You wouldn?t think it from most of the world?s headlines, but happy days are here again. Far from the dot.com bust becoming a high-tech South Sea Bubble, leaving nothing behind its speculative collapse, the dot.com frenzy can now be seen as Act One of a lasting and world-changing drama that today is gathering tremendous force; while creating sub-plots just as fantastic as any of the earlier explosions of unbridled entrepreneurship?drive ? and satisfied greed.
Take the astonishing case of Skype. After only three years of life, the company, founded by Niklas Zennstrom and Janus Friis, has won a reputation for having the top technology for internet telephony. This attracted the avid attention of some big, big names: Rupert Murdoch, Yahoo!, Google, Microsoft, etc. They were warned by Skype?s venture capital backers that a billion bucks was the lowest acceptable offer ? but the pair didn?t get that magic figure.
The price was actually $2.6 billion. It was paid by eBay, which itself went public not so long ago. And how much revenue does Skype generate? The amazing answer is a mere $60 million, on which it doesn?t even break even. That historic moment isn?t expected to arrive until late 2006. At that point, all being well, Skype?s sellers will be licking their lips over the prospect of pocketing another $1.5 billion in 2009, if the performance targets agreed with eBay for its new baby happen to be met.
LUNATIC DEAL
What kind of lunatic, you may well ask, pays some 40 times sales for an unprofitable business? It?s not even that the purchaser is especially large; eBay is paying more than its own revenues ($2.1 billion) for what is, after all, a mere start-up. But in the highly charged atmosphere of this Act Two boom, all considerations of business economics and fiscal prudence have flown out of the window ? so much so that even Business Week?doesn?t?marvel at the surely miraculous Skype price. It mildly observes that ?it?s a lot of money? and notes that the ?gamble is hardly cheap?.
The deal is no gamble from one aspect, however. I have long argued that internet telephony is inherently superior to capital-intensive landlines and cables. Cheap, flexible, and tied in with other?internet business, this has to be the great wave of a fast-growing future: Skype already has 54 million ?subscribers?. They don?t pay for the computer-to-computer phone service, but get charged for linking PCs to phones and voice mail. So if the numbers don?t seem to make sense, the technological offer certainly does; eBay is betting on huge revenues from getting its auction buyers and sellers to use Skype automatically for transactions.
The negative side of the dot-com comeback is self-evident. Buoyed by their own excessive share prices, wallowing in cash, and driven by the hot pace of their sectors, the i-entrepreneurs believe that any price is worth paying to stay ahead of the game ? especially if they are paying in inflated shares. They forget the old-fashioned truth that the higher the shares are rated, the higher the cost of equity ? and the harder the task of getting a return on the gee-whiz investment.
Without question, fingers are going to be burnt, just as in Act One. In the first nine months of the year, according to Business Week, 66 ?tech deals? were completed for a total value of $61billion ? over half of it spent on software and services. Oracle alone has bought a string of companies for $17 billion. The Golden Oldies of high tech like Oracle are vying with the new start-up stars such as eBay and Google in a contest which is bound to breed a fair share of disasters ? unless the rules of management have changed.
PRUDENCE PASSES
Have they? As noted, one key principle has plainly gone by the board: financial prudence. When two young inventors can become billionaires over-night: when Microsoft can install an incentive scheme which stands to pay around 120 vice-presidents million dollar incomes: when a Wall Street investment bank pays executives over $100 million each to leave ? well, plainly incomes and other rewards have become as much a free-for-all as takeover tags.
These examples are all American. But the contagion will spread rapidly to Europe, from where the two Skype billionaires hail. The internet is truly and totally global, and so, of necessity, are the companies seeking to exploit the furious pace of change. Four years ago I wrote that?
?The Digital Revolution is unquestionably the broadest, most significant change that managers of the modern era have seen, a tide so powerful that even executives who try to resist it cannot fail to be swept along. Every aspect of running organisations, for profit or non-profit, is being or will be profoundly affected?.
Looking back over that quote only confirms its rightness. The tide is running still more swiftly, and it poses a major challenge for the Act One survivors. They are now three or so decades old. Some have become very large, in both numbers of business lines and employees. Age, size and spread have long been recognised as key enemies of corporate success. It was widely believed in Act One that the very nature of the high-tech companies and of the people they hired immunised these corporations from the afflictions of their elders at work in boring big businesses. But the dot.com disaster only emphasised that folly is a more destructive force than age, size or spread.
All the same, something new and vital is afoot. The Act Two companies run on ideas as cars run on gasoline. Like Skype, they started life with nothing but an idea. Sustaining their market positions has depended on constant, timely renewal of the founding idea and addition of many others. Diversification has tested their openness to the new and their readiness to embrace difference and variety.
The tech deals range from photo-sharing to wireless phone software, comparison shopping to mobile services. The buyers have to master the arts of swift appraisal and even faster action. The value of their buys mostly rests in the brains of those bought. The purchasers have to respect and nurture the brains while applying the pressure for performance taught by venture capitalists. At the same time they must defend the core businesses against some deadly serious would-be boarders.
AUTO-DESTRUCT DANGER
As Steve Jobs of Apple observes, ?We have world-class competitors out there trying to kill us?. In fact, in its past Apple has often seemed in danger of pressing the auto-destruct button.
