Market Share – Is It Really The Right Measurement?
Our CEO posted a recent blog on the current events at Nortel. Certainly, their bankruptcy filing is an eye-opener for many companies. However, it also betrays a buying pattern that actually runs counter to the intuitive buying patterns of most consumers: that market share data should be an exclusive buying criteria.
Don’t get me wrong – there are benefits to being a market leader. However, manufacturers incorrectly use market share data to implicitly convey two messages: first, that the product is high quality, and second, that the company is stable. The truth is that both of these are false conclusions.
Let’s take the quality implication first. Would you ever assume that wine is the highest quality because it is created in high volume? Is a Timex watch higher quality than a Rolex watch, due to higher sales? In fact, is there anything you can readily think of where high volume necessarily equates to higher quality? As a general rule, the highest volume product is generally the cheapest, both in cost and build quality. By market share logic, the Chevy Malibu is a vastly superior car to the Porsche 911. It’s simply a false conclusion.
While we’re on cars, let’s look at the stability implication. GM is an order of magnitude larger than Porsche. They have a huge market share, while Porsche owns a fraction of a percent. That said, GM is on the verge of bankruptcy, while Porsche is the most profitable company per car. Size or market penetration is not an indicator of stability; counter-intuitively, size can often be a company’s most lethal characteristic. As Rupert Murdoch has said, “Big will not beat small anymore. It will be fast beating slow.” Like Dinosaurs who lost the planet to fast-moving, warm-blooded mammals, so too are the business markets favouring the lithe and nimble to the inflexible and slow.
Rather than pure market share data, buyers should ask market share questions that make sense for their buying decision. Porsche’s market share data is substantive if you are concerned with a particular market: high end sports cars with a premium placed on cornering and acceleration. So does ShoreTel’s market share stand out, as an example, for professional services companies on UC solutions distributed throughout the globe on a single-image system.
With regard to company stability, instead of market share, buyers need to be explicitly asking, “Is the company I am buying from stable?” In ShoreTel’s case, that is a resounding yes. We are among the healthiest companies in the market!
First, we are publically traded, which means that we are completely transparent, and our customers are welcome to examine our financial strength. This is a growing rarity these days. Second, we have 110 million in the bank (actually, multiple banks, and none of them Icelandic). On that subject, Bill Gates always wanted a year of cash on hand, so he could survive for a year even if there were no sales; at our current run rate, ShoreTel has well over one year worth of cash in the bank, one of the highest reserves to revenue ratios in the business. Nortel had lots of cash as well, but what killed them was servicing their debt. ShoreTel has no long term debt. Furthermore, we are also investing more on a percentage basis than any other vendor on Research and Development: over 20%! Even with these investments, we also have one of the highest gross margins in the industry: close to 65%. This high gross margin has allowed us to stay profitable for the last 14 quarters and cash flow positive for the last 3 fiscal years. (Learn to read income statements: there is a difference between GAAP accounting and Non-GAAP accounting, which does not consider stock based compensation expenses.) Finally, ShoreTel is a high growth company in a high growth market. We believe we are the fastest growing company in the space, and we see future growth.
Buying preconceptions are often challenged in soft economic times, and I expect that buyers will again ask the right questions to differentiate between thought leaders and market leaders, to juxtapose large companies against stable companies, and to compare quality opposed to pure volume.