Friday, December 31, 2010

Tablets succeed across the board

Everyone has remarked on the success of the iPad. Now we have (slightly credible) evidence of other product success, and with that optimistic predictions for 2011.

By all accounts, the iPad was a strong seller this Christmas season, but the official results won’t be available until Jan 18, when Apple releases earnings and sales for the quarter ended Dec. 26.

However, intrepid Fortune columnist Philip Elmer-DeWitt contacted 27 analysts for their estimated sales for this quarter, and got estimates ranging from 5.0 million to 7.5 million iPads sold. (The mean was 6.35 million). That’s on top of 7.5 million sold in the first two quarters (4.2 million of that in the quarter ending Sept. 25).

So Apple has sold at least 12.5 million of its $500-800 iPad, and maybe as many as 14 million. Meanwhile, Apple is preparing to announced the iPad 2 (although predictions vary wildly as to what that is.)

Apple is not the only game in town, but it’s still the market leader. According to Forbes, analyst Craig Ellis notes that with 69+ tablets for sale, Asian suppliers expect 40-60 million tablets sold 2011. He predicts 53.6 million (not 53.7?) sold, and 36.1 million (67.35%) of those to be iPads.

Update 3pm: Similar figures come from analyst Robert Cihra (via John Paczkowski): 54 million tablets in 2011, 36 million (67%) from Apple — up from 14 million in 2010.

Craig’s guessestimate on e-readers is 20 million in 2011, up from “around” 10 million this year. Forester puts the numbers at 11 million and 6.6 million respectively (but those might be US-only).

Such estimates are impossible to check since the category king, Amazon, is evasive and non-transparent when bragging about Kindle sales. Sure enough, this week, both Amazon and Barnes & Noble this week issued meaningless press releases that say their Kindle 3 and nookColor are its best-sellers ever.

A Bloomberg report claims internal leaks from Amazon place 2011 estimates at 8 million sold, vs. 2.4 million in 2010; most of the former are presumably the $139 Kindle 3 Wi-Fi. Analysts believe B&N sold about 2 million Nooks — most of those nookColor and most in the past 6 weeks.

One difficulty in comparing tablets to e-readers is that the Amazon and certainly the B&N sales are primarily in the US, while tablets are a worldwide phenomenon. Samsung’s hoping to sell 9 million tablets in 2011, and from its tepid US results, most of those are likely to be outside the US.

So by the numbers, it appears that 2011 will be the year of the tablet. Next week’s CES in Las Vegas will bring a flurry of Android tablets, as well as Microsoft’s latest effort to compete in the category.

Still, so far everyone expects the tablet category to remain dominated by Apple in 2011, even if its market share slips in the face of product proliferation by its rivals. Using Craig’s estimates, Apple still retains 2/3 of the combined tablet & ereader category, while Amazon would be limited to about 20% at a much lower price point. (The What-me-worry? folks at Amazon also noted that many iPad owners are also buying the Kindle.)

I predict Amazon will introduce black & white Kindle this summer at the magical $99 price point, but will it be enough? More importantly, will people continue to buy into its proprietary media format? Or will the entry of the Google eBook store — with files that can be read on everything but a Kindle — finally start to nudge the industry towards a more open format?

Personally, the most interesting question is leadership of the non-Apple tablet market. Perhaps the HP webOS tablet will catch on, but most likely the leader will be an Android tablet, such as the one I own — the nookColor.

The nookColor has already been hacked to run Android apps, including (as long predicted) even Amazon’s Kindle reader for Amazon. B&N promises to introduce its own Android download shop in Q1, presumably excluding Amazon products from the subset of apps provided. At its aggressive $250 price point, it seems to be the early leader among 7" Android tablets — at least in the US market.

Monday, December 27, 2010

Bad pork and worse pork

A particularly trenchant analysis of the faulty logic of “stimulus” came this morning in a Wall Street Journal op-ed entitled “Confessions of a State Stimulus Czar.” (The original title was Confessions of a Stimulator.)

Industry veteran Tom Evslin tried to spend Vermont’s stimulus funds wisely but found it was mostly a futile exercise. One highlight:

The acceleration of government projects that had already run the approvals gauntlet—primarily the paving of roads—worked. But the building of new infrastructure failed. Due to the time required to apply for grants and receive permits, none of it was done during the recession, and only a little will be done in the next few years.

Nothing is "shovel ready" in the U.S. We've created a wall of regulatory obstacles—environmental, historical sites, etc.—that blocks doing any major project on a predictable or reasonable schedule. Not even all the king's men with all the people's money can build tunnels, railroads, wind turbines, nuclear plants or anything else significant without years or even decades of delay. If permitting were speedy, we wouldn't need government money to have a construction boom.
In other words, we needed pork barrel spending to fix the problems caused by government regulation, but in the end regulation won out over pork.

Even the good short-term effects were cancelled by the worse long-term effects. As predicted, Evlsin noted that the spending made things worse, because “the federal money came with strings attached” to prevent state governments from becoming more efficient by cutting costs — and thus the funding worked to “prolong the overspending.”

Despite being CIO of the most socialist state in the union, Evslin was blistering in his criticism of subsidies for renewable energy:
An industrial policy based on government grants and tax credits is an oxymoron at best and a disaster at worst. As an example, tax credits for solar photovoltaic systems have stimulated the solar industry in China. The Chinese don't install them there, they just sell them to us. More generally, these grants, tax credits and the like just mean higher-cost electricity.
Finally, he disputes any net job benefit from the stimulus spending:
The stimulus failed to keep the national unemployment rate below 8%, as had been promised. Overall, the stimulus had a negligible effect on overall unemployment, although it saved government jobs (temporarily) at the expense of private employment. Counts of "jobs created or saved" are meaningless. Jobs lost due to higher taxes, national debt or government crowding-out were not counted.
Driving home tonight, I heard one talk show host quote this “bureaucrat” with glee. Clearly this was a pundit too lazy to spend 2 minutes throwing Tom’s name into Google and reading what was readily available, including the biography at

I knew Tom (and his wife Mary) when the were running Solutions, Inc., a fax modem company. After that he ran server products for Microsoft BackOffice, launched AT&T WorldNet and cofounded a wholesale VoIP company that IPO’d in 1999. Not my definition of a bureaucrat.

It’s too bad that we don’t have more people like Tom in ”public service”: these are people who’ve had to manage the bottom line, including cutting spending if revenues are inadequate to cover expenses.

California briefly had someone like this in statewide office — Democrat Steve Westly, who gave up his job as state controller in a futile run for governor against career politician Phil Angelides. Westly’s failure to win election — along with that of Al Checchi, Meg Whitman and others — will certainly discourage other qualified business leaders from trying to enter politics directly from private industry.

Wednesday, December 22, 2010

Qualcomm: beyond the cellphone

Qualcomm has pulled the plug on FLO TV, its attempt at terrestrial broadcasting to cellphone (later dedicated device owners). It sold the spectrum to AT&T (so that LTE iPhones will have better Internet access than the 3G phones have today) and is refunding the purchase price paid by buyers.

I’m not sure what it means for Qualcomm’s future, but I offer some thoughts on my San Diego Telecom blog. Certainly it hurts its batting average under its second CEO, Paul Jacobs, son of the original CEO Irwin Jacobs.

On the other hand, Intel has been through multiple CEOs since its founding, and basically makes all its money from the 1980 decision to source IBM’s PC cpu and then later to pull out of DRAMs. So while Intel is un-sexy and no longer is seen as a growth company, it’s not in trouble, desperate or in danger of going away any time soon.

In some ways, it suggests second acts are very hard to pull off. Intel Microsoft and Motorola moved beyond their original products to another cash cow, but Oracle and SAP have not. (eBay may eventually make more money off of PayPal than auctions, so it’s too soon to call that one.) RCA and the original AT&T were once technological powerhouses that eventually died. Once-great pharma companies are also in great trouble nowadays.

