Wednesday, February 28, 2007

Silly Palm Acquisition Rumors

[Palm Logo]A bunch of reporters are spreading the rumor that Palm is up for sale. While some claim Palm is in no hurry, others flatly predict Nokia is going to buy Palm. Yes, the Palm team is no longer as influential or generating the buzz it once did in the first years after the Treo’s introduction or even when Palm bought the Treo line.

Still rumors of Palm’s sale — like Apple’s imminent death a decade ago - appear to be greatly exaggerated. As Ed Hardy wrote last September:

Rumors that Palm is going to be bought out surface a couple of times every year, but these never turn out to be based on facts.
The timing for Palm seems wrong — yes if the ship were about to sink you’d want to sell while it’s still afloat, but thus far it doesn’t seem to be that bad. For 2007, Palm seems to have important new products coming, while it has recently enjoyed iPhone-like gross margins in excess of 30%. The stock has been in a trading range for nearly 3 years after recovering from the bottom in early 2004.

Perhaps Nokia has done poorly — particularly with US smartphone buyers, but the idea they would buy Palm is just silly:
  1. Nokia already has a smartphone operating system and various BlackBerry-type phones.
  2. Nokia knows how to make hardware, so nearly all of their recent acquisitions seem to be software. What would they do with the Palm OS software if they bought it? (See #2 above)
  3. Has Nokia ever done a billion dollar acquisition? Last year’s purchase of Intellisync was less than $500 million, but Palm (at least for now) has a market cap of $1.7 billion.
  4. [E61]
  5. Large technology acquisitions with incompatible technologies are usually a disaster. The only things that saved the HP-Compag merger were that a) some divisions were weak enough to shut down (e.g., Compaq peripherals, HP PDAs) and b) for some class of products (notably PCs) both companies use the same technology.
  6. When acquisitions (rarely) makes sense, usually it’s to acquire smaller firms that are into markets where they aren't — when it's quicker to buy in than to work your way in (A good example is Cisco getting into the home market by buying Linksys). Nokia has an unusually broad range of products, so there would be considerable duplicated and wasted technology.
  7. Silicon Valley firms don’t well when acquired by outsiders.
  8. As the biggest handset maker, Nokia would face certain antitrust review, and could face particular problems over the combined smartphone share.
  9. Nokia has exited CDMA phones and will be unwilling to give Qualcomm any negotiating leverage until the current impasse (with Nokia’s threat to not renew its agreement to pay Qualcomm W-CDMA royalties) is resolved.
The rumor of an acquisition by Motorola is a little more plausible:
  1. In its best years, Motorola has had a Silicon Valley-type culture, and its middle management is trained at Northwestern, which is certainly similar to many of the other practically-oriented among the top business schools.
  2. Motorola doesn’t have much of a smartphone platform strategy. The first decent smartphone in years is the Windows-based Q. In 1998, they were one of the earliest Symbian shareholders but later dumped their shares: now all they have to show for it is three discontinued phones and one current mode (although the forthcoming Motorizr Z8 could be a serious entry.)
  3. Motorola was once interested in Palm OS (for which Palm now owns rights). In response to their smartphone problem, 1½ years ago Motorola thought it had bought PalmSource — which would have been a better fit than then the actual outcome.
  4. Both Motorola and Palm are trying to use Linux for the lower layer of their respective platforms.
But if anyone makes sense as a Palm buyer, IMHO it’s HP. Palm is eight miles down El Camino Real from HP and its culture is heavily influenced by Apple (whose founders first worked for HP). And HP is trying to get into the cell phone business.

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Monday, February 26, 2007

Carterfone for Cellphones

Sorry I'm behind on the news, but I’m working on two papers to send off to conferences this week. Last week brought a potentially huge development in the communications industry, one that largely went unnoticed. (No, I don’t mean the XM-Sirius merger).

[Carterfone]On Tuesday, Skype asked the FCC to prevent cell phone carriers from blocking its VoIP service. Compared to the satellite radio orgy, it barely brought a ripple of coverage. But it did bring the predictable cellphone carriers’ preventive blitz.

Some have likened Skype’s petition to the Carterfone decision, which allowed third party answering machines, fax machines and modems — but most of all allowed Radio Shack to sell everyone a $10 handset. I think it’s more similar to the Execunet decision, in that it allows others to provide services over the telco lines. For those who are not rabid telecom historians (like you know who), below are the key decisions increasing AT&T’s competition, which I compiled for my planned mobile phone dissertation from two excellent books (by Brooke Tunstall and Peter Temin) on the end of the old Ma Bell:




Decided by

Competition Authorized

Jan. 1956

Final Judgment (1956 Consent Decree)


AT&T, Justice Department

AT&T limited to common carrier services and equipment sales to own subsidiaries

July 1959

Above 890 Mc.



Private lines operated by users

June 1968


Carter Electronics


Third party terminal equipment

Aug. 1969




Private lines for resale

June 1971

Specialized Common Carriers



Common carriers providing private line service

July 1977



Circuit Court

Switched long distance service

Beyond the effect on the 2½ remaining Baby Bells, Skype’s petition will have implications far beyond the US. The same action could be brought in the UK and Japan, the two large countries whose telecommunications liberalization during the 1970s and 1980s most closely resembled the US. It’s also possible that one of the smaller markets — Australia, Canada or one of the Scandinavian countries — might take the lead.

This may get wrapped in the larger US debate over “net neutrality,” which has elicited strong pro and con arguments — as with many policy debates, a combination of philosophical and self-interested arguments. Some carriers are hoping this will go away, but that seems merely a bad case of denial.

Compared to fixed line “net neutrality,” there are important practical and philosophical questions raised by mobile VoIP. At least in the US, the landline voice and IP services are separate (usually separate carriers), so voice traffic over the IP network benefits the IP carrier — and (at least with cable modems or fixed wireless) the IP carrier has an incentive to both open the network and support the VoIP effort. On mobile phones, the same carrier controls both the IP network and the voice business that would be cannibalized by it. Smaller carriers (who have more to gain) are embracing the possibilities, but the major carriers fear the downside.

