Thursday, December 3, 2015

Who will disrupt Google and Facebook?

Driving home from a breakfast meeting this morning, I got to wondering who is going to disrupt Google — and how soon.

Those of us who teach strategy know how all about examples of new entrants commoditizing and destroying the revenue models and profit sanctuaries of long-stable, long-established businesses. (The term “disruptive innovation” seems most convenient here, despite the recent controversy over the original evidence of same). Here are a few examples.

  • Craigslist and various Internet portals (such as Google and Yahoo) destroyed newspapers — aided by the latter’s poor business models, some unfortunately inaccurate assumptions about the supply (and thus price) of Internet advertising and key tactical errors along the way.
  • Two entrepreneurs created GrandCentral, a (temporarily) free telephone answering and forwarding service, and in 2007 sold it to Google (where it is now Google Voice). It now has voicemail transcripts and other improvements but is still free. Thousands of small companies and nonprofits (including my own) use it in lieu of an answering service.
  • I learned how to use Google Forms from my friend Mako Hill (and his need to run the OUI conference with limited cash and volunteer resources). Now I use it for most things that other people use SurveyMonkey for.
So the question I mulled over was, who will disrupt Google? Facebook would like to take business away from Google, but it’s not through cost reduction or elimination of revenues. Rather, Facebook imagines that its socially embedded ads will be more valuable than Google’s search context-specific ads.

Instead, I find Facebook ads creepy and sometimes invasive of my privacy, particularly when Amazon ads show up for a book that I looked at (but ruled out buying) five minutes earlier. (Apparent Amazon is not alone). I am appalled at what would happen if I had looked at a socially undesirable product on Amazon (sex toys, a book on bombing government buildings) — even though I know that anonymous browsing without cookies would allow me to ask a question (if not make a purchase) without leaving digital breadcrumbs.

Then when I got home, I saw this wonderful article by Andrew Orlowski of The Register (who I mainly know from his insightful analysis of mobile phone platform wars). One passage (emphasis mine) touched on the same theme:
'Dear Daddy...' Max Zuckerberg’s Letter back to her Father
What do you mean, I can't get off Facebook?

2 Dec 2015 at 13:02, As told to Andrew Orlowski

Comment Yesterday Mark Zuckberg accompanied the birth of his first child, a daughter Max, with a long open letter.

Thanks to the miracle of modern technology, we've found what Max might write back, and we're sharing it with you:

Dear Daddy

Thank you for the letter that your PR and public policy team wrote to mark my Birth, and sent to every news outlet in the World. Most Daddies wouldn’t do this. Heck, most Daddies don’t even have PR and public policy team, and those that do wouldn’t use to leverage a private family event!

That’s why you Daddy, are so special.

You write: "We want you to grow up in a world better than ours today."

Well, duh!

If I discovered that my well-educated billionaire parents wanted me to grow up in a world that’s worse than ours today, I’d already have crawled my way to a phone booth and dialled 911 to alert the authorities.

That goes for "a world without suffering from disease” too. Wow. Where do you get this stuff, Daddy? I heard more original ideas when I was a single cell blastula!

You also write:

"Technological progress in every field means your life should be dramatically better than ours today."

I’d like to think so too, Daddy, but there’s this thing that’s bothering me.

It's called Facebook.

And not just Facebook, it’s the way Silicon Valley companies like yours pile up huge wealth by destroying value in every other part of the economy, as if technological progress were a zero sum game. It’s the way you strip-mine individuals so they have no ability to be autonomous economic agents, owning and trading the stuff we make, so all we have to live on is some feudal digital plantation - and we have to be grateful for it. It's the way some Valley firms place themselves above the law and try to block the work of elected officials who want to defend human rights.

Not you of course, Daddy. Just some of your friends.

I mean, come on. There's a lot to teach children in this modern world I've just been born into. But one thing we've got to learn is that just because you can do something, it's not necessarily morally acceptable to do it. Who's going to teach me that in Silicon Valley?

And Daddy. Connecting people all over the world through an internet website is very cool idea indeed. But it's not that cool or original. It’s as if the guy who invented the bottle-opener wrote a plan to become Emperor of the World. Like, "Remind me who you are again?"

I think that’s pretty weird already. And I’m only one day old!

Well if there’s any of the economy left by the time I graduate, perhaps my generation will be a bit less selfish than yours, Daddy, and we can teach you about it.

