Advertising Anachronism

Every morning I see this billboard ad in Boston’s South Station:Surface2

The ad is for the struggling Surface 2 tablet. Unable to build momentum since the launch of the original Surface in late 2012, Microsoft has doubled down on marketing its combined laptop/tablet product, and these ads have run for months.

Visually the images are eye-catching, reflecting the company’s new colorful aesthetic. And it does a nice job conveying the core marketing messages: this product combines a laptop and tablet; it’s for both work and play; it’s new yet familiar, etc.

But it was the second image in particular that stuck out to me. It’s obviously intended to highlight the Type Cover keyboard, and the closeup frames the key with the new Windows logo. But it’s slightly off-center, so that the eye also focuses on the Alt key.

And that’s what stopped me. Why Alt?

Alt has been standard on PC keyboards since at least 1981, and has been lodged next to the Windows key since 1994. Its original purpose was as a modifier, multiplying the possible keystrokes one could input, before the advent of the graphical user interface obsoleted that need. Today, most Windows PC users only use it for a few idiosyncratic functions, like Alt-Tab to switch between windows and the infamous Control-Alt-Delete for logging in and calling up the task manager.

In other words, the Alt key is the quintessential vestige, like the human tailbone – an anachronism. No one designing a new keyboard or operating system de novo today would include it. True to form, Apple – famed for ruthlessly eliminating features that begin to outlive their usefulness – didn’t include Alt on the iOS keyboard for iPhone and iPad. So why has Microsoft kept it?

This gets to the heart of why Microsoft is being disrupted. Every business and product line accumulates barnacles, but for a long time, Microsoft had far more to lose from defeaturing the products at the center of its near-perfect business model than it stood to gain from tearing things down and starting over. When that’s been true for long enough, an organization becomes incapable of severing its vestigial organs and designing from scratch. And when that stops being true, the persisting inability can be fatal.

So even if the ad’s focus on the Alt key is unintentional, the message it symbolizes is quite deliberate. The entire Surface and Windows 8 strategy was a half-step into the future of tablets and touch, and its ads reassure its past customers “Don’t worry. This is familiar. We haven’t made a clean break with the past.

But the product is compromised and the strategy has failed. Microsoft’s strength has become its weakness. As mobile rises and the personal computer falls, all Microsoft can do is stand athwart progress yelling Stop.

In a world where Apple ritually kills its darlings, where Google launches moonshots no one sees coming, and where Samsung employees still live by their chairman’s order to “change everything but your wife and kids,” Microsoft advertises a brightly colored, defunct key more than 30 years old. Like Gatsby, Microsoft tragically fights for a future that continues to recede into the past. All it’s advertising is its own failure to adapt.

Samsung Style

James Allworth, author and expert on disruptive innovation, has a great post on the blog Asymco titled “The real threat that Samsung poses to Apple.” In it, he refers to an earlier article by John Gruber on Daring Fireball that asks whether Apple’s product design or operational model is their most important advantage. Gruber concluded that it was Apple’s operational strength “that is furthest ahead of their competition, and the more sustainable advantage.” Products can be copied; capabilities can’t.

Or can they? Allworth draws a connection between Samsung’s status as a major Apple supplier and their emergence as Apple’s most (perhaps only) formidable competitor in smartphones. The patent lawsuits over whether Samsung’s products copied Apple’s designs, he says, are a distraction. The real threat to Apple is that Samsung, as one of its key suppliers over the last five years, may have learned to build the critical capabilities it takes to develop and rapidly ramp manufacturing of huge volumes of incredibly powerful and beautiful smartphones at low cost – no doubt one of the most difficult feats in business. As Allworth says, “Perhaps [Samsung] didn’t have to copy Apple. What happens if Apple had already taught them?”

