Friday, April 30, 2010

Silly smartphone revisionism

Sorry, I just can’t take this lead sentence from page B1 of today’s NY Times:

For much of this decade, the fates of Palm and Motorola were intertwined.
The parallel is just plain silly.
  • Motorola invented the handheld mobile phone in the 1970s, Handspring (later bought by Palm) shipped its first phone in 2001.
  • Motorola has been exporting phones to Japan and Europe since the 1980s, while Palm has always been a North American phenomenon.
  • Motorola was late to digital, Palm was always digital.
  • Motorola was late to smartphones, Palm was only smartphones.
  • Motorola was a radio company, Palm a PDA company.
  • At their peak, Motorola made good hardware and so-so software, while Palm had so-so hardware and good software.
  • Motorola phones tended to be slim and light while Palm phones were big and clunky.
  • Because of its lousy performance, Motorola’s handset division is (someday) being spun out, while Palm sold itself cheap to HP.
Need I go on?

Yes, as the NYT reminds us, Motorola hitched its wagon to Android in October 2008, while Palm is pursuing its go-it-alone strategy (now with HP’s money.)

Motorola (corporate) revenues continue to decline, but at least this quarter is profitable, and CEO Sanjay Jha hopes to ship 12-14 million smartphones in 2010 — with smartphones accounting for the majority of handset sales and raising the average selling price. (Almost all of those smartphones have been Android.)

So the explanation is pretty simple:
  • An open source operating system (like Android) is the ultimate commodity software: free and available to all firms.
  • If software is a commodity, then the only hope to differentiate and gain share is through hardware competencies.
  • Motorola has those competencies (like Nokia and the Koreans) but Palm doesn’t.
By the way, if software becomes a commodity, that’s not good news for Apple and Research in Motion, whose have convinced consumers and enterprises (respectively) to buy phones because of their software, not their hardware.

Thursday, April 29, 2010

Adobe strikes back

To respond to Steve Jobs’ official criticisms of Flash, Adobe CEO Shantanu Narayen granted an exclusive interview this afternoon to the Wall Street Journal, which promoted it via a blog and its News Hub online video. Note to iPhone owners: News Hub cannot be viewed without Adobe’s Flash.

While most of its responses fairly presented Adobe’s side, Narayen made two comments that bear response:

We are multi-platform.
Actually, Adobe wants the world’s web developers to write for a single platform — Adobe Flash — that is hosted on top of all the other major platforms.
Flash is an open specification.
That doesn’t make it an open platform — if there’s only one implementation, then the firm gains all the benefits of lock-in and economic rents of a proprietary standard (Adobe’s a little more open with PDF, where it supplied its technology for ISO 32000 standardization, through a process known for allowing firms to retain influence and control.)

So if Adobe’s idea of an open specification is one where everyone can implement what it decides, that’s even less open than an open source company that throws dual-license implementations over the wall while using “fishbowl development” processes that don’t allow for open governance and participation.

In his letter, Steve Jobs was reasonably accurate on this point:
Adobe’s Flash products are 100% proprietary. They are only available from Adobe, and Adobe has sole authority as to their future enhancement, pricing, etc. While Adobe’s Flash products are widely available, this does not mean they are open, since they are controlled entirely by Adobe and available only from Adobe. By almost any definition, Flash is a closed system.

Apple has many proprietary products too. Though the operating system for the iPhone, iPod and iPad is proprietary, we strongly believe that all standards pertaining to the web should be open. Rather than use Flash, Apple has adopted HTML5, CSS and JavaScript – all open standards. … HTML5 is completely open and controlled by a standards committee, of which Apple is a member.

Apple even creates open standards for the web. For example, Apple began with a small open source project and created WebKit, a complete open-source HTML5 rendering engine that is the heart of the Safari web browser used in all our products. WebKit has been widely adopted. Google uses it for Android’s browser, Palm uses it, Nokia uses it, and RIM (Blackberry) has announced they will use it too. Almost every smartphone web browser other than Microsoft’s uses WebKit. By making its WebKit technology open, Apple has set the standard for mobile web browsers.
Sharing an implementation provided under a non-viral license (as WebKit is) is today the most open form of platform available. Apple is rarely this open, but for WebKit they deserve credit for sharing code and control, just as IBM shared code and control with Eclipse.

