Saturday, May 31, 2008

Tons of 3G iPhones

ImportGenius has found evidence that Apple has imported 188 ocean containers worth of unspecified electronics from its key Taiwanese suppliers, Hon Hai and Quanta. The assumption is that these are 3G iPhones being announced on June 9 (although presumably another product could also be in these containers).

Forbes has a summary of the other evidence, including increased mileage by Steve Jobs on his Gulfstream V.

The scrutiny and speculation seem almost funny: Apple gets all this free advance publicity, just by saying it doesn’t want advance publicity. As in 2007, the 3G iPhone shows that Apple still is the tech industry leader in PR efficiency.

Friday, May 30, 2008

Not all R&D created equal

As a UCI postdoctoral student in 2000, I was adapting parts of my dissertation to be an e-commerce study of Apple Computer. The idea was that the study (released as a working paper) would stand side-by-side with other PC industry e-commerce studies done by my colleagues on Dell and Gateway.

At the time, Dell was still riding high as the cost leader of the PC industry, earning record profits from relentlessly commoditizing the Wintel PC business. At best, Apple seemed to be demonstrating a dead cat bounce from the depths of its near-death experience in 1997.

One of the arguments I had with my colleague, Jason Dedrick, was whether Dell did more R&D than Apple. While Dell had low R&D intensity, at the time it was much bigger than Apple, so the reported cash R&D figure was higher than Apple’s. I argued that Apple was still doing more innovation, no matter how big Dell’s number looked, because we knew that Dell (unlike Apple) was not spending significant money on either developing software or on being the first to bring new technologies to the PC industry.

This week, Dell CEO Michael Dell was interviewed by Walt Mossberg of the WSJ at the newspaper’s annual “D” conference. I wasn’t there, but there’s a summary of the interview on the WSJ blog and the Barron’s blog, as well as some video highlights.

Dell confirmed the point I was making back in 2000-2001 when arguing with Jason. Here’s my transcription of the relevant portion of the taped interview:
Mossberg: The former Dell of CEO of Dell — Kevin Rollins — appeared at this conference a few years ago. And I'm paraphrasing here — it's not an exact quote — but he said something like “R&D was a waste of money.” Was that the Dell philosophy at the time and is it now the Dell philosophy?

Dell: No. (long pause … then video cut) We'll spend roughly $600 million year in R&D, so certainly not an insignificant committment to developing new technology and new products. I think it's also to remember that there's tens of billions of dollars of R&D spent in the industry
In other words
  • most of our “R&D” is really just product development
  • we don’t do much research
  • we rely on the rest of the industry to create technological innovations for us.
Now there’s nothing wrong with using open innovation to support a generic cost leadership strategy: historically Dell lets component suppliers do the technology innovation, and then copies at lower costs the innovations of companies like Apple, HP or IBM (now Lenovo). I personally think that Michael Dell is silly to feel embarrassed about being a not-very-innovative company: solving key supply chain problems and being a relentless cost-cutter made him worth $16 billion. Much as I like innovation, I’d trade places in a heatbeat (even if it meant moving to Texas).

In fact, it would be stupid for him to try to make Dell into Apple. There’s only one Apple, and even Sony (with its brand and 50+ years of innovation) has been unable to match it in PCs and music players. If Dell tries to combine its traditional strategy of cost-cutting with bits and pieces of innovation, it will become “stuck in the middle” (as our old undergrad strategy textbook used to call it), neither fish nor fowl — in other words, like HP for much of the past decade.

The problem instead appears to be execution. When Dell comes out with products, then need to be good ones, even if they’re not first to market. As the news article in CNET made clear, the company needs to improve its product design:
[Dell] promised that the PC maker will not be a technology laggard going forward.

"We've tripled our resources in design and user experience," the company's founder and CEO said in an interview with technology journalist Walt Mossberg at the D6 conference here.
Business execs (like politicians and even judges) lose their way when they care about what other people think of them, rather than doing what they know is right. For Dell’s shareholders, let’s hope that Michael Dell returns to his winning formula, suitably updated to allow for today’s greater consumer expectations of product design and usability.

Thursday, May 29, 2008

Unlike Apple, Qualcomm embraces Flash

Apple thus far has refused to support Flash on the iPhone, but this week Qualcomm announced that it finally will.

Qualcomm has its own proprietary cell phone platform called BREW (vs. Java, get it?) that is used by Verizon, Alltel, Japan’s KDDI and several other carriers around the world. It differs from other mobile phone platforms in that it includes an integrated business model for third party software vendors, incorporating distribution, fulfillment and payment. Qualcomm made the announcement at its annual developer’s conference.

Clearly BREW lacks the momentum of the iPhone, but with the prior cooperation of many of the industry’s heavyweights, helps Adobe’s ongoing push towards providing a (relatively) seamless cross-platform multimedia delivery platform.

Hiring your way to Total World Domination

In the early 1990s, Microsoft had its pick of college graduates; five years earlier, it was Apple, and of course in the 60s it was IBM. Fortune magazine has surveyed MBA students as to where they’d like to work, and the number one choice was Google (24%).

For a company based on innovation, technology development and creativity, you’re only as good as your people (and your management). Google has been hiring the best engineers for years, and (has been amply demonstrated recently) has much better management than Yahoo (and also got some help from its older Stanford cousin). Continuing to attract the best people in the world is certainly one key to remaining on the path to Total World Domination.

However, all good things must come to an end. Microsoft got less attractive when dot-coms looked more exciting and lucrative and then later when its stock collapsed (and then stagnated), making stock options useless as a recruiting and retention mechanism.

In the last year, Google’s stock began to follow Microsoft’s pattern (off 22% from its 52 week high), reducing its potential as a motivation tool. This could be followed by other problems common to once high-flyers. If it doesn’t have high internal growth (as opposed to growth through acquisition), there will be limited opportunities for internal career growth — although with Google’s broad span of control, the opportunities for advancing up the management chain for latecomers were always lower than at a traditional company.

On Fortune’s list, six of the top 10 were investment banks or consulting companies; the only other tech company was Apple, fourth at 14%. Among IT companies, Microsoft is #12 on the latest list, and IBM #29 — both ahead of Cisco (#43), Intel (#44), Dell (#63), HP (#64) and Nokia (#81). The surviving dot-coms do a little better, with Amazon (#23), Yahoo (#32) and eBay (#53).

Wednesday, May 28, 2008

Two minor victories for openness

Wednesday’s paper brought news of two minor victories for openness.

The most clear cut was the concession by the National Association of Realtors that it would stop fighting the US Justice Department over control of its home listings. Some NAR brokers (regional bodies?) had adopted rules saying that their home listings couldn’t be shown on non-Realtor websites, and so in 2005 the Justice Department filed an antitrust suit.

This is an example of disintermediation — cutting out the middleman. Theoretically, any listing originated by a Realtor could be sold by a web-based discount broker who passes its savings onto its customers. Two examples of such firms are Zip Reality and Redfin, although the WSJ predicted that the effect of competition on overall commissions will be slow.

If this plays out, the commissioned human being in real estate will eventually be replaced (as in plane tickets and many financial services) by a computer serving a website. Given the stakes and risks, I worry a little bit about new home buyers (or sellers). On the other hand, the fraud (mainly by overleveraged home buyers) in the past few years show that the existing system of real estate agents, appraisers and lenders already had gaps big enough to drive a mobile home through.

The other interesting tidbit was the proposal by major US cable TV operators to standardize distribution of advanced cable services, allowing Sony to incorporate set top box functionality in its TVs. The reports say that the standardization is mainly in software — a Java application called “tru2way” that is used to arbitrate requests for access to interactive services. (Of course, access to unscrambled cable channels has been governed by FCC-approved standard frequency allocations for decades).