Well, I’m kinda tired writing all that. It’s time for nap. Just remember when you’re burping me, do it over your shoulder, that way I won’t puke all down your front.

Your loving baby daughter,

Max
In the Google (and now Facebook) case, I thought about Microsoft. They were a one trick pony that was handed a monopoly in operating systems (and used that to build another one in business productivity apps) that they exploited to the maximum degree possible. But a) they lacked the ability to create new compelling products and business models and b) everybody distrusted them and thus were wary of providing them new monopolies, no matter how good their technology.

So at some point, the shoe will be on the other foot: what happens when Google and Facebook have their profit sanctuaries destroyed? Google — now Alphabet — appears headed towards becoming a diversified technology conglomerate. It has worked (so far) for Hitachi and Samsung, but not for HP or Sony. Thus far, it appears that Apple and IBM have been the masters of re-invention: will the new kings of Silicon Valley be able to replicate such feats?

Saturday, September 5, 2015

Open Social Media is a decade away

Today we wanted to send a video birthday greeting to our eldest, who is far away. We asked our youngest to make it happen (in part because her newer iPhone has 64gb while my two-year-old 16gb is full).

The two of them have in common Snapchat and Instagram; the eldest also has WhatsApp and the youngest has Twitter. Our youngest first considered Snapchat, but that’s temporary and has a 10-second video limit, so instead chose Instagram that has a 15-second limit. They both also have Facebook, but that seems mainly used for relatives and other clueless people to send one-way communications to these teens. They also talk via Skype but (like me) don’t launch it often enough to see text messages.

I use Twitter hourly and Facebook every day or two, while my Instagram and LinkedIn (web page) get launched perhaps once a month. So I went to Facebook to send a birthday greeting to our eldest — as did 11 other people, including my sister — but unlike with my middle-aged friends, did not prompt an ongoing stream of likes and replies.

Clearly there is both a proliferation of competing social media platforms and little or interoperability. Some people do automatic (one-way) feeds using tools like TwitterFeed and Hootsuite, but that doesn’t allow for conversations to take place across social media boundaries.

I am told that at the turn of the (20th) century telephone systems were not fully interoperable, and having a phone in one town meant you couldn’t call another. I wasn’t there and my dad’s gone, so (short of spending an afternoon on Google) I can’t confirm this. But (grabbing The Fall of the Bell System from my bookshelf) it’s clear that by 1913 AT&T had achieved interoperability between its local operating companies and its Long Lines division, allowing transcontinental calls to be made on its system.

From my (aborted) dissertation, I also know that the design points of 1st generation analog cellular systems in the US, Japan and Europe were to be fully interoperable with the PSTN (Public Switched Telephone Network). The US pre-cellular mobile phones of the 1960s required an operator to route calls to the PSTN, but the invention of the microprocessor made it possible for the AT&T’s car phone (and later Motorola handheld phones) to automatically complete calls. When the EU and the CEPT invented GSM —and with it Short Message Service — they made text messaging also interoperable (except with landlines) over the PSTN.

And, of course, fax machines used the PSTN to complete calls, but generally agreed on a series of (ever-improving) transmission standards for the graphical representation of the images sent over those calls. So when the telcos were involved, they grokked interoperability.

A Lesson from E-mail

Perhaps a better — or at least more recent — analogy comes from the proliferation of incompatible e-mail systems prior to the commercial Internet.

Using Google, I found a February 1987 posting I made to the Info-Mac e-mail list. After I quit my job to become a Mac developer but before co-founding Palomar Software, I used this as the signature line

Joel West                            MCI Mail: 282-8879
Western Software Technology, POB 2733, Vista, CA  92083
{cbosgd, ihnp4, pyramid, sdcsvax, ucla-cs} !gould9!joel
joel%gould9.uucp@NOSC.ARPA
In between, I know my various Palomar business cards had e-mail addresses for MCI Mail, AppleLink (later eWorld) and perhaps my AOL account as well. When Apple finally provided full Internet interoperability, it said joelwest@AppleLink.apple.com, while the next business card said joel@palomar.com when we bought our own domain name and locally hosted server.

So there was roughly a 10-15 year period when the proliferation of proprietary e-mail systems meant that two people could have e-mail accounts but not be able to e-mail each other — and (like today’s social media) people might maintain multiple e-mail accounts.

Now, any e-mail user can send to any other. With various MIME and HTML extensions — and dozens of client implementations —  the e-mail may get garbled or unreadable due to mutually incompatible interpretations of the format standards, but that’s a function of commoditized (often free) e-mail clients that don’t reward quality control.

