Too late to openness

I saw an interesting comment Wednesday on BlackBerry’s late conversion to openness. VC Fred Wilson wrote:

So RIM has decided that it is time to make Blackberry Messenger (BBM) cross platform. They announced yesterday that by this summer BBM will be available on iOS and Android.

The time to do this was in 2008/2009 when BBM was huge and everyone was on it. The core users were beginning to leave for iOS and eventually Android and if RIM would have let them take BBM with them, they would now own the biggest cross platform messenger out there. BBM is great and everyone knew how to use it and was comfortable with it.

But RIM execs waited four years to make this move. When BBM hits iOS and Android this summer, they will face dozens of cross platform apps that people use to message each other, one of which is in the USV portfolio. My bet is this won't help RIM or BBM much at this point.

Even when I was consulting to Symbian from 2006 to 2008, people were speculating when BB (then Research in Motion) would license or partner with its email platform. (Its BlackBerry Connect mail client was available for a few Nokia phones during that time). RIMM held strong market share in the US until 2009, when it began its unchecked fall towards zero.

As someone who studies the strategic use of openness, I’ve seen this tendency to put it off openness until too late, across a wide range of companies, product categories and decades. Wilson attributes this to The Innovator’s Dilemma, which I interpret as an unwillingness of firms to cannibalize their own high-margin business with low-margin (or low price) business.

Yes, cannibalization is hard. Yes, Clay Christensen made an important observation why such cannibalization is so hard. But having studied these sort of choices over and over again, I think “Innovator’s Dilemma” is too pat an answer: sometimes it explains why a firm can adapt, but it’s rarely the complete explanation.

It often happens that the managers know exactly what they're doing — increasingly likely after the publication of Christensen’s book.. I’d split this into two subcategories. One is that it’s a rational choice — milking a cash cow to the end and using that cash while it lasts to do something else. (For example, from 1999-2002 I took the rents from my printer driver business and used it to finance a shift to a new career).

The other variant is that the managers get it but the owners do not, a classical principal-agent problem. If I’m getting commission on sales (or stock options on current capital appreciation), why do I care about company performance 2, 3 or 5 years from now? It may be perfectly rational for me as CEO to get while the getting’s good, even if I know it will eventually all come crashing down. (I call this the Ceaușescu theory of management, given the predictably unhappy end to the Romanian ruler’s reign.). As such a CEO, I hope to be lucky enough to be I’m retired to my Maui estate before everything falls apart)

Finally, what I think the most common explanation is Da Nile (that river in Egypt). I’ve worked with, for and competed with a wide range of companies that just can’t recognize — or can’t admit — that the competition is a serious threat. Christensen identified conditions where this happens, but often the explanation is much simpler one: arrogance or hubris. (In marketing, we say “they’ve come to believe their own propaganda.”) Certainly BlackBerry/RIM has had this problem for years.

Intel’s once great founder-CEO (now Stanford business professor) had it right: only the paranoid survive. But having escaped Hungary after Soviet tanks invaded the country to crush a popular uprising, the former András Gróf lacks the complacency common among highly successful US business leaders.

Aboard the S.S. Ballmer

Microsoft’s success has always been about its alliances: Bill Gates lining up Basic licensees, the 1980 deals with IBM and Seattle Computer Products and (most importantly) licensing the IBM-funded DOS to all of Microsoft’s competitors.

With declining PC revenues, Microsoft is using its $50+ billion cash horde to buy friends. The Redmond company has created alliances with Nokia and Barnes & Noble in hopes of gaining a footprint in smartphones and low-end tablets. But into doing so, both companies have (for better or worse) paced on their platform bets on Microsoft’s (thus far) losing hand.

As part of my studies of Nokia’s smartphone strategy, I’ve been following the Microsoft-Nokia deal for several years. Tomi Ahonen has done a great job of covering how badly thinks have gone since Nokia threw away its (declining) smartphone lead and cast its lot with Microsoft.