This has to be bad for the two major producers of settop boxes: General Instruments (now owned by Motorola) and Scientific Atlanta (owned by Cisco). Once upon a time, Microsoft hoped to dominate settop boxes with Windows CE, but the cable companies said nyet to Microsoft creating another platform monopoly and instead went with Java. The (relatively) open nature of the Java standard means that any STB maker (and now TV maker) can implement a Java-based connection standard.

The other interesting thing to me is the parallel to the Carterfone decision that allowed consumers to hook any standardized device up to their home phones. Once upon a time, phone companies and cable TV companies charged on a per-connection basis. I remember as a teenager wiring an extension in my bedroom without notifying (or paying) The Phone Company, and going to great lengths to minimize the chances that TPC could detect the extra line.

Now consumers will be paying for their connection to the network, plus any equipment they rent — but soon the commodity functionality of switching channels will be bundled into most new TV sets. The tru2way standard comes from the CableLabs and (in the tradition of “Wi-Fi”) is the consumer-friendly name of what used to be called “OpenCable Applications Platform” (or OCAP).

As the LA Times (and the trade press) makes clear— but the business press does not — Sony is a holdout late to the CableLabs party, lagging Panasonic, Samsung and LG.

Tuesday, May 27, 2008

Web 2.0 just like Web 1.0

In addition to the obvious entrepreneurial and financial speculation, the dot-com era of the 1990s had two main characteristics: leveraging an information technology infrastructure that promised (and did) transform society, and a wide range of business model experimentation.

From an academic standpoint, the latter is perhaps more interesting. In talking with friends, the idea of articulating (or analyzing) a "business model" is relatively recent: in 2002, my friend Hank Chesbrough published one of the most oft-cited articles. Although Hank’s work ties back to Xerox PARC and has traced the evolution of corporate R&D to create the field of open innovation, most of the other business model research of the past decade has focused on e-commerce.

And why not? The old business models were pretty simple: make something, sell something, produce a service. There were a few wrinkles — multi-level marketing (aka a Ponzi scheme), referral networks, etc. — but for centuries most of the value in the economy was tied to a face to face transaction that led delivering a tangible good into someone’s hands. Information goods changed all that.

The fun part of the dot-com era was all the experimentation. New combinations were invented, some producing Internet giants like Google, eBay and Amazon. The tragic part was all the money investors lost betting on dot bomb startups that never stood a chance, like PeaPod or

Now we have Web 2.0, the amorphous neo-dot-com startups of the past five years. Because of my master’s student 2007 project studying Web 2.0 in the mobile phone industry, I’ve been tracking Web 2.0 more closely over the past year. And there was certainly a sense of déjà vu all over again.

I’ve done consulting for a dot-com and several open source startups. With or without Web 2.0, these business are good at creating value and less so at capturing the value. In particular, if you want profits you first need to get a growing, dependable source of revenues.

This morning, from 5300 miles away, the FT has pronounced that the emperor has no clothes. A few excerpts:

Many members of the Web 2.0 generation of internet companies have so far produced little in the way of revenue, despite bringing about some significant changes in online behaviour, according to some of the entrepreneurs and financiers behind the movement.
“There is going to be a shake-out here in the next year or two” as many Web 2.0 companies disappear, said Roger Lee, a partner at Battery Ventures.
“If you look at some of the valuations, you wonder what fantasy of revenues they’re based on,” said Mitchell Kertzman, a partner at Silicon Valley venture capital firm Hummer Winblad.
A companion article looks at the failure of the widget economy — the ability to create value by stitching together Internet services with tiny pieces of software. Here’s a few excerpts:
The difficulties of the widget companies point to a broader problem that has beset the crowded Web 2.0 landscape. The wave of “social media” companies that has arisen since the middle of this decade, many of them characterised by user-generated content and new forms of communications, has changed the way millions of people interact and entertain themselves online.

Yet, by their nature, these new forms of behaviour are proving extremely difficult to turn into hard cash.
I’ve told the story many times about how a friend (until recently a VP at Apple) wanted to short eBay but his wife wouldn’t let him. We both should have realized eBay’s key advantage: in addition to network effects (more buyers brings more sellers and vice versa), its revenue model is secure. Its users are paying real money to buy real goods, and eBay skims its take off the top.

Sunday, May 25, 2008

ARM'd to the teeth

Last month, Intel said it wants to own mobile phones the way it does PCs. The only obstacle along the way is dominant position of ARM-licensed CPUs in the mobile phone market.

In tomorrow’s Financial Times, the CEO of ARM “sounded a note of defiance”:

“Who is to say it will be Intel taking market share from ARM and not the other way?” said Mr East.

“Intel will probably always be able to make a microprocessor that runs faster, but ARM can do one that uses less power. We are still a long way ahead in that.”
As part of its counter-attack, ARM claims it can leverage the efficiency of the ARM chips to save power in server farms.

However, the FT article makes the words of the British CEO sound like bluster:
Mr East insists that ARM, whose chip designs power 98 per cent of the world’s mobile phones, has little to fear. However, the company’s heavy focus on the “Intel issue” at its recent analyst day in London is seen as a sign of growing concern.

“ARM is clearly paranoid about Intel,” said Robert Sanders, an analyst at Dresdner Kleinwort. “It is a very well resourced company and could easily catch up with ARM.” Mr Sanders said most mobile phone manufacturers, who had invested heavily in using ARM-based chips, were highly unlikely to switch to Intel’s products.
Intel has made some missteps before, including its last foray into mobile phones (that was jettisoned in the Marvel spinoff). But thinking that it can scare Intel (or convince the world that it would threaten Intel) seems like a losing strategy.

Thursday, May 22, 2008

Sun’s not so bold strategy

The headline on the front page of this morning’s Merc was about airline nickel-and-diming, but the lead headline on the business section was

Sun’s Strategy
‘bold’ and ‘risky’

I read the story — about Sun’s use of open source — and there was nothing bold about it.

Yes, Sun overpaid in blowing $1 billion on an open source database company that only generates $50 million/year in revenues. Perhaps I’d call that decision ‘bold and risky,’ but that’s old news.

What about open sourcing the rest of their code, including Solaris and Java? Sure, it would have been bold in 1998 or even 2001, but in 2007 or 2008? Not hardly.

By the time (2003) when we were doing our paper on Linux adoption, it was clear that Unix was being commoditized, and that cost-conscious buyers were increasingly unwilling to pay a premium for Sun’s products. Sun reminds me (to a lesser degree) of Digital Equipment, who came to us in March 2004 for advice on open sourcing OpenVMS (which they never did). As with DEC, Sun’s potential to capture the imagination of the industry (particularly software companies and major IT buyers) through open source has long since passed as every big company now has some sort of open source strategy.

The opportunity was when Sun led the industry. I remember back around 1996, I asked one of the IT guys at UCI whether he’d recommend FreeBSD or Linux. Ben said that FreeBSD had better technology, even if Linux got better press. While FreeBSD was good, Solaris was the industrial strength BSD variant that Unix sysadmins preferred. Even through 2000, Solaris was known to be superior to Linux by key IT buyers, so there was still a window to prmote an open source Intel Solaris using a paid support model, ala Red Hat.