Flash! Steve buries Adobe cash cow

Steve Jobs signed an open letter this morning on six reasons why there is not — and never will be — Flash on the iPhone, iPod and iPad.

His first five points:

  1. Instead of being open, it’s single-vendor proprietary.
  2. It’s got security flaws, it’s slow on mobile devices and is the #1 reason Macs crash.
  3. Adobe says that no Flash means not “the full web” — but most video is now available in H.264, and the iPhone has its own games.
  4. Battery life is 2x as good using H.264 as using Flash.
  5. It’s designed for mice, not a touch interface.
But, he concludes with the argument that many of us suspected but Apple never stated explicitly:
Sixth, the most important reason.

We know from painful experience that letting a third party layer of software come between the platform and the developer ultimately results in sub-standard apps and hinders the enhancement and progress of the platform. If developers grow dependent on third party development libraries and tools, they can only take advantage of platform enhancements if and when the third party chooses to adopt the new features. We cannot be at the mercy of a third party deciding if and when they will make our enhancements available to our developers.
This becomes even worse if the third party is supplying a cross platform development tool. The third party may not adopt enhancements from one platform unless they are available on all of their supported platforms. Hence developers only have access to the lowest common denominator set of features. Again, we cannot accept an outcome where developers are blocked from using our innovations and enhancements because they are not available on our competitor’s platforms.

Flash is a cross platform development tool. It is not Adobe’s goal to help developers write the best iPhone, iPod and iPad apps. It is their goal to help developers write cross platform apps.
Jobs concludes — with his usual élan — by suggesting that Flash should be consigned to the dustbin of history in a speech:
Flash was created during the PC era – for PCs and mice. Flash is a successful business for Adobe, and we can understand why they want to push it beyond PCs. But the mobile era is about low power devices, touch interfaces and open web standards – all areas where Flash falls short.

The avalanche of media outlets offering their content for Apple’s mobile devices demonstrates that Flash is no longer necessary to watch video or consume any kind of web content. And the 200,000 apps on Apple’s App Store proves that Flash isn’t necessary for tens of thousands of developers to create graphically rich applications, including games.
To my ear, this seems reminiscent of Mark Antony in Shakepeare’s Julius Caesar (“I come to bury Caesar, not to praise him.”)

Whether one agrees with Jobs on the specifics — and a few examples seem stretched to make a point — the entire posting is a clear articulation of why Apple is not only blocking Flash on its platform, but seeking help from others to replace it with open standards where it controls the implementation.

Note to readers: Normally I avoid posting two major articles in one day, but the recent Apple and HP announcements were too important to ignore.

HP's curious acquisition

I’m still not sure why HP spent $1.2 billion to buy Palm, other than it can. Yes, it has a minimal presence in mobile phones and other mobile devices, leading MarketWatch’s Therese Poletti on March 2 to predict an HP purchase of Palm:

Surely numbers-driven Chief Executive Mark Hurd is looking for ways for H-P to take advantage of the boom in smartphones. Buying Palm could be a way for H-P to get into the market for lower cost devices. It might have to abandon Windows, or offer two families of devices. H-P has often juggled competing product lines, diverse chip architectures and operating systems.
With its cash and global reach, HP can certainly do more with Palm’s technology that Palm has been able to do. And yes, Palm was available cheap, losing 73% of its market cap since its recent peak stock price of $17.07 last October.

It was a great victory for Palm and its investors, which despite good technology has been given up for dead for nearly two years. Elevation Partners, which took 25% sake in Palm three years ago, cashed in its (now) $460 million investment for an estimated $485 million — suggesting that it was worried about further deterioration rather than optimistic about a future upside. (Wednesday, Palm revealed Q2 revenues were expected to be 40% below analyst expectations, which would have punished the stock further.)

