Uber’s über IPO fiasco

This will be one for the business textbooks for years go come. Unfortunately for Uber, it’s initial public offering (IPO) is the perfect case study for all the wrong reasons:

The company waited nine years before its IPO. If it had delayed in order to achieve some level of a true business model, that might have been one thing. But in this case, all signs of that being achievable are vague at best.
In fact, the company showed no signs of a roadmap to profitability, now burning $1.8 billion a year and a staggering $10.7 billion in losses over the lifespan of the company.
CEO Dean Khosrowshahi was handed a compensation package tied to an inflated valuation for the company at the time of IPO. If the company reached a $120 billion in market value at IPO and remained there for 90 days, he was to be awarded $100 million.
Much of the stock was in private hands already, through a network of investors, many of whom included those who were expected to buy again at the market price when the company went public. They weren’t thrilled about it, to say the least, which is why the IPO price dropped from $45 to $42 at the last minute.
Even the underwriters were wary of the price and were shorting employing “naked shorts,” a highly questionable tactic, which in most cases is illegal and in this case was detrimental to the overall IPO.
The market is souring on the Unicorns, companies with $1 billion+ valuations that emphasize gaining market share over profitability.
Lyft, which itself had just gone public and is Uber’s main competitor, had only days before Uber’s IPO posted less than favorable “earnings” (i.e. losses) statements.

Can Uber survive this? Buried deep in its S-1 prospectus, the company makes this rather pointed statement:

“Our business would be adversely affected if Drivers were classified as employees instead of independent contractors.”
Uber S1 filing with the SEC

What this means is that Uber, which is paying a median rate of $8.55 per hour to U.S. drivers, with female drivers making on average of $1.24 an hour less than their male counterparts, is essentially admitting it cannot stay in business if it must act like a regular, grown-up company.

Days before the Uber IPO, Lyft and Uber drivers went “on strike” by turning off their apps, to protest their low wages. Driver turnover will be a main concern. If Uber is not able to address this, it could ultimately affect user experience.

And now that the company is public, the pressure will be on. Under the glaring spotlight of earnings reports, Uber must continually convince shareholders, analysts and pundits that it is on the path to a sustainable business.

And while it is doing this, it has to bet big (via R&D investments) on autonomous driving, in the hopes it can do an end-run around (no pun intended) its driver problem. But it is highly unlikely that this is going to come soon enough. There are myriad regulatory hurdles, not to mention technological and social acceptance issues.The company claims it is modeling its business on Amazon, which focused on gaining market share and ran at a loss for 14 years before turning a profit. But Amazon started very, very modestly compared to Uber. (Amzon’s S-1, by comparison, had the goal of being “the bookseller to the world.”)

Also in Uber’s S-1 filing, the company states:

“We do the right thing, period.”

I guess we’ll see what that means in the coming months.

Sources:

[https://www.washingtonpost.com/b…

[Uber’s growth slowed dramatically in 2018

Uber’s I.P.O. Flop May Be Wall Street’s Worst Ever

Dara Khosrowshahi hasn’t yet earned his $100 million-plus stock bonus for when Uber hits a $120 billion valuation — but there’s still time for him to do it

Uber’s Top Investors

Lyft’s First Results After I.P.O. Show $1.14 Billion Quarterly Loss

https://www.npr.org/2019/05/08/721333408/uber-and-lyft-drivers-are-striking-and-call-on-passengers-to-boycott

Eight reasons for Apple to buy Tesla

I have never been a big fan of mergers and/or acquisitions. What looks good “on paper” invariably ends in a much-less-than ideal situation. I can count on one hand the mergers I have seen or been involved in that had a semblance of success. I can’t calculate the number I have seen fail.

So, with that disclaimer, let me lay out the reasons I think it is a great time for Apple to buy Tesla.