[MCI logo]The old Baby Bells were among the nastiest scorched earth lobbyists around, and today the two largest U.S. cellphone carriers are Baby Bells. But eventually MCI won and AT&T lost. The idea that carriers can block traffic because it competes with them seems like an unwinnable battle. Who knows, since the Cato Institute has opposed VoIP regulation, maybe they’ll back Skype.

Photo credit:

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Friday, February 23, 2007

Size Matters

Since re-introducing myself to Mike Mace, the iPhone introduction, and supervising a student project on mobile phone operating systems, over the past two months my research has been moving back towards cellphones. I started researching the industry in 1996 as part of an international research project, and originally hoped to do my dissertation on it, but due to problems with the data (Baby Bells not keeping archives of their launch of US cellular service in 1983-1985) I had to switch to another topic. Still, I got a couple of papers out of the early work, some teaching cases, and material that will eventually end up in my next book.

Now that I’m back on the cellphone beat, I’ve loaded my favorite RSS reader with a bunch of mobile phone industry blogs and news feeds. One of the most provocative sources of industry gossip is the wireless section of Seeking Alpha. Its timely stock-oriented snippets nicely complement Mace’s blog, which tends towards think pieces on long-term corporate strategies for making money (rather than which stocks to flip).

On Thursday, Seeking Alpha had a fascinating posting about the planned IPO next month for Clearwire, a company that hopes to get rich using WiMax to deliver local broadband service. Clearly Clearwire is benefiting from great press, as well as the big pile of money Intel is throwing at WiMax. Of course, there are serious concerns about whether WiMax can deliver on the hype any time soon.

The posting by Bill Koss on the planned Clearwire IPO was unusually long by Seeking Alpha standards (3,300 words), but I encourage you to read the whole thing. Three key points:

  • There are eerie parallels between the Clearwire IPO and the Netscape [sorry, not NetScape] IPO. And we know what effect that had.
  • Many expect Clearwire to succeed because its chairman (not CEO) is Craig McCaw, reprising his old script.
  • Clearwire is competing against big companies in an industry where size matters.
[Cellular One]The parallels to McCaw’s earlier career might be a positive or negative. Although McCaw has a book about him, most people don’t remember who he is. They might remember the Cellular One brand name he created, or that he sold McCaw Cellular to AT&T for $11 billion effective in 1994. (Of course, AT&T spun off AT&T Wireless in 2001, it was bought by Cingular in 2004 , and is now AT&T again.) Later he was in the news for funding the Nextel turnaround, and having to split his billions in a messy divorce.

Koss argues that McCaw is following the same pattern of amassing spectrum at any price, assuming that it will rise in value. That worked for cellphone licenses in the 1980s, but it remains to be seen whether it will work for wireless broadband.

I heartily concur with his last point, which is that an infrastructure business (building a nationwide network) requires a lot of cash and has huge economies of scale. As I teach my technology strategy class, this is the big change of the IT industry from 30 years ago — no longer is it enough to have a cool idea and launch a company in a garage, because the Intels, Ciscos and Oracles of the world (or AT&T, Comcast and Verizon) can throw more money at the problem if they decide you’re on to something.

As with other such businesses, I can see three outcomes:
  • Clearwire gets enough money from the IPO to grow big;
  • Clearwire does well enough to get gobbled up by one of the big boys (a successful strategy recommended by my old mentor Charlie Jackson); or
  • Clearwire runs out of money and dies.
There’s a lot that can happen either way — uncertainty about the technology, about demand, about economics, about direct competitors (e.g. 3G), and substitutes (wired broadband). That’s why IPOs are not for the faint of heart.

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Thursday, February 22, 2007

Why Professors Shouldn’t Make Predictions

Back in 1992, John Sculley (Apple CEO 1983-1993) made an amazing appearance before a group of executives at Harvard Business School. It was amazing not because of his brilliance, but his utter cluelessness. One comment was:

I wish we had started moving our technology to the Intel processor years ago so we had more options. Because most of the industry is taking advantage of the tremendous price drops that are going on the Intel world, and we can’t because we’re not on it, and it’s very difficult to move our technology over to that processor very quickly. So I wish we had that option, which we don’t.
As I noted in my analysis of Apple’s many failures during that decade, later in 1992 (according to Jim Carlton’s excellent book), a small team of engineers got a working prototype of Mac OS 7 working on Intel chips, but the project was abandoned when its sponsor left Apple. So if Sculley (nominally CTO) knew what was going on, he could have started the project years earlier and protected it once it launched.

Sculley’s host for the Harvard session was David Yoffie, a much more successful, famous and distinguished strategy professor than yours truly. Yoffie has written the various HBS cases on Apple, as well as a Qualcomm case that (I’m told) competes with my five cases on the company. I consider Yoffie one of the leaders in IT industry strategy, with his cases, journal articles and books. He has a Ph.D. from Stanford, has been an HBS professor since 1981, and also is a director of Intel and Charles Schwab.

However, today I found a 2004 interview of Yoffie that was very skeptical about Apple’s future. Among other things, he noted their revenues had shrunk from $11 billion to $6 billion (true). He then predicted long-term failure for Apple’s niche strategy, for its competition with Windows Vista (then called Longhorn), and Jobs’ ability to continue to succeed:
The interesting thing about teaching Apple is that when things are going bad, everybody says, "Of course." And when Apple is doing well and you begin to teach the same basic ideas and explain why it's not sustainable, there's enormous skepticism. I've seen the cycle now several times. When I first started teaching the case, things were going great and nobody believed me that Apple had problems. And then when Apple was going down, everybody said, "Yes, of course." We see these wonderful cycles in teaching where people tend to be swayed by the latest fad in the business press about Apple.

