History, they say, never repeats itself – except, perhaps, as a farce. That really does seem to be the case. A few hundred Bonnblogs ago we wondered what IBM was going to do with its war chest of around $100 bn and whether Big Blue would be able to catapult itself back into the centre of the IT action by means of acquisitions.
Now that Microsoft has a war chest of around $100 bn the question that constantly arises is which takeovers Redmond has in mind and why they might serve to bring Microsoft back to the centre of the cloud-based IT scene. The day before yesterday Salesforce was seen as a likely candidate for a Microsoft takeover; yesterday it was the microchip manufacturer AMD.
The two companies could hardly be more different.
Salesforce with its cloud-based CRM software is undermining established providers of sales support solutions and securing important sources of revenue. Oracle, SAP and indeed Microsoft are not achieving anywhere near the same growth rates in this market segment. It is a highflyer and there is talk of astronomically high takeover prices. The latest figure to be bandied about was a fabulous $60 billion price tag.
Advanced Micro Devices in contrast supplies the Who’s Who of the IT scene with chips and thereby secures important sources of revenue for them. AMD graphics or computing chips power Apple MacBooks, Sony’s PlayStation and Microsoft’s Xbox too. Yet the industry oldtimer is nonetheless valued most cautiously. The current price tag is a mere $1.26 bn.
That is little more than one per cent of Microsoft’s war chest and, conversely, the sum that Microsoft has to pay AMD annually for its Xbox microprocessors. So Microsoft CEO Satya Nadella could hardly go wrong by acquiring AMD, especially as competitors such as Sony or Apple would then face the alternative of either allowing Microsoft to participate in their business success via AMD or building up totally new supply chains.
But did Satya Nadella not just state in his mail to Microsoft employees that it isn’t a hardware company? Did he not repeat that it is a cloud first, mobile first organisation that has enough on its plate to see its own PC business safely into the cloud? Nadella owes his well-filled war chest to the PC product business, which accounts for 40 per cent of Microsoft sales and three quarters of Microsoft profits. The challenge must then surely be to keep Microsoft’s profitability high despite lower future profit margins from the cloud. What that requires cost reductions and not cost drivers like in-house chip production.
The problem for all established companies that are preparing for the cloud is that they have grown large and fat on an inflow of dollars from the licence business, whereas companies like Salesforce, Amazon or Facebook, which have lived under the cloud from the outset, are lean and streamlined in their positioning. Their partner structure is totally different too and does not rely on the traditional cascade model in which the manufacturer, the consultant and the implementer share the licence cake.
They, in contrast, live on complex and multi-faceted relationships between platform and service, between offerings that strengthen each other and on a market presence that builds up reciprocally. They use the dynamics of the cloud rather than the statics of co-marketing. How difficult this has become for Microsoft is indicated by the latest poll of partners, 25 per cent of whom said that Microsoft was their most important supplier, but 70 per cent see Microsoft merely as an important partner among many. The old binding mechanisms no longer work.
IBM also underwent – and suffered from – this trend. After all of its acquisitions in recent years Armonk has been forced to realise that the company is still the same: IBM. Microsoft too will face the same experience, with or without Salesforce, with or without AMD. Change does not come from without and not by means of acquisitions. The transition to a flawless cloud company can only succeed from within and with products that pass on the company’s own heartbeat and that of its employees.
AMD would otherwise just be Another Microsoft Device. And that would really be money poured down the drain.