Tesla is a consumer technology company. Apple is a consumer technology company. Both companies are making high-end gear that has comparatively high profit margins. It’s a perfect fit.
Tesla needs a White Knight. Elon Musk is a character and has done what no other human could, single-handedly changing the automotive industry and focusing the world’s attention on renewable energy as the future for transportation. But, as is the case with many founders, he has reached his capacity to govern. And with myriad other interests (The Boring Company, SpaceX), his attention span is spread thinly. Tim Cook knows operations. He can make Tesla work and make it work economically so that it can scale. And Apple has the deep pockets to make that happen.
Speaking of Tim Cook, he needs a visionary, or at least a vision. Elon has laid it out for Tesla: to accelerate the world’s use of sustainable energy for transportation and the home and beyond. It’s simple, it’s bold, it’s brilliant, it’s do-able. Tim can get it done. And here’s the beauty of this scenario: Tim doesn’t need Elon to make it happen. Tim has already proven that. It has been 8 years since the inimitable Steve Jobs passed away. And Tim has done quite well by the vision that Jobs laid out. The problem is, that vision has reached the end of the road and Tim needs a new one. Tesla would set the company on the right path.
So what is that vision? It’s all about the home. That’s right. Tesla gets Apple in the home. Tesla is much, much more than a “car” company. It’s ultimate vision, with Solar City and Powerwall and Tesla is a system of renewable energy from home to auto and beyond. Apple has been a laggard in getting into the home. Amazon has Alexa. Google has Nest. Apple is a follower in this space. No other company has the holistic view of providing these kinds of technologies to the home owner.
It’s all about the car. OK, so No. 4 was a bit of a click-bait. Yes, acquiring Tesla gets Apple into the world that is rapidly heading to autonomous transportation. This is a no-brainer. It’s exactly the holistic systems approach to a whole new market that Apple needs. It’s way, way behind Uber, Google and others that have been investing heavily in this arena. Apple needs to not only catch up, but leapfrog the competition.
Closed ecosystems. Apple has built the largest consumer tech company on a closed ecosystem. As much as it pains me to say so (coming from the world of Unix and open source), it is a brilliant strategy. By controlling every aspect of its hardware, software and services, Apple can provide a user experience that is unparalleled in the industry. Mind you, I have many, many complaints — as do we all — about shortcomings that Apple needs to fix (iTunes, iCloud are woefully outdated, for starters). But it is showing promise. It’s now on a run-rate with services to be over $40 billion in revenue a year. That’s something like No. 236 on the list of Fortune 400 companies if Apple Services were a stand-alone entity. Meanwhile, Tesla has built its own ecosystem with massive reams of data on users’ miles driven. It can provide over-the-air updates based on Big Data analysis of what customers want and need. It is unbeatable in the automotive market today for continuous improvement. And this gives it a long, long lead in the world of autonomous driving.
Fiercely loyal customers. Ever talked to a Tesla owner?
They are proud, they are excited, they are adamant. Same with most Apple users, although this has dipped as of late. But each company has locked their users into an ecosystem. And the users love it, because the highly-integrated experience it provides cannot be matched by their respective competitors.
It’s all about “showing me the money.” Tesla is scrounging for funding, while Apple has a big, big problem to the tune of about $245 billion that it needs to invest wisely. How many stock buybacks can the company do? Investors want to see those funds used to increase their shareholder value. Apple could pay a super premium and purchase Tesla outright for about $100 billion and still have more money than most countries in the world. But more than that, it would be able to, pardon the pun, shine the headlights on the future.

Full disclosure: I own no shares personally in either company. My spouse is a former Apple employee and acquired shares during her tenure. I don’t know how many and don’t care to ask.

The Path of Least Resistance Has a Habit of Prevailing

For every action, Newton tells us, there is an equal and opposite reaction. True in physics. Not necessarily so in business.

In another case of a traditional industry reacting in traditional ways to an untraditional threat, we have incumbent Marriott, the largest purveyor of hotel rooms in the world, drawing a line in the sand against that pesky start-up, AirBnB. Marriott is launching its “Homes & Villas,” which is a premium home rental service, very similar to what AirBnB offers with its AirBnB Plus service.

The fact is, in just a few short years, AirBnB, which owns no properties, has turned a software platform into a network that can claim about 5 times as many rental nights as Marriott alone.

The fact is, AirBnB has turned the hotel industry upside down. And the hotel industry is trying to adjust to the new game. But is it enough?

As has been the case with myriad industries, the incumbent struggles with a major dilemma: How to protect its cash-cow-generating machine while cannibalizing that machine to combat the attacker.

It rarely works. In fact, I’m hard-pressed to come up with an example where it has worked.