Let’s see what’s happened since Yoffie’s commentary was published:
Market cap§
Stock appreciation
Net income (2006)
Return on sales

§ As of market close Feb. 22, 2007
† 2005 is latest available

I think what Yoffie is missing is that CEOs matter. Even if Bob Sutton is right that they often don’t, in this case Apple really had an awful string of CEOs from 1983-1997: they wasted more than $2 billion on R&D and inventory-related losses, and the opportunity costs of neither improving the Macintosh nor making a winning PDA were huge. Yoffie’s first Apple case was published in 1992, which means that all the down cycles came in the past 15 years under the bozo CEOs. Meanwhile, Jobs has done the best job of the PC companies of breaking away from the PC paradigm and finding something truly new. (Can it be sustained? Who knows?)

So one take-away is that professors shouldn’t make predictions. Unlike stock analysts, we don’t make a lot of predictions, so with small numbers it’s hard for even the best to yield a Ted Williams batting average.

I also wonder whether Yoffie’s perspective has been colored by sitting inside Intel board meetings since 1989. In 2004, Apple was still outside the Intel ecosystem and Andy Grove had been predicting for a decade that Apple would fail without Intel chips. Thus my second take-away is that professors (like journalists) are human, and we should be more up front about our biases. As a result, I’ve updated my web page to list consulting clients.

Graphic credit: O’Grady’s PowerPage

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The enemy of my enemy is not my friend…

There has been tremendous enmity between Microsoft and the open source crowd over Microsoft’s aggressive attacks on Linux using a combination of ongoing FUD and threats of patent infringement suits. Sometimes Microsoft has agreed to a truce with open standards groups, or Red Hat’s main rival, but there isn’t a lot of love lost on both sides. Today, a Federal jury ruled Microsoft guilty of patent infringement, which certainly will please some Microsoft-haters. But (if upheld) the outcome has very scary implications for open standards and open source implications.

A federal jury said Thursday that Microsoft owes $1.5 billion in royalties to Alcatel-Lucent over Lucent’s MP3 patents. This would be the largest US patent settlement of all time: Kodak’s 1991 payment of $873 million to Polaroid over instant photography patents would only be about $1.3 billion in 2006 dollars.

Microsoft thought (or so it claims) that it had paid $16 million to license the MP3 patents from Fraunhofer, which created most of the 20 claimed MP3 patents. If that was a fair price, then the jury is saying infringement is worth 100x that. Even given Microsoft’s volumes, that’s a mind-boggling charge for having a small part of a complex software product (i.e. the media player within Windows) infringe these patents. (I won’t claim to be an expert on the essentiality of the Lucent IPR vs. other claimed patents that read on the MPEG Audio Layer 3).

The outcome is fraught with ironies. The verdict is part of a larger pissing match between Microsoft and Lucent over various counter-claims of infringement. Microsoft’s fight with Lucent dates to the latter’s attack on PC makers, which Microsoft indemnified customers as part of its anti-OSS FUD. Those that live by the sword, die by the sword.

However, the net impact of this will be to reward patent rent-seekers more than punish software monopolists. In this case, Lucent (a shadow of the company that once invented the transistor and cell phone) really hasn’t been able to make market leading products for nearly a decade. So their recent business model is to try to make money off their patent portfolio. RCA tried the same plan 40 years ago when they no longer made color TVs that people wanted, and as legendary scholar Al Chandler recounts (see Table 2.1), the result was RCA’s eventual collapse and sale to Thomson at fire-sale prices.

Given the multibillion-dollar incentives, this will escalate the battle over extracting rents from nominally “open” standards such as MP3 and MPEG2. On the one side will be the oligopolists — the pigs with their snouts in the trough — who get their IP added to a standard through various influence tactics. On the other side will be the patent trolls, using submarine patents and other techniques to support questionable claims.

Where’s the role of patents as an economic incentive for innovation? And would tightening patent criteria really make a difference?

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Wednesday, February 21, 2007

iPhone Lawsuit Settlement

Apple and Cisco settled their iPhone trademark lawsuit, but (as of yet) nobody knows why. There are three explanations that I find plausible.

  1. The lawyers agreed that they are distinct markets, as in this AP story:
    “Although Cisco is making the point that we don't know what the future brings, it just strikes me that their markets are plenty distinct, and there's probably room for them to find peaceful cooperation,” said James Pooley, an intellectual property litigator and adjunct law professor at the University of California at Berkeley. “They're not naturally going to be stepping on each other's toes very much, so cooperation makes a whole lot of sense.”
  2. Cisco decided to settle for whatever Apple is willing to give — likely better than what they offered on Jan. 8.
  3. If today (or 3 months ago) you asked someone what an iPhone is, more consumers would say Apple than Cisco, undercutting Cisco’s claim to have established and protected its trademark.
The last two points are made by the New York Times story:
“Cisco had to provide access to the trademark to Apple if it wanted to achieve the highest value for the name. There was no potential second buyer who would have equaled Apple’s desire for the iPhone mark,” said Alan Fisch, an intellectual-property lawyer at Kaye Scholer in Washington.

He added that Cisco also faced the reality that consumers associated the name more with Apple.

“The iPhone name has been informally synonymous with an anticipated Apple phone for years prior to the product’s formal announcement,” he said.
I hate to say it, but Steve Jobs’ game of chicken seems to be vindicated. Of course, we need to hear what the actual terms are — perhaps in the next Cisco or Apple 10-Q.

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Sunday, February 18, 2007

RIAA Arms Dealer to Jobs: Take a Flying Leap

On Friday, Fred Amoroso — CEO of copy-protection vendor Macrovision — posted a reply to Steve Jobs’ Feb. 6 plea to RIAA to drop DRM. The self-interest of each is pretty straightforward: Jobs wants to sell even more iPods to consumers (with or without DRM) while Amoroso wants to sell even more copy-protection (aka DRM) software to Hollywood music and video companies.