Open Social Media

Will we ever have open social media? That would mean that there was some sort of formal interoperability standard (beyond OpenSocial), that it was implemented by the major platforms and that these implementations include the full functionality of their native platforms — public and private messages, text, images, video, “like” and perhaps even adding friends. (This ignores inherent incompatibilities such as the SnapChat model of disappearing messages).

The business models of these various companies seems to assume (or hope) that we will not, and that they can create stickiness and keep us in their proprietary walled gardens for as many hours/day as possible. This creates winners and losers: I like the idea of LinkedIn for contacts but hate it as a content site, and so only visit it when I’m seriously procrastinating (not Twitter or Facebook or blogging procrastinating) to avoid something I really ought to be doing.

One path forward would be vertical integration, but with one exception that seems a long way off. The exception is Facebook, which owns WhatsApp, and so could make them interoperable at any point.

Microsoft has Skype — but no real social media — but until one of these platforms falters and is available for sale, it will have nothing to integrate. Google still thinks people will someday use Google+ and would probably be blocked anyway by the EU from buying one of the major social media platforms. Apple with iMessage seems to want to add convenient, easy-to-use clients on top of the existing (commodity) addressing and delivery systems like text messaging, rather than build a proprietary communications platform and try to gain share against the Silicon Valley upstarts.

The 10-15 year time horizon could apply here as everyone copies each other’s features and (like email) social media platform become passé and readers move on to something else. Twitter launched in 2006, WhatsApp in 2009, and Snapchat in 2011. So realistically, barring some blockbuster acquisition there’s not much hope for the rest of the 2010s, but the 2020s seem likely to bring improved interoperability in this segment.

Friday, June 19, 2015

Business journalism: Math is hard!

As a buyer, I hate price increases as much as the next consumer. As a business professor for the past 17 years, I have tried to develop (and encourage) economic literacy among future employees, entrepreneurs and voters.

Thus, as a parent about to shell out $200 for Disneyand tickets for two teenagers, last weekend I had decidedly mixed feelings as I read an article in the Washington Post:

How theme parks like Disney World left the middle class behind
By Drew Harwell
June 12

When Walt Disney World opened in an Orlando swamp in 1971, with its penny arcade and marching-band parade down Main Street U.S.A., admission for an adult cost $3.50, about as much then as three gallons of milk. Disney has raised the gate price for the Magic Kingdom 41 times since, nearly doubling it over the past decade.

This year, a ticket inside the “most magical place on Earth” rocketed past $100 for the first time in history.

Ballooning costs have not slowed the mouse-eared masses flooding into the world’s busiest theme park. Disney’s main attraction hosted a record 19 million visitors last year, a number nearly as large as the population of New York state.

But looking closer at the article, I found two math errors — both obvious to someone of my generation (but perhaps not a 30-ish graduate of U. Florida’s j-school). The net result was an apples and oranges comparison that undercut the core premise of the breathless 1,730-word exposé.

As a former newspaper reporter, I thought I'd follow procedure — by writing to the ombudsman to request a correction. Here is the letter that I sent:
Subject: Inaccurate statistic in Disney story
Date: Fri, 12 Jun 2015 22:03:06 -0700
From: Joel West
To: readers@washpost.com

Dear Reader Rep,

I am writing to call attention to the inaccurate (or at best misleading) story and graph in the story on Disneyland.

http://www.washingtonpost.com/news/business/wp/2015/06/12/how-theme-parks-like-disney-world-left-the-middle-class-behind/?tid=pm_business_pop_b

The story says:
When Walt Disney World opened in an Orlando swamp in 1971, with its penny arcade and marching-band parade down Main Street U.S.A., admission for an adult cost $3.50, about as much then as three gallons of milk.
This number is highly misleading because today's $99 admission includes unlimited rides, and the 1971 admission included no rides whatsoever. Instead, (when I was a kid) we had books of A- through E-tickets, or just E-tickets -- an additional amount that always totaled more than the amount of admission.