Obviously HP has been looking forward to the day when smartphones and other devices start to eat away at the Windows-based PCs that account for a nearly a third of the company’s revenues.

HP claimed the acquisition is even about the post-smartphone world:
"Smartphones are a part of this, but this is really about the Web operating system," Shane Robison, HP's chief strategy and technology officer, told Forbes. "It's a change in our business model to a connected device model." HP, he said, is assuming a world in which almost everything needs at least the potential to connect to the Internet.
But by taking on Palm and its webOS, HP is going down path it’s almost completely avoided during its 40+ years as a computer maker — as a sponsor of a proprietary computing platform.

Yes, it sold proprietary 16-bit mini computers in the 1970s, and it also bought two leading proprietary minicomputer companies: Tandem and Digital Equipment (when it bought Compaq).

However, its PCs have been DOS and Windows, and its servers Windows, Unix and Linux. The Unix (HP-UX) had its own development group, but the recent trend by HP and its customers has been away from HP-UX to Linux.

Of the world’s top five PC makers — HP, Dell, Acer, Lenovo and Toshiba — all have made mobile devices based on Windows Mobile (now Windows Phone) and Android. HP now seems to be abandoning this model and casting its lot with the leading proprietary vendors: Apple, Nokia and Research in Motion. (Yes, the operating system Nokia controls is open source, but its competitors are largely ignoring it.)

This also means that HP hopes to use webOS to differentiate its mobile products, rather than merely shave pennies off of operating costs as CEO Mark Hurd loves to do. Perhaps the thought of competing against commodity Taiwanese and Chinese firms in the mobile segment prompted him to do something different.

It’s really too soon to say whether HP will have any luck here. However, in the short-term, I think the biggest negative is for Google. A lot of people have been assuming that Android will take over the world, coalescing all the various carriers, vendors and users into a single platform. Instead, fragmentation of mobile phone platforms — as well as tablets — will continue.

It‘s also bad for Microsoft and Dell. Perhaps this will be the nudge that gets Microsoft out of the handset OS business, or it may cause it to more aggressively ally with Dell (which previously aligned with Android.)

But in a perverse way, I think in the short-term it will be good for the other proprietary platform vendors. Together, Nokia, RIM, Apple and HP will be able to hold off Android, and may cause the other phone makers to reconsider whether they want to hand control of their future to Google.

The one sure thing is that the number of webOS applications is going to explode. The iPhone (nearly 200,000) and Android (around 40,000) application stores are already crowded, while webOS only has a few thousand. Developers looking to get noticed will flock to webOS, hoping to get in on the ground floor now that its survival is no longer an issue.

Because of this demand — and because the webOS tools are very friendly — I predict that HP/Palm will have more than 5,000 apps by the end of the year, and perhaps closer to 10,000 apps.

Wednesday, April 28, 2010

Microsoft hosts Android platform

Earlier this month, Microsoft Research in Silicon Valley hosted a seminar on Android. I tweeted live from the event:

Serious irony: here at Microsoft Research (Mountain View) waiting for talk on Android, using the Internet via GoogleWiFi (free in Mtn View).
6:53 PM Apr 13th via Tweetie

At Android event local IEEE CompSoc vice chair installed Android on his AT&T Tilt phone (originally Windows Mobile).
6:58 PM Apr 13th via Tweetie
This is not to say that Microsoft and Google can’t find occasional common ground in their fight for Total World Domination. (For example, Microsoft said Wednesday it will license patents (under royalties) to its customer HTC to defend against allegations that HTC Android phones infringe iPhone patents.)

However, in this case the seminar — “Android: A 9,000 Overview” — was organized by the Santa Clara Valley chapter of the IEEE Computer Society. It had a unique two-part format: a business overview by Mike Demler and a technical tutorial by Marko Gargenta.

Android Platform: An Ecosystem View

Demler is a semiconductor engineer (with a MSEE from SMU) who I met when he was getting his MBA at San Jose State. He summarize his own talk on a blog post that includes his slides:
This presentation provides a quick overview of the participants in the rapidly expanding Android ecosystem; from software to semiconductor companies, wireless providers, handset manufacturers and app stores, to the numerous opportunities in consumer electronics beyond smartphones.
He was seriously limited for time, but Mike provided a very clear overview of the ecosystem, complete with information about recent trends (part of a his planned update to his $200 report on Android trends.)