John Gruber has posted a humorous (not to say cynical) translation of the Macrovision statement.

Obviously Macrovision loses if Hollywood finds a non-DRM solution to its business model problems. The iTunes Music Store has provided some income to supplement sales lost to piracy, but at some point Hollywood (or at least the actual artists) needs to find a permanent solution — which may or may not involve DRM.

Hat tip to
Slashdot for the original link to Gruber.

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Saturday, February 17, 2007

Who Closed the iPhone, Part IV

On the whole open-closed spectrum of IT strategies, the most interesting thus far in 2007 (as well as the most successful vaporware) has to go to the iPhone. (I was clearly naïve when I thought I could limit iPhone-related posts to 10%.)

The question of “who closed the iPhone” may not rank with “who lost China,” but it’s an interesting one nonetheless. The saga to date:

The latest installment in the saga came on the front page of today’s Wall Street Journal, in a story entitled “How Steve Jobs Played Hardball in iPhone Birth.” The relevant quotes:
Apple bucked the rules of the cellphone industry by wresting control away from the normally powerful wireless carriers. These service providers usually hold enormous sway over how phones are developed and marketed — controlling every detail from processing power to the various features that come with the phone.

Not so with Apple and Cingular. Only three executives at the carrier, which is now the wireless unit of AT&T Inc., got to see the iPhone before it was announced. Cingular agreed to leave its brand off the body of the phone. Upsetting some Cingular insiders, it also abandoned its usual insistence that phone makers carry its software for Web surfing, ringtones and other services. The deal also calls for Cingular to share with Apple a portion of the monthly revenues from subscribers…
Why would Cingular do this?
Cingular executives were willing to cede control to Mr. Jobs and tolerate his digs at cellphone carriers, all for the privilege of being the exclusive U.S. provider of one of the most highly anticipated consumer electronics devices in years — and to deny rivals a chance to do the same, according to people with knowledge of the situation.
So the question “who closed the iPhone?” is almost as easy as “who built the ark?” As predicted, it took two partners to do the deed: Apple gave Cingular the exclusive in exchange for control over things it most cares about.

We’ll see if consumers will crave the iPhone features enough to put up with the double-dose-of-closedness, or whether they’ll favor rivals like the LG Prada or Samsung F700. (The choice will be easy outside the U.S., where the iPhone can’t be had for love nor money in 2007.)

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Friday, February 16, 2007

Da Nile Runs Through Barcelona

To read this week’s accounts of the 3GSM speech by the CEO of T-Mobile, da Nile is no longer just a river in Egypt. Hamid Akhavan said that while VoIP may be cannbializing the wireline voice business, it will have “far less impact” on the mobile phone business.

Translation: we have a closed and locked business model, we control the handset, and we will refuse to let our customers use VoIP.

Some choice quotes:

"When people talk about VOIP, they think free," Akhavan said. "With any mobile service provided over the Internet, you're going to need to buy a data package."
Translation: we will charge them so much that VoIP is uneconomical.
“There are all sorts of technical issues that make mobile VOIP services difficult to implement,” he said. Technical issues related to how networks pass on IP addresses of mobile users have not been completely resolved, he noted. “Take reachability, for example: How can the call come to me?”
While SkyPE is certainly aware of mobile phone issues, I guess Akhavan hasn’t noticed that problems such as routing incoming calls and emergency phone location have been solved with cell phones and are being solved with landline VoIP.

Certainly all these things may happen. But I have a two word retort: Wi-Fi hotspot. Even ignoring VoIP-over-3G deals, who’s going to buy a smartphone that doesn’t work with free (or more reasonably priced) Wi-Fi hotspots? The operators who cripple their handsets (like Cingular does with the Nokia E62) will find that people will go to other vendors (or buy uncrippled phones like the E61 on the open market).

[on something]All this tells me is that T-Mobile does not see business users as important to their US market share. T-Mobile has spent more than $100 million to wire every Starbuck’s in sight, but apparently they’re not serious about leveraging the possible synergies to drive cellphone subscriptions.

Meanwhile, Hamid Akhavan argues that the impact of mobile data services will be greater than that of the (fixed line) Internet. Apparently he hasn’t listened to Mike Mace. (Big mistake).

As the cartoon says, he must be on something.

Graphic credit: “Pepper … and Salt,” Wall Street Journal, Feb. 14, 2007

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Wednesday, February 14, 2007

HP’s Cell Phone Entry: Déjà Vu All Over Again

At the 3GSM World Congress, HP has introduced the iPaq 500, a GSM/Edge smart phone using Windows Mobile 6. The Washington Post headlined this “HP Enters the Cell Phone Fray,” but I was sure I'd heard this song before. And I had — in 2004.

Why does HP keep entering the mobile phone market, a brutal commodity business that’s in the midst of a shakeout? Who do they think they are, Apple?

Not surprisingly, HP’s entire mobile phone strategy is drafting on Microsoft — because the iPaq division is one of the few parts that HP kept from Compaq, a slavish Microsoft loyalist. So while HP (California) is a big Linux fan — and might be tempted to dive into the more difficult task of making a Linux mobile phone — it makes a lot of sense for HP (Houston) to use an open innovation strategy until they figure out whether they stand a chance in this market.

Windows Mobile is part of Microsoft’s long-standing Windows Everywhere campaign that mainly appeals to large corporate IT managers, so it’s plausible for its major systems partners to support the full range of products. But then IBM was running a money-losing PC division under the same theory until they decided synergy was too expensive and outsourced the losses.

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Tuesday, February 13, 2007

How Much is “Open” Worth for Mobile TV?

