“Cash Cow Disease”

Ron Burk has a provocative post about Microsoft and Google at Silicon Alley Insider. He says they both suffer from “cash cow disease” which he defines as

“Cash cow disease arises when a public company has a small number of products that generate the lion's share of profits, but lacks the discipline to return those profits to the shareholders.”

I agree with the first part, not the second. He takes the view of many on and around Wall Street that R&D/diversification investments are a poor use of money, and that investors, not managers should decide what to do with profits in the form of dividends

If Intel had heeded his advice they would never have invested billions in 386 and later chips. If Apple had, they would never have taken the risk on launching iTunes, iPhone or iPad. If Plantronics had, it would still be praying for NASA budgets to be growing, not transitioning as it did into call center markets in the 80s, home/small offices in the 90s, mobile/Bluetooth markets in 00s, and now Unified Communications (there is a nice case study on them in my book).

The key in each case above is they diversified well, which Microsoft has not done consistently in many sectors.  Ron cites many recent Microsoft  initiatives  in the mobile market. Yes, some of them are head-scratching but he neglects to mention that Microsoft had a healthy mobile market share 3 years – and arguably a dominant share in some Asian markets with partners like HTC. There is no reason Apple and Google should have gained so much momentum in that sector and for Microsoft to languish as much.

Similarly you could argue Google could be charging for and delivering better customer support around many of its diversifications – turning them into real businesses rather than its tentative, always-in-beta approach.

My other issue with the “cash cow” view is that markets follow linear paths. It creates a condescending view that consumers are dumb and will tolerate high margins for ever – even, though many of those consumers are corporations with their own analysts and negotiators. Or that high margins fail to attract competition. That “abnormal profits” can continue for ever no matter what we learned in economics in school. That Intel was naive to “eat its own children”

So, I would amend Ron’s second part of the definition to …”but lacks the discipline to itself cannibalize the cash cow business and smartly and seriously diversify into other markets”