The Maiden Issue — BM & Intel, PC Uncertainty Principle

Bill Gurley’s first Above the Crowd, October 1994 — opening with Neil Young and an observation about the exodus of ranked technology analysts to the buy side. The founding issue of the newsletter whose full archive is indexed on Gurley’s page.

Notes

• “It’s better to burn out, than to fade away… …the king is gone, but he’s not forgotten”
• —Neil Young, “My, My, Hey, Hey”
• It appears that that great sucking sound Ross Perot heard may have had little to do with Mexico but rather with the mass exodus of highly ranked technology analysts to the buy side. And although we recognize that some readers may still be mourning the recent loss, we cannot help but view this departure as an opportunity.
• Thus, as solace, we offer the inaugural issue of “Above the Crowd” —a one- to two-page biweekly publication focusing on current topics in and around the personal computer industry.
• And while our vantage point from 6’ 9” above the ground may not provide a better view, we at least hope that it provides a different one.
• True Blue Love
• One week ago today marked the official announcement of the IBM PC Company’s new corporate product line —the IBM Personal Computer Series 300 and 700. We were fortunate enough to participate in a conference call for investment analysts that was associated with this product announcement. During this call, IBM PC Company executives made a concerted effort to declare that relations between the PC Company and Intel were quite rosy. And despite the fact that IBM has decided to drop Intel’s “Intel Inside” branding program, management declared that IBM’s relationship with Intel in no way resembles the now well-known public dispute involving Intel and Compaq.
• Does anyone consider the PowerPC and Pentium to be complementary products? Because when we jog our memory banks, we seem to recall that the whole purpose of the PowerPC was to put an end to Intel’s monopolistic dominance of the microprocessor market for PCs. As you know, we are not referring to some small division within Intel but rather its flagship product that is responsible for the majority of its revenues and earnings. And while we are sure that some would argue that the PowerPC comes from a different division within IBM, these same executives disclosed that later this year they will introduce a PowerPC-based server.
• Oh yeah, and then there is this other thing about being the primary manufacturer for two of Intel’s three direct competitors. In case you are not aware, IBM is the primary contract manufacturer for both Cyrix and NexGen. Furthermore, IBM’s expertise in semiconductor manufacturing processes will no doubt help these products come to market faster than they would have without IBM’s involvement. Once again, some will argue that these efforts are the work of IBM Microelectronics Division and not the PC Company. But with Gerstner’s well-announced “reining in” of IBM’s separate divisions, we consider this point moot. (This consolidation process in also known as Reverse-Akering.)
• We are not sure who IBM was hoping to fool with this piece of ingratiating diplomacy, but we
• speculate that Andy Grove sees things our way. Gerstner’s vision may still be in the development
• stages, but it is a sure bet that one of IBM’s two major long-term corporate goals is to unseat
• Intel, the second obviously being to unseat Microsoft. So while IBM likely saw this as a great
• opportunity to bash Compaq, we suggest it pay attention to its credibility. Then again, all is fair
• in love and war, whichever this case may be.
• PC Uncertainty
• German physicist and Nobel prize winner Werner Heisenberg is best known for his 1927
• discovery of the uncertainty principal, which declares that the properties of atoms and particles—
• such as position and linear momentum—cannot be measured accurately. The problem is that the
• mere exercise of measurement distorts the actual variable which one wishes to measure. In his
• case, the light emitted from his microscope actually propelled atoms he was hoping to analyze.
• Scientists have long since speculated that the uncertainty principle applies to other disciplines as
• well, and we find the high-technology investment world no exception.
• Our main theory is as follows. In analyzing and reporting on the personal computer industry,
• sell-side analysts, investors, and the trade journal community may actually distort the industry
• and companies which they are analyzing. Marketing managers at high tech companies regularly
• read Wall Street research in an effort to make predictions about demand or to perform
• competitive analysis. This activity can have peculiar results, especially if the information being
• disseminated is inaccurate.
• Let us provide a few examples. This past summer, most PC stocks fell over 25% as both the
• investment community and the trade press determined that we had entered what affectionately
• became known as “the” summer slowdown. When the dust settled, Dataquest reported that actual
• second quarter PC sales were up 23%, an acceleration from the first quarter’s 18%. What
• happened here? Very aggressive competition among resellers resulted in less than stellar
• financial figures and abnormal market share exchanges. The financial and press community in
• turn interpreted these results as signs of a slowing industry. Why is this a problem? Well,
• consider the reseller who lost market share. The management of the company is likely to (1) read
• about “the slowdown,” (2) figure that their results represent industry trends and therefore not
• react to a potential problem, and (3) report that sales are light due to a secular industry downturn-
• perpetuating the myth.
• Here is another example. General perception in the industry (at least three weeks ago) is that
• inventory levels are extraordinarily high. This “industry perception” is most likely driven by the
• inventory levels at one single vendor —Compaq. The truth is that the inventory levels at most of
• Compaq’s competitors are at all-time lows. This includes AST, Apple, Dell, and Gateway.
• Furthermore, while Computer Reseller News continues to write articles about the severe
• inventory situation in the channel, particularly for Compaq, their August Reseller Poll and
• September Reseller Scorecard show a different perspective. In terms of excess inventory,
• Compaq came in fifth, behind IBM, Apple, AST, and Dell.
• This situation is exaggerated in stock prices, and perhaps this is why stocks like Dell and
• Gateway are up over 50% off their summer lows. As stocks represent an aggregation of
• expectations for future performance, perceptions are not everything, they are the only thing—to
• borrow a phrase. Smart investors can use this knowledge as opportunity through sound
• contrarian investing. When sales are “slow” or “depressed,” try to obtain a broader view.
• Question the general thinking. Try to determine if the symptom is the result of an alternative
• reality. Likewise, when markets are “hot,” look for potential kinks in the armor.
• Open to Open Sourcing
• Lastly, we would like to take our hats off to Steve Raymond, CEO of Tech Data Corp., for his
• thoughts on open sourcing revealed in the October 17 issue of PC Week. While others in the
• reseller community complain about the increased competition, Mr. Raymond declares, “Open
• sourcing has been an important catalyst in the channel’s development of services and a low-cost
• structure to fend off challenges from direct marketers and, in some cases, our own suppliers.”
• Executives like Steve who are adaptive and see industry changes as opportunities rather than
• obstacles are much more likely to be successful than those who fight change.