Asymmetric Marketing

Part 3: Asymmetric Marketing, Microsoft Style: Competitor Lockout

This is the third installment in a 10 part blog on Microsoft as a practitioner of asymmetric marketing.

3. Competitor Lockout

Microsoft knows from its competitive experience that having the leading market share does not equate to market dominance. IBM, Lotus, WordPerfect, Novell, Netscape---all had overwhelming market share when Microsoft took them on. Asymmetric marketing goes beyond market share leadership to market ‘ownership’ or market rule-making, i.e. competitive lockout (all within the context of the law of course).

The best competition for an asymmetric marketer is zero effective competition. Zero effective competition means that while there may be alternative providers in the market category, they are not rule-defining competitors and can be ‘contained’. Microsoft has been very smart over the years in working out the specifics of this.

Here’s a few instances of what I mean by ‘rule defining’.

Licensing Model Rules: Per processor OEM Windows licensing that got Microsoft paid by a PC OEM whether or not a system had Windows;

Developer Rules: Undocumented or ‘unreleased’ features in Windows that provided them with an edge in applications development;

Encroachment Rules: Error messages that appeared when competitive products tried to co-exist with their products without their market permission. For example, Novell tried to sell Digital Research DOS to PC OEMs to run underneath Windows.

But I see the real muscle behind Microsoft’s lock-out power as the same common sense approach attributed to Hyman Roth, the fictional character in the legendary film the Godfather. The Hyman Roth character was modeled after Miami mob financier Meyer Lansky. And I quote, ”Hyman Roth always made money for his partners.” That’s the secret of a long term competitor lockout---Make money for your partners.

Where would Dell be without Microsoft? Where would the tens of thousands of 3rd party developers be without Microsoft? Where would the thousands of vertical system builders be without Microsoft? Where would millions of IT professionals be on their career track without the Microsoft Certification programs that empower technical professionals trained in Microsoft technologies to find employment in both up and down markets? Am I cheerleading for Microsoft? No. I’m simply asserting that if your business model ends up always making money for your partners, your efforts to foster a natural monopoly lockout in a given category are that much more effective.

In basic complexity theory, complex adaptive systems (from living species to economic markets) ‘self-organize’ in the presence of the right ‘catalyst’. The Microsoft ‘value chain’ has in fact self-organized around Windows and as a consequence, alternative or competitive technical solutions to the same problem are not relevant to the value chain. The catalyst is the economic model provided by the Microsoft franchise. That’s the strategy for an asymmetric lockout. When you develop your own partner program and business development initiative, don’t ask first ‘How do I sell more of my stuff’. Ask 'how do I make money for my partners'.

In the next installment, I’ll address the Microsoft best practice of market creation, the key to long term asymmetric advantage.

Part 2: Asymmetric Marketing, Microsoft Style: Customer Lock-in

This is the second installment in a 10 part blog on Microsoft as a practitioner of asymmetric marketing.

2. Customer Lock-in
To practice or resist this kind of category regime change I describe in Part One of this essay, you need to proceed from a base area of locked-in customers, the real asset of a natural monopoly. While CRM vendors tout their products by explaining how the ‘balance of power’ has been shifting to the customer in the IT customer-vendor relationship, you clearly can’t become a long term asymmetric market leader unless you mitigate against this power shift to the customer in creative ways. To accomplish this today it’s important that tech CEOs and marketing leaders detox from the coolaid of the ‘customer economy’ and begin to behave like asymmetric marketers by making ‘lock-in’ a key requirement of their products, programs and practices.

Lock-in is all about the art and science of what I call ‘barrier management’, i.e. systematically and programmatically keeping the customer from leaving your fold through both positive and negative inducements. The negative inducement can be summed up in the 4 letter word spelled PAIN. For example, if today I wanted to buy a Mac, or switch from Windows to the Scott McNealy thin Java client view of the universe, I’d experience serious pain since I have been locked-in to Windows for a long long time and use if for everything, hence the term ‘natural’ monopoly.

Barrier management 101 usually takes the form of the economic lock-in, i.e. business terms. Microsoft has been well known for its client OS lock-in of PC OEMs but it’s not a one-trick pony and that’s not the only arrow in their quiver. Their new server subscription model is a similar type of economic lock-in and despite early resistance to the switch to subscription pricing, it looks like Microsoft will stick with it and get it right because the whole structure of an asymmetric natural monopoly requires conscious attention to barrier management.

And they must be succeeding at it. The Yankee Group did a survey they released on Jan. 29, 2004 that documented that 43% of Microsoft SMB customers are ‘concerned’ about becoming ‘overly reliant’ on Microsoft, while 72% of the surveyed companies were ‘actively seeking to lessen the dominance of Microsoft’s products’ and were exploring ‘alternative vendors’. There’s that customer power rearing its head again. The key is to limit the customer power to ‘concern’ through making stealth barrier management a core competency.