Instead, Sun — like other established firms with established software revenues — worried about cannibalization more than growth of adoption, and watched open source rivals grow their share while Sun’s paid products occupied an every smaller niche. Sun worried too much and too long, given (as the Merc notes) it makes two-thirds of its revenues from hardware — and that it also makes significant revenues from services. As IBM has shown, both hardware and services revenues are helped by giving away software, and are helped even more by establishing your software as an industry standard through open source adoption

Is the headline right about Sun’s current strategy being ‘risky’? Sure it is, but not doing anything is certainly riskier. Sun once led the Unix and network computing industries, and has been unable to adjust to its post-bubble drift towards irrelevance. If it doesn’t do something to grab mindshare and marketshare, it will be like Cray and SGI and Data General (and eventually DEC), occupying a ever-smaller niche.

I still think Jonathan Schwartz has a plausible strategy. The problem is, the strategy isn’t working. After running up to $25 last fall, the stock is now near $13 — below where it was three years ago. Its shares fell 23% earlier this month the day after it announced an unexpected loss — missing expectations by 22¢/share.

How to make enemies and lose influence

As young adult, I read Dale Carnegie’s seminal book How to Win Friends & Influence People. It had a great influence on me, but every so often I need a refresher course when I’m suffering from a (particularly acute) humility deficiency. Since I can’t find my own copy (which is sitting in a box somewhere), this week I went to the library and borrowed a copy to read over the long weekend.

Carnegie’s book was brought to mind last night when I heard about the latest marketing disaster by american airlines — lead by American Airlines. The TV shows all led with the announcement that AA wants to charge a fee to check all bags, including the first at $15 (in addition to the $25 that United started charging earlier this year for the second bag).
I know the airlines are in trouble, I know they are losing money, and I know they are desperate to raise revenues to cover jet fuel made from $130 barrels of oil. I also know this also the strategy used by European discounters like EasyJet. Still, this sounds like the last gasp of the dying legacy carriers, for two reasons.

First, this will shift behavior — charge people more and they’ll do it less. It will generate less revenue than a straight fare increase. It is going to exacerbate the fights over carry on baggage that have been worsening this year as load factors go up.

[History of Air Cargo and Airmail]And what are they going to do with all the extra cargo hold space? Are they really going to be able to sell that capacity for airmail?

Second, this will continue the decline of the industry’s customer satisfaction measures and the market share lost to competitors who treat their customers like, well, customers, not revenue sources. The latest American Customer Satisfaction Index found that airlines have the worst satisfaction of 43 industries among American consumers. As USA Today reported on Tuesday:

Southwest Airlines is the only one of seven legacy airlines with a high customer-satisfaction score. Southwest, which has led in customer satisfaction for 15 years, received a score of 79 on a zero-to-100 scale. A score in the 70s indicates a high degree of customer satisfaction, Fornell says.…

Though Continental and American Airlines tied for second with a score of 62, it's a "very low" score, Fornell says.

US Airways had the lowest score, 54, which indicates a customer-service "disaster," he says.
The creator of the ACSI, Michigan Prof. Claes Fornell, reacted as I did to American’s bonehead plan. As the NYT quoted him this morning:
“I’m constantly surprised at the creativity in the wrong direction of airline management,” said Claes G. Fornell, a professor of business administration at the University of Michigan.

This week, the university’s American Customer Satisfaction Index rated the airline industry last among consumer businesses measured in the study. In this light, American’s move “seems really, dare I say it, stupid,” Professor Fornell said.
Fornell thinks the other carriers should not copy this trial balloon, but other (industry-specific) analysts predict that all the legacy carriers will do so. I would guess that Southwest will not, because they have been more reluctant to annoy their customers with annoying fees; for example, they still don’t charge for a second bag.

As a business flyer since 1980, I have been following the industry (and its business models) with interest during that time. Because I know the industry, I used to teach the airline industry in my undergraduate strategy class to illustrate Porter’s two generic strategies, low cost vs. differentiation. Before 2001, the legacy carriers provided better service and Southwest (with a few obscure copycats) were the discounters. First the Sept. 11 shock and then the jet fuel price increases have accelerated the commoditization of the industry. Other than frequent flyer benefits, today there is nothing about the legacy carrier service that’s really better than the discounters (even ignoring Jet Blue).

More seriously, the service is worse — the “TWA effect” I noticed 10-15 years ago. Flight crew assignments are based on seniority, so in a growing airline more junior people are hired and the veteran flight crews are able to bid for ever more desirable positions every year. In a shrinking airline (TWA 15 years ago, most of the major carriers today), junior employees are getting laid off, the plum routes are even harder to get, and facing another 10-15 years of declining working conditions the middle-aged cabin crew gets surly.

In a declining manufacturing firm, no one sees the surly workers, so as long as quality doesn’t decline the company might survive to grow another day. In a service business, the surliness is out front, and customers who can go elsewhere will.

The lowest ranked airlines is US Air, which changed its name from Allegheny because its poor service and reliability earned it the nickname “Agony” airlines. The next lowest rating was United Airlines — once a great airline that’s been recently cutting its way to greatness. On the proposed merger between United and US Air, Fornell dryly observed: “When it comes to mergers, combining two negatives doesn’t make a positive.”

Cartoon credit: Steve Breen, San Diego Union-Tribune, May 22, 2008.

Tuesday, May 20, 2008

Is Apple recession proof?

MacpcWhile US sales for the rest of the PC industry are declining, Apple’s PC sales in the first quarter of 2008 grew by more than 50%. Among US retailers in Q1 2008, Apple has 14% market share. And it sells two-thirds of all PCs at the $1,000+ price point.

eWeek (the former MacWeek) quotes Stephen Baker, VP of the NPD group:

Apple's success above $1,000 defies some of the conventional retail thinking about PCs, where the emphasis is on lower pricing and greater features. "Consumers don't care about features," Stephen asserted. "People see a value proposition in an offering that gives them a great experience."

Stephen said Apple appeals to the right segments, like multiple-computer households. Consumers that are buying a second, third or even fourth PC have different buying priorities, such as ease of use.

But the retail stores make a huge difference. "Apple has got better distribution than it's had in the last 15 years," Stephen explained. "They're in the right spot right now. There's the iPod advantage. But the big thing is the stores."

Apple's retail stores aren't just places to buy Mac products. They're part of a larger end-to-end value chain—and with it the promise of a certain kind of experience.

"What Apple drives home: This is a product that we own from factory to finger," Stephen explained. "We exert some control so that you get the best experience. When you get in the store, we get you what you want."
Or, as John Paczkowski of the WSJ blog put it, “Apple has tapped deeply into an affluent and expanding fan-base that’s willing to pay a premium for its iProducts.”

Apple is a successful systems vendor, with end to end integration. Such integration also works for Dell, but only in delivering low-margin commodity products. It didn’t work for Gateway, and HP depends on other people’s stores for most of its consumer and SOHO sales.

Of course, Apple — like any premium-priced product — is not recession proof. But right now the number of people who can afford to pay a premium is growing faster than the number who want to buy a commodity PC.

Update May 21 10am: Looking for something else, I found this interesting retrospective (with pictures) of Steve Jobs opening Apple’s first retail store. It does a great job of putting into perspective that Apple has not always been doing so well. Back then 5% US market share seemed like an impossible dream, while today its share is 6.6%.

The difference between success and failure here is called management. Apple’s new management of the past decade has dramatically changed both the company’s innovation strategy and also its ability to execute.

Saturday, May 17, 2008

Lies, dam lies, and advertisements

A phrase attributed to Disraeli (or perhaps Twain) is “'There are three kinds of lies: lies, damned lies, and statistics.”

It was the key quote from one of my favorite books of my childhood math geek days: Darrell Huff’s classic How to Lie With Statistics, which (Wikipedia claims) is the most widely read statistical text of the past 50 years. Alas, despite Huff’s wide distribution, such lies (such as truncated graphs) remain popular, particularly in the popular press.