Of tech companies, Apple and IBM have pulled off multiple re-inventions, but is there anyone else in that league? Google might get there someday, but they’re not there yet.

Tuesday, December 21, 2010

Even tech industries grow up someday

When I started the professor gig back in 1998, I had a smug sense of superiority: I’m a tech strategy guy, and I didn’t worry about the dinosaurs and dying industries and boring stable mature industries.

Since that time, we’ve had the dot-com crash, the NASDAQ crash, a decade of sideways tech stocks (some still below all-time peaks) and in general a mature, commoditized IT industry, including once-great companies like HP and onetime high growth companies like Oracle.

This is not just IT, but also the onetime epitome of high R&D/sales ratio and science-based differentiation, i.e. big pharma. Reflecting declining returns to R&D, big pharma has underperformed the S&P 500 for 15 years — even before the dot-com crash — and has responded by budget cuts, layoffs and offshoring.

In other words, all industries grow up someday. Light bulbs and transistors and telegraph wire were once cutting-edge too. Masked (slightly) by mergers and acquisitions, companies like Oracle and SAP lost the ability for organic growth almost a decade ago. Today the tech products — like PCs or phones or tablets (or proprietary pharmaceuticals or PV panels) have to worry about cost-based competition and the perennial threat of substitutes.

Empires of Industry - Cola Wars (History Channel)Given that, I’m now convinced that every would-be high-tech MBA needs at least a half-semester (or one-quarter) course on strategic marketing in mature consumer industries. We have a lot to learn from selling autos and soap and sugar water — despite what Steve Jobs said about selling sugar water almost 30 years ago.

Yes, we’d like to think (thanks to Moore’s Law) we’re not peddling tail fins but instead an ongoing stream of incremental improvements. Still, well-run companies in mature industries have a lot to teach us about product proliferation, cost engineering, consolidation, and buying/selling companies, not to mention maintaining and leverage brand equity in the face of commoditization.

In fact, I just got through reading final exams about soft drinks in the late 20th century. From 1975-1995, the two major cola companies squeezed out the smaller companies as they grew their share from 45% to 73%. (Does anyone remember drinking 7-Up? Of being able to buy it in a restaurant or on a plane? I do.) This growth occurred as they also grew the pie, with per capita soft drink consumption almost doubling during this same period.

Sure, New Coke is right up there with the PC Jr. (what?) or Lisa, Apple /// and Newton (huh?) as great marketing flops. Still, while all the growth this century will come from developing markets, both KO and PEP stretched their run out for another decade through a variety of product, marketing, supply chain and corporate-level strategies. The US auto makers haven’t done so well — Ford better than most — but the Europeans and Japanese have coped well with a maturing market.

Of course, high-tech marketing people need to learn how to do real consumer marketing. Intel and Qualcomm have grown their own, while Apple’s top marketing execs came from Macromedia (a software company) and Target. (The difference between Jobs I and Jobs II was the intervening experience building a consumer brand at Pixar.)

Ideally, the course on strategic marketing would be combined with a course on consumer marketing. However, the reality is that at most business schools, these are two separate skill sets not found in the same person.

Once upon a time business strategists studied Sun Tzu or Civil War battles. In the 21st century, they should study the cola wars, diversification efforts by the Japanese auto makers, franchising by Ray Kroc, the re-invention of water and coffee, and the branding of generic acetaminophen and ibuprofen.

Sunday, December 19, 2010

Bad signs at the mall

AP says that shopping is better than this year than last. (Certainly it’s better than the England, where unfamiliar snowstorms are preventing stores from restocking.)

We ran out to the major Santa Clara mall this afternoon to buy a couple of items, and what I saw was signs that retailers were desperately discounting because traffic was lower than expected. Bath and Body Works had a number of 50% discounts and pretty much everything seemed to be 25-33% off. Abercrombie sold my tween a sweatshirt for 10% less than what we were charged on the morning of Black Friday — usually the day of deepest discounts.

Perhaps this was just the stores we went to — one for silly luxuries, one for stylish teen clothing. Other stores selling more basic goods could be doing great. Or it could be the Bay Area, or California more generally. After all, our statewide unemployment rate is 12.4%, or one-fourth higher than the 9.8% national figure.

In any event, this data is dissonant with the all-smiles-and-cheer view being presented by retailers.

A final possibility is that retailers underestimated how quickly demand would shift to online stores — which, as the WSJ notes, can now be consulted by smartphone-wielding shoppers as they stroll down the aisles. Given Silicon Valley has always had the highest penetration of e-commerce awareness and now has a relatively high smartphone penetration, this could explain the local desperation. After all, distribution is just another service that’s been commoditized by the Internet.

If I’m right, luxuries/frills/non-necessities will be heavily discounted on Dec. 26 — a great bonanza for those who have birthdays in January (or are willing to exchange gifts on Twelfth Night.)

Saturday, December 18, 2010

NookColor: 28 days later

I’ve now had the nookColor for four weeks, enough to draw observations about the product and tablets more generally.

It’s been a long time since I had a 1.0 of anything: it’s both exciting and frustrating. I’m hoping that Barnes & Noble (like Apple and others) will have a generous software upgrade policy — beyond the subset of the Android Market promised for Q1 next year.

I carry the nookColor to work, to home, to Starbucks, to the airport, on several airplanes. I’ve used it for wardriving (well warwalking) down a city street with more than a dozen hotspots. I’ve loaded PDFs and RTFs and DOCs, bought a magazine and tried to buy a book (but it wouldn’t let me).

The use cases I’ve found so far:
  • paid media (for me, more likely magazines than books)
  • PDFs (which for a college professor is the format for professional journal articles)
  • web-surfing at home (the WiFi at work is too user-hostile)
  • (someday) viewing/listening to online media.
I haven’t resolved the issue of when to carry it and when to leave it home. However, for use in a hotel room, I find it makes a great second screen (for a web page or PDF) when writing something on my laptop.

I believe I’ll own a tablet for the next few years (until tablets merge with laptops or smartphones or both.) There’s no way I’d ever buy a single-purpose device like the Kindle, no matter how cheap. And unless Apple ships a $300 7" iPad next month, I’ll not have any regrets about my purchase, despite some significant problems. (B&N promised money back until Jan. 31, but my wife or tween will grab it if I give it up.)

The hardware is pretty good: yes battery and weight could be better but I suspect they’re close to the state of the art. (And being priced half that of the 7" Samsung Galaxy, I’m gonna be realistic). The hardware gripes:
  • Lack of a hardware brightness control (I use the hardware volume control about 2x/month vs. 2x/day for brightness)
  • A case better designed to use as a (landscape) easel for watching video
  • The @*!#%& charger: a nonstandard cable and a non-standard (1.9amp) brick (try carrying a single brick for all USB devices; try grabbing a spare microUSB cable when you left your charging/upload cable at home).
  • Nonstandard microSD cards: my Class 4 microSD card doesn’t work and tech support was useless; the manual is ambiguous but implies the nookColor requires a Class 6 microSD, but I can’t find anyone who sells them.
A hardware related issue is that (due to the power plug) the NC can’t be used in portrait (vertical) mode when plugged in — until the software people decide to allow 180° rotation.

The frustration comes from the software. This is a portable tablet computer, implemented as a hodgepodge of apps cobbled together to ship in time for Christmas.

Several basic functions are different depending on where you are: paid book, paid magazine, your own PDF, a .RTF file or a web page. The device (not applications) need a consistent and standard interface for:
  • zoom in/out, and auto-zoom to width (set for HTML but not PDF)
  • brightness control
  • browsing/page turning in a hundred or thousand page document (except HTML)
  • finding specific text
Some things are just sloppy implementations: if you zoom magazine pages, you have to re-zoom on the next page.

Someday it will be a good media device. With WiFi and a good UI, it would be great for podcasts — except that today it only streams .MP3 files and not .PLS files (a simple 10-line text file with embedded URLs). Once I thought I got it to play YouTube videos, but today the YouTube preflight proves that it fails both the MP4 and H.263 tests. (sigh).

