Ahead of the Crowd

At the shoe shine stand on Friday, the workers busily buffed and chatted with customers. When I mentioned I worked in Information Technology, the shoe-shine guy bragged he had just flown back on the red-eye from the O’Reilly Emerging Technology (ETech) conference in San Diego.

How was the conference? “Great, I was amazed at how much fun everyone had,” he gushed. “Especially those alpha geeks, the scraggly guys with Apple laptops.” I gave him a skeptical look. “All the beautiful people were there, but I was disappointed to miss the rock star who got the death threat,” he intoned with a visible wince. Could that be Kathy Sierra? “Yeah,” he marveled, “she writes a wonderful world-class weblog.”

What’s the buzz on emerging technology? “To be honest, we non-geeks had no idea what the alpha geeks were talking about. But the geeks grokked each other and their stuff looked pretty cool,” he confided as he stroked the final buff. I handed him a wad of cash including a generous tip. Deftly straightening the rumpled bills, he whispered, “I have an even better tip for you: Buy Google stock.”

Pondering this surreal encounter, I felt as though I had passed through a time machine and landed on Wall Street in 1928, six decades before alpha geeks roamed the planet. Back then, Joseph Kennedy, Sr. spoke these prophetic words: “You know it is time to sell when the shoe-shine boy tries to give you stock tips.”

How many Dell employees does it take to screw in a light bulb? According to Heard on the Street (paid subscription) in today’s Wall Street Journal, that’s a question CEO Michael Dell and his management team are now deliberating. The company’s employee base jumped by nearly 50%, to 82,200 workers, in the past two years. Wall Street thinks now is a perfect time for Dell to reduce headcount, just as rival Hewlett-Packard successfully did two years ago. A Goldman Sachs analyst upgraded her rating of Dell’s falling stock to ‘buy’ because she predicts that slash-and-burn moves are imminent. I counsel thinking one more move ahead in this chess game.

Given that the key to Dell’s past success was an efficient direct sales model, why did headcount go out of control? Was it sloppy management? Or is something more fundamental going on?

No doubt missteps occurred, including an ongoing SEC investigation into company finances as senior managers fell on their swords. After Dell faded in customer satisfaction and laptops exploded in flames, plenty of bad press ensued. In response the company said last September it was investing $150 million to enhance customer relationships, including adding 2,000 support staff. But that move failed to reignite sales.

Why didn’t ramping up support headcount pay off? It’s tempting to blame poor execution. But I think that Windows PC support costs are rising so fast that Dell, no matter how hard they run, will never profitably catch up. When customers suffer malware, phishing attacks, or defective patches, they call tech support. With razor-thin margins in the PC hardware business, every tech support call erases a pile of profit. As a thought experiment, imagine what two additional years of support (above the one year warranty) for a $359 PC should cost. Now go to the Dell website, price that computer, and check out the support cost. Ouch.

Why is Dell considering offering Linux on its computers? Hint: it’s not just to save the few dollars that go to Microsoft for every computer shipped. Support costs are almost certainly a key part of the equation. Imagine how many tech support calls would vanish if Dell delivered a robust operating system.

What’s more, Dell is struggling with a global trend: transition from a computer industry driven by corporate information technology to one that’s centered on consumers. The company’s response involved broadening its product mix to include consumer items like digital cameras and television sets. That strategy didn’t pan out for CompUSA; it nearly put them out of business. Considering Dell’s accounting issues, it’s hard to evaluate the toll this strategy has taken, but the outlook isn’t favorable.

So the time has come not just to “streamline the organization,” but to consider real alternatives to the Dell 1.0 business model, which has grown too long in the tooth. The company must recognize that Windows PCs have become low-margin appliances like lamps, dishwashers, and toasters. Going forward, PCs need to be reliable like lamps and supported like toasters. You can’t achieve that by throwing thousands of warm bodies into a call center in India in a futile attempt to screw in that light bulb. Dell 2.0 ought to mean reshaping PC support by totally redefining the PC product experience. Else nobody will be left at Dell to turn out the lights.