Uber and Lyft can be annoying to use. But is there any comparison with taking a taxi? Does anyone enjoy a taxi more? At least with Uber and Lyft you know the price, the driver’s name, his/her ratings, the length of the trip, and you never, ever have to worry about being “taking for a ride” for an additional 45 minutes to drive up the fare.

Yes, the auto industry is swapping out internal combustion engines for batteries faster than you can say “rickety-split.” But in the meantime, Tesla has rewritten the rules by amassing millions of miles of user data to be able to provide over-the-air updates to their customers. The other guys aren’t close, at least not yet.

The reaction of Blockbuster to Netflix has become a Business 101 case study. Blockbuster’s reaction to Netflix is a beauty. Blockbuster actually thought customers would enjoy the experience of traveling to the store to pick up a USB drive, vs. clicking a few clicks on a website from the comfort of their own homes.

The list goes on, with Amazon (not only in books and everything else, but in cloud services, an industry it single-handedly created right under the noses of the biggest hardware and software companies in the world). Google did the same thing with online advertising.

The pattern for the challengers is very similar. They enter an existing market orthogonally, usually using technology to rewrite the business rules. Their strategy is to:

Disrupt the market with better, faster cheaper
Go for growth and scale over profits short term
Use that scale to reach a critical mass
Capture the market
Take profits
Expand into new markets
Never stop

Meanwhile, the incumbents react in similar ways:

Ignore the start-ups
Accept the start-ups by offering some low-end solution
Realize the offering isn’t working and then do some soul-searching as to how to truly protect their territory and preserve their cash-cow-machine.
Struggle with their hybrid business model and their legacy infrastructure while the new guys breeze through encumbered.

This pattern has repeated itself multiple times in the past 25 years or so and is documented in the brilliant book “The Innovator’s Dilemma,” by Clay Christensen.

Having just spent the past three months traveling the world and using both AirBnB and VRBO (Vacation Rentals By Owners) for about 80 percent of my nights, I can tell, unequivocally that the value that the challengers are providing to the hotel industry is noticeable. The average nightly cost is about half of what a comparable hotel would cost, and with that you get a kitchen, washer, dryer, a living room area. A hotel’s offering would be a square room with a bathroom and a Keurig coffee maker, if you’re lucky.

Now, I’m a big fan of Clay and the book, but I had the chance to have dinner with him some time back (2006) and I posed the question to the Harvard professor: “Why isn’t your industry (higher education) vulnerable to this challenge?”

He gave me a long, unsatisfying response.

This was long before Kahn Academy, Udemy, Teachable, even YouTube had come along that provide the ability to learn just about anything for free or a small fee. Yes, it’s not perfect by a long shot. But, as with all the other cases, you can see where it is heading.

Like it or not, this disruptive force is unstoppable in virtually every industry. If it can be disrupted, it will be disrupted.

Electricity, it is said, follows the path of least resistant. That might a more apropos “law” for business than any of Newton’s.

Luxury properties. VRBO Vacation Rentals.

Links to products are on a referral basis, which means the author receives a commission — at no cost to you — should you decide to purchase using the link. You have the ability to bypass and go directly to any online retailer of your choice or your local book store. Regardless, it’s a great book!

The Apple Has Fallen Far From the Tree

It’s all about services. That’s the message from Apple Inc. these days. It’s a good line and it should be true. It’s the perfect opportunity for the world’s most recognized consumer technology brand.

But if this is a true pivot, then the best place for the company to start is with its mission statement. This is the sentence or two that should describe what a company’s vision, goals and aspirations are. Here’s Apple’s today:

Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App store, and is defining the future of mobile media and computing devices with iPad

Notice anything strange about that statement? To begin with, it’s not a mission statement. It’s about what Apple does today, not about what it wants to become. It doesn’t even mention services, at least overtly. And what’s with the bragging? Who needs that? How does that inspire any employee, customer or partner of this massive conglomerate?

Let’s look, in contrast, to the mission statement Steve Jobs put out in the 1980s:

“To make a contribution to the world by making tools for the mind that advance humankind.”

Whoa. Notice the difference? This isn’t about what they do but about what they desire to be. It’s positive, inspirational, aspirational, passionate, clear of purpose and bold.