However, the Barnes & Noble story is a different one. It has been searching for a viable tablet strategy for years. When it signed its surprising $300 million deal a year ago, it was losing its decade-long battle fight with Amazon over books, online sales, tablets and every else. The original 17.6% equity investment in the B&N spinoff of Nook Media was supplemented by a promise of $305 million in other payments.

Last week, rumors surfaced that Microsoft would pay $1 billion for the remaining shares of Nook Media. Barnes & Noble shares jumped on the news.

This would be the only good outcome for B&N: Microsoft gets a portfolio of online assets to fight Amazon, Apple and Google, and B&N gets some cash to prop up its dying retail business. To quote Steve Miller: “Go on, take the money and run!”

In the meantime, both Nokia and Nook Media are aboard the S.S. Ballmer without a lifeboat. Microsoft has known for 15 years that it needs a viable mobile strategy, and despite billions in R&D (and funds for products and alliances), has been unable to break single digit market share on either phones or tablets.

It’s not for nothing that Ballmer was named the worst CEO by Forbes a year ago, saying “"Without a doubt, Mr. Ballmer is the worst CEO of a large publicly traded American company today”. Ballmer was merely second worst in CNBC’s 2012 rankings. Both were before the recent Windows 8 fiasco exploded in the company’s face.

On Sunday, Al Lewis of Dow Jones cited yet another Ballmer critic:

Former Microsoft executive Joachim Kempin released a book timed to the Windows 8 launch last fall, called "Resolve and Fortitude: Microsoft's Secret Power Broker Breaks His Silence." In it, he, too, says Mr. Ballmer should be fired.

"He has no clue about technology," Mr. Kempin said in a telephone interview. "All the guys around him agree with him or they get fired."

Because of his long friendship with America’s second richest billionaire, his job has been secure thus far. As long as Ballmer remains at the helm, Microsoft (and Nokia and B&N) shareholders should expect more of the same.

Adobe jumps off a cliff, leaves parachute behind

Adobe announced Monday that it was moving all its professional graphics arts users from a package software purchase model to a subscription model. This is certainly a bold — if not risky — move, but so far I can’t tell if it’s a sign of strength or weakness.

Package software is how Adobe was started — as was true for nearly all 20th century software companies. The company would develop a major new release, sell it as a product, provide free bug fixes for a while and then start over. Adobe was unusual — or perhaps a trend-setter — in that it never tended to give much of a discount for previous owners to buy the new copy. Adobe also got in the habit of bundling packages in “suites”: for example, I once was a Dreamweaver user, but the suite pricing forced me to find another alternative (currently the open source SeaMonkey) when an OS upgrade rendered my 8-year-old copy of Dreamweaver obsolete.

Under the new plan, the flagship “Creative Suite” will become “Creative Cloud.” Fortunately for users, the "cloud" term is somewhat misleading: it’s not a Cloud in the sense of Google Docs or webmail — with all the apps running in the cloud — because the latency of such interactions would make Photoshop or Illustrator unusable. Instead, Creative Cloud is more like the Apple model with apps on the PC and document synchronization between a PC (or other device) and Adobe’s servers. In the 1990s, we called this groupware, although obviously things have gotten better since then.

The big difference is that instead of paying for releases, Adobe wants users to pay for subscriptions. The migration will be enforced by orphaning the old products, which gradually will become obsolete and irrelevant.

Usually when you make such a dramatic transition, you run the two business models in parallel. In Monday’s presentation, Adobe’s CFO Mark Garrett said that the subscriptions have topped 500,000. At $50/month, that’s $300 million a year; with annual revenues of $4.5 billion, that’s meaningful but not overwhelming. Their 2012 10-K stated:

We continue to derive the majority of our revenue from perpetual licenses. However, our subscription revenue, as a percentage of total revenue, has increased to 15% in fiscal 2012 from approximately 11% and 10% in fiscal 2011 and fiscal 2010, respectively, as we transition more of our business to a subscription-based model.

So the ability to make this shift suggests strong pricing power by Adobe. As Garrett said:

So our end goal, from my perspective, of faster revenue growth for this business and more recurring revenue is now even clearer than it was before, and these announcements today really reinforce that.