At it's essence, barrier management must be 'designed in' to a tech company's product strategy. In my consulting practice, I use a concept called a 'continuous product' to replace the legacy 'chasm' concept of 'whole' product. A continuous product gains its asymmetric advantage from its use of network effects, which at a basic level, means its relationship to the internet as a medium of feature-updating. Examples of products that rely on network effects for their lock-in include ASP-based software (Salesforce.com), anti-virus and intrusion prevention software or services (Internet Security Systems, Counterpane Internet Security, Symantec), anti-spam products, search (Google, Yahoo), web conferencing platforms (Webex, Placeware) and others. The lock-in is aided by the 'addiction' of the customer to the new updates which are essential for the correct functioning of the application or infrastructure. More on this in future essays, since it's one important reason why .NET is so important for Microsoft's natural monopoly.

Part 1: Asymmetric Marketing, Microsoft Style: Category Regime Change

The fines levied this year by the European Union against Microsoft demonstrate once again that Redmond’s competitors have failed to effectively develop countermeasures against them and so must resort to government intervention as a marketing strategy. But government intervention, even if upheld, is essentially ineffective against tech ‘natural monopolies’ because natural monopolies follow Professor Brian Arthur’s law of increasing returns

I like to think of asymmetric marketing as asymmetric warfare theory applied to technology markets, i.e. the ability of market combatant to wage unconventional or unorthodox market warfare (hence the brass knuckles metaphor on this weblog) against both emerging and market share leaders. For CEOs of today’s new crop of startups and emerging market leaders, it is absolutely essential to both study the history of Microsoft, as well as to have a ‘Microsoft strategy’ since their ability to move at will, short of government intervention, is a matter of public record. Here is a short list of 10 Microsoft best practices in asymmetric marketing that should form the basis for an introductory course on the Microsoft ‘way’.

1. Category Regime Change

Let’s describe market asymmetry in tech categories. One of the key indicators of an asymmetric marketer is the ability to systematically go on the offensive against, and out-compete, a market share leader in an adjacent category effectively ‘restructuring’ that adjacent category or market segment around one’s own rules. I call it Category Regime Change. Microsoft has done this in at least 4 major engagements and now has a set of best practices in place to replicate this almost on-demand in both emerging and mature categories. Here are four classic market restructurings in which Microsoft carried out ‘regime change’:

PC Standards: I’m dating myself here but I do seem to recall a time in the distant past of Middle Earth when today’s PC used to be known as an ‘IBM compatible PC’. Now it’s the ‘Wintel’ or simply Windows PC. Microsoft, in it’s first major regime change engagement, recognized that the rapidly expanding IBM clone industry of the early 90’s was more significant to their long term business than their original platinum customer, IBM. IBM, itself seeking to maintain control of the standard, wanted to impose OS/2 on Microsoft and pre-empt Redmond’s then emerging Windows franchise. Moving from a position of relative weakness and risk to one of absolute strength, Microsoft rejected IBM’s moves to make OS/2 the dominant x86 graphical OS and pushed forward into the clone ‘hurricane’ making Windows the standard for the hundreds and hundreds of 800# direct marketers and international ‘white box’ builders. Back in those days the so-called ‘all others’ (non-branded PCs) category was the volume brand in the U.S. and still is in many emerging international markets. IBM never regained control of the standard they created, today commands only single digit market share in PCs, while Microsoft realized from this historic engagement that it had begun perfecting the practice of asymmetric marketing.

Desktop Applications: Using OEM marketing clout, bundling deals, and technical innovation, Microsoft rolled over WordPerfect and Lotus with its Office package. It’s important to note that these 2 companies had 80 plus percent market share in their respective markets when Microsoft made its moves. When Microsoft undertakes regime change, it is usually against an incumbent with dominant market share. I remember having a dialog with the marketing VP at WordPerfect, inquiring as to his strategy to defeat Microsoft’s OEM marketing program for desktop apps. Sounding like he had just stepped out of a seminar run by fresh-out-of-b-school MBAs, he responded that ‘we’re the top-of-mind brand, we command strong retail pricing power, and we’re don’t need to have an OEM marketing program’. Oops. Regime change number two as both Lotus 1-2-3 and WordPerfect are brought low by the asymmetric marketers from Redmond.

Local Area Networks: The next market ‘regime change’ target was Novell. Novell also had overwhelming market share dominance in network server software and even purchased Digital Research to try to go after the DOS desktop market. But Microsoft’s NT server, based on internet protocols, overtook the more proprietary Netware. Strong product management that emphasized the same developer APIs for both the client and server turned the tide in Microsoft’s favor, helping them build an army of 3rd party developers and solutions providers. Hundreds of years ago, Sun Tzu described asymmetric warfare as ‘stones on eggs’. This army of third party developers that morphed into the Microsoft Partner network were the stones thrown onto the eggs of Novell’s disgruntled VAR channel.