Lying seems to be taken for granted in advertising. People can say things that aren’t true (“I lost 20 pounds in one week”) because that’s marketing license and thus people discount such claims. Still, the FTC has rules that says ads are deceptive if by omitting key information, a reasonable person would be misled. So nowadays the trick is to add small fine print, briefly flashed on the screen.

Even within this context, the AT&T ad of the past several months has been bothering me. It claims “best coverage”. But of course, that’s not true - according to Consumer Reports, AT&T places fourth after Verizon, Alltel and T-Mobile. Call quality is not a new problem for AT&T Wireless (née Cingular).

The footnote says “based on global coverage.” (Of course, AT&T has no coverage outside the U.S., just roaming agreements with other carriers). So for the fraction of minutes used by the 1% of Americans who use cellphones overseas, you might get better cell phone coverage. That’s assuming you’re willing to pay outrageous roaming rates, although it’s not clear how AT&T has better coverage than T-Mobile or a dual-mode CDMA phone. Meanwhile, the claim that a dad will get better coverage on lover’s lane because his AT&T phone roams to London is not misleading, it’s a lie.

The other lie — a new one this weekend that pushed me over the edge — is the claim that the latest Narnia movie is “even better than the first.” The first cognitive disconnect came with the review in my morning paper, which called it cliche and predictable due to hollow characters and wooden acting. However, the weekend onslaught of Disney ads is claiming Prince Caspian is “triumphant” and “the must-see film of 2008”. This is traditional movie hype, but when I can’t read the names of the critics or the periodical on my 26" TV, I got even more suspicious.

Sure enough, the only recognizable publication among the list of favorable “Caspian” quotes was CNN. Except that critic Gorman Woodfin is not a critic at CNN (founded by Ted Turner who called Christians “losers”), but instead is at CBN (founded by Pat , who wants Christians to take over the country). Given the status of C.S. Lewis as an iconic Christian philosopher and the Narinia novels as Christian allegory, the difference matters.

In strategy, we often expect ethical corner-cutting from schlocky little companies (or young high-growth companies like Worldcomm). Here AT&T and Disney are just the opposite. Both are Fortune 100 companies, and Disney is a top 10 global brand, even if the US-only AT&T is not.

So is this ethical decay in the executive suite? Another rationalization that “everybody does it”? I don’t know the explanation, but it’s not encouraging.

Friday, May 16, 2008

iPhone's world tour

Rumors of the June 9 announcement of the 3G iPhone keep building. Normally Apple (used to) pre-announce by 30 days to fill the channel, but because the 2G iPhones have disappeared from the channel, it suggests that the new phone will be available for sale within 24 hours.

Beyond AT&T in the US and its three partners in Europe, Apple has added Rogers in Canada and America Movil (owned by the man richer than Bill Gates) in Latin America. Its existing partners, Vodafone and (this morning) Orange, have announced plans to sell the iPhone outside their home countries in places like Australia, Austria, Belgium, India, Switzerland and now Africa/Middle East.

Not all of the deals are exclusive for the national markets, and it’s unclear what’s happening with the revenue share. That these are sales coming in the future implies they’re waiting for the 3G phone.

But still no major Asia deals, as I’d predicted back in January. Does this mean the Apple brand does not provide the buyer power necessary for cutting a favorable deal in Asia? That there’s no point of killing gray market sales until the 3G phone is available in quantity? Or that that part of the world is just not interested in Apple’s combination of iPod, web browser and Wi-Fi?

Thursday, May 15, 2008

A mighty Fortress...

At JavaOne last week, Sun updated the world on Fortress, its Java-based programming language for massively parallel processing. It’s consistent with Sun’s view of being an innovator, rather than a low cost commodity supplier.

The program from Sun’s Programming Language Research Group was originally developed using DARPA HPCS (nee High Performance Computing) money, and then with its own dollars.

For most of the past decade, Sun missed numerous opportunities by trying to control Solaris and Java rather than win adoption through open source. Given Sun’s origins as an “open systems” supplier, its failure to embrace openness was perplexing, in the face Linux at one extreme and Microsoft at the other. However, this time the prototype Fortress interpreter is already released under a combination of BSD and GPL licenses.

About 20 years ago, I was a programming language geek, working on compilers and programming language design, including some ideas about language design for one of the earliest massively parallel computer systems, the JPL hypercube.

At the time, the most radical programming language effort was Occam, intended for the Transputer processors. It was interesting to note that Sun Fellow Guy Steele acknowledges Occam in an interview about the Fortress efforts.

Having the smartest people in the field in house (like Steele, co-inventor of MIT’s Scheme language) is the path to differentiation through innovation, and having your own people implement the language is the surest path to make sure it works well on Sun hardware and software.

The problem is adoption. Historically, network effects have been the death of specialized languages (coming from the inventor of a specialized language). People would rather work with libraries wrapped around standard languages (like Fortran, C, C++ or Java) than learn a new language. So major breakthroughs like APL, Simula, Simscript, Smalltalk, Scheme and Occam were used to teach programming, but were rarely used to solve real program.

So the challenge will be to make Fortress the standard language for massively parallel systems — first at DoD and DoE research labs (like LLNL and Oak Ridge), then for government studies and analysis, and finally for computing-intensive industry problems like biotech and oil exploration).

To become the standard, Sun needs the cooperation of both the user and vendors of massively parallel computers. It doesn’t have any computers on the Top 10 (of the Top 500) supercomputers, which is dominated by IBM with other systems from Cray, HP and SGI. (Sun only has one machine in the top 50). So, as with any other standards-based competition in the industry, good technology is only valuable if it leads to adoption, tipping and network effects — and much of the adoption is driven by politics and alliances rather than the quality of the technology.

Wednesday, May 14, 2008

Upgrading to Office 2004

Last night, I upgraded from Office 2008 to Office 2004. Office 2008 is native for my Intel-based MacBook Air, but it turns out the four year-old Office 2004 (which I’d never used on an Intel Mac) actually runs faster. Plus is more reliable and has some more features. (Apparently I’m not the only one to notice).

I had hoped the SP1 update (Office 2008 12.1.0) released Tuesday would make Office better, but it’s about the same. For example, PowerPoint still wipes out the last changed date of any file you open (when or not you change anything). If not for the dreaded DOCX disease (a nonfatal virus spread by casual contact), I’d rip out of Office 2008 entirely.

I have not yet bought Windows Vista so I can upgrade to XP, but does anyone see a pattern here? Windows XP shipped in 2001 and its successor did not ship until six years later. Microsoft corporate is spending $7 billion a year overall on R&D — somewhere between 10% and 1/3 of that on Windows — so after six years that amounts to several billion dollars of R&D on Windows Vista. The cost of Office 2008 was probably only a few hundred million.

I am tempted to beat on Microsoft for poor management or lack of motivation, but I think the problem is more serious than that. Microsoft’s legacy code base is so large (if not bloated) that it’s very hard to add new features while keeping the old features, performance and reliability.

Rather than trying to be all things to all people, Linux (or FreeBSD or NetBSD) has the potential of allowing groups to customize the operating system to their own needs, serving a range of niches through decentralized community innovation. Desktop Linux seems dead for now, but such decentralized approaches seem one of the few options to overcome the inherent limits of coordinating such monolithic OS releases.

Tuesday, May 13, 2008

Wi-Fi: can’t even give it away

Not only is Earthlink getting out of municipal Wi-Fi, but it can’t even give it away:

The Atlanta-based Internet service provider said Tuesday that it could not find a buyer for the $17 million network and that talks to give it to either the city or a nonprofit organization had failed.

