Tuesday, March 6, 2007

Open vs. Profitable Strategies

[Palm stock 2000-2007]With my morning breakfast, I happened to read a column on Palm’s current woes in the Wall Street Journal. There was nothing dramatically new, but it provided a nice summary of how they got to where they are. And the stock price results were an eye-opener. Apple has been volatile, but Palm is only a slightly better investment than Iridium.

The article (subscription required) by Robert Cyran of BreakingViews emphasizes the failure of Palm to be proprietary enough. Normally we think of Palm as being a proprietary OS platform, but his view is that being proprietary in one layer is not enough:

How did this happen? In a nutshell, Palm failed to build competitive barriers around its devices, so consumers weren't locked into its products. The Palm Pilot became a dinosaur once cellphones could store contact details and other information. All the data stored on a Palm Pilot was easily transferred to other devices.
(It’s a short article, so under fair use I won’t quote more).

After recounting the fall in market cap from $92 billion to $2 billion, Cyran goes on to praise the Apple moat built using the iTunes Music Store, and Research in Motion (and its BlackBerry product) with its server (and associated services). This is consonant with the advice given by Berkeley’s Carl Shapiro and Hal Varian in Chapter 6 of Information Rules almost a decade ago.

It turns out that the Apple refugees at Palm copied Apple’s old playbook at a time when Apple had to learn a new playbook. Once upon a time, a proprietary platform was enough to extract profitable rents. Now, however, with the co-existence and interconnection of devices (via the Internet, Wi-Fi, etc.), the individual product technology may not matter. The good news is (as I argued four years ago) is that niche platform (like the Mac) can co-exist via open Internet and web standards.

The bad news is that buyers care less and less about the software technology that goes into a phone to make it work, any more than they care about the software technology that goes into a TV or DVD player. Despite new products like HDTV, all vendors get release similar products in parallel and the consumer electronics industry has long-since been in brutal commoditization and price wars. Perhaps a few products can be truly innovative and unique (e.g. the iPhone) but most products are me-too. That would suggest opportunities for pooled R&D, either through a for-profit consortium (like Symbian) or open source done right (which is easier said than done).

Nowadays, it appears that enterprise infrastructure like servers and the associated services have much higher switching costs than client devices and appliances. Addition to RIM and Apple, there’s Microsoft BackOffice, and the granddaddy of them all, IBM Global Services. Of course, the closed interfaces for these servers have gotten Microsoft and Apple in trouble.

Update (4:45pm): Unstrung claims that interest in Palm is fueled by Jeff Hawkins’ mystery device which may not be a cellphone, while PalmAddict says it will be demo’d in May. This would both be an Steve Jobs-style re-invention of Palm, and give Nokia a reason to get involved beyond the phone technology they don’t need.

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