In today’s Wall Street Journal (WSJ), the article Linux Starts to Find Home on Desktops describes how Chief Information Officers (CIOs) are thinking about deploying Linux on desktop computers in their enterprises. Corporate data centers began switching from Unix to Linux servers years ago, but most CIOs still say Linux on the desktop isn’t ready for prime time. Thinking one step ahead of the WSJ article, I see people increasingly relying on Web 2.0 services to get important work done. Individuals will have less and less need for traditional Windows applications, eventually accelerating corporate adoption of desktop Linux.

Let me tell my company’s story. To save money on software licenses, we replaced all our Windows servers with SUSE Linux (now Novell SUSE Linux Enterprise) five years ago seamlessly and without skipping a beat. Emboldened by that success, I switched my office desktop computer to SUSE Linux, but the pain was excruciating. For over two years, I had both a Windows laptop and the Linux machine on my desk, and, until recently, the Windows laptop was the one I mainly used. Gradually I did more of my work in the Firefox web browser, so I needed the laptop less. By adopting Web 2.0 tools like Writely (now Google Docs and Spreadsheets), I discovered I didn’t need most of the “bells and whistles” of Microsoft Office. Still, my Linux desktop machine simply couldn’t do many things as well as Windows, especially anything involving audio and video.

My desktop environment took a quantum leap when I installed Ubuntu Linux about four months ago. After a bit of customizing, Ubuntu is reliably doing everything I need. The Windows laptop is off my desk. I can’t say I’ll never use Windows again, but now I’m getting most of my work done in Linux and Firefox.

Why did I suffer the pain of migrating to Linux? Mainly the reasons are cultural: Gate is a small firm and we pride ourselves on doing things simply and efficiently. We don’t see the point of buying and reinstalling the same basic functionality again and again (for example, Office 97, Office 2000, Office XP, Office 2003, Office 2007) when we can get it at no cost. For us, the switching costs are not very high because our workforce is highly computer-literate and flexible. I wanted to see whether the gain of escaping Microsoft lock-in was worth the pain of migration to Linux. Thanks to the web, the pain is no longer intolerable.

Let’s go back to the industry view. A key trend in Web 2.0 is AJAX applications replacing their desktop counterparts. For example, two years ago, you couldn’t edit photos in the web browser. Now, Snipshot enables easy web photo editing and Adobe will soon deliver a Web 2.0 version of its flagship Photoshop. As more and more Web 2.0 applications need only the web browser on the desktop (or PDA, or phone), we all become less dependent on the Microsoft technology ecosystem. Companies that deliver Web 2.0 server infrastructure will gain traction in low-end applications and traditional desktop software providers will move further up-market. After all, the web version of Photoshop won’t do all the high-end effects and image manipulations that Photoshop CS3 on the desktop will do.

The Photoshop scenario is a perfect example of disruptive innovation. As new players enter a market, initially they satisfy the needs of less demanding customers (like me). Gradually, their products improve, starting to meet the needs of mainstream customers. Well-entrenched incumbents (such as Adobe and Microsoft) then move to higher ground. Of course, the incumbents try to compete with the new players, but competition isn’t easy because the incumbents’ corporate values and partner networks aren’t optimized to conquer low-end markets. We saw the same scenario years ago when Microsoft attacked Novell’s NetWare and we all know who won. In the face of Web 2.0, Adobe is fighting by introducing the advertising-supported Web Photoshop. But they are fleeing to higher ground by introducing Photoshop CS3. Microsoft is doing likewise with Windows Live, Vista, and Office.

As the WSJ article mentions, two big Microsoft partners, Hewlett-Packard and Dell, are talking to customers about better Linux desktop support. Such conversations would have been inconceivable two years ago, but the potential of Linux adoption on enterprise desktops will affect hardware vendor strategies. So we are seeing the first cracks in the hardware partner network. Changing alliances often signal disruptive innovation and changes in industry values. Watch that space.