This week was another set of reminders that without proprietary software it’s hard to have a profitable business model.
Ubiquiti managed to come public this week and although they are positioned as a wireless hardware company their strategy, business model, profits and high valuation all come from a focus on software. They combine proprietary software with zero incremental cost with commodity hardware to deliver a solution that is low-priced, high function and generates increasing returns to scale. (Check your email if you are a client or wait until the note gets published on Seeking Alpha.)
It should come as no surprise that the founder and CEO of Ubiquiti cut his teeth at Apple. Apple generates the bulk of the revenue from “hardware” but it’s not obvious to everyone that it is the software (and design to be fair) that generates the advantage, the margin and the valuation for Apple.
Amazon leverages software too but in their own way. An online, service-oriented set of systems that is now going to be the main gateway for most consumers to discover, purchase and access real and virtual goods.
Contrast all this with Dell who continues to struggle to find a new positioning in a world where the things they are known for are now commodities. Dell may still have a price/performance edge in delivering commodity hardware but it’s not a ticket to high operating margins.
This week Dell is stressing their power and prowess as an “enterprise” technology company and asserting that Apple is not. Unfortunately for Dell they are wrong on both counts. First of all Apple has been on the rise in terms of enterprise spending and plans for the past two years and that trend is accelerating thanks to the iPhone and the iPad.
Second of all the ability for Dell to add proprietary value is limited. They have made a number of acquisitions but not enough in software. Customers point out there are many sources for low-cost commodity solutions and companies like Red Hat provide excellent software to make those systems perform well. Add into that improvements in virtualization technology (where VMWare dominates) and you end up with hardware vendors simply competing on price/performance.
In terms of innovation in the server space Dell is being outdone with Cisco with their UCS.
Closer to the consumer we’ve been doing some work on a private company called FitBit. They have a little device that goes in your pocket to track your activity but the power and value of the company is completely in their software that brings together multiple aspects of activity, consumption, and health measurements into a goal-driven context. The hardware bit is irrelevant. In fact the one they make has many flaws. As the company grows maybe third parties will emerge with different/better devices that tie into the software. Again it’s the software in the middle that drives all the value.
FourSquare has just introduced some new software features called “Radar” that promise to make a very big difference in the usage and value derived from their service. We see companies every day that forget the simple software lesson and investors wasting time with companies that don’t have it right.
Architecture is important too but we’ll leave that for another post.
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