And therein lies the difference between the “Steve Jobs” Apple and the “Tim Cook” Apple.

Tim seems to be a nice guy, a decent guy. He has done an admirable job keeping the engines running. So I wouldn’t go as far as to say Apple has lost its way since Jobs’s death; it has simply drifted aimlessly. It has no vision. It has no focus. It has no passion about making a “contribution to the world.”

Don’t get me wrong: Apple is an amazing company. It has amazing products. I use many of them every day. I am probably the best example of an Apple customer: loyal to a fault. I appreciate quality over price. I appreciate ease of use. I want everything to work seamlessly together and I’m willing to pay for that, too. (I am a musician and Apple makes the best tools for producing music today.) I have nearly every Apple product or service.

But what has the company truly done since September 2011? It has grown its user base of iPhone customers to 1.3 billion. It has launched Apple pay, the watch, Air Buds, acquired Beats, launched Apple Music. It has amassed $235 Billion in cash on hand. It’s still making money hand over fist.

With Jobs gone, Tim Cook has focused on running the company, that Jobs built. Meanwhile Jony Ive, the design genius, has gone off the deep end with form over function. Every product that Apple makes these days requires a handful of expensive dongles to make it work. But boy, are those products pretty to look at. So sleek, so simple.

What’s clear is that neither Tim Cook nor Jony Ive know where to go next.

With a closed ecosystem of 1.3 billion users, millions of app developers, and a fully integrated set of technologies, the obvious answer is services. Yes, it has built services into a $10 billion business over the past 10 years. That’s admirable. But it’s not nearly enough.

iCloud is dated, outdated even. While DropBox and Box innovate and create new offerings, iCloud still offers a measly 200 Gb of space and for that you have to pay. Every iPhone or Mac or iPad user ought to get this for free. And have you tried using Photos or iTunes and dragging and dropping files between those apps and iCloud? It’s a mess. Speaking of iTunes, it is even more of a mess. The user interface is completely unintuitive. And this is the umbrella product for TV, for apps, for music that you buy, but NOT for streaming music. Oh, no, that’s a different service.

Apple is supposedly relaunching a TV service. But Netflix, the preeminent video streaming service, isn’t playing along. Apple’s also trying to consolidate news organizations, but, again, not everyone wants to join. It has massive clout to make things happen. It is giving Spotify a run for its money, for instance. But it is still rudderless and these seem like toe-dipping exercises compared to what it could do with such a massive, locked-in user base.

And what about totally new markets? Autonomous vehicles? Virtual or augmented reality? Internet of Things? Well, they may or may not be working on these things. Apple is a very secretive company. But consider this: Right now, Amazon is spending about $23 billion in research and development. That’s about twice Apple’s budget. Twice the budget of a company that prides itself on making the “best personal computers in the world.”

Meanwhile, Amazon has launched several new products and services, including Kindle for reading and voice-activated digital assistants (Alexa). And it launched an entire new industry with Amazon Web Services for cloud computing. Love them or hate them, Amazon is focused. And guess what, they have a mission statement that reflects that focus:

“Our vision is to be earth’s most customer-centric company, to build a place where people can come to find and discover anything they might want to buy online.”

What or when is the Iron Age Epilog

For a guy who spent the better part of his career in high technology, you might be scratching your head at the name of my blog. So let me explain it to you.

When I first started my career in tech, back in 1993, it was a golden time. The world looked so promising. Technology could solve so many problems. It could be the great equalizer. When the World Wide Web hit that year, we talked a great deal about the “democratization of information.”

How’s that working out do you suppose? Yes, that’s a rhetorical question.

For every action, there is an equal and opposite reaction. In the world of technology, that reaction is usually in the form of what is known as an unintended consequence.

We build stuff. We put it into the market place. We have great hopes for the goodness it will bring mankind. Only problem is, we have no idea what the side effects are until we put it out there. Genetically modified foods (GMO), nuclear power, Facebook. They all sounded like good ideas at the time. Nobody expected for a moment anything bad to happen.

But, invariably and inevitably, it does.

That’s what this blog is about: Taking a critical look at the unintended consequences of our world of technology. So why the Iron Age Epilog? Well, we have been at this game a lot longer than just the past 25 or so years.