To readers of this blog, some of his basic points were familiar: Android has won support by all four US carriers, the rate of new devices is increasing, and it’s going to have an impact beyond cellphones. Because (unlike the iPhone), all four carriers are carrying multiple Android devices, Mike is among those who are very optimistic about its future US/global market share.

Two tidbits were specifically interesting to me:
  • Cellphone manufacturers and carriers are mobilizing their developer support organizations to back Android, through programs like MotoDev and third party tools like DeviceAnywhere.
  • In products beyond mobile (to use Bill Weinberg’s phrase), Android licensees are pushing the platform in an area that’s not a priority for Google. Examples include not only the Nook (and an e-reader rival named Alex), and various notebook-type computers from HP and Acer, but also settop boxes on at least two continents.
Android Platform: Technical Overview

From both his talk and website, Marko Gargenta clearly spends a lot of his life helping programmers understand the Android platform. He posted his slides to his LinkedIn profile which points to SlideShare, but similar earlier talks (particularly “Android Internals”) can be found as PDFs via Google.

Marko’s tutorial looked fun to this former programmer, including the Eclipse tools that make it (relatively) easy to target multiple platforms: Android 1.1, 1.5, 1.6, 2.0, 2.1. It was also fun to see that Android adopt a 25+ year old Apple concept of resources, both to hold program data and also to support a non-procedural definition of user interfaces and other program structure.

Marko identified two aspects of the technical architecture that provided insight into Google’s business strategy.

First, Java fanatics were excited to hear that the programming APIs are in Java, but Sun was disappointed that Android doesn’t use its standard Swing or other J2ME (Java ME) libraries, but instead has its own unique user interface APIs. The equation Marko put on the board was:
Android Java = Java SE – AWT/Swing + Android API
and he got a few laughs for his Trumanesque newspaper headline.

On a related note, Google didn’t want to pay royalties (in its free OSS distribution) for Sun’s Java Virtual Machine, so Java code is translated from Java bytecode into .dex files to run on Google’s own Dalvik Virtual Machine.

Secondly, the message-based Android APIs allow a third-party application to handle any function that an Android-supplied one can: browser, email, calendar, mapping, etc. Like Windows (or the iPhone), the Google code cannot be deleted from an Android device, but unlike the iPhone (or other platforms) the third-party software can supplant the built-in application, fully integrated into the phone operations and the user experience.

Finally, from a technical standpoint, Google is allowing native development of C/C++ source code using its NDK. Unlike Java, this code is no longer processor independent (thus requiring bundling separate code for ARM-licensed and Intel processors), but it does allow high performance for things like image or audio processing algorithms.

The availability of such information — and the overflow crowd of programmers eagerly seeking it — shows one of the strengths of Silicon Valley. With nearly 40,000 Android apps available, we in the audience were not exactly the leading edge, but there is a huge pent-up interest in Android here that seems to be approaching that of the iPhone.

The interesting question is: how much longer can new entrants into either ecosystem make money? I think it will play out like the PC, Mac and other software platforms. In a year or two (if not today), the the only ISVs making money on either platform will be either the pioneers (who shipped one of the first 10,000 apps) or the big boys (EA, eBay, Amazon).

Tuesday, April 27, 2010

Commoditization, control and culture

Probably the most popular post in my more than 1000+ blog entries was the testimonial to Mervyn’s, which died 16 months ago just shy of its 60th birthday. As a retail outsider, I never felt I had the complete picture.

On Monday, I got a chance to ask an industry professional and former Mervyn’s employee, Jenny Ming. An SJSU alumna, she was back at SJSU to speak to the Sbona Honors program. Overall, I think the implied explanation was more convincing than the explicit one.

