunlap. Once a Wall Street darling for his effective (albeit brutal) turnaround methods, his fame turned into infamy while he was the CEO of Sunbeam as his heavy practice of channel stuffing (selling next year's products at a discount to make today's numbers) blew up in his face.

Given this, why do VCs and Wall Street keep preferring professional CEOs and don't give more chances to entrepreneur CEOs? Partly because entrepreneurs sometimes really do not know how to handle a large company. But also because they don't share the same values as their corporate masters. VCs initially provide funds to entrepreneurs so they can grow a promising startup. During the honeymoon both agree that the entrepreneur should have free reign. But after a while the VCs grow impatient and want to see a return on their investment (it's all about the yearly return). In particular these days VCs don't have the patience to finance the next Google, they want to finance the next YouTube. Get in, get acquired as soon as possible at a premium and cash out.

Some entrepreneurs might be interesting in selling out, but for most of them money is not their main drive. For them their company is an end in itself and not a mean as it is for VCs. Entrepreneurs sure don't mind an IPO, but they hate the pressure from Wall Street and are sometimes (often?) irreverent to shareholders or VCs. In the 80's, Steve Jobs was seen as a loose cannon by investors. No wonder the board sided with Sculley instead of Jobs.

So what often happens is that, after a while, the VCs oust the founder and replace him/her with a professional CEO. Professional CEOs are polished, and have values on par with investors. They play by Wall Street rules. And they acknowledge the importance of quarterly results.

The only problem is that high tech markets move very quickly. And unless they are in high tech themselves, professional CEOs can have a hard time understanding how the market evolves.

Actually, the market doesn't need to be high-tech to prove challenging. Consider Starbucks. Entrepreneur Howard Schultz turned a small Seattle coffee shop chain he acquired in 1987 into an empire, and more importantly was able to change America's perception of coffee from a commodity into an experience. In 2000 Schultz stepped down as CEO. And while his successors worked hard to increasing the top and bottom line, it ended up being at the expense of the brand. Selling other items such as sandwiches or even teddy bears sure brought in more money, but it diluted the Starbucks brand. In 2008, after Starbucks experienced a decline in sales for the first time, Schultz came back as CEO of the company and decided to focus again on coffee. Time will tell if his bold move will be good for the future of the company, but his predecessors showed the limits of doing business by the book.

It doesn't mean that professional CEOs are useless. Lou Gerstner is credited for turning around IBM. But IBM is a large firm operating mostly on established markets. When it comes to a company that needs to reinvent itself like Apple, professional CEOs haven't done so well.

There are also companies that try to combine both types. Consider Google. Its two original founders, Sergey Brin and Larry Page, were teamed up with Eric Schmidt who became the CEO. The same scenario happened when Meg Whitman was appointed CEO of eBay. And while Jeff Bezos stayed as CEO of, he brought in an operational expert when the company was losing too much money. Obviously there needs to be some chemistry between the professional CEO and the founder(s). But the result can be worth its while.

Friday, March 14, 2008

On the legality of ripping songs

Even though they've kept a low profile so far, several people inside the recording industry believe that copying music tracks from a CD onto a computer (also known as "ripping") is illegal. But during a recent testimony, Sony BMG's head of litigation Jennifer Pariser said that ripping a legally purchased CD onto one's computer is "a nice way of saying 'steals just one copy.'" (the RIAA has since claimed she "misspoke" and "misheard the question")

Without taking a poll, I suspect that the huge majority of consumers believe ripping a CD is perfectly legal under the concept of "fair use". President George Bush even publicly acknowledged he ripped some CDs onto his computer. But the fact that the RIAA has kept a low profile on the issue probably has more to do with the public outcry if it began suing individuals for ripping legally purchased songs than the belief ripping is OK.

So why such a huge gap between the recording industry and the consumers expectations? I see two reasons.

The first reason is that the recording business as we know requires a license to do pretty much anything. You need a license from the songwriter to sell a song. You need a so-called synchronization license to air the song onto a television program, film, video, commercial, radio. And you need a so-called mechanical license from the music publisher to mechanically reproduce music onto any type of media (e.g. a CD). I suspect a lot of music execs consider that people need a mechanical license to copy songs from their CDs to their computers.

