In boom times everyone's a genius. It's the downturns that distinguish the pros from the minor leaguers.
For the last three years, as we've watched the stock market climb back into the stratosphere, and as one tech company after another sets records in revenues and profits, there's been no shortage of CEOs and senior executives swaggering about and talking smack about how their "vision" or "strong hand" or just flat-out leadership brilliance has guided their companies to unprecedented success.
You can hear the self-satisfaction in their public pronouncements and see it in their master of the universe redux poses in business and trade magazines.
Well, pardon me if I haven't bought it, but I've seen all of this many times before. The truth is that good times conceal a whole lot of bad management, weak products and structural flaws. They also present indifferent and momentarily prosperous customers as being far more loyal than they really are.
By the same token, the onset of hard times quickly reveals all those problems, often turning them from benign to malignant. Downturns expose dangerous overextensions, internal business contradictions and fair-weather friends and partners.
Any moron with a good suit can run a hot company during boom times; only a true manager can pilot a struggling company during a bust.
In the last few days, as the tech industry slowly slides into its latest cyclical downturn, we have seen four telling examples of great companies -- a couple of them run by famous executives -- suddenly finding themselves at risk of running aground. How these executives act to keep their firms afloat in the months ahead will do much to decide the duration of this downturn, the nature of the next boom, and what role their own firms will play in the years ahead.
A Bite Out of the Macintosh
The first of these companies is Apple Computer. As I noted in this column a few weeks ago, and am even more convinced now, the introduction of the iPhone late last spring may prove to be the high water mark of Apple for a long time to come.
Despite the apparent (but by no means guaranteed) success of the iPhone, Apple has already -- and it would seem prematurely -- cut its price by nearly a third, slicing into its profit margin. And despite a clever PR decision to give those early adopters refunds in the form of company store credits, some customers still aren't satisfied and are suing. Though the litigants haven't a leg to stand on, their very presence creates cracks in the powerful image of a monolithic army of Apple true believers.
And these aren't the only unhappy customers. There are also legions of iPhone owners who are unhappy with Apple's requirement that they sign on with AT&T as the sole carrier. Needless to say, it wasn't too long before the first hack surfaced to break into the iPhone's code. Apple's response was to warn any user who fiddled with the hardware or software guts of the iPhone that his device would be "bricked"-- that is, rendered permanently unusable.
The result was a lot of righteous anger, even from Apple loyalists -- and that was without most users even noticing the massive hypocrisy of Steve Jobs. Jobs first made his reputation for criminally hacking the phone system, now becoming the avenging angel on his spiritual children for doing the same thing.
And the iPhone isn't the only market in which Apple is facing growing pains. In computers, the company has had a nice run recently as it benefited from the collapse of Dell Computer. But Dell is coming back, HP and Sony are stronger than ever, and the impending Christmas price war in computers, combined with a falling stock market, is going to take away a lot of the precious capital Apple will need to compete in three major markets. The third one? MP3, which Apple essentially owns with the iPod.
But the MP3 competition, which has been feeble until now, is also getting stronger. Microsoft may have whiffed with the first generation Zune, but the new one looks a lot better -- as do the players starting to appear from other competitors. A price war is going to erupt there as well -- as it will in the downloadable music world, especially now that Amazon is in the game with a DRM-free inventory -- and price wars aren't something Apple is good at.
How Steve Jobs responds will determine if Apple can stay in its privileged position at the top of the tech world in the years to come.
Old Company Looks at Hot Young Social Networking Site
Meanwhile, over at Microsoft, the slow decline to inconsequentiality continues, resisting every effort by Steve Ballmer to breathe life into the company.
Microsoft did manage to -- finally -- bring out Vista, thus maintaining its monopoly on the OS for personal computers. But the announcement was met with a yawn, and a low level of trepidation that Vista would prove to be yet one more kluge-y operating system from the "wizards" of Redmond.
No one really wanted Vista, but many (like me) needed a new computer, so we swallowed hard and bought one, Vista and all. The fact that my computer hasn't crashed or frozen yet is a credit to Microsoft, but not much of one.
The sad truth is that no one cares about, much less fears, Microsoft anymore (a lesson for the next time an apparently unstoppable company appears on the scene). The only businesses it has ever really been successful in is Windows and Office -- hardly negligible, to be sure, but hardly making it the rapacious monster it was once presented as.
Now, like a company undergoing a midlife crisis, instead of buying a red Porsche, Microsoft is rumored to be planning on a taking a major stake in the hot young social networking site, Facebook.
A wise decision or a desperation move? I think a little of both. But either way, it is an admission of defeat: Microsoft is all but admitting it can't keep up with the industry on its own anymore.
Will Facebook make Microsoft young again? Ballmer might want to ask Meg Whitman. When, two years ago, eBay paid $4.1 billion for the Internet phone service Skype, many observers thought the price was a little high -- but then, how did one value a company racing toward 200 million users and threatening to supplant the entire telephone industry?
Others wondered how exactly Skype's business fit with the online auction giant. But the general consensus was that eBay had made a shrewd move in buying one of the hottest of all Web 2.0 companies.
This week, Whitman and eBay all-but admitted that they still can't figure out how to monetize Skype, took a $1.4 billion write-down on the company and in the process all but put the subsidiary on the market … a move obviously made to prepare eBay financially for the long, cold winter to come.
Thus, we have Ballmer and Microsoft going in one direction in embracing Web 2.0 -- and passing Whitman and eBay going the other direction in abandoning it. Who's smarter? I think Ballmer in the long run, though in the short term Whitman's tactics are defensively much shrewder. If this recession is long and painful, Whitman will look like a genius. But if it is short and shallow -- which I think will be the case -- Microsoft is going to make a lot of money off Facebook.
Finally, this week, Mark Lipacis, an analyst with Morgan Stanley, stunned the chip industry by noting that shipments were beginning to outstrip demand -- and thus raising the specter of that old semiconductor industry bugaboo: double ordering, and the inevitable inventory correction. In other words, yet another price war.
Chip company stocks tumbled at the news -- the best signal we have that the electronics industry downturn has now officially begun. And what will the best executives in this, the most difficult of all tech businesses, do in response? Double down, of course. Watch Intel and AMD actually increase their R&D investments in the months ahead, even at the risk of blowing themselves up. That's what great managers do. It takes a lot of guts -- and, as the chip guys show, it also helps to be a little crazy.
TAD'S TAB -- Italy's La Linea was a brilliant animated series in which the main character is at the mercy of the cartoonist. In the course of more than 100 episodes, he walks along an infinite line encountering whatever the artist decides to draw. You can spend all night watching each hilarious episode here, at http://www.tv5.org/TV5Site/la_linea/index.php?Player=&numero=14
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
Michael S. Malone is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News, as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is the author or co-author of a dozen books, notably the bestselling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNEWS.com Silicon Insider columnist since 2000.