The tablet desperately needs apps for email, calendar, address book (editable) and Twitter. The AJAX-based UI of Google Maps fails miserably, because it’s never clear whether the zooming/scrolling is for the NC or for the app. (The iPad solves this with a dedicated app, something the nookColor badly needs.) My luck entering text into Facebook has been similarly spotty.

I’m guessing most of these are known problems. Certainly getting YouTube working and some of the zooming quirks are going to be high on any gripe list. (If you call 1-800-THE-BOOK, nookColor is the first tech support option offered).

And then there’s that tech support: inexperienced and not very good. I was unable to buy any books, or even browse books free in the B&N store. I finally got through to tech support (dialin hours are biased towards East Coast customers). After being told that the way to fix the problem was to reset my computer — wiping out all settings, preferences, bookmarks and documents — I had to point out to tech support that the problem was probably that I had no valid credit card on file at (Sure ’nuff, that was it.)

Finally, there’s that business model issue. Apple thinks it’s selling me a general purpose hardware device for me to use as I see fit, while Amazon wants to pay me to take its e-reader in hopes that I’ll be locked to its file format in perpetuity. B&N is trying to appeal to the Apple market, but its TV ads emphasize the color Kindle angle, hoping to get me to buy hundreds of dollars of locked content. (Ain’t gonna happen.) Meanwhile, Samsung TV ads promote the Galaxy as a ubiquitous 7" Internet tablet — without the content cross-subsidy and without the reasonable price.

As the first one on my block, in my building, on my train/plane to own a 7" color tablet, I get a lot of envious stares. People look closer and realize it’s not an iPad, but are intrigued by the smaller size (and even more by the smaller price).

Still, it’s at the bleeding edge of technology — even before the early adopters. Things may get better with the app store, the claimed update to Android 2.2 (or, better yet, 2.3) and an improved browser. In the meantime, it’s an interesting way to avoid doing my real job.

Thursday, December 16, 2010

E-book adoption barrier

E-Book readers (and to some degree tablets) are locked in a chicken & egg standoff with e-book content when it comes to user adoption: no one wants to buy books in a format that doesn’t work on the reader or a reader that can’t read the content they want.

Amazon’s solution is that you can read their proprietary format on Kindle, computers, some smartphones but not their competitors’ e-readers. Apple and B&N have the same approach, except they also support ePub.

A worker asked me last night (at a bar) what book format he can buy that will be readable 20 years from now. I told him ePub, which might actually be true. Certainly ePub is like the MP3 format of digital books — when it’s DRM-free everyone can read it and thus the least common denominator of e-books. (Amazon doesn’t read it but obviously could if they weren’t concerned about undercutting their proprietary format.)

However, the iPod/iPad MP3/ePub analogy breaks down pretty quickly, as Forbes blogger Chunka Mai points out:

I’d like to have an e-reader that would let me read the paper books on my bookshelves, plus the ones that have been consigned to assorted stacks and (gulp) boxes as my kids’ books crowd mine out. …

This is important because much of my reading is spent on books I already own, not just new purchases. Have you, for example, ever stumbled across an old favorite and found yourself immediately consumed? Or rediscovered a book that you bought and never got around to reading? Have you gone searching through the stacks for that reference that suddenly became timely? Those are the kinds of experiences that I want my e-reader to support.

In concept, I want to make the same transition as I did from CDs to digital music. Once I ripped the CDs that I owned into iTunes (thank you, gracenote, for filling in the track names), I packed away the CDs and the CD player and never looked back.
This is a flaw in the adoption model that (AFAIK) no one is pointing out. The MP3 caught on explosively because it provider a graceful path from the CD installed base.

In my case, about 10 songs are DRM-infested AAC from iTunes, and perhaps 100 DRM-free from Amazon. The rest are DRM-free version of CDs, including CDs I bought in 2008, 2009 and 2010.

So MP3 players were useful immediately, long before consumers made a large financial investment in electronic-only content. It’s not like the record companies wanted to make this easy: I’m sure they were hoping that I’d repurchase all my music again, just as I repurchased about 20% of my cassettes as CDs (and then abandoned the rest).

Mai also wants an open transfer of annotations and other content around the content:
These are, of course, not original cravings. They fit the vision famously laid out by Vannevar Bush in a 1945 Atlantic Monthly article describing his Memex system. They are fed by the aspirations that underlie much of the development of the World Wide Web.
Billion Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 YearsAgain, this is an angle not covered by others. I looked up this bio, noted that it included yet another book about dot-com success and also that truly inspirational book, Billion-Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years.

Mai offers an entertaining (if somewhat preposterous) way out of his dilemma:
Amazon is perhaps best-positioned to pull off what I want. I’ve been buying books there since 1997 and, as is the case for all their customers, Amazon has a detailed history of every book I’ve bought. This solves the question of whether I already own a book. If Jeff Bezos offered me the chance to upgrade to digital library with even just those books, he’d have me locked up in the Kindle’s proprietary format for life.
This assumes that publishers will let Amazon re-license the book on reasonable terms; Apple charged 30% to upgrade to DRM-free songs, presumably with most of that going to the record companies.

This also assumes that the publishers are stupid enough to slit their own throats. (Who knows, it could happen). If Amazon upgrades its print customers to its proprietary format, Mai and millions of other customers will be irrevocably locked into the company and its format. Pretty soon, the publishers will have only one distribution channel and a monopsony buyer who dictates the margin split with the authors and editors.

Absent such a clever solution, e-book adoption is going to be slow and gradual. And all the cute TV ads in the world won’t be enough to convince buyers that they should cast their lot perpetually with Amazon and its locked format. (If/when Amazon gets out of readers and allows others to read the format, it could be a completely different story.)

Wednesday, December 15, 2010

Betting too much on Twitter

Silicon Valley and the VC world are-a-twitter about the $200m venture investment in Twitter that leaked today. The number is mind-boggling on several levels.

First, this is a Series F round when most companies would have IPO'd by now. We can’t really call it a mezzanine round if no IPO is in sight.

Second is the huge bet by Kleiner Perkins, which seems to be moving away from its recent dalliance with cleantech and a certain VP-turned-VC. I was being interviewed by a reporter on this topic and my planned response ended up on the cutting room floor:

In funding Twitter, Kleiner Perkins is going back to its roots -- the sort of information technology companies that Gene Kleiner and Tom Perkins knew best, and the ones that created its reputation.

One might read this as a repudiation of the Al Gore-led foray into cleantech. Certainly the venture industry -- as well as those of us who study it -- have figured out that the scale and timeframes of building energy companies or car companies aren't going to work for venture investors.
Finally, there’s that $3.7 billion valuation. I’m a regular Twitter user, and recognize it success in building network effects and an installed base. Even so, I haven’t seen evidence that its planned revenue model is going to work (which must be why it needs expand via dilution rather than retained earnings).

Apparently I’m not the only skeptic. Business Insider quotes Series B/C investor Union Square Ventures as not being interested in this round due to the valuation. As Fred Wilson of USV wrote:
One thing I've seen many VCs do wiith their initial investment in a company is invest more when the valuation gets expensive. They are ownership driven, not valuation driven. So if they originally wanted to invest $4mm at a $20mm post money valuation and buy 20% of the company, they talk themselves into investing $8mm at a $40mm post money valuation so they can still buy 20% of the company.

I have never liked this approach. When the price of an initial investment goes up, I prefer to invest less, or nothing at all.

Investing more when the price is too high makes no sense to me. If you are overpaying by 2x, doubling down feels like overpaying by 4x.

I think the root of this "doubling down on the overpay" issue is that many VCs manage large funds of other people's money and they really don't care so much about how much they invest in each deal. They are looking to buy large stakes in companies and hope that one or more turns into a big winner.

So instead of being ownership focused, I prefer to be valuation focused. And the key figure I look at is average valuation of our entire investment. We take the total amount of capital we have invested in a company and divide it by our total ownership. We like that number to be as low as possible relative to the current value of the business. I believe that is the recipe for the best returns and that is what we seek to deliver to our investors.
This is yet another example of herd mentality among VCs, and the disconnect between VC risk and limited partner risk as VCs make these huge bets.