City officials have said it would cost taxpayers millions each year to operate the network.

“It's been an unfortunate situation,” Chief Executive Officer Rolla Huff told The Associated Press. “It was a great idea a few years ago, ... but it's an idea that simply didn't make it.”

EarthLink, which will give current customers until June 12 to switch to another provider, said it even offered to donate the Wi-Fi equipment to someone and give them an additional $1 million.
Earthlink’s announcement implies that their other business are sound, but, frankly, if they don’t grow in wireless access it seems that they are doomed to be a declining seller of dialup access and reseller of broadband that competes with their cable and DSL suppliers.

Still, Earthlink will probably outlive the imminent death of the municipal Wi-Fi movement, which has been facing imminent death for more than a year. With Earthlink abandoning systems already built, other cities have decided not to even start.

It must be a pretty lousy business that you can’t even make a business with a zero capital cost? At least the new Iridium was able to turn a profit after acquiring its assets for a half cent on the dollar. At least satellite phones have a small niche of customers who have no alternative, as opposed to connectivity in a big city where there are cable, DSL, dialup, local hotspots, libraries and increasingly 3G mobile phones.

However, the local nonprofit, Wireless Philadelphia, seems to be in denial:
Wireless Philadelphia and the City of Philadelphia continue to work together to ensure a positive future for Philadelphia's municipal wireless network and nationally-recognized Digital Inclusion program, the vision of which is to provide all citizens with access to essential technological resources for education, employment, and other life opportunities.
Good intentions and noble causes don’t obviate economic reality. It’s good to see such “frill” services held to some measure of economic accountability, even if the core functions of government are not.

HP buying EDS

To increase its services revenues, HP confirmed it is buying EDS for about $14 billion. They’ve been down this road before.

In the fall of 2000, CEO Carly Fiorina was going to spend $18 billion to buy PWC, but then gave up a few months because it was too expensive. After the end of the bubble, IBM bought PWC for $3.5 billion, and was almost immediately successful in making things work

Increased exposure to services was a major factor behind the 2002 Compaq acquisition that nearly destroyed HP and cost Fiorina her job. More recent analysis claims that the merger was a success, some of that with insiders arguing their case after Fiorina’s departure. (Whether the merger made sense or not, the process for making it work set a new standard for the rest of the industry to follow.)

As Business Week points out, EDS (like Compaq) has fallen far from its heyday. The company has been in serious trouble for nearly six years. In September 2002, it announced an earnings shortfall of 80%, prompting a strike price lawsuit after its stock lost two-thirds of its value and its credit rating approached junk bond status.

Now, the hometown paper writes:

For EDS, the deal represents a chance to cash in after years of cost cutting and reorganization failed to give the company's shares much of a lift.

For H-P, an acquisition would boost the company's ability to compete in the services area with rival IBM Corp.

And for EDS employees, the purchase almost certainly means at least some job cuts.
Peter Bendor-Samuel, founder of Everest Group, a Dallas consulting firm that helps companies do business with outsourcers such as EDS, said EDS is a mature company.

While the company is widely recognized for its expertise, chairman, president and chief executive Ron Rittenmeyer hasn't been able to boost the stock price, Mr. Bendor-Samuel said.

"Ron has been running the game plan to take costs out of EDS, but you can't cut your way to greatness, and quite frankly the stock has languished," he said.

"There's really nowhere for EDS to go," he added. "They can do minor acquisitions, but it's hard to see how that drives stock prices."
Mergers to increase scale are common in mature industries, although Fiorina (a modern-day Ahab) was obsessed with surpassing IBM’s scale in hardware and services. Mark Hurd seems to share those goals.

Under Fiorina and now Hurd, HP increasingly looks like a slow-growth commodity company that grows via acquisition rather than organic market creation. In that light (so to speak), the photonics summit that HP hosted Monday would be more about gaining licensing revenues for HP’s patents than enabling HP to differentiate its products through the use of photonics.

Monday, May 12, 2008

Loving the summer of code

When I was growing up, the big news out of the Bay Area was the “Summer of Love.” Now it’s the “Summer of Code.”

Google has announced its “Google Summer of Code™ 2008,” with 1125 students (out of 7,100 applicants) working on 175 open source projects. The announcement that it would spend $5 million funding summer projects got some blogger coverage, but the program (which began in 2005) is highly visible here in the Silicon Valley and among the open source community.

About a third of the applicants and 40% of the accepted participants are from the US. Eyeballing the pie chart, India, China, France and Sri Lanka had a lower acceptance rate than average, while the US, Canada, Germany, Poland and UK had a higher acceptance rate. (Brazil looked about average).

In looking over the projects, the sponsoring open source organizations have become more democratic (i.e., less elite). I browsed through the list of projects of the 10 or 15 most recognizable projects. A few of these looked interesting:

Beyond these, most of the projects are small incremental improvements to existing subsystems (and many of them obscure subsystems of obscure OSS projects). Very few are ones that I would have been excited about at age 21 (when I’d been a paid programmer for 5 years).

So my guess was that the attraction will be mainly for students who don’t have the option of getting a paid summer job with a real software company for real money. The high rate of application from India, China and Sri Lanka is consistent with this. (The high rate of Germans could be the generous public support for German students, who don’t need to receive worthless dollars to pay their rent).

Sure enough, if you look at the top universities for applicants and participants (covering only about 100 of the 1125 participants), conspicuously absent are schools with strong summer programs and strong local IT markets like MIT, Stanford and Berkeley (Georgia Tech being a notable outlier, apparently due to strong word of mouth). This would imply the participants are either highly motivated free software supporters, those without good professional opportunities (seeking to “flip bits not burgers”), financially comfortable, or conversely places where $4500 is a lot of money.

Google is spending this money without much direct benefits, for which they should be commended. However, I found the FAQ claims of altruism to be misleading at best. Either Google’s geeks aren’t very precise writers, or they’re being disingenuous:
3. Is Google Summer of Code a recruiting program?
Not really. To be clear, Google will use the results of the program to help identify potential recruits. But that's not the focus of the program. Take a look at the organizations we've worked with in the past, and you'll see the vast majority are engaged in work that's not directly applicable to Google's business. That said, the more code out there, the more everyone benefits.

Additionally, we've heard from several of our past student participants that their participation in GSoC made them more attractive to potential employers, and most participants who have gained employment as a result of their GSoC work are not currently employed by Google.
This is pretty easy to parse:
  • "not related to Google technologies" might be true, but when screening applicants it’s clear that working on NetBSD provides a better evaluation of programming ability than a class project
  • "most participants" could mean "we have 49%" and “not currently employed” could mean “we hired them initially.”
Google’s legendary secretiveness means that we don’t know what the true benefits are of the program to Google: it might be altruistic, but the evasiveness of this wording seems like they are shooting themselves in the foot. I could imagine that after accepting 15% of the applicants, they could hire 10% of that 15% to work at Google — a net cost of about $45,000 per recruit. (Not cheap, but not outrageous). Since Google does everything by the numbers, this calculation has certainly been done — perhaps why they don’t disclose their hiring rate.

Still, this is more altruistic than a typical summer internship program. Thanks to the Internet (and the open source development tools), there are relatively low coordination costs for such virtual distributed work. It’s clear that the sponsoring organizations (such as the Perl Foundation) have put a lot of thought into how they’ll organize the efforts.

It’s not something that would have been possible when I was in college, when long distance calls were $1/minute and a high bandwidth data channel was sending a 9-track tape (holding at most about 150 mb) via Federal Express. The upper limit was “station wagon bandwidth,” attributed to Andrew Tannenbaum of Minix fame.