Garrett said that beyond the core audience of beyond full-time “creative professionals,” it’s targeting three other groups: marketing staff at small/medium businesses, SOHO photographers/hobbyists, and education.

All of these problematic. When I ran a small business, we wouldn’t spend $600/year/seat for anything, nor would I as an individual. Even at a reduced pricing of $360/year, the price seems too rich for the education market (“one of our most important vertical markets” according to Garrett).

Various commentators have questioned this pricing model, including Karl Denninger on Seeking Alpha and Lori Grunin of CNET. People are grumbling, but of course nobody likes a price increase — so the real question of pricing power is whether customers have any realistic alternative. (Adobe’s 89% gross margins suggests most of their customers are stuck).

On the other hand, the shift to seek revenue growth through a new business model — rather than creating new products — could be seen as a sign of weakness. It takes me back to my second software more than 30 years ago, developing minicomputer simulation tools. In our case, once the software was mature it became difficult to provide major new features that would excite customers. We used monthly (or annual) service contracts to provide a steady revenue stream when we were unable to provide major new releases that people would buy.

Adobe’s new pricing model does not appear (yet) to cover low-end consumer products such as Photoshop Elements. My guess (just a guess) is that if the professionals cooperate with the subscription model, Adobe will attempt to shift consumers to the subscription model within 3 years.

One thing going for Adobe is that most of its rivals among professional software companies have pulled back or (as with Aldus and Altsys) been bought up. Open source alternatives are not viable competitors to the Creative Suite apps. However, Adobe faces challenges in the low-end consumer market from App Store apps that sell for $30 or less as new customers seek convenient, affordable alternatives.

IP, BTE and funding startups

In running the @KeckGrad business plan competition this week, I was struck by how different our students’ life science startups were from the retail or IT startups that are common at other colleges. In most cases, our students needed $5 to $50 million in outside funding to jump through regulatory hoops and generate initial revenues.

It seems like this also reflects a fundamental difference in IP strategy — how a successful startup discourages entry or imitation, and how that ties back both to their funding needs and their IP strategies.

The retail startups have a brand, and locations, and perhaps a little bit of internal process trade secrets. Seed funding is available, but (shy of an IPO or acquisition) any subsequent growth tends to be organic and self-funded. Whether restaurants or clothing, these sorts of startups take years to build up, and the margins are generally thin.

The IT companies rely on copyright and trade secrets to protect their implementations, and hope to build network effects or switching costs to discourage entry. A hot property attracts plenty of money, because the scale is small and (if successful) the TTM and thus the payback time is quick. Still, a well-funded, well-run competitor could catch them. Many startups hope that the differentiator is the vision and positioning: for example, MySpace had years to respond to Facebook, but somehow never did.

Then there’s the life science companies: they need spend (and thus raise) huge amounts before ether generate revenues and — given mandatory regulatory disclosures — give rivals plenty of time to see what they are doing. The only way this works is if you have a patent, that gives investors an ironclad assurance of exclusivity for some period of time.

I'm not exactly sure what the model is for cleantech — but maybe there isn’t one. Certainly renewable energy — such as solar or biofuels — the hope is to leverage economies of scale to attain cost advantages in producing commodity energy. Given the hope of scale as a BTE (or BTI), many companies bulked up quickly, leaving a lot of dead companies strewn along the way. China’s Suntech was once world’s largest solar company — the first to sell 2 gigawatts of solar panels in one year — but is now shrinking and bankrupt.

If we look at older, mature industries, scale is never enough. Scale has reduced (but not eliminated) competition in electronics, steel and autos, but has done nothing to provide barriers to imitation to protect HP, US Steel or GM from subsequent entrants. If anything, the race for scale has led to overcapacity and thus price wars — in steel, DRAM, LCD panels, solar panels.