Internet Technology: The Netscape/Microsoft ‘browser wars’ are well documented. Microsoft gave away Internet Explorer as part of the Windows OS, triggering the DOJ actions, which should be seen by industry marketing professionals for what they were---marketing countermeasures against Microsoft by a company that was unable to defend it’s own franchise in the marketplace. Microsoft also built their internet web server into it’s Windows server thus attacking Netscape’s intranet software business, which was the real revenue base in the year prior to their shared acquisition by AOL and Sun. The browser wars showed how Microsoft had really perfected the practice of category regime change, and how it’s competitors, having failed in the study of marketing best practices, resorted to government intervention to attempt to reverse the situation. The recent EU fines related to Windows Media Player must be seen in this context.

Microsoft has learned these lessons well and let me repeat once again that today every tech company in every tech category should at least ask themselves the question “Do I have a strategy to resist regime change should Microsoft enter my market? Do I have a strategy to either aggressively partner with them, or develop counter-measures against them? But what are the specific ingredients of regime change used by Microsoft that can be studied and applied by emerging category vendors. I will describe them in the next sections of this essay.

Yahoo as Asymmetric Business Model

Yahoo's recent revenue momentum is closely tied to their asymmetric business model relative to their competitors. It's not that Google and Microsoft are not extremely powerful in their core competancies. That's obvious. It's that Yahoo has been working on its asymmetric business model for about a decade now and the evolution of it's model over a long period has provided it with most of it's asymmetric advantage. Yahoo's business model contains the following key elements of asymmetric advantage:

It's Hybrid

Yahoo is growing paid services, advertising services, commerce services and affiliate services and this mix makes the company very rugged and much more resistant to market interruptions in what I call the 'sandstorm economy', i.e. the post-bubble, post-9.11 market environment. It's also seeing synergies emerging (remember that famous Bob Pittman term at the AOL/Time Warner merger press conference) from this hybrid mix of services and models.

It's M&A Advantaged

Yahoo's strategy to pre-empt Google by acquiring paid listings leader Overture and search technology provider Inktomi is paying off. Yahoo has achieved parity in search capability and is rapidly growing it's paid listings business. And it weakened Google in the process by dropping them as it's search provider. No doubt Google will use it's upcoming IPO war chest to counter-attack.

It's Highly Adaptive

Carly Fiorina talks about the Adaptive Enterprise. Yahoo is an adaptive enterprise. It's gone through numerous market changes (the downturn in banner advertising, the loss of giant sponsorship fees from the dead bubble dotcoms) and has emerged stronger than before.

I suspect this recent quarterly report from Yahoo is being closely studied at Google, MSN and AOL and that the competition in the search/portal space is going to get more brutal than ever. One thing is certain. Yahoo's competitors will do well to go to school on it's asymmetric business model and begin looking for other vulnerabilities to take them down a few notches.

Category Clutter in the Security Space

Here's an interesting story reporting on the recent FOSE exhibition in Washington. It makes reference to the marketing communications challenge faced by technology and service providers in the fast growing security space. It seems that more than 100 of the 500 exhibiting vendors at FOSE were security technology or service providers and that attendees (Federal IT buyers) were having a hard time figuring out how one was different from the next. Here's how asymmetric marketers address this basic issue of category clutter.

Define a Category of One

Don't waste your marketing dollars on trying to get Gartner to place your company into a magic quadrant somewhere. Instead, work with a specialist agency to really focus your messaging around a 'category of one' story. This is a non-trivial challenge, but it will really pay off when it your sales folks ask your marketing team to really explain 'how we're different from XYZ Inc.'

Engage in Overhang Communications

Overhang communications means that you talk about the 'future roadmap' just as much as you talk about what you have to sell today. All the real asymmetric marketers (IBM, Microsoft, Intel, Oracle) do this to pre-empt the upstart providers who are nipping at their heals in some niche market. It's what hockey legend Wayne Gretzky meant when he said 'Skate to where the puck is going to be, not where it is now.'

Promote Your 'Thought Leader'

Great tech companies (security included) all have a 'thought leader' who provides the 'vision thing' for their company and their category. The thought leader may be a CEO, a CTO, or even a CMO. Bill Gates re-assignment as the Chief Software Architect at Microsoft is in part designed to free him up to engage in more industry speeches and thought leadership around Microsoft's long term agenda.

It's About Stones on Eggs

The security space is exploding, and the spoils will go to those companies that are not just able to 'differentiate' but to define the 'sound bites' that get broadcast to the industry as a whole. As Sun Tzu said, asymmetric warfare is like 'Throwing stones on eggs'. You want to be the stones, not the eggs.