Sunday, May 11, 2008

Who's the Mac user?

A friend forwarded an Internet joke that has been circulating since at least February 2004 but has also been posted in 2005, 2006, 2007 and in 2008. Here it is:

Abbot: Super Duper computer store. Can I help you? ..
Costello: Thanks. I'm setting up an office in my den, and I'm thinking about buying a computer.

Abbot: Mac?
Costello: No, the name's Lou

Abbot: Your computer?
Costello: I don't own a computer. I want to buy one.

Abbot: Mac?
Costello: I told you, my name's Lou

Abbot: What about Windows?
Costello: Why? Will it get stuffy in here?

Abbot: Do you want a computer with windows?
Costello: I don't know. What will I see when I look in the windows?

Abbot: Wallpaper.
Costello: Never mind the windows. I need a computer and software.

Abbot: Software for windows
Costello: No. On the computer! I need something I can use to write proposals, track expenses and run my business. What have you got?

Abbot: Office
Costello: Yeah, for my office. Can you recommend anything?

Abbot: I just did.
Costello: You just did what?

Abbot: Recommend something?
Costello: You recommended something?

Abbot: Yes.
Costello: For my office?

Abbot: Yes
Costello: OK, what did you recommend for my office?

Abbot: Office.
Costello: Yes, for my office!

Abbot: I recommend Office with Windows.
Costello: I already have an office and it has windows! OK, let's just say, I'm sitting at my computer and I want to type a proposal. What do I need?

Abbot: Word. Costello: what word?
Abbot: Word in Office.

Costello: the only word in office is office.
Abbot: the Word in Office for Windows.

Costello: which word in office for windows?
Abbot: the word you get when you click the blue W

Costello: I'm going to click your blue W if you don't start with some straight answers. What about financial bookkeeping, you have anything I can track my money with?
Abbot: Sure, Money.

Costello: that's right. What do you have?
Abbot: Money.

Costello: I need money to track my money?
Abbot: it comes bundled with your computer.

Costello: what's bundled with my computer?
Abbot: Money

Costello: money comes with my computer?
Abbot: yes. No extra charge.

Costello: I get a bundle of money with my computer? How much?
Abbot: one copy

Costello: isn't it illegal to copy money?
Abbot: Microsoft gave us a license to copy Money.

Costello: they can give you a license to copy money?
Abbot: why not, they own it.
Of course, the parody is a tribute to one of the best vaudeville skits of all time.

Saturday, May 10, 2008

HP's "open innovation" gambit

In March, HP reorganized their labs to re-emphasize "open innovation". At the time, I said “all we can do is wait and see.”

This week HP got a splash in the local papers when it announced an RFP for its new “Innovation Research Program.” Each of the seven HP regions have their own preferred research topics, totaling 49 overall. Among the 31 topics for “Americas” are social computing, networks on demand, exascale datacenters, personalization, and a number of semiconductor and materials topics. Other regions have shorter (non-overlapping) lists: EMEA has eight topics, including four about information/knowledge management and two on security.

The story was covered by the Chronicle, the Merc and CNET, among others. All featured Rich Freidrich, director of the “Open Innovation Office” (which apparently was reorganized from the university relations office). Internal HP blogger Jamie Beckett interviewed Friedrich:

"I want to use this office to partner with some of the brightest minds in the world," Rich says.

He also hopes to change the way HP and its partners collaborate and to explore using Web 2.0 social networking tools to pursue and support research.

'I'm interested in what a Research 2.0 world looks like," Rich told me.

"How do we build a research community that combines the deep technical expertise of university professors, the deep domain knowledge of industry and the financial resources of government to solve the pressing problems of today and set the agenda for tomorrow?

And how do you do it in a way that you harness collective wisdom and create a really vibrant community?"
As the blogger notes, HP has been partnering with universities for years. In fact, I attended a workshop last month (hosted by UC Santa Cruz) in which one of the HP university account managers (now with the OIO) talked about best practice of working with universities, including his own journal article on the subject.

Clearly there is a continuity between HP’s long-standing university ties (going back to Terman, Hewlett and Packard) and its efforts to introduce open innovation into its R&D activities.

Thursday, May 8, 2008

Time to stick a fork in WiMax?

Various geeks and entrepreneurs have been trying to exploit the opportunities created by the big bad cell phone oligopolies that have been ripping people blind. All of the various claimed solutions are facing their own problems.

One solution is the all-you-can eat cellphone carriers represented by MetroPCS and the Cricket service of Leap Wireless. While these services have been gaining market share — particularly among teens and twentysomethings — in February the four major carriers rolled out their own flat rate plans. The effect of the $100/month (with roaming plans) on $40/month (no roaming) plans is yet to be seen.

Another proposed solution was the idea of free or cheap municipal Wi-Fi. But with the failure of Earthlink’s efforts and most city-sponsored plans, this appears to be a dead end.

This week, Sprint reopened its planned WiMax partnership with Clearwire, combining their respective properties into a joint venture that’s also funded by Google, Intel and a passle of cable companies. To me, the deal suggest that WiMax as technology is done, finish, finito — stick a fork in it.

While Forbes optimistically proclaims this the salvation of WiMax, IDG asks whether the coalition will “save” WiMax? I think not. Just a few reasons:

  • There have always been problems with the fundamental WiMAX business model, problems not solved by this new deal.
  • Quite a few analysts are skeptical that this partnership will succeed.
  • Not all the partners are fully committed; one analyst noted that Google is “wading, not jumping” into WiMax with a one-time $500m investment.
  • Analysts writing for Barron’s wonder whether after spinning off WiMax, Sprint will shift to the same 4G strategy as every other major carrier in the world: LTE.
Actually, none of these are my reason for concluding this week that WiMax is through.

My reasoning is this: if this is the best the world can muster for a WiMax carrier, where’s the economies of scale? The upside? The growth? People made fun of CDMA, but it had half of the US and Canada, all of Korea, and a significant presence in Japan and Latin America. If WiBro and WiMax get reconciled (as claimed), WiMax will perhaps get 25% of the US, all of Korea and less than 10% of all other major world markets. Despite Intel’s claims, no one is going to bundle WiMax support into laptops for such a niche solution.

If WiMax dies, the big loser will be Intel, which has pumped billions into Clearwire and other WiMax efforts.

Wednesday, May 7, 2008

Jerry needs to sharpen his resume

The local papers and websites have been full of coverage of how mad Yahoo shareholders are at being told that $33 is not enough for a stock now trading at $25. AP has a Microsoft leak showing that the last-minute raise to $33 was a credible offer. Now there is talk of a fight for the board of directors, not by Microsoft but by shareholders.

The blog site ValleyWag has wall-to-wall coverage, but my favorite posting came from a reader comment by “pleinad”:

You know what? I am hearing the 3 envelope story...a fictitious story of course...yet again:

Jerry had just been hired as the new CEO of a large corporation. The CEO who was stepping down (Terry) met with him privately and presented him with three numbered envelopes. "Open one of these if you run up against a problem you don't think you can solve," he said. Well, things went along pretty smoothly at the beginning, but later, stock price were down and he was really catching a lot of heat.

About at his wits end, he remembered the envelopes. He went to his drawer and took out the first envelope. The message read, "Blame your predecessor." The new CEO called a press conference and tactfully laid the blame, forcing a bunch of former execs to quit and gave a 100 day plan. Satisfied with his comments, the press and Wall Street responded positively, things began to pick up and the was soon behind him.

100 days later, the company was again experiencing a dip in growth expectation, combined with perceived strategy issues. Having learned from his previous experience, the CEO quickly opened the second envelope. The message read, "Reorganize." This he did, and the stock price rebounded.