This is the week of the GSM World Congress in Barcelona, where the big action is for the entire year of mobile phones: I’d love to be there, but my current budget doesn’t support such a trip. On stage are the various standards battles in the ongoing Nokia v. Qualcomm war, including the one over delivering television to cell phones. Apparently both sides saw this week as a chance to put their best foot forward.
[Nokia N77]
In one corner is Nokia, promoting DVB-H (the handheld variant of the DVB standard) with its new N77 phone. As London Guardian blogger Bobbie Johnson notes, Nokia took every opportunity proclaim DVB-H as an “open standard.” DVB is owned by the DVB Consortium, which seems to be “open” in the sense that the annual membership fee of € 10,000 is relatively cheap.

In the other corner is Qualcomm pushing MediaFLO. According to Johnson, the MediaFLO trials by British broadcaster Sky confirmed Qualcomm’s claim of twice the channel capacity of DVB-H for the same infrastructure coverage. Perhaps that is why that MediaFLO has won U.S. support not only from CDMA carrier Verizon, but also by AT&T, a former IS-136 (aka IS-54 aka D-AMPS) carrier that has since converted to GSM. AT&T cares more than most, since it requires mobile TV as the final leg of its “three screen” strategy.

I’m not an expert here, but obviously many European manufacturers would like Europe to be entirely DVB-H and Qualcomm would like the US to be all-MediaFLO. Suppose we accept the respective claims of the two sides: which is more important, an “open” standard with low IPR costs, or one that delivers better performance?

Of course, this assumes people want to watch TV on their 3“ screen. I suspect that for consumers to embrace mobile TV en masse, they don’t care so much about IPR costs as the lowest total price, both for the equipment (right now a long way off) and the monthly tariff. But then I’m sitting not in Barcelona but America, where we tend to prefer ”cheap“ on just about everything. Of course, other factors will be the supply of popular content and good image quality from both the equipment and the network.

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Monday, February 12, 2007

Will Borg or Evil Empire Rule the Universe?

[Darth Jobs]Today I saw an odd posting by blogger Charles Coxe, which compares Apple to the evil empire. He points to the impact of the iPhone, its sale of 90 million iPods and 2 billion iTunes downloads, Steve Jobs’ attack on the record companies’ DRM tactics, the pressure on Microsoft because Vista doesn’t work with iTunes, and the Beatles settlement.

I agree these are interesting stories (after all, I blogged 80% of them), but does that really make Apple a dominant force in the industry?

[Borg Gates]A decade ago, my college computer store was selling bootleg T-shirts that compared Bill Gates to the Borg (the Star Trek villains invented in 1989). The Borg slogans “you will be assimilated” and “resistance is futile” seemed particularly apt given Microsoft’s (then) ever-increasing influence on the entire IT industry.

Perhaps it is plausible that Gates’ influence has been reduced. But the more relevant question is: who is more likely to achieve total world domination, Gates or Jobs? If I looked at a straight linear trend line, I’d have to say Eric Schmidt has the best hand.

Interestingly, if you believe Wikipedia, Jobs, Schmidt and Gates were all born in 1955. So at 51 (Jobs turns 52 on Feb. 24), they all have an edge on Azim Premji, who might otherwise be a contender if he weren’t so close to retirement.

PS: Apologies to regular readers (all five of you) for not posting for 130 hours. While I’ve been meeting my teaching commitments, deadlines on a research paper (finally) took priority over blogging.

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Wednesday, February 7, 2007

Apple to RIAA: Solve Our Regulation Headaches

I wondered how Apple was going to solve its problem with European regulators, who don’t like that Apple’s DRM-protected iTunes downloads can’t be played (directly) on third party players. Tuesday Steve Jobs gave us his answer: do away with DRM entirely.

Steve is a smart guy, but the term “reality distortion field” was coined more than 25 years ago to explain his abilities to influence the thinking of others. However this time his logic is unassailable:

The second alternative is for Apple to license its FairPlay DRM technology to current and future competitors with the goal of achieving interoperability between different company’s players and music stores. … However, when we look a bit deeper, problems begin to emerge. The most serious problem is that licensing a DRM involves disclosing some of its secrets to many people in many companies, and history tells us that inevitably these secrets will leak.
Even if it’s not the real reason, given all the efforts to crack the CSS encryption of DVDs — and (as Jobs said) the power of the Internet to rapidly disseminate them — a shared DRM scheme is one dike that would not hold for long.

Al Gore aside, my assumption was that it would be a cold day in hell before the record companies willingly embrace such a plan. They didn’t disappoint: their initial response is to instead seek a “combination of interoperability and DRM.” Perhaps recognizing that lack of cooperation, the speech did nothing to reduce pressure in Norway.

At its root, DRM is a record label issue, not an Apple issue. For years in the classroom, I’ve been been using the case of the Big Six (now Big Four’s) as an example of too little, too late response to an inevitable technological change.

Ultimately the labels will have no choice. Despite Apple’s attempt to create a legal download market, it’s really only worked with a subset of responsible middle age adults (and the kids they subsidize) in a few developed countries. The rest of the world is stealing music as they have since Napster first appeared in 1999. Pink Floyd’s ex-manager Peter Jenner argued (in more colorful language) that the record labels are toast because they realize DRM is a failure.

By the time my daughter is in college a decade from now, the music industry will have a new revenue model. Will it be concerts, like 300 100 years ago? Or a hardware tax, as in Canada or Germany? As with any technological change, it is likely to create new opportunities for some and be an unpleasant reality for others. The Rolling Stones will manage just fine, but new chart-toppers (and the next generation of record executives) must think about some other way to pay for their limos.

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Who Closed the iPhone? The iChat Test

This is the 20th posting to this blog. Since I vowed to limit iPhone coverage to no more than 10%, I felt it was time to write the iPhone post that prompted me to blog in the first case. (I’ll quickly gloss over the original ideas to get to the new stuff).