Bootstrapping Startups with Asymmetric Marketing

As VC firms continue to play it safe and focus on later stage investments, one of the key skillsets startups need to re-discover is the ability to 'bootstrap' the company. Bootstrapping means different things to different people but generally refers to a startup team's capability of selling and marketing it's way from a standing start to revenue-generating products without a major Series A round from a VC firm. This obvious pain of bootstrapping (uncertainty,irregular paychecks,etc.) can often yield a better valuation and more founder equity at a later stage so I think it's well worth it.

In contrast to the dysfunction of the bubble years, bootstrapping also goes a long way toward creating a rugged internal culture of cross-silo collaboration that defines your startup and it's core operating values. For asymmetric marketers, operating culture is the key to winning against larger, better-financed competitors. For more background on the role of operating culture, here's a link to an essay on my corporate website.

Here's 3 best practices I've isolated from a number of startups I've worked with during the post-bubble period that can provide some asymmetric advantage and momentum to your bootstrapping initiative.

Create a 'Projects to Products' Roadmap

One of things most troubling about the bubble period was that marketers often had a blank check to build what they saw as the perfectly conceived 'whole product'in a context where the investors were telling them that 'revenue didn't matter'. With bootstrapped companies it's all about revenue. It takes revenue to self-fund your product development efforts, and that revenue is usually available through selling your team's 'expertise' in the form of profitable consulting, software development or systems integration projects. These projects then throw off the IP that becomes the core of your product roadmap. So it helps to identify those projects that are most relevant to accelerating the accumulation of product-specific IP.

I have a client who did just this developing a next generation identity management platform by serving a very select set of banking customers. This company recently merged with a public company which had spent tens of millions of dollars during the bubble and never really created a market-ready product. My client is now running the public company, the board of that company having seen the power and market discipline of bootstrapped product development.

Develop an Ecosystem Infiltration Action Plan

One of the other problems that cropped up during the bubble period was the proliferation of non-productive, zero revenue-producing 'business development'activities. What bootstrapped startups need is bizdev that focuses on revenue and hard targets of opporunity. And don't get too hung up on my use of the much maligned word 'ecosystem'. For the purposes of the point I want to make here, an ecosystem is simply the installed base of customers,channels and co-evolutionary partners that is the 'target of attachment' for your startup company's project services. It's an important decision to get right---where to attach and where to infiltrate to gain the key opportunity intelligence you need to be self-sustaining. For example, if your space is software, do you go Microsoft, do you go Linux, do you go Sun? Where do you focus your limited resources for the maximum traction and momentum? In other words, build an infiltration action plan.

An infiltration action plan is designed to generate highly qualified lead flow from the target ecosystem and possibly from it's host. Many of the small company acquisitions made by Microsoft are companies that specialize in some niche capability that Microsoft does not have internally. And many of those acquired companies 'bootstrapped' themselves by deeply infiltrating the Microsoft developer ecosystem to find that target of opportunity.

Build a Culture of Special Operations Selling

Special operations warfare is the revolution currently underway in the Rumsfeld military. It's a 'task force' model that aggregates expertise across a number of key functions and deploys it to the front. The concept applies equally to startup selling. You need to make sure that your team is not just relying on the guy with the big rolodex to generate revenue. Revenue ownership is everyone's job. A culture of special ops selling means that you build customer facing teams that seamlessly include engineering, product marketing, executive sponsors and sales team members. This force structure is optimized to interact with today's complex buying teams in the enterprise, government and even in other technology companies you may want to do OEM deals with. Once again, special operations selling produces a virtuous cycle of internal cultural uplift as people participate in successful deal closure and see the model pay off.

There are many ingredients that go into a successful bootstrapped startup. These 3 can help you gain an edge over your better-financed competitor.

Sun/Microsoft Settlement & Asymmetric Marketing

Here's a link to today's announcement about the deal between Sun and Microsoft. While the press is focused on the legal settlement, the really important thing here is the 10 year technology collaboration agreement. It demonstrates that Sun has decided to cease being in denial about the extent and importance of the Microsoft ecosystem. It's the right thing to do for Sun and absolutely demonstrates Microsoft's mastery of asymmetric marketing. Sun's dramatic revenue declines since the bursting of the dotcom bubble coupled with Microsoft's continuous growth is what really got the 2 sides together. Remember back when Microsoft helped bail out Apple and got them to bundle Internet Explorer? Look for near term announcements that help both companies define the 'market interfaces' between the Sun installed base and the Microsoft installed base. This can't be good for Oracle either, especially in the wake of losing out on the Peoplesoft acquisition. Will be watching this one as it develops.