After several more months, the company once again got into trouble with shareholder issues with his performance. The CEO went to his office, closed the door and opened the third envelope. The message said, "Prepare three envelopes."

Tuesday, May 6, 2008

Want to become a b-school prof?

Every month the Financial Times runs a few articles on business education. For example, today’s e-mail contained an article on a looming shortage of b-school faculty (due in part to retirement demographics) and also plans to convert English literature and math PhDs to become b-school profs.

Depressing stuff — we don’t have enough supply, in part because of the AACSB (and Business Week rankings) assumption that research output is a measure of faculty quality. (AACSB is particularly perverse in that they require faculty both to have a PhD and publish — presumably being smart enough to publish without a PhD doesn’t count).

One solution would be to raise wages, to attract the best and the brightest. At the high end schools (top 10), wages of $150K or $200K for experienced profs is not uncommon, although that goes much further in Ann Arbor or Bloomington than in Palo Alto or NYC. Of course, raising wages means raising prices, which means a wider spread in MBA quality: very expensive MBA programs taught by very expensive faculty, and very cheap MBA programs taught by cheap faculty. (Or worse yet, expensive MBA programs taught by cheap faculty).

Another possibility is to use experienced faculty without a PhD. A lynchpin of our entrepreneurship program is Steve Bennet, our venture finance prof who’s “merely” and adjunct. However, he’s an adjunct who’s been CFO of several startups, has lectured at Berkeley, and is a director of an angel group. But because he only has a UCLA MBA (and a Wharton undergrad), he depresses our “academically qualified” ratio.

In another FT article today, Pete Hahn, a British finance professor emphasized the importance of real world experience

I know that my first suggestion to anyone thinking about an MBA or executive education would be to ask prospective schools: “What percentage of your full-time faculty have experience in what they teach?”

Surely there could not be a better measure. And shouldn’t employers seeking new managers who can quickly make a contribution also be asking this question?

You would probably be scared to death if your surgeon told you she had learnt all her surgery from a book, or only read about your required surgery in a journal.
But of course, top students use the Business Week or FT rankings to pick their programs, not what they’ll learn
I interviewed top business school graduates for almost 20 years and when I asked candidates how they chose their MBA school, the answers were typically league table, senior colleagues had come from the school, salary scales, location and name recognition. Few, if any, knew about the academics beforehand. There was not even a passing thought about the quality of research or teaching, although those are my ambitions as I start my faculty career. A few business PhD students have intellectual curiosity, but they are now mostly trained to produce research (the money can be good) over thought and ideas.

But intellectual curiosity of MBAs themselves? Apparently not: they are investing in or perhaps registering at some of the most exclusive executive search firms. While I have the benefit of career perspective and know what would be of most value later on the job, most prospective students just do not want to make a mistake in their school selection.
Hahn himself had significant experience as Managing Director of Citigroup Corporate Finance in London (with a MBA from NYU).

When I was first on the job market, I got very smug about the value of work experience, but now I’m not so sure. Experience (or at least age) seems to be a negative predictor of “A” level research (which is needed to get tenure at a top 20 school). It seems completely uncorrelated to teaching ability — both to communicate and entertain. It does seem correlated (at least weakly) to the ability to be an administrator and make decisions.

Still, like Hahn, I think every school needs some of its faculty to have this experience. They could be industry types turned PhDs, or adjuncts. Or they could be very smart straight-through PhDs who’ve done consulting for real firms, whether to rake in the big bucks or to help their students launch an actual company. The key is to get your hands dirty.

He started a PhD about 10 years later than I did — with more experience, but less time to get a payoff from the training. In addition to customer disbelief, he found significant ageism among British hiring faculty. I didn’t see that — and when I raised it explicitly once (I’d been warned) it was quickly knocked down. Frankly, a fresh PhD in her late 30s is pretty common; early 40s is not uncommon, although beyond that is probably a risk if you want to work at an elite school.

Monday, May 5, 2008


Yahoo shareholders enjoyed a wild ride today, albeit not as terrifying as it might have been. After bidding good riddance to Microsoft’s withdrawn buyout offer, Yahoo’s stock collapsed today, opening today near $23 (more than $4 lower than where it closed Friday) before recovering slightly below $25, down 15%. That the stock finished as high as it did is attributed to the belief that Microsoft will eventually make another offer. However, this being the USA, contingent fee lawyers are already preparing lawsuits against Yahoo management for refusing the offer.

For someone who played so much poker at Harvard, Steve Ballmer comes across as a terrible strategist — threatening to lower the price before raising it. No wonder employees, shareholders, Yahoo and analysts couldn’t figure out what he was up to.

Among all the coverage I saw today, I liked best the six minute video interview with analyst Henry Blodget — who (with good humor) noted that Ballmer cannot be simultaneously criticized for bidding too much at $31 and then for being too cheap to raise the price. Ironically, I found it on Yahoo Finance.

Blodget encouraged Microsoft to focus on its core business of operating systems and applications, not obsessing over its search rivalry with Google: “That’s what Steve should be focusing on, not trying to win a game he’s already lost.”

Sunday, May 4, 2008


One of the problems in being innovative — creating a business that never existed before — is that there’s no way to know if there’s a big enough market. We tend to think of these businesses as technology based, but charging $3 for a cup of coffee or $1 for a bottle of filtered tap water were certainly businesses that required a leap of faith.

Market research will only tell you so much — what people say they want, but not what they’ll do. Cost reduction or substitution plays to business are the safest best, since they tend to make analytical rather than emotional decisions, and saving money is always a driver. So PCs making computers affordable, or faxes instead of FedEx® (and e-mail instead of faxes) were a no-brainer.

Getting people — particularly cheap Americans — to pay more is much tougher. It’s even tougher if you want people to pay for something they’re used to getting for free. The risks are magnified if it’s an infrastructure play, where you have to build the infrastructure and coverage up front to realize a single dime of revenue.

Of course, sometimes these barriers to entry are just what you need to make a killing. It worked out well for the Baby Bells, GTE and the radio common carriers that got AMPS licenses back in the 1980s. It particularly worked out well for Craig McCaw (who made billions off Cellular One) and even his spurned wife Wendy, who grossed $460 million in the largest divorce settlement in US history (Heather Mills, take note).

All of which is a very long-winded way to express my consolations for the owners of Clear, the biometric security-enabled express lane for airports. I can see how it seemed like a good idea at the time: post-9/11 waits have gotten longer, biometrics can improve identification reliability, and it’s a big market.

The risks were there — the up front infrastructure spending, the franchise fees to the airports and/or the FAA. There’s a limit to future labor saving — every station has two employees, perhaps to prevent collusion or to allow for bio breaks.

So Thursday morning when I spent 20 minutes at morning rush hour waiting to clear the long security lines at SJC, I didn’t see anyone walk up to Clear. Not one. Clear has been here almost a year, so it’s not as though they’re still in ramp up mode.

Instead, Americans are cheap. Just as I pay a skycap when I’m at risk of missing my flight, I'd pay $2-3 per trip to use the service, while some might pay $5 or $10. But none of us would pay at 3 p.m. in the afternoon when there are no lines. However, both as a pricing decision (all you can eat) and to cover up-front screening costs, their pricing model is a $100 annual subscription. (No free trials here).

It’s not clear (all pun intended) whether the problem is market size (of people willing to pay anything) or the revenue model (no ala carte pricing). It’s also not clear if (ala Iridium and Globalstar) they have a graceful fallback position short of bankruptcy. But if they can’t find significant paying customers in tech-wealthy Silicon Valley, they are not long for this world.