The most complete (positive) coverage came from David Pogue (with his hands on and later FAQ), an excellent writer, former Macworld columnist and author of various Mac books. The most complete list of iPhone gripes (parts 1 and 2) came from Jason O’Grady. The best analysis is from Mike Mace (former strategist for both Apple and Palm), who say that “It’s not a phone, it’s a PDA done right” and that “it changes the terms of the debate for everybody.”

Many have complained about the price — $500 with a contract, equivalent to $700 without a contract. But as Steve Jobs said, the price will come down over time. Let’s not forget that people said the same thing about the $400 price of the original iPod in 2001. Since then, Apple has released more than a dozen models and today has a product family of 5 models ranging from $79 to $349. So in 3-4 years, Apple is going to have a family of iPhones for different users and price points. To use the iPod analogy, some will have bigger screens than 320x480, and some will have smaller screen (or maybe even buttons).

With those user issues out of the way, I wanted to focus on the central iPhone issues for this blog: how closed is the iPhone, is that a bad thing or a good thing, and who dunnit?

In the open innovation sense, it’s more open than a typical Nokia phone or Matsushita phone, in that Apple doesn’t try to make its own chips or hardware: we all know that today Apple specs a design but all they make is software. The iPhone is made by Hon Hai, which began its relationship with Steve Jobs and Apple making iMacs.

The two major ways that the iPhone is closed are on distribution and 3rd party applications.

After Verizon reportedly turned down Apple’s conditions for carrying the iPhone, Apple made it exclusive to Cingular. Tom Evslin (a friend who developed Mac fax drivers when I did printer drivers) wrote

While the GUI is new, "the business relationship is as old school as it can get: exclusive US distributorship through Cingular (which will soon be exclusively owned by AT&T).
However, some believe the 5-year exclusive is only for this model, which would make sense because Apple won’t achieve its desired volume putting all its American eggs in the Cingular basket. But obviously Apple prefers to closely control the distribution of its products, as demonstrated since its Apple store days.

The more obvious lack of openness is the ban on downloadable applications, except for widgets. My initial reaction is that this was a reversion to Steve Jobs’ natural instincts. The Lisa was almost entirely closed, then Apple widely sought third party applications for the Mac. (Mike Mace, who as Apple’s Director of Competitive Analysis knew Jobs better, has another theory)

The two forms of closed-ness are allegedly linked, as with this quote of Steve Jobs by Apple chronicler Steven Levy:
“You don’t want your phone to be an open platform,” meaning that anyone can write applications for it and potentially gum up the provider's network, says Jobs. “You need it to work when you need it to work. Cingular doesn’t want to see their West Coast network go down because some application messed up.”
However, Cingular already sells 4 different types of phones that take downloadable applications: Symbian, Windows Mobile, Palm OS (i.e. Treo) and Blackberry. For me, many an airport wait has been ameliorated by playing Leo Singleton’s hearts on my Treo 650 (or Samsung i500 or Kyocera 7135 6035). Of course, if you allow the application to control the phone layers, you need signed applications, but that’s not rocket science. With the Unix-strength memory protection of OS X, it seems straightforward to allow limited-functionality applications today — not just a widget implementation of solitaire, but real OS X programs as long as they don’t touch the network access code. The technical problem is an easy one.

A big problem is that Cingular (now AT&T) prefers a closed business model. For example, they finally introduced a Symbian OS phone, the Nokia E62, but it’s just the Nokia E61 with WiFi deleted; Cingular doesn’t want WiFi Skype on any phone.

Evslin and Mace are both smart guys, but right now I’m going with Evslin (or Charles Ferguson) in blaming US cellular carriers for the ongoing barrier they pose to industry development. First, the heavy upfront handset subsidies (rare until recently in Europe) make the lock-in motivations irresistible. Second, the top carriers include the two largest U.S. local exchange carriers, plus Europe’s largest LEC; Sprint is the exception after its Embarq spinoff. The two vertically-integrated Baby Bells (plus Deutsche Telekom) like to control cellular customers, because that was their wireline modus operandi. Steve Jobs himself complained about likely industry barriers at the May 2005 “D” conference.

Here I propose the iChat test of closed-ness. If you can do iChat AV videoconference on your iPhone without going on the telephone network, then Apple’s the one locking the doors. If not, blame it on AT&T/Cingular.

Update (11:30am): According to David Pogue’s FAQ, it already fails the iChat test, suggesting Cingular is the culprit. But if it lacks Java web pages (and maybe Flash too), that would be Apple’s decision.

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Tuesday, February 6, 2007

iPod & Windows: Tail Wagging the Dog?

I don’t know if anyone saw this blurb [registration required] on the stock pages of the Wall Street Journal this morning:

The Dow Jones Industrial Average crept higher, helped by Hewlett-Packard but hampered by Microsoft. … Microsoft shares slid 1.9% after Apple warned that iPod users might experience compatibility problems with Microsoft's new Vista operating system.
The story didn’t say it, but Apple shares also fell 0.96% on Monday to 83.94.

[iPod Nano]The implication is that Microsoft Window Vista (henceforward Windows V) needs the iPod more than the iPod needs Windows V. Music playing is an important part of the reason that teenagers and young adults use a PC, and several hundred million iPods hold a majority of the U.S. market. It must really hurt Steve Ballmer’s feelings to know that this key part of his consumer ecosystem is controlled his OS rival, who’s using the iPod to raise (if ever so slightly) Macintosh market share.

To add insult to injury, during Christmas season the Zune earned barely 3% of the US market (less than that, actually, since it’s not counting Wal-Mart or Apple stores). Bryan Lee fell on his sword but that doesn’t solve the problem.

Apple and Microsoft have different roll-out strategies, however. Apple’s PR-driven strategy depends on making a big splash the first time, while Microsoft has enough money to pay for as big a roll-out as it wants. Apple (at least under Jobs) tries to come up with something “insanely great” to build momentum. Microsoft has released a few duds over the years (think Windows 1.0, 3.0), but uses its wealth and market power to keep making it better until it’s pretty good. Windows 95 nearly put Apple out of business, so it would be foolish to assume that there won’t be a much better Zune every 6 months or so for the next few years.