Thursday, December 2, 2010

LTE: end of all you can eat

The FT reports this morning on Verizon Wireless’ plan to unveil its LTE network this Sunday. By covering 39 markets and 60 airports, the footprint is equivalent to a POP of 110 million — slightly less than 40% of the country. It’s bad news for AT&T: it will have to stop bragging about the “fastest” data network in the US, and pundits say the iPhone LTE is just around the corner.

Although the ITU says LTE and WiMax are no longer “4G” standards — even though they were clearly developed as same — this will be the second major carrier to offer 4G service in the US and the first (unlike Sprint) to follow the global 4G standard. At "up to" 12 Mbps, the new service is 10x as fast as existing 3G service. So perhaps we can call these 4G- as opposed to T-Mobiles faux 4G that is 3G+.

What’s strikes me is the pricing of the data plans. On the one hand, Verizon is offering 4G data bundles at the same price as comparable 3G ones. The VZW LTE plans are $50 for 5gb/month or $80 for 10gb/month. Each additional GB (or fraction thereof) is $10. On the other hand, the new rollout marks the long-predicted end of Verizon’s $30/month unlimited 3G plan, following AT&T’s lead. Now $35 only gets you 3gb/month.

This is both a threat and opportunity for Sprint. Sprint surcharges owners of 4G (WiMax) by $10/month over its 3G users, and that surcharge may no longer be sustainable. On the other hand, Sprint still is promising unlimited voice and data services with its $100/month plan ($110 for 4G).

Today the $40/month unlimited 3G data for the Virgin Mobile hotspot or USB modem is now looking pretty good — a real market opportunity for the Sprint division. If I were sending a college student away to college, that would be the no-brainer option.

Update, Friday 7am: InfoWorld offers an overview of the strange anomalies in the pricing of the various carriers’ data plans.

Tuesday, November 30, 2010

Google: the sometimes honest broker

The Wednesday papers have an interesting juxtaposition of two stories: bad Google and good Google.

The bad Google is that the EU (is finally) going after Google with an anti-trust complaint. After openly seeking Total World Domination for years, bad Google will enjoy the same sort of proctological exam that Microsoft once did. For those that watched the US and EU futilely attempt to stop Redmond’s bid for Total World Domination, two issues seem like déjà vu all over again.

First is the issue of tying. As the AP notes, yes we expect YouTube to show up first in Google searches, but its maps? Its finance? In a 2007 YouTube video, then-Google search executive Marissa Mayer noted that Google favored its own finance site when searches previously listed Yahoo first. Meanwhile, The Register details the complaints of the British firm Foundem and how it fell to the back of Google’s rankings after a 2006 algorithm shift.

The other is that Google’s ranking process is notably opaque — and the company intends to keep its algorithms a trade secret — which means that whether or not it’s fair, no one can say for sure. (Shades of Microsoft’s secret APIs that were revealed long after 1-2-3 and WordPerfect were wiped out while Novelware had entered its terminal glidepath.)

That’s bad Google, and the accusations (and rationalizations) seem no different than any other quasi-monopolist. Despite its activist nature, the current administration is certain to go easier on the US firm than the EU will — just as happened under the last two presidents.

The good Google is — according to the WSJ — going after Amazon and other lesser proprietary publishers (NB: Apple, B&N) to provide a truly open document file format. If that’s not enough, the new Google Editions will help brick & mortar retailers compete with both Amazon & B&N by setting up their own shops. (Presumably, this is much as Amazon zShops helped home-based resellers bypass eBay).

E-books are not going anywhere until there is the inevitable single universal format, available from all resellers and supported by all hardware. I suppose we could temporarily support two formats (cf. VHS and Beta, 8-track and cassette, or RCA vs. CBS in vinyl), but in this case it will be the market-leading proprietary AZW being challenged by the open format where (as is customary) everyone gangs up on Amazon.

Google can and will be open on books precisely because it is a monopolist elsewhere in the food chain. Its monopoly rents from search allow it to be indifferent as to book content and reader business models, because it knows it will make money searching for this content no matter who sells it. (Just as Intel was indifferent as to how the Internet grew as long as people used Intel-equipped PCs as clients.)

For years Google (out of copyright) books have been available both in PDF and (for selected texts) the EPUB open format. In it latest effort, Google seems to be winning the cooperation of (once suspicious) publishers and authors to sell content in an open format.

A key question is when Google’s strategy will attract the enemy-of-my-enemy allies against Amazon. Right now Apple dominates full-featured tablets with the iPad (the way Amazon dominates single-purpose e-readers with the Kindle), suggesting that it will be in no hurry to join Google’s parade — particularly since they are rivals in so many other areas.

On the other hand, the iPad business model makes money selling hardware with negligible ebook sales — and so Apple has little to lose by switching formats. Meanwhile, B&N is more interested in selling books in its store rather than nook hardware — so will it try to become the leader of open book content or continue to imitate Amazon’s proprietary book strategy?

Saturday, November 27, 2010

Tablet Wars (3): Is Wi-Fi enough?

Despite doing research on 3G cellular service for the past five years, I’ve thus far held off on buying any 3G service (or a smartphone that requires 3G service). The use case really isn’t there: I spend almost my time at work or at home, both locations with good Wi-Fi. Throw in free Wi-Fi at friends, Starbucks and many bakeries, and there isn’t much time in any day when I’m not being irradiated with 2.4 GHz radio waves.

So do tablets need 3G? Apple has both WiFi and 3G+WiFi models, Amazon sells Kindle models with 3G (but only for books, not for free content), while Barnes & Noble eschewed a 3G model with its nookColor. Fresh off its initial iPad partnership with Verizon Wireless, Apple is rumored to be preparing a dual GSM/CDMA 3G iPad 2 for launch next year.

These sort of 3G-enabled devices have provided business for chipmakers for the past few years — and in particular, the dual-mode device is the bread & butter for the growth of Qualcomm’s chip division. Meanwhile, Verizon, AT&T and the smaller carriers hope to use these additional 3G devices to sell more 3G data plans — while at the same time hoping these plans won’t get used, or that users will offload into local WiFi hotspots.

So do tablets and netbooks and notebooks need their own data plans? Or conversely, how/why will user buy 3G data plans (or real 4G as it becomes available)?

One path is the one the industry has been on the last few years: more smartphones, bigger screens, more computer-like features. I think that’s great for certain apps — notably traffic maps — but not for editing a spreadsheet on Google Docs.

The network operators’ preferred option is to have cellphone users buy a second 3G plan for their laptop or whatever. So instead of having one data plan, you have two. Not a bad option if you have an expense account, but do you get 3 data plans if you have a cellphone, laptop and tablet?

A third option is the Wi-Fi hotspot — like the MiFi cards Verizon is bundling with the Wi-Fi iPad to pretend (for now) it’s a CDMA iPad. It’s a great option for a college student or young adult (since anyone under 26 is still a child) to have wireless data available for all his/her personal devices at all time.

The future I’d prefer to see — although the jury’s clearly still out — is widespread availability of tethering, as was introduced by the Palm Pre, now available on the Droid X and other Android phones, and technically feasible on the iPhone even if AT&T (or Apple) tries to block it..

A shift to tethering would have two major benefits for mobile phone consumers. First, cellphones could go back to being cellphones. Rather than creating ever larger (but still inferior) imitations of a PC, cellphone makers could focus on making small pocketable devices that make phone calls, send text messages and can be used for light internet browsing.

Secondly, the use of Wi-Fi for tethering a laptop of tablet would decouple these products from the carrier subsidies and contracts — allowing users to replace them as needed, and keep their computer when switching their phone between carriers.

It seems like we keep coming back over and over again to the same issue between 20th and 21st century telecommunications. Back in the 20th century, you had one (or maybe two) wireline phone, one cable TV account, one Internet connection. In the 21st century, the network operators are hoping that you’ll keep adding new service plans every time you buy a device.