Saturday, May 3, 2008

Never mind

After saying for 3 months that it wanted to buy Yahoo, on Saturday night the owner of said (to quote Emily Litella) “Never mind.”

Why did Microsoft throw in the towel on Yahoo? To summarize utterly conventional wisdom, I came up with 3 possible explanations:

First, Microsoft realizes a hostile takeover isn’t feasible, so Yahoo’s stalling will be rewarded with its continuing independence.

Second possibility is the price (as Steve Ballmer said today). MS originally offered $31 a share, today raised it to $33, but Yahoo was holding out for $37.

Third, Microsoft knows that pulling its offer will yank the support under Yahoo’s shares. The stock closed Friday at $28.67, but will open Monday below $25 and may fall next week as low as $20.

Current owners already wanted Yahoo to take the deal, but the collapse of Yahoo’s shares will certainly cause shareholders to light a fire under management. If management can’t get the shares above $30, shareholders with force management to sell the company — even if it is to Microsoft.

Another iTunes victory

Apple this week announced same-day download movie sales from 20th Century Fox, Disney, Warner, Paramount and a few other studios. (It’s also possible to buy movies directly from AppleTV, for the few people who own one). The movies cost $15 each. This even includes cooperation from its recent nemesis Universal.
Some speculate that it will help digital downloads by others like Amazon and Netflix. I’m not sure I buy it — should Apple not try to grab market share and create switching costs, for fear it would grow the market and help its competitors. But analysts have to write about something.

The iTunes Store is not invincible: nothing is. But attempts by suppliers to reduce Apple’s buyer power keep failing.

Friday, May 2, 2008

Information goods and disintermediation

Regular readers know I enjoy topics about how the Internet is impacting information goods. One of the first business cases I wrote was about Barnes & Noble’s e-commerce strategy. As a professor (and a blogger) I’ve been musing on how newspapers are (failing) to deal with the end of dead tree businesses.

Competing with online sellers, Borders (the bookstore) is going through wrenching changes. One reaction has been cutting back on some of the traditional sources of value. The company is trying a new format, and the first one on the West Coast opened yesterday near San Diego.

As the San Diego paper reported, the problems of the retail book industry are daunting:

Pity the poor bookseller, stuck between two less-than-heartening statistics.

One in four adults read no books of any kind in 2006, according to an Associated Press poll released last year. And those who do read increasingly like their page turners to be digital: Sales of e-books have grown at a compound rate of 55.7 percent a year since 2002, compared with a 2.5 percent growth rate in sales of paper books, according to the Association of American Publishers.
The response? Have a physical store where you can buy download goods, like mix-your-own-CDs.

IMHO the Borders plan is doomed to fail, and if Borders fails re-invent itself, the company too. Will Barnes & Noble follow? Or are the cross-promotion opportunities of clicks-and-mortar (the purpose of my old teaching case) enough to insulate it from the problems of their retail-only problem.

Modular platform upgrades

I was talking with an industry contact earlier the week about an interesting problem: is it better to update a software package all at once or in little pieces?

The cost drivers were clearcut when back in the 1980s we had to ask someone to mail us a floppy disk, or in the mid-1990s to send a CD-ROM. Only major changes (that generated money) or crucial bug fixes would generate an update. For example,with PLOTTERgeist we sent out a beta release floppy for several months to address how the Motorola 68040 caching architecture violated our design assumptions for the segment loader in our printer driver. (AFAIK, the first and maybe only Mac printer driver to have its own virtual memory system).

Today, the Internet has ended the cost issue; I can’t recall the last minor update I got on physical media. So the issues instead are the revenue side, which boils down to two issues: charging for something that you want to get paid for, and the related issue of aggregating lots of little things into one thing big enough to charge.

Here, Microsoft and Apple provide an interesting contrast. Apple shipped the first OS X in March 2001, and shipped the sixth version (10.5 “Leopard”) in October 2007. That’s about one release every 16 months. Unless you buy a new computer, you have to pay $100 for each release.

For desktop users, Microsoft has released 3 operating systems since the end of the last century: Windows ME, XP and Vista. That's about one every 3.5 years. Although Microsoft obviously has a larger customer base, it appears that Apple is able to get more revenue out of each customer through more frequent releases.

Certainly Apple has a more modular and thus much lower risk platform upgrade strategy — befitting both their scrappy image and also the limited resources they had when they dug themselves out of the near-death 90s. Microsoft puts a lot of resources into really big upgrades, which may hit technical snags or even (as in the case of Vista market acceptance problems).

Apple pushes point releases about every 2 months depending on new hardware and security bugs; 10.3 made it to 10 releases (10.3.0 to 10.3.9) while 10.4 had 12 (10.4.0 to 10.4.11) Microsoft has its service packs. I don’t know enough about SPs to compare the strategy, but I think it would be worth it for any platform vendor to look further. Apple and Microsoft also release security and other bug fixes to their various applications, which also would be worth comparing.

But (in my conversation with my industry friend) what I think is really really cool is what they give away several times a year — free updates to major subsystems.. These subsystems are not only important parts of the Mac platform (most predating OS X), but also platforms in their own right. Looking at the Apple update page, it appeared that the regularly updated subsystems are (from oldest to youngest):

  • QuickTime, its multimedia (and streaming media) APIs and subsystems
  • iTunes, used to support both the iPod and iTunes [Music] Store business models
  • Safari, which is not only the Mac’s window on the Web and Web 2.0, but also an important (once only)part of the iPhone third party APIs
Interesting, all three of these are subplatforms that Apple now distributes and updates for both Mac and Windows. (Java would have made the above list, but since it’s Apple’s opening to Sun’s mythical write once run everywhere, it doesn’t fit as an Apple platform).

But what I find very interesting — if not courageous — is that APple is willing to favor subplatform success over trying to coerce primary platform updates. The latest QuickTime 7.45 release is available for 10.5, 10.4, 10.3 and Windows.

Since OS X came out, Apple has been really really good about supporting the N-1 OS release with most of its key applications and subplatforms. Having run R&D for our tiny software company, I know the extra testing is a real headache. But the Apple strategy has huge benefits:
  • it’s much more customer friendly — trying to support customers where they are, rather than coerce them into upgrading.
  • it’s more realistic: many individuals and organizations delay upgrading to new OS releases, either out of caution, to better coordinate upgrades across all machines at once, or just because they have better things to do with their lives.
  • the approach makes the subplatform much more successful — because it starts the adoption process of the subplatform N+1 long before adoption of updated OS has become widespread.
They can’t do everything this way. Some features will require the APIs of the new OS: for example, an occasional iTunes upgrade will require a free QuickTIme upgrade. The combinatoric problems of testing mean that not all subsystems can be tested with all other releases of the core OS, applications and subsystems.

There’s also the problem of cannibalizing the paid upgrade cycle: who’s going to pay for the cow if you give all milk away for free? One solution would be to switch to SaaS, and put the latest software into people’s hands as it becomes available.

Wherever Apple draw the line, I think it’s much more customer friendly (and aggressively making innovations available) than Microsoft. The beast of Redmond has been notorious in tying file format changes to Office updates to Windows updates. By default, it generates new incompatible files with the latest version of Office, forcing your friends and coworkers to buy the new Office. Make the new Office only run on the latest Windows, forcing people to buy the new Windows.

This model is a great way to extract rents from a monopoly franchise, but not a way to inspire customer loyalty among customers who have a choice. And perhaps, in the long run, it’s an ultimately self-defeating strategy. Certainly it’s a way to engender resentment and inspire a desire to switch to any other alternative — exactly the sort of precipitous decline that helped fuel DEC’s rapid collapse during the 1990s.