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Editor's Note: Beating the Wal-Mart Effect

Mar 03, 2006, 23:30 (18 Talkback[s])
(Other stories by Brian Proffitt)

By Brian Proffitt
Managing Editor

I just finished reading The Wal-Mart Effect, by Charles Fishman. If you want a blow-by-blow of how and why a small-town operation grew to be the biggest non-oil corporation ever, this is the book for you.

Like many Americans, I have a vague sense of distrust about Wal-Mart. Their prices are lower, on average, than any other store's prices. But they're big. And loud. A pain to park at and a pain to get out quickly.

Reading this book brought together a lot of information that I had heard in bits and pieces here and there. Fishman does an excellent job of examining the impacts of Wal-Mart on the American marketplace, both good and bad. Because of its sheer size (about one percent of the entire US economy), Wal-Mart's cost-cutting approaches towards its almost maniacal goal to keep prices low has benefited the overall US economy by keeping inflation down. But those same cost-cutting measures have caused lost American jobs as US suppliers are forced to use non-domestic workers just to keep up with Wal-Mart's demands for lower prices.

This is not a bashing book, nor is it one of praise. Fishman takes a balanced approach to his examination, as he genuinely tries to discover the net gain or loss associated with having Wal-Mart, both locally and in general. I really do recommend it.

Of course, this isn't a Web site about retail business. It's about Linux. But when I was reading this book, there was simply no way to avoid making comparisons between one mega-corporation and another we're all more familiar with: Microsoft.

The colossal growth and power of Wal-Mart mirrors the strength and size of Microsoft, but more than that, the way both companies affect their respective markets is very very similar--so much so that the weaknesses that Wal-Mart's competitors have successfully exploited could easily be exploited by Linux and open source projects and companies.

One of the biggest effects Wal-Mart has on the retail landscape is that of expectation. By offering items at low prices, the expectation is created that similar items sold at other retail outlets have to be the same price, or close to it. If Wal-Mart is selling Widget A at $2.97, then there's no way the store down the street can sell it at $5.99--or even $3.99. (And in case you're wondering, "down the street" in the US means pretty much everywhere: currently 90 percent of Americans live within 15 miles of a Wal-Mart.)

Consumers, therefore, come to expect that Widget A will cost around $3. The company that makes Widget A has to get their costs down so they can profitably sell said Widget for that amount. Even companies that don't sell their products at Wal-Mart are effect. Widget X--Widget A's main competition--has to either keep its price down at that $3 level or have a heck of a value add, or they will get killed, too.

This expectation effect carries over to the computing world. We see it every day. Windows runs N number of apps, so therefore any other operating system has better run N, too, or they are simply no good. The fact that the other operating system is more secure, more stable, and is free and libre may make no difference in the face of this expectation effect.

Another example, recently examined by my colleague Steven J. Vaughan-Nichols, is the sheer purchasing power of Microsoft. When he asked the question why won't Dell admit they're selling a Linux desktop, his answer was crystal clear: Dell cannot risk angering Microsoft. Without an operating system to sell, Dell is terrified that their sales would plummet. But such a scenario would be unlikely. Microsoft would not cut out Dell machines completely. But they could raise their OEM fees and cut into Dell's profit margin, which is likely very tight already. Ironically, the presence of mega-retailers like Wal-Mart would keep Dell from raising its PC prices to gain relief from higher OEM fees. Thus, Dell gets squeezed from both sides.

That's the power Microsoft has over OEM vendors--much like the power Wal-Mart has over its suppliers. Play our way, or take your marbles and go home. The problem is, once you have committed all of your business' resources to the game, leaving usually means forever.

But in their similarities, there are also shared weaknesses. One area that Wal-Mart has trouble competing in is that ephemeral quality of experience. As I mentioned, Wal-Marts are usually not fun to shop. I would much rather drive four miles farther and shop at another discount retailer. Even though the prices at this other retailer are slightly higher than Wal-Mart, the experience is much less stressful and therefore more desirable. That's the value add that keeps this retailer competing in the face of a giant like Wal-Mart.

Linux, too, has value adds over Windows. A lot. And, despite the FUD churned out from Redmond (and in some amusing cases, because of that FUD) the message is slowly getting out to the IT masses. On the other side of the coin, Windows has value subtracts: using Windows is just as painful as shopping at Wal-Mart. Like my personal shopping experience, I am much more willing to not run every single app I want in Linux rather than have Windows eat my data or happily hand it out to whatever script-kiddie who hacks into Windows.

Wal-Mart can't compete well in niches, either. It's physical nature--big, sprawling stores where you can buy anything from tires to lingerie--means that a competitor can make a go of it specializing in one specific retail area. These niche players don't have to be small, either. According to Fishman, successful examples here in the US are Best Buy and Circuit City. They are huge, too, but there's no way Wal-Mart can knock them out, because a Wal-Mart store simply cannot physically offer as much choice in electronics. As another example, Home Depot and Lowe's are two niche players in the hardware and home improvement space.

Linux, as we have all seen, does compete well in niches. Build a platform, any platform, and you can run Linux on it. Not only run on it, but run well. It is much easier on the wallet to get teams of volunteer labor to work on an open source project than hire more and more developers to compete with open source. Microsoft may have big, sprawling resources, but they are not infinite.

There is one more point I got from Fishman's book--but it's not a similarity between Microsoft and Wal-Mart. It's a difference I think will be a key point for Linux' success in the near future of IT.

When Wal-Mart's suppliers can't provide their product at the costs Wal-Mart wants, Wal-Mart will severe that vendor relationship and then move to a supplier who can meet the retailer's demands. Wal-Mart can do this because they are huge enough to expect the demand to be met in the first place, and because there are plenty of other suppliers out there who will step in if the original supplier is forced out.

But Microsoft's situation is different: they are more dependent on their suppliers than Wal-Mart is on theirs. Windows is still predominantly a PC platform. If a major OEM vendor decided to openly offer Linux alongside Windows, Microsoft might put the squeeze on them, and it would likely hurt the OEM vendor. But let's play this out.

If a vendor like Dell started selling less PCs because their prices went up, Microsoft would be getting less copies of Windows (and, more critically, Office) out Dell's door. Other OEM vendors would pick up the slack, but meanwhile Dell--if they were smart--could work to get their boxes more integrated with Linux and start selling these Linux-only boxes in whatever markets they chose. Because of the lack of Microsoft tax, Dell would make their historical profit margin and then some compared to any Windows box they sold.

This transition would not be without pain, but if Dell hung on, they could ultimately prevail. Even more importantly, other vendors would take a look at Dell's Linux sales and want to give it a try. Microsoft might be able to squeeze one big OEM vendor? But two? Three? Unlikely. Especially if it got out that the reason an OEM vendor's prices were going up was because Microsoft rose their fees. Microsoft, if it got punitive, could likely precipitate the very thing they want to prevent: wider-spread adoption of Linux on the desktop.

It's quality, customer experience, and choice that enables Wal-Mart's competitors to succeed. The same thing will work against Microsoft.

Good thing Linux has all of those qualities.