But time and again it survived by its dedication to The Idea. When all seemed lost, innovation came to the rescue, most recently and notably with the phenomenal success of the iPod music system. Those would-be world-class assassins have enjoyed scant success against Apple?s innovations, which spring from Jobs? success in preserving a unique?corporate culture.
He told Bobbie Johnson of The Guardian that ?There?s a very strong DNA within Apple, and that?s about taking state-of-the-art technology and making it easier for people? people who don?t want to read manuals, people who live very busy lives?. Unquestionably, the DNA owes much to Apple?s father figure. Jobs has shown his rare ability to turn ideas into profit by his parallel success with Pixar and its wonderfully entertaining computer animation.
What you won?t find in an outfit headed by Jobs are the Four Forces of Failure: innovation stagnation, slow product development, bureaucratic red tape, sagging morale. You can recognise the Fateful Four by these signs:
1. Lavishing time and money on existing products delays and handicaps developing the new.
2. Individual product groups are robbed of stand-alone individuality and forced to waste time on collective, cross-boundary efforts that make the fast move at the same pace as the slow.
3. New management processes, instituted to create greater discipline and order, impose endless meetings, rules and regulations which hamper creativity.
4. All the above contribute to worsening morale, whose giveaways are rising internal complaints and external poaching of key employees.
Business Week has found a company where all four afflictions appear to be in full flood ? Microsoft. If you don?t believe this star of stars could suffer such a fate, just look at one startling fact: the stock is worth no more than seven years ago. The only person BW found who was overtly bullish on all aspects was Steve Ballmer, the long-time friend and ally of Bill Gates and the man to whom the latter turned over control. Gates remains the software guru, but there?s an eerie echo of events at Apple in the mid-eighties: Jobs handed over executive power to a Pepsico recruit, John Sculley.
ORDER AND ORTHODOXY
Like Ballmer, Sculley tried to impose management order and orthodoxy. For good (or bad} measure, he had Jobs removed completely; it took Sculley?s own removal and the return of Jobs to put Apple together again. Luckily there was enough of the original DNA around for Apple to work its magic. But that may also be true of Microsoft, to judge by a 12-page memo that two Microsofties sent to Gates a few months ago. Their ?Ten Crazy Ideas to Shake Up Microsoft? include six that are eminently sane:
? Break up the business. Build it round independent discrete units with their own?leadership.
? Set up development units to nurse new ideas to fruition ? like the ?skunk works? of legend.
? Allow people to pursue their own ideas in company time.
? Create ?bureaucracy police?, empowered to search out, expose and excise counter-productive red tape.
? Reduce staffing of large projects ? in its palmy days Microsoft created Windows (the key to its wonderful rise) with far less people than IBM devoted to a rival product ? which failed.
? Incentivise people to take risks ? give them rewards based on the achievements of their own independent units (see above).
The two authors of this document are by no means alone in confronting management with their criticisms. The company?s own technology helped to create what has become a thorn in the side of the corpocrats but a beacon for the disaffected ? the blog. Made possible by internet technology, the 2,000 blogs supposedly posted by Microsofties are a rich source for searchers after answers to questions like why has Micrsoft become a ?passionless, process-ridden, lumbering idiot??
Those are the words uttered by Mini-Microsoft, the king of the company?s anonymous bloggers. He is no troublemaker, telling BW that ?Microsoft has been wonderful to me. I really want to improve it. I really want to make a difference?. That?s a key phrase. The high-tech companies are not alone in hiring people who are highly educated, full of ideas, genuinely concerned with making the business a better place in which to work, and inherently not afraid to express their opinions.
THE BLOG EXPLOSION
Note that Microsoft?s leaders had nothing to do with the blog explosion. The employees created their own electronic talking shop as individuals. But the impact is organisational. For a start, it?s anarchic. But if you want an ideas company ? and I?ve argued that this is the only kind to have ? more anarchy is essential. Ballmer was heading off in the wrong direction with his reforms of the internal processes. Creative organisations are inimical to administrative order-and-obey cultures. Blogging is one means of penetrating the layers of hierarchy and custom and revitalising the business.
Kai-Fu Lee, a speech recognition expert, is one of Microsoft?s recent deserters, and a serious loss. He went to Google and to a culture which he feels is ?very supportive, collaborative, innovative, and internet-like ? and that?s bottom-up innovation rather than top-down direction?. As the Act Two products pile into the marketplace, more and more technologies will become available to allow companies to combine anarchy with reasonable order and to earn plaudits for a culture that lives up to Lee?s glowing portrait of Google.
There is, however, a real risk that the high-tech buying spree represents a falling away from this ideal, a move towards the same excesses that gave Act One such an unhappy ending. As the Microsoft story shows, being at the leading edge of technology is no protection against the hardening of the corporate arteries. Staying true to the original virtues is no easier than developing them from scratch in a mature business.
But failure here is deadly dangerous. Managers who don?t live by foundation ideas that generate a flood of genuinely new products and processes are in rotten shape for competition with others who do.
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Source: http://www.manswersonline.com/money-business/internet-business-the-dot-com-revolution/
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