Once one of Business Week’s Top 25 Managers, Ming was best known as the first president of Old Navy: her 2006 departure was seen as a major blow for Gap Inc. (Since that time, she joined private equity firm Advent International, which bought her a company to run and even moved it to San Francisco for her.)

After after graduating from San José State, in 1980 Ming began her retailing career at Mervyn’s — a working class oriented clothing retailer — after turning down competing offers from Macy’s (then the big kahuna of department stores) and Bullock’s (an upscale retailer).

At Mervyn’s, she worked herself up from manager of a store department, to assistant buyer and eventually Mervyn’s buyer for teen girls’ denim wear. She moved over buying knit sweaters for juniors, until in 1988 she was stolen away to Gap by its legendary CEO Mickey Drexler. In 1994 she joined the founding team at its new Old Navy division, which grew to $1b in four years.

From this perspective, I asked her what went wrong at Mervyn’s and how Old Navy got it right.

She gave the conventional answer: Mervyn’s lost its way when it shifted from its original focus — discounted brand name products — to the lure of private labels. At the same time, it was not ready to cope with the challenge posted by Kohl’s.

But the story between the lines was much more interesting, a story of dysfunctional corporate culture. Ming said she suspected that Mervyn’s never would have promoted her past buyer, but under Drexler she made VP, EVP and president in fairly short order.

Both Mervyn’s and Old Navy promised good prices for average Californians — commodity distribution in a mature industry. Ming joined Mervyn’s in its middle age, after the founder was gone and it had been gobbled up by Target’s parent, Dayton Hudson. After driving the company into the ground, Target eventually sold it off in 2004.

Ming brought the same talent and initiative to Gap Inc, where it was recognized and rewarded. She eventually led newborn Old Navy during an exciting high growth period, with a clear strategy and a free hand in a small startup. (I’m guessing that she did not explicitly cite the corporate culture because — like a fish in water — the Gap executives thought such a can-do attitude was the only logical way to run a company.)

Not all founding CEOs are effective CEOs, but the best ones have a consistency of vision and purpose that leave the lost bureaucracies behind. They hire well and empower their people to realize their potential.

As a former manager, I’m most proud of bringing numerous college students (and a few high school students) into the computer industry. After they left Palomar, they went to places like HP, IBM and Microsoft. Fifteen years later, one has started his own company and another is tenured at MIT. (Alas, another is still enabling the evil empire.) Their success is their own, but I’d like to think our corporate culture gave them a sense of their own potential.

Monday, April 26, 2010

What is Amazon hiding?

Amazon last week reported strong sales and earnings last week, with sales up 46%, operating income up 62% and net income 68% above figures a year ago. Some investors were disappointed at a decline in gross margin, but otherwise it’s a very impressive quarter.

However, as usual, it gave no information about sales of Kindle hardware or content.

As I did in December 2008, I wonder: what is Amazon hiding? We have quarterly and even first weekend sales for iPhones and iPads from Apple, a $45 billion/year member of the Fortune 500 that’s far bigger than Amazon (almost 2x revenues, 9x profits).

We also have the number of smartphones sold by Nokia, the number of PCs sold by HP and Dell — not to mention the number of Toyota, Ford and GM cars sold last week.

Some speculate that the Kindle sales are buried in the 72% ($1.5 billion) growth in “Electronics & Other General Merchandise” to $3.51 billion, although some of that is presumably due to last year’s acquisition of Zappos.

At the end of 2009, CEO Jeff Bezos said “millions” of Kindles have been sold. Assuming 2 million as the upper limit, at $250 each that’s $0.5 billion on 2009 sales of $24.5 billion. So I suppose until sales are 5x as big (proportionately), Amazon will be able to postpone honest disclosure of how the Kindle is really doing.

Once we get Kindle sales, perhaps Barnes & Noble will level with us on Nook sales. I’m not holding my breath.

Update Monday 11am: Taiwanese news site Digitimes concludes that the Nook gained 53% of US e-book shipments in March 2010, surpassing Kindle. It estimates 2009 global e-reader sales at 3.8 million, projecting 11.4 m in 2010. Hat tip: Jay Yarrow, Forbes.