Wikipedia and this local TV station explain it clearly:

https://en.wikipedia.org/wiki/E_ticket
http://www.mynews13.com/content/news/cfnews13/on-the-town/article.html/content/news/articles/cfn/2014/2/27/disney_ticket_price_history.html

In the story's graph, the "price" jumps in 1982 because 1982 was when (according to Wikipedia) admissions included unlimited rides. So the 1982 price is not directly comparable to the 1971-1981 price

This website estimates that the actual net cost in 1971 was $10.25, or almost 3x as much as your newspaper reported:

http://historical.whatitcosts.com/facts-disney-1971.htm

According to this inflation calculator, that would be $59.88 in today's dollars:†

http://www.usinflationcalculator.com

So yes, Disney pushed through a 65% price increase ($59.88 to $99) in an era when the real price of air travel, computing, TVs and other products fell. (California and Northern Virginia real estate probably increased faster than inflation during this period).

Still, the claim the price went from $3.50 to $99 is inaccurate, since today's readers would assume the admission prices would include unlimited rides (as it has for the past 40+ years).

Joel West
…, California
(I have never worked for Disney Co nor has any member of my family)
† With the June CPI update, the website now says the present value is $60.19.
The ombudsman didn't think the criticism was important enough to investigate (let alone publish):
Subject: RE: Inaccurate statistic in Disney story
Date: Mon, 15 Jun 2015 19:43:59 +0000
From: Readers Internet DropBox <readers@washpost.com>
To: 'Joel West'

Hi Mr. West,

Thanks for taking the time to write. I’ve forwarded your feedback along to the author of the piece.

Best,

--
Alison Coglianese
Reader Representative
The Washington Post
As I suspected, when asked to self-police, the reporter neither published a correction (or clarification) or even bothered to reply to my correspondence.

The article overstates the increase in the out-of-pocket price by a factor of three: as someone who went to Disneyland before Disney World opened, I can testify first hand as to how much parents had to feed the mouse to satisfy teens and pre-teens. The 6x increase in the CPI is also not negligible: a gallon of gas that today is $3.50/gallon was 25¢/gallon up until the 1973 Arab Oil Embargo. So the 28x increase is less daunting when there’s an 18x correction needed for a mouse-to-mouse comparison.

Now I get that business skills and journalism skills are a rare combination. When in my 20s as a (small-town) reporter, I had two years of college calculus, one semester of upper division math (tensor calculus) and a degree from a prestigious technical university. Despite that, I didn’t really understand business or economics until I left journalism — starting my own company in 1987 and getting an education from the school of hard knocks. Still, a cable TV station in Orlando (the 19th largest TV market) managed to get it right — in a story written by their “web content editor”.

This is not rocket science, folks. The reality is that the Walt Disney Company charges all the traffic will bear because it can. Knott’s, Six Flags and other amusement park are pale imitations of Uncle Walt’s original. It’s much more than the proprietary IP, as teens really don’t care about mice and princesses — but the imagination and creativity that make the rides more than just spin-until-you-puke physical entertainment. (Universal Studios —with its Wizarding World of Harry Potter — seems to be the only park operator who seems interested in competing in this segment of the market).

Overall, one would think that America’s seventh largest newspaper — one with a historic disproportionate policy influence — would be able to hire more qualified business reporters in what is clearly a buyer’s market. (Or at least one will derive the story from the facts rather than the other way around.) For example, the WSJ is laying off a veteran business reporter who’s knows a lot about pharma and has a bachelor’s in accounting.

That’s why I usually find more insightful and accurate coverage from industry professionals (and part-time columnists) at sites such as Forbes or Seeking Alpha. For example, more than any other news source, I learn the more about the pharma industry from Scott Gottlieb (who brings both FDA and Medicare/Medicaid experience to his MD).

Wednesday, May 27, 2015

More about the Silicon Valley legend

My friend Shane Greenstein this week wrote a book review of Moore’s Law, a biography of the famous Silicon Valley chemist, entrepreneur, billionaire, philanthropist and visionary. As Shane opened his Wall Street Journal commentary:

Fifty years ago, Gordon Moore formulated his famous “law,” typically summarized as “the number of transistors that can be placed on an integrated circuit will double every two years.” The accumulation of exponential improvements that he foresaw has indeed ushered in perpetual reductions in the cost of computing and the size of computers. And it’s at the core of the information technology revolution.
Even before his famous 1965 paper, Moore was a Silicon Valley pioneer, there when they put the silicon in Silicon Valley. After attending SJSU, Cal and Caltech, in 1956 Moore went to work for (later Nobelist) Bill Shockley, working on the technical challenges of adapting silicon (rather than germanium) to construct reliable semiconductor devices.