The word “smog” was coined in 1905 to describe the combination of fog and coal-generated pollution in the dampness of old London. Smog didn’t exist before then.

Well, actually it might have. In fact, it is theorized that humans first developed lung cancer shortly after taking their newfound skills of producing fire indoors, into a cave.

So we have been at this game a long time. Iron Age Epilog is just a way to describe that the more things change, the more they stay the same.

Also, Iron Age Epilog happens to be an anagram for my first and last name. So welcome to my new blog. I hope you find it enlightening, insightful, thought provoking or at least entertaining.

The Carbon Footprint Game

Let’s get one thing straight: There is no such thing as “zero emission.”

Fortunately, an analysis at Seeking Alpha has raised awareness of this today. It’s one of two reports that came out that coincidentally made comparisons between Tesla and Toyota.

(Let’s dispense with the more fun one first: The guys at Marketwatch claim it’s cheaper to own/lease and operate a Tesla Model 3 than it is a Toyota Camry.)

Now, on to the more serious topic of carbon footprint.

To be clear, I’m a big fan of the rapid ascent of EV autos in the world. I do think Tesla has spurred the makings of a revolution and the big manufacturers are falling right in line.

But, just as companies exploited the “Green” label by slapping it on everything and anything, (they might as well have added “Gluten Free”) the claims of “zero emission” are spurious at best and misleading to boot.

What the Seeking Alpha article finally points out is that we have to look holistically at the Tesla — or any electric vehicle — when analyzing the carbon footprint. And in this case, according to the report, the Tesla Model 3 is, overall, a bigger polluter than a Toyota Camry.

Ouch.

Now the argument here, while thoughtful and meticulously researched, has drawn fire a la the comment section. I am not going to claim I can dispute the position of the author or the uproar in peanut gallery with any level of authority.

But what I do appreciate about this report is that for the first time, at least that I’ve seen, someone is analyzing EV car manufacturers’ carbon footprint based not just on the “tailpipe” emissions or lack thereof, but on:

1. The overall cost of manufacturing the vehicle

2. The fact that the electricity used to charge the batteries has to come from somewhere and more often than not that is a coal-, gas-, or oil-fired plant. The emission at the tailpipe might be zero but really it just means the emission has been moved elsewhere.

Certainly, solar is offsetting some of that. Many EV owners are eco-conscious and putting solar on their roofs. This is a good thing.

But it still must be taken into account that it all vehicles — in fact everything that is produced, requires raw materials that are extracted, transported and refined (using carbon-spewing vehicles and machines). It requires energy to power the manufacturing process. It requires oil and gas to transport the finished product via air, rail, road or sea.

So here’s my point: I like the Seeking Alpha article for raising awareness around the need to look holistically at how what we buy and use contributes to the overall carbon footprint.

It is one of my peeves are the “Zero Emission” bumper stickers and branding the EV car companies exploit.

Nothing in this world that humans touch or use is zero emission. Nothing.

Good deed for the day

I would never guess looking in the mirror that the reflection I see is a face you could trust. Yet, repeatedly I find myself being approached by strangers of the female persuasion asking for help. On several occasions, little old ladies have stopped me in the hardware store to seek my advice. Just last year, while riding my bike, a college student flagged me down and managed to convince me to help her move furniture.

And then today, I found myself again helping a damsel in distress.

I was crossing a parking lot when I spotted the big SUV. It appeared to be jacked up on one side and was halfway in a parking spot. The engine was running and the door was open but there was no one inside. As I rounded the vehicle, I spotted the driver and the problem.

The driver was crouched down looking at the tire. She had her hands over her mouth in exasperation.

The tire had gone up over the curb and into a ditch. That was the good news. The bad news was the tank — I mean Lexus — was wedged just inches from the next vehicle on one side and a dumpster on the other.

“Do you need some help?” I naively inquired.

Her eyes lit up but her response was not in English. I took an accompanying head nod as affirmative. I began to walk behind the car to get in position to direct her but she stood up and pointed to the driver door.

“You want me to drive?” I asked.

Again, she shook her head.

I chuckled to myself but climbed up in the vehicle. I looked around to familiarize myself with the dashboard and surroundings, as you might do when renting a car. I noticed that the seat was already positioned at just the right length for me. This seemed peculiar, given my friend-in-need stood no more than 5 feet tall.