Saturday, April 24, 2010

Facebook takes on Goliath

Facebook got a lot of favorable publicity this week at its f8 developer conference for its ambitious efforts to expand its APIs, and with it transform its influence over its customers and the web.

For most firms, a frontal assault on Google might seem like a bad idea, like David kicking Goliath’s shins rather than pulling out a slingshot. However, because Google has already attacked Facebook (with Buzz), perhaps this is merely shifting from a defensive battle to an offensive one.

At some level, the Facebook model — of relational information interpretation by 400 million volunteer coders — has many technical advantages over the Google model of context-free, semantic-free text searches.

For a young Web 2.0 company, Facebook is also doing relatively well at monetizing its social embeddedness, with revenue doubling annually (to more than $500m last year) and an after tax margin exceeding 25%. However, even if Facebook reaches revenues of a billion or two in 2010, it remains less than one-tenth the size of its newfound rival.

However, the more serious threat to Google is that the success of Facebook is part of the transformation of the openness of the web to a network of browser-accesible walled gardens. If the world’s content is not available on freely accessible HTML pages but inside password-protected silos, then the only content Google can index is that inside its own walled garden.

This process has been dubbed the Splinternet. As my friend and mentor Shane Greenstein observed in his (highly recommended) blog last month:

The Internet should no longer be called a “network of networks”, as it was called two decades ago. That era has passed.

Commercialization has brought with it a new structure, a “network of platforms”. The splintering of the Internet describes the results of platform competition on the Internet.

Sometimes it resembles a horror movie.

Splintering happens all the time in this market. But it is a symptom of something bigger, not to be understood in isolation.

At any given moment, somebody will be trying to raise switching costs and deter migration. Designing proprietary standards is one way to do that. So it blocking the use of standards from rival firms.
The entire post is recommended reading for those who care about platform competition, Web 2.0, social media or the future of the Internet.

In some ways, with these fragmented and separate platforms, we seem to be re-creating the pre-Internet ISP era of CompuServe, AOL, Prodigy and Delphi. As with the cellphone, cable TV, Baby Bells and other fragmented networks, it will take consolidation of the various walled gardens into a small number of surviving firms or networks to make these networks useful.

Perhaps Facebook and maybe even Twitter can form networks independent of the Monster of Mountain View. (Other social media companies may be able to continue their regional success).

However, even the most successful Web 2.0 platform winners will need to align into the orbit of Microsoft/Yahoo, Apple, Nokia or one of the other major platform owners — under the time-honored (but questionable) rule that the enemy of my enemy is my friend. Whether this is through acquisition or alliances (as with Microsoft-Yahoo) is one of the many open questions of our SplinterNet future.

Thursday, April 22, 2010

Bundling and commoditizing hotspots

In his column Thursday, NYT columnist David Pogue expressed puzzlement at the sudden availability of free Wi-Fi from his local cable TV companies:

Starting now, any New York, New Jersey or Connecticut customer of Cablevision, Time Warner or Comcast can use any of those companies' hot spots.

In other words, I, a Cablevision customer, can now use all of Time Warner's and Comcast's hot spots in these three states.

Now, I think this development is fantastic. It hits me where I live. It's free. It's fast and reliable. I love it.

But I'll be frank: I can't understand why they're doing this.
David, I’ve loved your product reviews since the Macworld days. But as business strategies go, this is no mystery.

Wi-Fi hotspots are a commodity — something everyone wants, but nobody wants to pay for.

The phone and cellphone companies — AT&T, Verizon, T-Mobile — have been bundling hotspot access with their cellular or DSL accounts for years. For iPad and iPhone users, the hotspots are clearly more useful (in terms of bandwidth) than what they’re getting on the actual (congested) 3G networks.

Clearly cable has to respond to these efforts by telco rivals to create loyalty and switching costs. In a Geoff Moore sense, this is a clear neutralization expenditure — get rid of the rival’s advantage.

As a consumer, it’s a great deal when there are multiple equally plausible alternatives to choose from. By making their offerings more similar, the NYC cable companies are helping along the process of commoditization. More power to ’em.