But the biggest reason might be a business reason more than a legal one. If you remember, the CD has been a huge financial bonanza for the recording industry in the 80's and 90's. For a start, the novelty of the CD was used as an excuse to jack up prices. CDs were more expensive than cassettes, although just as cheap if not cheaper to produce. Second, a lot of consumers repurchased the vinyl albums they had in compact disk format to enjoy the convenience of the new technology. I also remember CDs with lyrics sold separately. Last but not least, the era of the CD saw the rise of "best of" albums, megamix and other ways to sell old songs. So the recording industry has grown used to sell the same song SEVERAL TIMES to a person. The consumer paid a first time for a vinyl album and a second time for the same CD album. Later on, the consumer might pay several times for the same songs as they tend to overlap when you buy "best of" albums.

Consumers accepted this practice with the CD as they acknowledged the limits of a physical medium. But with a fully digital medium the party's over - even if you set aside illegal download. The pendulum swings back in favor of the consumers. Now they can purchase only the few hit songs they like and are not forced to pay for all the B-list songs that are usually crammed into an album. Worse, they do not expect to pay to convert their song collection to MP3. Consumers understand the need to pay when a company adds some added value. For instance, with the switch from the vinyl to CD the music majors had to manufacture and distribute then state-of-the-art compact disks. But when consumers can convert their CDs into MP3 format on their own, the music majors add zero added value. In such cases, the public doesn't understand why they should pay.

So what it really comes down to is whether the recording industry can charge consumers several times for the same song without having to ship anything. Most consumers would consider this practice unfair, but the recording industry has grown used to this revenue for so long it now feels entitled to it. So after having witnessed the steady decline of CD sales over the years, it behaves like a wounded and cornered animal. Wounded because sales suffer, and cornered because it doesn't see any way out (at least no way as easy as the good old days').

The recording industry has deployed a tremendous amount of energy to protect its revenue. They tried to increase the price of online songs but Steve Jobs wouldn't let them. They have poured millions of dollars against piracy, have brought down several companies on their knees (think Napster) and have been issuing thousands and thousands of lawsuits against individuals left and right. To no avail. And that is what has been driving the RIAA mad.

Will the recording industry ever change its attitude? Unlikely. The four big music majors haven't changed their ways an inch. Sure, the four big majors have now all decided to sell unprotected MP3, but that's not because they think it's the right thing to do but because 1) they realized protected music has zero effect on piracy and 2) the MP3 is the way to sell to iPod users without having to deal with Steve Jobs. But once Apple iTunes isn't the main online music site (it currently represents 80% of online sales), chances are that the music majors will become greedy and will significantly increase the prices of the "hot" songs (without decreasing the prices of old songs of course). Except that this time the public has one way of retaliation - albeit illegal: pirate the expensive songs.

The recording industry might also try to evolve and find its revenue elsewhere. Microsoft has agreed to give a slight cut of its Zune sales to the RIAA, but knowing Microsoft this will stop if the Zune conquers the music market. But the RIAA could for example start taking a cut on artist tours, which is the way artists make real money.

Some would like to see the current music major fading away and replaced by an Internet competitor, but so far the Internet competition has been disappointing. Music majors provide indeed two services:
  • First of all they provide talent screening. The public indeed does not want to hear any garage band and wannabe artist. This can however be easily replicated by an Internet competitor.
  • The major competitive edge music major enjoy is promotion. They indeed know how to cut deals with radio stations and TV to promote songs. The Internet has failed to provide a consistent word-of-mouth mechanism to provide unknown talents with some publicity.
My guess is that the current music major's revenue will continue to decline as more people switch to purchase online songs, but this decline will eventually level off (when almost everyone purchases music online revenue will stop dropping). The music majors might not wait that long and might try to strong arm in some extra revenue. The risk is to suffer a backlash in the form of a surge of piracy.