I tested the throttle to ensure I had a good sense of how this two-ton beast was going to react when I tried to get it moving. At that point, I also wondered: whose insurance covers this if something happens? This is not a question that comes up in Knight School.

Throwing caution to the wind, I pulled the shift into reverse and nudged the tire back up on the curb. This was one of those new fancy vehicles with radar detectors everywhere. And they just love to complain when you get too close to some immovable object. If the beeping wasn’t bad enough, my friend was visible in the rear view mirror, providing extra pointers, frantically waving her hands this way and that.

I went into zen mode to become one with the vehicle. With intense concentration, a steady hand on the shift and one on the steering wheel, an ever-so-gentle tap on the accelerator, some back-and-forth rockings to the tune of a hundred or so more warning beeps, I set the ship upright and properly moored in its berth.

As I got out, my friend said: “Oh thank you! You are a life-saver!”

“No problem,” I said. And as I walked away I wondered how it was that this was the only phrase she knew in English? And then it dawned on me. Perhaps that was why the driver’s seat was already set at the height of an average man. She has been here before and was waiting for the next chivalrous individual to happen by.

Oh, well, all in a day’s good deed. For what it’s worth, I charge extra for dragon slayings.

A little light reading on the plane

A curious bit of infotainment while on board an Air Portugal flight over the Atlantic. As we glided across the celebrated body of water, our TV screen map included locations and dates of major maritime disasters. The Titanic, of course, is the most famous. But the other ship names included in this map aroused enough curiosity to do a bit more research when I reached dry ground.

Only two years after the Titanic disaster, The RMS Empress of Ireland collided with a the Norwegian Storstad, resulting in 1,012 deaths. Percentage-wise, it is a higher mortality rate than the Titanic. What is truly tragic about this incident is that the ship sank in the relatively calm and shallow waters of the Saint Lawrence Seaway in Canada. And the Storstad remained afloat and was on hand to help rescue passengers and crew. But the hull of the Empress was sliced open in the accident, causing the vessel to take on water so rapidly that it capsized and sank within 14 minutes. Reportedly, open portholes contributed to the rapid flooding.

I remember stories of the Andrea Dora shipwreck as a kid but, did not know the details. Apparently, this gem of the Italian shipbuilding industry collided with the MS Stockholm in 1956. (What is it with these Scandinavian sailors, anyway?) Forty-six people perished off the coast of Massachusetts. But it could have been a lot worse, considering it had a total of 1,700 passengers and crew.

The U.S.S. Thresher submarine disaster of 1963 remains a mystery, 55 years after its sinking off the coast of Massachusetts. What is known is that all 129 crew members died as the hull imploded under immense pressure while plunging to a depth of 8,000 feet.

Not included in the Air Portugal map was an even more recent nuclear submarine disaster involving the Russian Dursk. The entire crew of 118 perished in the sinking in 2000. (Technically, this occurred in the Barents Sea, a body of water just north of the Atlantic and just south of the Arctic Ocean, but, hey, close enough for my book.)

Up in the Air

Not surprisingly, the Air Portugal map did not include major air disasters in and around the Atlantic, but here’s a few of the more notable ones:

Tenerife, Canary Islands, 1977. This collision of two 747s on a runway is still the largest air disaster in history, resulting in 583 fatalities.

Pan Am 103, better known as the Lockerbie Bombing, took the lives of all 243 passengers in 1988 when terrorists blew the plane up on takeoff. The flight was bound for Detroit via The Pond.

In 1996, TWA 800 exploded on takeoff from JFK, killing 230 people as the aircraft plunged into the Atlantic just south of Long Island.

Air France 4590 was bound for New York City from Paris on a hot July day in the year 2000. But debris on the runway punctured a tire and a fuel tank, resulting in the horrific calamity that cost 109 people their lives. This was the only accident involving the commercial super-sonic transport in its 27-year history. But it was also the last, as the joint venture between the French and British owners grounded the plane from that day on.

The only one I recall from the South Atlantic is also the most recent: Air France 447, en route from Brazil to France. In 2009, the craft plunged uncontrollably into the waters, killing all 228 aboard. Analysis of the accident concluded that ice crystals caused the autopilot to malfunction. When the pilots reacted. they over-corrected, sending the plane into an uncontrollable dive.