Am I going to use twice as much data if I own an iPhone and an iPad? Of course not. Does AT&T have the chutzpah to increase my DSL (or U-verse) bill if I add another PC or PDA at home? Of course not.

So until we get back to the per-household (or forward to the per-gigabyte) pricing, the idea of buying a new account is going to deter 3G adoption for tablets or laptops, except for that small niche of relatively price-insensitive businesses or consumers.

Meanwhile, Wi-Fi as a substitute for 3G still needs considerable improvement. Walking across campus with an (unactivated) Palm Pre acting as a Wi-Fi PDA, it was clear that our network and access policies were not designed for smooth handover from hotspot to another. Plus tablets and other devices need to bring back that great 1990s Internet innovation: offline browsing. (Hint: ignore the META REFRESH tag if there’s no network connection.)

Thursday, November 25, 2010

Tablet Wars (2): half a tablet can be better than one

At the October earnings call, Steve Jobs both defended the long-term future of tablets and attacked the 7" form factor. While I agreed with him on the former, after five days with a 7" tablet, I’m convinced he’s wrong on the latter.

In fact, I believe that Apple will miss the boat if it dogmatically holds out against the in-between file format — the way it missed the 1990s PDA boomlet by sticking to the overweight, oversized and overpriced Newton.

In October, Jobs directed 4 criticisms at the avalanche of tablets expected this year. Two were at the 7" form factor. Here are excerpts from the Seeking Alpha transcript:

Second … a seven-inch screen is only 45% as large as iPad's 10-inch screen. … Well, one could increase the resolution of the display to make up for some of the difference. It is meaningless, unless your tablet also includes sandpaper, so that the user can sand down their fingers to around one quarter of the present size. … There are clear limits of how close you can physically place elements on a touch screen before users cannot reliably tap, flick or pinch them.

Third, every tablet user is also a smartphone user. No tablet can compete with the mobility of a smartphone, its ease of fitting into your pocket or purse, its unobtrusiveness when used in a crowd. Given that all tablet users will already have a smartphone in their pockets, giving up precious display area to fit a tablet in our pockets is clearly the wrong tradeoff. The seven-inch tablets are tweeners, too big to compete with a smartphone and too small to compete with an iPad.
Kindle Wireless Reading Device, Wi-Fi, 6" Display - with New E Ink (Pearl) TechnologyMeanwhile, for the past three years Jeff Bezos has been selling millions of specialized 7" black & white tablets (which he calls “Kindle”), while Barnes & Noble, Samsung and various others will sell than more than a million 7" color Android tablets in Q4 2010. (Samsung already sold about 600,000 in its first month.) In the Black Friday newspaper ads, I counted nine different tweener tablets or e-readers — excluding the Kindle and nookColor — and the Galaxy was mentioned more often than the iPad.

The iPad has a screen that rivals the resolution of small laptop (or a netbook) with its 9.7" LCD, while the B&N nookColor and the Samsung Galaxy offer a screen in a 7" form factor. The smaller size brings a smaller weight and price: the nookColor is half the price of the WiFi-only iPad while the 3G Samsung is essentially the same price as the 3G iPad (but with a camera).

Steve Jobs posits a chasm between the smartphone and laptop/tablet form factors, and that his two extremes are the only ones that are viable:
ModelScreenResolutionWiFi Price3G Price
Apple iPod Touch3.5"640x960$229
Amazon Kindle6.0"600x800$139$189
B&N nookColor7.0"600x1024$249
Samsung Galaxy Tab7.0"600x1024$600
Apple iPad9.7"768x1024$499$629
However, a 7" tablet can be held with one hand, walking around and is roughly the dimensions of a paperback book. It works pretty well for reading most web pages and certainly for watching a 480x360 YouTube video.

After trying to read web pages on an iPhone and a Palm Pre, I can’t ever see using one again for anything other than an emergency. Dunno, maybe it’s being farsighted (+1.5 correction for reading) and this is not an issue for their core teen market.

Now Steve sells laptops with screen ranging from a 11.6" to 17" diagonal size and prices from $1000 to $2300. In marketingspeak, that’s segmentation — trying to avoid leaving any needs unmet.

I’m guessing that Steve’s would be that laptops are different: it’s possible to provide pointing and data entry for all these sizes for a laptop but not for a tablet. Since the 7" virtual keyboard is clearly superior to the 3.5" iTouch/iPhone keyboard, the barrier is the pointing experience.

There is a very real difficulty of hitting tiny hyperlinks in 8 point font with a fingertip. My tween (with much smaller fingers) complained about it tonight with my nookColor, and it’s been an ongoing frustration since I brought the mini-tablet home.

However, if Steve doesn’t sell a 7" tablet, many other people will — most of them undercutting the iTab’s price point. Maybe they won’t have 100,000 apps but there will be thousands of Android apps — including apps from the major media companies (Facebook, NYT, Time etc.) that will probably be just as good in the 7" size as in the 9.7" size. And a $200 color tablet will reach a lot more people as an impulse buy than a $400 one.

One of Steve’s other comments was about the usability of the products based on Android 2.1 or 2.1 and it appears he was right. More later.

Wednesday, November 24, 2010

Obituaries for Chalmers Johnson

The obituaries now have come out for Chalmers Johnson, the noted Japan scholar (and my onetime mentor) who died Saturday.

The best dead tree obit was in the Los Angeles Times by Dennis McLellan — the only obit indexed by Google News that addressed the breadth and depth of his influence, capturing all three phases of his career: China, Japan, and the “empire trilogy.” (The NYT fixated on the latter and ignored the work that created Chal’s reputation in the first place). Two other good obits were on the SF Chronicle website by Zennie Abraham (a student of Chal’s at the Berkeley poli sci dept in 1985) and the Seattle Business website by Leslie Helm, the Japan correspondent of the LA Times from 1990-1993.

More personal tributes came from Steve Clemons (his JPRI co-founder), and fellow “revisionists” Clyde Prestowitz and Jim Fallows. The coda to these tributes comes from Arthur Salm, a San Diego writer who got to know Chal in his final years.

Tablet Wars (1): media and media formats

Over the weekend, I became the first kid on my block (and in my office) to own a nookColor. Even a few days have helped me understand and appreciate the form factor and its future; this is the first of several postings on the future of tablets.

I’m a true believer, and I think Apple has it almost right. For that matter, two decades ago John Sculley almost had it right. The tablet is not a computer for typing, it’s a media device for consuming three things:

  • websites and the limitless free content of the WWW
  • professional, paid media — replacing the dead tree versions of books, magazines and newspapers
  • video
At a reasonable size, weight and price, the tablets will make paper newspapers and magazines virtually disappear in less than a decade. If the price were right, my entire household would switch tomorrow.

One of the big problems, however, is open data formats. The world has become used to the open Internet and there’s no turning back. We also have MP3 (or AAC) files and MPEG4 streams that are also available on all platforms and devices.

Books and book DRM are only a small part of the problem. Yes, everyone but Amazon has agreed upon ePub with encryption (for now Adobe’s, in the long run probably an open standard.) Amazon hopes to make its proprietary format the world standard — even to the point of running TV ads arguing that any client device can read AZW files.

In the long run Amazon’s efforts are doomed, just as Apple’s proprietary FairPlay encryption was doomed. (For that matter, book encryption is as certain to be broken as DVD encryption was, but since the encryption is all in software, the encryptors may be able to occasionally pull ahead of the decryptors).

Supreme CourtshipToday, the vertically integrated bookstores have ridiculous margins due to their lock-in and lack of a resale/remainder market. For example, a hardback Christopher Buckley novel remaindered at $6 was for sale at the Nook store for $10. For a 67% premium, consumers get no distribution, no printing, no inventory cost — and no option to resell or donate the used book.

