Act two of the boom

Oct 12 2005 by Robert Heller Print This Article

The boom of a few years ago should now be viewed as Act One of a long-term and revolutionary drama in new internet business that is gaining momentum by the day.

A remarkable case in point is Skype. Just three years after Niklas Zennstrom and Janus Friis founded the company, it had gained such a reputation for top technology in internet telephony that eBay purchased it for $2.6 billion.

This is amazing considering Skype generates a relatively meagre $60 million, failing to break even.

In fact, it's not expected to break even until late 2006 and if everything goes according to plan as far as agreed performance targets are concerned, Skype's sellers will receive a further $1.5 billion in 2009.

So you have to ask, who on earth pays 40 times sales for an internet business which is unprofitable?

In Act Two of the boom, it seems once again financial prudence and business economics have been discarded.

The downside of this comeback is obvious. With excessive confidence from their own share prices and revenue, and driven by the momentum of their sectors, the internet entrepreneurs think that no price is too high to stay one step ahead.

It almost goes without saying that tears will be shed in the future, as with the first wave of the boom.

The old guard such as Oracle are competing with the new boys like Google and eBay in a game that will produce a good number of catastrophes unless the management rules have changed.

But have the management rules changed? As mentioned before, financial prudence has fallen by the wayside.

I wrote back in 2001: "The digital revolution is the broadest and most significant change seen by managers in the modern era, a tide so powerful that even those who try to resist it will be swept along. Every aspect of running organisations, both profit and non-profit, is or will be profoundly affected."

Rereading that passage confirms its rectitude. The tide has grown swifter and it represents a key challenge for the survivors of the first act of the boom.

But something new is happening. The companies of Act Two are reliant on ideas and their stock market success has depended on evolutionary change.

Apple's Steve Jobs observes: "We have world-class competitors out there trying to kill us."

No-one has managed to kill Apple in the face of the company's innovations, the key to Jobs' success in sustaining the unique culture of the company.

But you won't find Jobs in charge of an organisation that demonstrates the Four Forces of Failure: innovation stagnation, sagging morale, slow product development, bureaucratic red tape.

Business Week has identified a company that exhibits all four: Microsoft. A simple fact should temper any disbelief of this: the stock is not worth any more than it was over seven years ago.

The blog Ė that the company's own technology helped to develop Ė has become an irritant for the corpocrats but a useful tool for the disaffected.

Brought to life through internet technology, there are reportedly 2,000 blogs posted by Microsoft employees speculating on why the company has become a "passionless, process-ridden, lumbering idiot".

That description comes from Mini-Microsoft, the most prominent of the anonymous bloggers. He is not just making mischief - he tells BW that Microsoft has been "wonderful" to him and he wants to improve the company and "make a difference".

The moral of the Microsoft story is that being at the cutting edge of technology does not guard against the rot setting in. Sticking to your original principles is just as hard as developing them from a clean slate in a mature business.

If managers don't develop ideas that create new products and processes, they will find it difficult to survive in a market with others who do.

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About The Author

Robert Heller
Robert Heller

Robert Heller, who died aged 80 in August 2012, was Britain's most renowned and best-selling author on business management. Author of more than 50 books, he was the founding editor of Management Today and the Global Future Forum. About his latest title, The Fusion Manager, Sir John Harvey-Jones wrote: "The future lies with the thinking manager, and the thinking manager must read this book".