Dirigisme wins, French entrepreneurs lose

By now, the whole tech world has heard the story first reported Tuesday afternoon in the Wall Street Journal about Yahoo’s failed effort to buy Dailymotion. As the story opened:

Dailymotion was on track to be the first big acquisition for Yahoo Inc. YHOO +2.76% Chief Executive Marissa Mayer, after her company signed a provisional deal to buy control of the online-video website from France Télécom FTE.FR -0.59% SA. Then Ms. Mayer's No. 2 executive met with French Industry Minister Arnaud Montebourg.

At an April 12 meeting in Mr. Montebourg's Paris office, the minister told Yahoo's chief operating officer, Henrique de Castro, and France Télécom's chief financial officer, Gervais Pellissier, that he didn't want 75% of a rare French Internet success story to be sold to an American Web giant, according to people briefed on the meeting.

"I won't let you sell one of France's best startups," Mr. Montebourg told Mr. Pelissier, his voice raised, according to people briefed on the meeting. "You don't know what you're doing."

Facing an uproar, the minister clarified:

“The minister has expressed his desire that a partnership between Yahoo and Orange should be built on an equal base, mutually beneficial to both companies,” his office said in a statement.

It was widely reported that the government was willing to let Yahoo get 49% — or maybe even 50% — but not beyond.

This has so many fascinating implications. First, Yahoo is back to the drawing board in trying to build up its video capabilities.

Second, are the policies of the socialist government — after five years of crypto-Gaullist Sarkozy — going to hurt trade and investment with France. From the New York Times:

The government’s intervention has alarmed entrepreneurs in France, who say it sends a bad message to foreign investors, especially at a time when the country is seeking their money to help jump-start its economy.

“I’m sure France will be downgraded in foreign investors’ eyes because they will think it is too complicated,” said Frédéric Montagnon, co-founder of OverBlog, a blogging platform.
…
The move to block a takeover by Yahoo comes even as France has been stepping up its efforts to attract foreign investment — much needed, analysts say, to pull the country out of a slump in which gross domestic product declined by 0.3 percent in the fourth quarter of last year.

Or, as the headline on the Financial Times proclaimed: “Dirigisme dies hard in France”.

The rebuff to Yahoo comes after Montebourg feuded with other foreign capitalists. From the London Telegraph:

But it is not the first time Mr Montebourg, on the Left flank of President Hollande’s Socialists, has been accused of damaging the country’s business image.

Last year he threatened to nationalise an ArcelorMittal steel plant in Floranges, north-eastern France. More recently he got into a spectacular public spat with American tyre tycoon Maurice Taylor, calling the Titan International CEO “extremist” after he pulled out of talks to buy a Goodyear factory over worker demands.

“The extremists are in your government, who have no idea how to build a business,” Mr Taylor fired back.

But what I think is most important is the message it sends to French entrepreneurs, who know that for the next four years (at least), they can’t build an economically significant firm and sell it to the highest bidder. From Business Week:

“It sends a very bad signal to the outside world, saying that because you aren’t French, we prohibit you from being involved,” says Christophe Chausson, managing partner of Chausson Finance, a Paris-based venture capital group. “To develop startups, you have to do the opposite of what the government has done. Dailymotion needs a lot of capital, hundreds of millions of euros, to develop and buy rights to content.”

The same article noted that the decision hit home for the company’s founders:

Perhaps the most poignant reactions to the collapse of the Yahoo deal came from Dailymotion’s co-founders, Benjamin Bejbaum and Olivier Poitrey, who started the company in Poitrey’s Paris apartment in 2005. “It shouldn’t have been THEIR decision,” Poitrey posted on his Twitter account on April 30. He recently moved to Silicon Valley to head a team that’s developing Dailymotion’s mobile offerings.

Added Bejbaum in a tweet today: “On Monday, there was hope. On Thursday we freaked out. The French economy is not a toy.”

Like Poitrey, some expatriate French are thriving in Silicon Valley. But I see a huge opportunity for French-speaking Switzerland (with access to capital and home of a first-rate technical university) or Belgium (already home of French tax refugees) to create entrepreneurial clusters and attract the best and the brightest minds trapped in President Hollande’s workers’ paradise.