Once we have open formats on e-books, then consumers will have choice, competition and (as is natural in a free market) distribution will again become a commodity. The price wars for music downloads (cf. iTunes vs. Amazon) and the alternate business models (cf. Rhapsody) will increase efficiency, reduce cost and fuel adoption for the printed word.

But another key content question is magazines: color magazine were one of the nominal reasons for the the NookColor going with power-hungry LCD over the e-Ink of its little sibling and the Amazon Kindle. They were also a great hope for the iPad launch.

The problem is that there’s neither a technical or business solution for tablet-based magazines and other color-heavy news publications. Each platform requires its own custom formatting. Also, as the former designer of notes, magazine art directors have also gotten carried away with size and features in a slavish attempt to replicate the paper version. There is hope for a common technology format, using Adobe’s tools, to allow creating digital magazines for all the major platforms.

Most of all, there’s the problem of price. Barnes & Noble offers 67 magazines and 24 newspapers. A few are reasonably priced, like National Geographic or a variety of Hearst publications for $2/month.

However, conspicuously missing are the major business magazines: Business Week, Economist, Forbes and Fortune. I was getting ready to buy an electronic subscription to Business Week, but it isn’t available. The three major financial newspapers are available, at a steep price: $15/month for the WSJ and FT, and $11/month for Barron’s. (Not to be outdone, the LA Times, USA Today and NY Times are holding out for $10, $12 and $20/month. Not gonna happen)

Today, we have closed formats, no competition and exorbitant pricing. If it stays that way, paid news on tablets will never catch on. But I think commoditization and competition are inevitable, just as it was inevitable that Disney had to sell DVDs in Southeast Asia for $2 instead of $20.

Then there’s tablet video, fueling the shift away from cable TV and inextricably linked the problem of monetizing Internet video. This is already happening on PCs, and the 7" WiFi-connected tablet is a far more credible replacement for a TV than a 3" smartphone on a 3G network (with a limited-capacity data plan.)

Another loose end is the library. We need a common format before libraries will lend electronic content. We also need cooperation from publishers, which may be delayed either by their greed or (somewhat) legitimate concerns about piracy. I talked to a restaurant manager Tuesday who wanted to buy a Kindle or Nook as a Xmas gift for her daughter: the problem is, her daughter mostly reads library book, and there’s no way either one of them can afford to buy books at Amazon’s (or B&N’s) ridiculous prices to fuel her voracious reading appetite.

Finally, there’s the issue of family pricing. Cable TV, newspapers, magazines and record labels historically provided content for an entire family — just as wired phones once did. Do publishers and media companies expect to sell multiple copies to each household? I know they hope to do so, but it seems as though some form of family pricing is necessary, just as Apple learned to offer MP3 sharing for the entire house across multiple PCs, iPods or cellphones.

Sunday, November 21, 2010

Killing startups, killing the economy

One of the arguments that us free market types make is that regulation, bureaucracy, and taxes with high transaction costs disproportionately hurt small businesses. Big established companies have their own bureaucracies to deal with government bureaucracies, but (as I can attest) the new entrepreneur usually struggles to make sense of all the regulation.

Over the past three years, there are fewer new companies creating fewer jobs — and not enough to replace companies that have died — according to a major article Friday in the Wall Street Journal:

Few Businesses Sprout, With Even Fewer Jobs
By Justin Lahart and Mark Whitehouse

Fewer new businesses are getting off the ground in the U.S., available data suggest, a development that could cloud the prospects for job growth and innovation.
The stats were grim. The WSJ charts showed that new firm creation peaked in 2005, but the past three years have had net job losses.

The article quoted the latest econometric research on job creation, which shows that (depending on the phase of the economic cycle) most or all of the net jobs created in the US economy come in the first five years of a company’s life. After that, established businesses (large and small) are a net wash.

Several of these studies have been publicized (and funded) by the Kauffman Foundation. One example was the study by John Haltiwanger, Ron Jarmin and Javier Miranda using data of the U.S. Census Bureau’s Business Dynamics Statistics. They found that from 1980–2005, firms less than five years old accounted for all net job growth in the United States. The WSJ article quoted Haltiwanger as saying the young firm job creation process “isn't working very well now.”

The data get worse: the firms that are being formed are creating less jobs. Some of this is the offshoring that has become common for (“born global”) startups born this century. However, it’s clear that scarcity of capital is impairing growth and particularly job growth.

Last month, I heard Prof. Haltiwanger deliver a keynote at a Kauffmann-founded workshop held at the Federal Reserve Board of Atlanta. (I was there to present my own research on uncertainty and small business success). The picture presented by Haltiwanger and others at the conference was consistent with other anecdotal evidence and the WSJ article: firms are not being created and those that are being created are much more cautious about hiring.

None of the studies yet prove what the root cause is of this weak expansion and job creation: lack of demand, lack of credit, increased costs caused by healthcare reform. But I think the data is relatively congruent: until new firms start being created and grow, there won’t be the jobs needed to get unemployment back down to single digits.

Saturday, November 20, 2010

An appreciation: Chalmers Johnson, 1931-2010

I received an email tonight announcing the death of my former mentor, Chalmers Johnson. According to his wife Sheila, he died this afternoon after several months of care from the local hospice.

Chal was larger than life, an unforgettable character who made an impression on most people he met. He could alternately be serious or playful, inviting or argumentative. Most importantly, he is the reason I became a college professor.

After obtaining his PhD from Berkeley in 1961, Chal taught in the political science department from 1962-1988 and was department chairman during some of its most influential years. He was lured to UCSD in 1988 by the promise of a new Asian Studies school called IR/PS, but then retired as part of the Voluntary Early Retirement Incentive Program, a UC-wide budget-cutting measure intended to get expensive senior faculty off the payroll.

Chal continued to teach part-time after his 1992 retirement, but soon had a falling out with the dominant IR/PS faculty faction and fully retired in the spring of 1994. As an open university student, I was there for his final IR/PS class along with a loyal cadre of Japan-focused master’s students.

I actually met Chal during his two semesters as a visiting professor at Cal State San Marcos (1993-1994). My mom saw in the paper that this famous guy was teaching a night class course on China/Japan/Korea at CSUSM — only 15 freeway miles from my work and home. For most of two semesters, I was the only student at his office hours as I made a point of visiting him whenever I could.

At a time when our Mac software business was slowly dying off — along with Apple Computer — Chal offered a window onto another career possibility: the life of a college professor. I decided to major in business — not poli sci or computer sci, two other options I considered — but it’s safe to say I wouldn’t have become a professor without his influence during this period. (This first required enrolling in grad school, because — as Sheila reminded me — “a Ph.D. is the union card of academia.”)

MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975When I met Chal, it was during the early years of the Clinton Administration, when the elevation of Laura Tyson to head of the Council of Economic Advisors (briefly) gave Chal hope that his trade policy proscriptions might be become US policy.

Chal was the academic heavyweight among the Japan revisionists (or “gang of four”) — that also included three other book authors: Clyde Prestowitz, Karel van Wolferen and James Fallows. Chal’s contribution was the once-famous MITI and the Japanese Miracle. Although I read all their books, I never followed the other three as closely as Chal. But to summarize his points at the time:
  • Japan is different from the US, an economic powerhouse, and needs to be studied on its own terms
  • assumptions that it follows Anglo-American norms are foolishly naïve if not a form of egocentric nationalism
  • Japan’s postwar economic boom was due to a form of managed trade
  • if the US wanted to correct its trade deficit with Japan, it would have to match Japan’s jobs- and firm-oriented neomercantalism rather than its consumer-oriented open markets
As he predicted at the time, Korea and China saw that Japan’s policies enabled exports to the US market while protecting domestic firms from meaningful competition, and so (successfully) followed Japan’s playbook.

I played a small role in helping him set up the Japan Policy Research Institute, a virtual thinktank that Chal founded that was originally run by Chal and Sheila out of their San Diego-area home. (JPRI working paper #7 marked the first “publication” of my new career.) I also helped him switch to a Mac, and was his tech support person for many years until I moved away from San Diego.