The ramifications of this can be seen in the history of other tech giants. Allworth quotes his book, cowritten with Clay Christensen, in describing the dangers of increasing outsourcing to a key supplier over time:

Asus came to Dell and said, “We’ve done a good job fabricating these motherboards for you. Why don’t you let us assemble the whole computer for you, too? Assembling those products is not what’s made you successful. We can take all the remaining manufacturing assets off your balance sheet, and we can do it all for 20 percent less.”

The Dell analysts realized that this, too, was a win- win…

That process continued as Dell outsourced the management of its supply chain, and then the design of its computers themselves. Dell essentially outsourced everything inside its personal-computer business—everything except its brand— to Asus. Dell’s Return on Net Assets became very high, as it had very few assets left in the consumer part of its business.

Then, in 2005, Asus announced the creation of its own brand of computers. In this Greek-tragedy tale, Asus had taken everything it had learned from Dell and applied it for itself. It started at the simplest of activities in the value chain, then, decision by decision, every time that Dell outsourced the next lowest-value-adding of the remaining activities in its business, Asus added a higher value-adding activity to its business.

In other words, in Dell’s own quest to cede lower-value work to a supplier, it helped that supplier forward-integrate into higher-value work and become a competitor. Fast-forward to the present, and according to Gartner, Dell’s share of PC shipments fell from 16.4% leadership in 2005 to 10.5% last quarter, while Asus has risen from nothing to to 7.3%. Dell built the staircase for its supplier to climb until it was no longer just a supplier. Allworth wonders whether Apple is falling into the same trap with Samsung.

Now, Apple is not yet outsourcing to Samsung (or any one supplier) nearly as much of its value chain as Dell had to Asus by the time Asus was able to launch its own brand. Other differences between the cases abound, so some have criticized Allworth’s post for positing based on a weak analogy with an N of 1 (see his post’s comments).

But what if there’s a pattern? What if Samsung had, in fact, done this before?

In a separate, far-ranging article, the investigative journalists at the Japan Subculture Research Center sought to untie the numerous possible causes of the long, horrifying decline of Sony, once the world’s preeminent consumer electronics company but which expects to lose $6.4 billion this year. Their analysis homes in on the tenure of CEO Nobuyuki Idei from 1999 to 2005, who restructured the company and eliminated many key engineers. According to Sony insiders, these were gobbled up by Samsung, the rising South Korean conglomerate which had become a major component supplier to Sony for technology such as LCD panels.

These panels were used in large flatscreen TVs – last decade’s equivalent of smartphones, in terms of how their huge popularity drove fierce technological innovation and manufacturing capability development. As one Sony veteran put it, “It was better than industrial espionage—Samsung could openly ‘buy’ the technology that Sony had developed simply by rehiring their best and brightest.” An investor remembers a key meeting with Idei:

When the investor pointed out that Sony’s operating profits on electronic products were roughly 2-4% and that Samsung was making similar products at a 30% profit margin, Idei hushed him by saying, “They make the parts for our products. We put them together. It’s the difference between a steel maker and an automobile maker. We make the automobiles.”

The investor countered, “Well, I’ve got news for you—the people you laid off from the car plant are now working at the steel mill, and soon the steel mills will be building cars with your technology.”

In the early 2000s, of course, Samsung forward-integrated and began building high-quality LCD HDTVs at lower cost than dominant Sony. By the middle of the decade it had surpassed its erstwhile customer and partner. This year, Samsung’s share of the category is 29%, while Sony has fallen to 8%. As pundits have noted, “The speed with which Samsung has overtaken its competitors is fairly remarkable.”

Apple has since replaced Sony as the world’s largest and most respected consumer electronics company. This situation is not perfectly comparable – for example, there is no evidence that Samsung is hiring key Apple engineers. But Samsung has become one of Apple’s most important suppliers, and is now also by far its most significant competitor. We’ve seen this movie before. This is Samsung’s style.

As Allworth puts it, this is no longer about whether Samsung aims to use its supplier experience with Apple to replicate its capabilities advantage. The key question is “is it already too late?”