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Monday, February 5, 2007

GPLv3: Stallman’s “New Coke”

The storm over the Free Software Foundation’s proposed version 3 of the GPL has been brewing for several years, far longer than the 16 days this blog has been around. Driven by Richard Stallman’s desire to expand ““software freedom,”” the FSF’s proposed license changes have spawned various controversies over the anti-DRM clause, patent retaliation, license compatibility, and a more expansive definition of distribution. Even though the aggregation clause is an improvement, it retains deliberate ambiguities by avoiding standard legal terminology.

Most significantly, the new license has been criticized by Linus Torvalds and his lieutenants, mainly over the DRM issues. It is possible that Linux may not move to the new license, but instead accept patches only under a “GPL v2 or later” provision, since right now the leaders have absolute authority over what to accept. Certainly there is no requirement that existing GPLv2 packages switch to GPLv3; for example, MySQL has changed its terms so that it is not required to automatically update to the new license.

[Tux]It seems clear that the GPL needs Linux more than the other way around. IMHO, the tremendous mindshare of the GPL has been due to its adoption by Linux rather than the other way around. One of my favorite open source books, the autobiographical Just for Fun (pp 96-97) makes it clear that the then 22-year-old Finnish college student picked the GPL as an afterthought in 1992 when he needed to have some way to distribute his increasingly popular operating system.

Andrew Morton and 9 other kernel maintainers said it best:

The current version (Discussion Draft 2) of GPLv3 on first reading fails the necessity test of section 1 on the grounds that there's no substantial and identified problem with GPLv2 that it is trying to solve.
On Friday, Bill Weinberg (of the late OSDL) wrote a detailed column about the issues he has seen in 7 years as an embedded Linux advocate, including how FSF thinking got us to this point. His conclusion:
The FSF role will shrink to marginal proportions, and GPLv3 will become, sadly, just another license.
Sounds a lot like “New Coke” to me.

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Apple and Apple Come Together

Apple Inc. (the former Apple Computer) and Apple Corps (the IP holding company of the Fab Four) have settled their latest legal squabble. The first one dates back to 1978, but as computers have developed more musical capabilities, the two have been back in court in 1989, 1991 and most recently over iTunes in 2003. Wikipedia has an overview chronology with interesting tidbits on the settlement amounts, even though their interpretation of the effect on Apple's strategy is suspect. A key public document on the case — the 1991 trademark license between the two — is available at FindLaw.

As someone who once had to write entertainment headlines at his school paper, I think the humor possibilities from the Beatles' backlist are limitless. (Well, OK, they only recorded 293 different titles, but that's still a lot.)

The Motley Fool said “Apple, Beatles Let it Be.” My own ideas also included

  • Jobs to McCartney: I Get By With a Little Help from My Friends
  • Jobs, McCartney Prove "We Can Work It Out"
But that (counting the headline of this post) only uses 4 of the 293 titles. The complete list of possibilities is available (at John Mark's I Am The Beatles fan site) in part A and part B. Of course, the possibilities extend beyond headlines: Eric Pfanner’s lead in the New York Times talks about the end of the “long and winding road.”

Blogger Jon Shurkin says “Insert Bad Beatles Pun Here,” but I refuse to concede that there is such a thing as a bad pun. Some puns just elicit more groans than others.

Please post your ideas below.

Graphic adapted from logos published by Wikipedia

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Saturday, February 3, 2007

Is Standardization Broken?

As I’ve said my research and this blog, open product compatibility standards provide the essential interoperability for the creation and use of most IT products. Of course, openness is a matter of degree: even the most proprietary standard usually has some degree of openness to allow third party use and complementary products such as software applications.

When creating standards for a given technology, firms face four competing imperatives:

  • technical interoperability, the nominal (and usually easiest) goal of a standardization effort;
  • creating value, both through features of the technology, and by encouraging a supply of products that deliver or build upon that technology;
  • capturing value, since if the various producing firms don’t make money there’s not much point in getting involved; and
  • timeliness, because if the standard comes too late (as with 56K modems or 802.11n), firms will go ahead and ship products without a standard.
On Tuesday, Carl Cargill delivered an impassioned plea at the DCCI conference arguing that the standardization regime as we know it will be unable to meet the demands of the 21st century IT industry. (His slides are not yet posted, so for now I’m working off my notes and a private copy of the slides.) A sample quote:
We’re post-industrial society and we have a pre-industrial standards regime … We still have the basic model for ISO as we had in 1945.
Cargill focused on standards consortia, which he described as "where we get together and help each other". Some of his major points:
  • Consortia are increasingly balkanized, with declining participation.
  • Standards are no longer an open effort to encourage interoperability but an attempt to block rivals. [NB: Pam Jones of GrokLaw recently used documents from a Microsoft court case to show how proprietary extensions eliminate interoperability and buyer choice.]
  • Standards are largely ignored by teachers, researchers and consultants.
  • China uses standards as an industrial policy, Europe for social and political goals, but US policy largely ignores them.
While the railroads and Gutenberg had 50 years to get their act together, by Cargill’s estimate, we have only 5 years to fix standardization. If cooperative standardization fails, the alternative is proprietary standards.

Some readers might say Carl who? Cargill did standards at DEC, Netscape and now is Chief Standards Officer of Sun. He’s been the most visible proponent of U.S. IT standardization for more than a decade, having testified before Congress, written various books and articles, funded an online library of standards research, and sponsored a series of provocative industry workshops on standardization issues. We first met at the 1999 edition of SIIT, the main academic conference on IT standards.

From any other source, I might accuse the speaker of having a lack of perspective: after all, cooperative standardization has often been about jockeying for position and digging in your heels if you don’t get what you want. But Carl’s no Pollyanna: he not only lived through the Unix wars, he was a field commander for one side.