Over the years, we drifted apart — almost entirely my fault. After my daughter was born, I had less time to spend hanging out with adult friends. But more than that, we drifted apart philosophically after “W” was elected, as Chal spent his final years raging not at America’s enemies or rivals, but at a US foreign policy that he repeatedly attacked as a form of imperial overreach.

Meanwhile, after I arrived at SJSU in 2002 and found several colleagues with far better Japanese language skills than I had, I turned my attention to (in a Ricardian sense) where I had both relative and absolute competitive advantage among the SJSU faculty: studying the technology strategies of Silicon Valley IT firms.

While he had been in declining health for many years, his death is a painful reminder to me that everyone’s time on this earth is finite, and that anyone may pass on without prior notice. It’s also nudge to take a more active role in maintaining friendships, beyond an occasional email and the annual family Christmas letter.

Photo credit: Chalmers Johnson, from a 2007 interview with UCSD TV.

Update Nov. 21: Dates of UC service updated per feedback from former IR/PS student Dr. Jason Dedrick.
Update Nov. 24: I’ve posted links to the best obituaries by reporters and Chal’s friends.

Saturday, November 13, 2010

Flash! Android is bringing commoditization!

the major goal of Android was and has always been commoditization: before Android smartphones were hard and now they’re easy. This is a point I’ve been making for a while, including August 2009, January 2010, March and earlier this month.

Now Forbes, its CIO network and the NPD consultants at PRTM have figured this out. To quote their article:

In 2007, Android looked like an experiment as well as a great and cheap way to challenge the extraordinary success of Apple and its iOS-iPhone-iTunes combination. But the success of the venture has unleashed a tiger, and now the handset companies are starting to look like its lunch.
More importantly, the PRTM consultants have put numbers to the trend:
  • From Android 1.6 to 2.1, cycle time for new handsets dropped from 8 months to 4.5 months
  • Most vendors bring new handsets to market within 16-20 weeks of a new Android release, eliminating any temporary OS exclusive.
To quote the report by David van Oss and Huw Andrews of PRTM, gross handset margins will shrink to the 8-10% common for commodity PC makers.

They encourage handset makers to find other sources of differentiation or perhaps look for a second handset OS. Perhaps they can use their custom Android UIs to create brand loyalty — I find this highly doubtful, but they may create gratuitous switching costs.

Van Oss and Andrews predict Google will charge a royalty for Android. Yes, the company’s got conflicting goals — promoting its mobile platform vs. promoting mobile search use. But I don’t see a scenario in the next 3 years that has Google trying to extract royalties from the Android platform. (Fine print: I won’t rule out it offering new “must have” royalty-bearing technology like voice recognition).

A lot could happen in three years. By then, Nokia could be making Android handsets, or the Chinese could be shipping the majority of the world’s smartphones. Or smartphones could be on their way out, replaced by tablets. So anything beyond then is pure speculation.

Friday, November 12, 2010

The new Borg

In the march towards Total World Domination, with the recovery of its stock and explosion of Android, Google seems to be in the driver’s seat. But what captures this march? If Microsoft is the Beast of Redmond or the Borg, then what is Google? For two years I’ve called it the Monster of Mountain View, but it is only rarely used.

Perhaps the “Borg” metaphor is more appropriate nowadays: not because it’s relentlessly crushing enemies, but the way that it’s inhaling raw talent. Particularly over the last two years, Google has the pick of Silicon Valley when it comes to recruiting as most IT companies are fighting the relentless march of commoditization. It’s #4 on the latest Fortune list of best places to work — the only Silicon Valley firm in the top 10 and one of three in California (the others being DreamWorks and Qualcomm.)

Meanwhile, the once-great HP is locked in a commodity business and has been cutting pay for several years and laying off workers for a decade. Meanwhile, Google is raising salaries 10%, and with it operating expenses by nearly 4% ($400 million). Because the generosity depressed GOOG stock, Google reportedly fired the employee who leaked the memo.

What I find anomalous is how the company is not just hiring from industry, but also inhaling bright minds from academia. I’ve know engineering and C.S. types to take a rotation in industry, but it’s much less common in business or economics.

Three years ago, Google convinced once of the world’s most senior information economists, Hal Varian, to leave Berkeley where he was a chaired professor and former dean of the Information School. Varian converted his temporary leave (one of the perks of academia) into retirement, according to his Berkeley website.

Less visibly, at the same time Google also landed Josh Mindel, an assistant professor at San Francisco State’s business school. This year they took Dave Mease from the SJSU b-school — right now David is on leave, but the flow of talent into Google seems to be similar to the flow of matter into a black hole.

As someone who used to work in industry, I can see both sides. Academia (post tenure) has unmatched job security, good medical and retirement and an unmatched degree of personal autonomy. Going to Google would probably mean a 50 or 100% pay increase, stock options and resources to pursue any interesting problem. Google’s 20% time plan also provide an intellectual freedom unheard of in industry.

The one question mark is: how long will it last? For the best jobs at AT&T — Bell Labs — the golden age extended across more than five decades. For IBM, the comparable period was about 30 years, while for Apple it was only a decade. Microsoft Research still seems to be offering attractive working conditions, but for ordinary employees the bloom went off when the stock options stopped being valuable.

So how long will Google’s run last? Absent draconian regulation — antitrust lawsuits ala AT&T and IBM — it could be a great place to work for another decade. However, the end at IBM, Apple and Microsoft came with unexpected swiftness, so I wouldn’t bet the house on it.

Update Nov 19: Google has now hired tenured Harvard CS prof Matt Welsh; his colleague Michael Mitzenmacher rationalizes why he’s not jumping ship (yet). H/T: Youngjin Yoo.

Wednesday, November 10, 2010

HP-Compaq Redux

Many of the most senior professors I’ve ever met — including some prize-winning engineering professors I interviewed in my research — say that to really understand something that you need to teach it.

Tonight in the capstone strategy class, our undergraduates revisited the 2002 HP-Compaq merger. We had a very healthy discussion, which I concluded by summarizing from my “Carly is right, I was wrong” posting earlier this year, particularly this passage:

  • Opponents’s Claim: The merger would increase HP’s exposure to the commodity PC industry. Reality: True.
  • Supporters’s Claim: The merger would give HP’s commodity business cost advantages through superior scale. Reality: True. Under Hurd, HP is a better commodity PC maker than even Dell.
  • Supporters’s Claim: The merger would help HP increase service revenues. Reality: False. What was left of DEC wasn’t worth much, and so in 2008 HP spent $14 billion to buy EDS.
  • Opponents’s Claim: Adding Compaq would dilute HP’s printer cash cow. Reality: True, but it didn’t matter.
However, from the student presentations I gained a few new insights:
  • Many “experts” (including me) say that prior IT mergers failed and thus HP-Compaq would fail (cf. WSJ, CNET, USA Today, AP, Red Herring.) However most of the acquired companies were clear losers (Apollo, Sperry, NCR) or firms whose category was dying (Cray, DEC). Compaq was the global market share leader from 1994-1999, and still had almost twice the share of HP.
  • HP didn’t beat Dell in PCs, Compaq did (using HP’s money, brand and distribution). HP was never any good at making PCs.
  • As my student David Sheyman pointed out, at the time of the merger Compaq’s ProLiant servers were the market leader, preferred by IT buyers.
Yes, the PC business is a brutal low margin commodity business, but if nothing else HP deprived Dell of a profit sanctuary for attacking HP’s other businesses.

Consistent with one of major themes of this blog, commoditization is the reality of most segments for Silicon Valley IT companies. Commodity firms are less fun to work to work for, so students have to recognize the industries and firms that have become commoditized if they hope to avoid them.

Tuesday, November 9, 2010

Alternatives to privatizing the UC

The president of the University of California proposed an 8% tuition hike yesterday, which would raise next year’s undergraduate tuition to $11,124 (from $10,302 this year and $7,778 in 2008-2009). The California State University (larger and less elite) is discussing a 15% tuition hike to $4,884 annually.