The next year, Moore and others of the Traitorous Eight set the pattern for the Valley when they Shockley Semiconductor to found Fairchild Semiconductor — the Valley’s first (unsanctioned) spinoff. In 1968, two of the eight — Moore and Robert Noyce — took Andy Grove to start Intel. (Four years later, fellow Traitor Gene Kleiner joined Tom Perkins to found the Valley’s legendary VC firm)..

Never fired and married to the same woman for 60+ years, Moore was neither a showman nor celebrity like the late Steve Jobs. Arguably, he and his compatriots did more than anyone else to set the pace of Silicon Valley (at least during the five decades when there was still silicon in Silicon Valley).

The authors of this latest biography — “a chemist, a historian and a journalist” — offer the definitive story of the 86-year-old chemist. As Shane concludes:
The authors have material on just about everything in Mr. Moore’s life—his relationships with his wife and children, the Porsche he drove, even his childhood adventures with nitroglycerin. The detail, on occasion, becomes overwhelming.

Yet the book brings an insider’s perspective into the discussion of Moore’s law. What became the law first emerged in 1965, in an article modestly titled “Cramming More Components Onto Integrated Circuits,” published in the journal Electronics. By the authors’ account, nobody paid much attention to it at the time. Why do we know it today? Mr. Moore revisited the idea in 1975, updated it and devoted public speeches to it. Others began to notice its deep foundations at the boundaries of science and production; Carver Mead, a longtime professor at Caltech, was the one who actually coined the term “Moore’s Law.”

Gordon Moore’s forecast was spectacularly right. Yet, as this compelling biography proves, even if he had never hazarded it, he would remain a legend in Silicon Valley.
Alas, it’s hard to deny the passing of this era. Moore is the only one of the Intel founders still alive, and one of only two (with Jay Last) of the Fairchild founders. Despite its continuing microprocessor monopoly, nearly 15 years later Intel stock is still only half its peak level of August 2000. Internet software — not electronics — is where Kleiner Perkins is making its money nowadays.

Wednesday, April 22, 2015

Target's Pulitzer-losing strategy

The success of Target over the past two decades has been built by offering better quality merchandise at lower prices, creating a unique position (and loyal following) between traditional discounters and higher-end retailers. As with other discount retailers, Target has partnered with higher end brands, providing volume in exchange for their cachet.

The latest effort was Sunday, when Target offered an exclusive collection from Lilly Pulitzer, a line of colorful women’s clothing originally based in South Florida. My teen tells me this is the brand of sorority girls and other Southern Belles. The line is normally sold in expensive boutiques, and thus Target provided both convenient distribution and the promise of better prices.

However, the demand vastly exceeded Target's expectations. As with healthcare, the initial focus was on the crashing. However, as it turns out, the more systemic problem occurred in the retail stores.

At the two stores nearest to our home, the clothing sold out in the first hour, with cosmetics and accessories lasting about a day — a pattern repeated around the country. It was a one-time deal, with no restocking planned. Target later admitted that it expected that the sales (and traffic) would last weeks and not hours.


Instead, enterprising shoppers cleaned out the stores — one shopping cart at a time — to resell the products upon eBay. By our count, there are 38,000+ “Lilly Pulitzer for Target” products on eBay at 3x the original price. Lilly’s fans have vowed to boycott the online sales with their own hashtag (#LillyforeBay).

Avoiding this problem isn't rocket science. Our generation knows this as the Rolling Stones (or Springsteen) concert ticket problem — limit 2 per customer. The former newsmagazine Newsweek reports that H&M imposes limits on similar promotions.

Per Fortune, Target claims that only 1.5% of the merchandise is being resold, but I suspect that includes the less desirable accessories. The fashionistas denied even a single copy of the iconic Lilly Pulitzer shift dress — despite being there when the doors opened at 8 — would consider the problem more serious than Target wants us to believe.

The Pulitzer fiasco has certainly undercut Tarzhay’s image of chic fashion and operational efficiency. And apparently this happened four years ago when Target sold the Missoni designer brand. A brand is a shortcut for quality — including reliability and predictability – which is the opposite of what this weekend’s shoppers experienced.

If they were targeting boomer geezers it wouldn’t be a big deal, but irritating the pre-teens and teens that are its future customers is equivalent to pissing in the soup. It’s a perfect plan to send these young shoppers back to mall for H&M and other specialty realtors.

So — as in so many other aspects of business — here is another example where the execution is more important than the strategy.