There’s more, of course, but these are the most notable.

Hashtagging #AirPortugal in case they want to add some new data to their infotainment maps.

And, hey, if you are reading this at the airport, have a safe flight!

SaaS has been around forever

Everything old is new again.

This couldn’t be more true than in the examination of Software as a Service.

If you start at the beginning of mainframe computing and the first remote log-in (some time in the 1940s between Dartmouth college and Bell Labs in New York), you get the first example of accessing computational functionality.

In the ‘80s, with the arrival of more computing power in smaller footprint, the concept of client-server came along. This was still the era of LAN/WAN and some connectivity to the Internet via TCP/IP.

The ‘90s kicked the concept of the network as the computer into full gear. While at Sun Microsystems then, I was responsible for marketing the Java technology, which provided the first universal programming environment for writing web-based applications that could run on any computer anywhere.

The first instantiation of cloud computing came about at the end of the ‘90s and early 2000 era with Application Service Providers. This was more the equivalent of private hosting. In other words, they took applications that you had been running internally within the four walls of your business and located the hardware and the software off-premise as a dedicated application for your business.

The SaaS consolidation trend

Consolidation. It’s the name of the game in the world of software. And as software manifests itself as a service (SaaS), the service companies are following the same path of consolidation.

If previous trends are any indication, we can expect the following:

Rapid innovation, which causes disruption.

Innovators battle it out with competition.

Some survive, some don’t and either get acquired or die.

History as an example

Let’s look at one example, the enterprise infrastructure software world. In 2000, there were a dozen or so companies — some startups and the big iron players such as IBM and Sun — trying to own the market. One company, BEA, starting making headway.

They acquired a smaller competitor, WebLogic, and this became the cornerstone of their revenue. They expanded and grew to be the big fish in the pond of enterprise infrastructure software with $1.5 b in revenue. (At the time, I believe they set the record for a software company reaching the $1 billion mark.) Then a bigger fish — Oracle — swallowed BEA. The enterprise infrastructure software (installed type) is now completely consolidated within the larger giants such as Oracle and Microsoft.

Or, let’s step back in further. Back to the future of the 1980s. Word processing was the killer app for PCs. Wordperfect quickly beat out competitors such as Wordstar and Multimate to be the king of the hill. Wordperfect’s stickiness was in its macros, keyboard shortcuts that, once you had learned them, you were reticent to try any other word processing app. Then along came Microsoft Word. With the inside track on DOS and then Windows APIs, Microsoft was able to displace Wordperfect as the predominant word processing app.

There were still holdouts: the legal profession in particular was dragged kicking and screaming into the new world. The killer death blow came when Microsoft cannibalized their own app and subjugated it to be part of its Office suite. And with that and a little magic known as OLE (object, linking and embedding), Microsoft could make drag and dropping from Excel, Powerpoint and Word seamless to the user.

The rest, as they say, is history. In the 2000s, search went through the same competitiveness, until Google, through a better search algorithm and little bit of luck as it stumbled upon the concept of Adwords and Adsense, beat out the competition.

Business Intelligence went through its innovation phase in the 2000s as well, and by the end of the decade, the major players were swallowed up.

What’s next?

So what can we expect to see in the world of SaaS (Software as a Service)? Mulesoft was recently acquired by Salesforce for a whopping $5.6 billion.

The interesting sidebar on this acquisition is that it came one year after Mulesoft went public. What motivated Salesforce to wait a year? Why didn’t they swoop in prior to IPO to offer a premium that would have saved them a few dollars.

Could be a few explanations. Perhaps the team at Mulesoft was more eager in testing the waters of the public offering. It could also be that Salesforce was — at least allegedly — a target of a takeover itself at the time Mulesoft went public. Perhaps Salesforce had its hands full.

Other significant acquisitions include Appdynamics scooped up by Cisco, just prior to Appdynamics IPO (the usual timing for these mergers). A study by a San Francisco firm tracked 95 software companies from 2005 onward. Seventy-eight percent — over three-fourths — of those companies have been acquired in the time period.

SaaS, I believe, is heading the same direction.