By comparison, Stanford will charge $38,700 next year for undergraduate tuition, making the two Stanford-level UC campuses look like a bargain. USC charges $20,192 this year, although not all of the nine undergraduate UC programs are at the USC level.

UC tuition will also increase by an unspecified amount for graduate and professional programs. MBA tuition this year at Berkeley costs $39,670 for residents and $47,637 for non-residents. (Stanford charges $53,118).

Both UC and CSU claim the increases are needed to cover reduced state funding. The state has been cutting its support for higher education for 20 years, as it expands the welfare state and becomes increasingly captive to powerful public employee unions like the CTA and AFSCME. (The CSU has a union but it lacks the membership and clout of its larger siblings.)

UC president Mark Yudolf doesn’t have a lot of good options. What are his alternatives?

  • Cut administrative overhead, in terms of both numbers and their cost. This has been done in a limited way,but despite an extensive crusade by the SF Chronicle, is unlikely to go further.
  • Cut other “waste, fraud and abuse.” Isn’t going to happen, and if it did, the bureaucratic costs would dwarf any savings.
  • Cut rank and file salaries or benefits. This is where the money could be saved, but it would also reduce capabilities.
  • Improve efficiency with larger class sizes, more automated grading, more classes taught by grad students. The UC lags the big Midwest schools in this category, in part because the legislature previously forbade it (such as grad students teaching upper division classes).
  • Reduce enrollment. This would save on variable costs, but do nothing about sunk fixed costs for buildings, plant, equipment, etc.
  • Increase prices, the direction the university has been on for decades. This is what Yudolf announced Monday in a program that the UC claimed would “strengthen UC finances”
I have long ties to the UC system. My parents and father-in-law all graduated from Cal (before it was “UC Berkeley”), I attended two UC campuses and my wife graduated from a third. We were hoping to send our child to a UC since we don’t have $200k to pay for a private school. As a prospective UC parent — and an existing CSU faculty member — I am seriously conflicted.

Any price increase has to be rebated to those students on financial aid — 50% at CSU, one-third at UC. So as the state reduces its funding, the salaries of UC employees are increasingly being paid by its customers — much as at a private school. The buzzword for this is “privatization,” and that’s effectively what happened to the UC business, law and medical schools during the last economic downturn.

In fact, Yudolf hinted at privatization last December, and one of his business school deans last summer openly called for an end to state tuition subsidies. But California is different than other states (like Michigan) that have pursued this approach.

As a middle-class taxpayer, I have a strong personal stake in continuing the middle class subsidy, but I think there is an economic rationale as well. For those bright students who don’t qualify for financial aid, forcing them to take $50k in loans to fund their undergraduate education is going to slow household formation and may force many of them to leave for states where the costs and taxes are lower.

Instead, I think the best option is to reduce enrollment, forcing the weakest UC students into the less expensive CSU system (which would presumably use the same approach). This will improve the quality of the experience for those who remain.

I realize this will reduce overall college access: one of the joys of being a public university professor is helping first generation college students get a leg on the economic ladder. Reducing UC and CSU enrollment would force the weakest students to reconsider a four-year degree — some of which would be better served by a two-year community college degree.

The next best option would be to charge the highest prices for the most elite schools, that presumably serve the students with the highest earning potential. Former UC regent Ward Connerly was blunt in recommending this:
"Let elite UC campuses like Berkeley and UCLA charge market rates," he says. "Students who go there would be high achievers who could afford it. Others would go to the other campuses or CSU or community college for two years. We've created the impression that you have to go to the UC system to be successful."
This is the philosophy of the UK government policy shift this month to triple tuition at elite universities (to $14,500) — relatively high for Europe. Perhaps the results of the UK experiment will allow the UC to consider Connerly’s proposal.

Friday, November 5, 2010

Picking winners, getting losers

One of the key tenets of the interventionist view of governance (whether socialist, fascist or communist) is the idea that the government can manage the economy better than the free market. While extreme views (NB: Cuba, Venezuela, China) make an argument based on naked power — your government will provide for you — the more moderate interventionist arguments are based on the concept of “market failure.”

Of course, the idea that the government can correct for the errors of the market assumes that the government is more intelligent and foresighted than the market, and also is not susceptible to capture, cronyism or other bias. This week provides a classic counter-example.

In between baseball and a clean sweep by Bay Area liberals to the major statewide offices, one of the big Bay Area stories this week was the announcement that one of the biggest solar companies is struggling financially, raising questions about its ability to repay its federal loan.

The latest installment in the company‘s troubles broke Wednesday in the New York Times:

Solyndra, a Silicon Valley solar-panel maker that won half a billion dollars in federal aid to build a state-of-the-art robotic factory, plans to announce on Wednesday that it will shut down an older plant and lay off workers.

Just seven weeks ago, Solyndra opened Fab 2, a $733 million factory in Fremont, Calif., to make its high-tech solar panels. The new plant was supposed to be the first phase of a rapid expansion of the company.

Instead, Solyndra has decided to shutter the old plant and postpone plans to expand Fab 2, which was built with a $535 million federal loan guarantee.
A report by Michael Kanellos of GreenTech Media suggested that the news was held until after the election to avoid embarrassing the administration.

Katie Fehrenbacher of GigaOM was even more skeptical:
Back in May, I raised the question of whether or not Solyndra’s $535 million loan guarantee from the Department of Energy — the DOE’s first and flagship loan guarantee — was a mistake. Despite the fact that Solyndra had raised around a billion dollars of its own private equity, I pointed out the company has one of the highest manufacturing costs of its thin-film solar peers. The economics just didn’t seem to work.

Since I wrote that article, Solyndra ended up ditching its IPO plans, and its founding CEO stepped down. Now this morning, the company announced it will close its first factory and will lay off dozens of workers. Wow. Things could not have turned much worse for the company the DOE held up as an example of a stimulus package that could create green jobs and a good candidate for its long-delayed loan guarantee program.
Fehrenbacher reminds us of the great symbolism of the factory’s 2009 groundbreaking, which attracted the governor, US energy secretary and a video keynote by the vice president. She leaves out that the president himself showed up to tour the factory last May.

Like Fehrenbacher, a GTM analyst quoted by the Oakland Trib thinks the investment was questionable to begin with:
"Solyndra is facing the heat," said Shyam Mehta, an analyst with GTM Research, which tracks alternative-energy markets. "Many higher-cost solar manufacturers are doing well. It's alarming for Solyndra to be cutting back when others are expanding."

"The company's problems raise questions about the federal government's wisdom in giving $535 million to a company with an unproven technology," Mehta said.
As with any tech company, the loan was risky — the difference is the magnitude of the risk. It’s rare that a single private investor puts up more than $50 million at once, and only someone who can print money will put up a half billion on a risky investment.

The chances are not looking good for the government — let alone private investors — to be made whole on their investment. As Kanellos concluded:
What happens next? We know what the solar industry thinks. Solyndra will collapse is the general opinion. But it still has a single factory. In some long-shot scenario, something good could, maybe, one day, come out of this.
If the deal fails, the US government owns an unprofitable solar factory and some industrial land in a high-tax state.

It’s clear that the government did inadequate due diligence on a loan guarantee that had a minimal upside and a huge downside. Apparently the assumption was that $1 billion in private money couldn’t be wrong. Has anyone heard of “escalation of commitment”? (Perhaps if they had more MBAs or psych majors they would have.)

What’s the answer? Writing in July, a professor of environmental entrepreneurship argued the answer is avoiding favoring specific individual companies:
The best investments will not come from backing individual companies but come from reshaping the competitive landscape—creating the opportunities for new business models and markets that enable the unique strengths of green technologies to emerge and develop. Consistent regulatory policies and open technology platforms will benefit all ventures and foster collective action to shape emerging market opportunities.
Meanwhile, the Heritage Foundation concludes that all the alternative energy industries are failing despite generous subsidies — and the answer is less, not more subsidies.