If there’s a canary in the coal mine, it’s last year’s IEEE 802.20 mess, where Intel and others aligned with the competing 802.16 (WiMax) standard sought to block a standard backed by Qualcomm. In an unprecedented move, the IEEE suspended the committee and its leaders until it straightened the mess out.

Tim Simcoe noted how firms that try too hard to capture value won’t create any. I’d like to think that this would lead firms to self-correct, but obviously there are cases where such self-regulation has failed. One cause may be that a firm prefers the status quo to a successful standard; as the lawyers like to say, cui bono?

Update February 4 (08:45 a.m.) — Carl’s slides have been posted to the program.

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Friday, February 2, 2007

The GPL Won’t Solve This NIH Problem

I almost called this “NIH — Not Just for Programmers Anymore,” “Physiologists Who Need a GPL” or perhaps “Forking the Human Body.” The 1st choice is particularly fun because NIH has a double meaning, one for the IT sector and another for health care.

There was an interesting tale of forking at this week’s DCCI conference at the National Academies of Science and Engineering. The story was told by Brian Athey, a bioinformatics professor at the University of Michigan. Because his slides are not yet posted, I need to reconstruct the story from my sketchy notes.

[Head cross-section]Back in the early 1990s, the federal National Library of Medicine began its Visible Human Project. There’s a nice article at GE explaining how the various 3D imaging technologies (plus cadaver slices) were used to generate the dataset. (For the IT types, the GE study talks about using the big iron of the day — SGI dual 150 MHz screamers). As Athey told it, after the NLM had a virtual man (and then woman), everyone else wanted one, including DARPA with its Virtual Soldier, NASA with its Virtual Astronaut, and others I couldn’t type quickly enough. Even Ray Kurzweil wants to get involved.

If I understood his point, there’s a lot of re-inventing the wheel, everyone creating their own human by starting over from scratch, rather than doing cumulative innovation where one researcher builds upon (and contributes back to) the infrastructure created by others. BTW, if you go to NLM website, their license even has a form of reciprocity.

It’s yet another reminder to the GPLniks and others who believe that compulsory sharing is the answer to all the world’s problems. Take embedded Linux. Even if you can force people to share changes, that doesn’t mean that those changes will be used: it took several years to get essential embedded Linux features incorporated into the mainstream kernel. For more almost 15 years, the various BSD variants have been (without compulsion) sharing their respective code, but still pursuing separate projects — a canonical example of the exaggerated fear of forking held by many GPLniks.

Sometimes forking is justifiable, if, for example different efforts have irreconcilably different goals. A better choice than forking would be a modular design that allows meeting goals via incremental improvements rather than re-implementation (a pet peeve of mine as a software engineer and manager for more than 25 years). In other cases, “duplicative” investment harnesses competition as a way to choose the best solution from a range of possibilities.

But in many cases, it’s merely pride — i.e. NIH (Not Invented Here) — that leads to forking. Fortunately for medical research, the other NIH (National Institutes of Health) directly or indirectly fund the bulk share of U.S. public research. So if the NIH says “no” to NIH — and yes to cumulative innovation — then there’s hope for at least one sector to channel resources towards areas that do some good.

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Thursday, February 1, 2007

Adobe’s PDF as an Open Standard?

[PDF logo]I was travelling, but this week’s big standards news is that Adobe announced it will submit its PDF file format for approval as a de jure standard by the ISO — not directly, but through a friendly trade association. (Yes, I know, this week Microsoft is also starting the half billion dollar roll out of its long-delayed maintenance release).

Some have speculated that the timing is driven by Microsoft’s introduction of the competing XPS format with Vista this week. I don’t follow either Microsoft or Adobe closely enough to add anything to the speculation — I’m a researcher on open source and mobile phones who has been Mac-only for the past 23 years.

As I said before, there are two tests for an open standard:

  • Is there an open process? Adobe claims others will be able to suggest changes to the standard.
  • Is there an open outcome? In this case, that would mean non-licensed implementations of players and generators on par with Adobe’s.
It turns out that Adobe has released various revisions and subsets of the PDF spec since that spec was published as a 1993 book, and there have also been a few competing implementations.

Still, it seems like “open” doesn’t seem to come naturally to Adobe on PDF. CEO Bruce Chizen said in a 2001 interview about Apple’s independent implementation of PDF in its recently-released OS X (10.0.0):
We continue to work closely with them to give them some indication of what we are doing, because we want to try to have compatibility, but you can probably expect that the PDF created from an Adobe application like Acrobat is always going to be richer than Apple's implementation of PDF.
Certainly Apple’s implementation lags Adobe’s updates to the spec: Adobe is standardizing version 1.7 of the spec while Apple’s 10.4.x (“Tiger”) is only at version 1.2. Is this because outsiders get the spec after Adobe? Because Adobe issues gratuitous changes to the spec to make downward compatibility harder? Because it’s hard to implement a PDF writer or reader? Or because it’s a low priority for Apple? I don’t know, but so far I haven’t seen any need for the features after Acrobat 4.0 (PDF 1.2).

I am a little uncomfortable with the idea of shopping for a friendly association to carry standardization forward. It’s a common approach used by proprietary firms to get an officially blessed standard while retaining de facto control of the standardization process. OTOH, Adobe has reason to be concerned about losing control. As my friend Tineke Egyedi wrote in 2004, Sun created Java but when it (twice) tried to make it a public standard it got blindsided by its industry rivals in the standardization committees.

When it comes to the promise of an “open” PDF format, both forms of openness will only be clear over time. IMHO everyone should start out naturally skeptical about proprietary companies claiming to be open. IBM's decision to open source what became Eclipse is a rare example where the reality matched the hype.

Andy Updegrove is more positive on this than I am. Who knows which one of us will be right in the long run?

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