Wednesday, April 21, 2010

Adobe says those grapes were sour anyway

After being blocked by Apple’s new SDK policies, Adobe seems to have officially abandoned efforts to bring Flash to the iPhone and iPad:

Developers should be prepared for Apple to remove existing content and applications (100+ on the store today) created with Flash CS5 from the iTunes store.

We will still be shipping the ability to target the iPhone and iPad in Flash CS5. However, we are not currently planning any additional investments in that feature.
In the rest of the post, Adobe emphasizes all the benefits to Adobe (but not Apple) of Flash portability:
Because this is Flash, it is rather trivial to port games created with Flash that target the iPhone to target other operating systems, such as Android. … There have already been a couple of of developers who have moved their Flash based content from the iPhone to Flash on Android (couple of examples below) and I expect that this is a trend we will be seeing more and more of.
This comes the same day that Apple stock hit a new record price — and analysts boosted price targets — after quarterly profits rose 90% due (in large part) to a 131% jump iPhone sales. (The iPad hit after March 27.)

iPhone sales in the next quarter (its fiscal year Q3) may be a little soft due to the pre-announced iPhone 4. But otherwise, the rest of the year should bring additional growth and record sales for the iPhone platform — both 3.5" and 9.7" size — of users happy to buy Apple’s latest product without Flash. There is a small opportunity for Microsoft on the iPhone with its limited version of Silverlight.

Apple seems to be OK with open data format standards (such as the H.264 used by YouTube and Microsoft) but not proprietary middleware APIs (either by Adobe or Microsoft). The popularity of the iPhone and now iPad makes it unlikely that website owners will be willing to ignore this major market, thus encouraging them to find alternate solutions (as YouTube did) for getting their Flash content before users.

What to me is the most interesting will be Google’s reaction. On the one hand, they want to promote Android over the iPhone at every opportunity. On the other hand, both legal (i.e. antitrust law) and market (customer demand) forces limit how much they can punish Apple or reward tying of their mobile platform to their search empire. There is also the issue that Google has no horse in the Flash vs. anti-Flash smackdown.

So will Google promulgate additional Flash-dependent content? Or will it continue to find work-arounds (as with YouTube) for those without Flash?

Sunday, April 18, 2010

McNealy on entrepreneurship

Scott McNealy, co-founder and CEO of Sun Microsystems (1984-2006), in an interview with Fortune magazine:

His conditions for starting another company: “It must be private, never go public. There will be no upside investors other than me and the employees. I will have enough of the voting shares – meaning more than half – so that the board will be hand-picked buddies that I know are smart. Nepotism will not be a bug but a feature, this will be a family owned and family-run organization. It also has to be cash-flow positive from day-one.

“I hope we can pull it off under those condition because I would be thrilled to lead another group of smart engineers, without all the crap that goes into running a company today. I just don’t want Congress telling me how much I should be paid or firing me. I want to pretend I am back in the 1980s again.”
He also describes a partnering rubric that all of us in industry intuitively know but never articulated so clearly:
Finding the right partners: “My gaming theory [sic] strategy says you can almost never partner with the leader. The leader has not interest in justifying or partnering with a smart, young, hot company. So it’s mankind versus Goliath. You go after No. 2,3,4 or 5. You team up to beat Google, beat IBM or Microsoft or Oracle or whatever. Everyone can coalesce around that, and they will partner with you because they think you will be collateral damage. We were going to be collateral damage every year at Sun, that’s why it was easy to partner.”
Hat tip: Wall Street Journal “Notable and Quotable”

Thursday, April 15, 2010

Very optimistic news premium

This morning’s Wall Street Journal had two ads promoting the availability of the WSJ on electronic readers.

Normally we think of complementers as desiring to sell their software (or content) on whatever platform people have. But clearly the WSJ thinks the volumes (and probably the margins) are much higher on the iPad product.

What’s going on here? Derek Thompson of The Atlantic thinks the WSJ is cream-skimming with the affluent early adopters of the WSJ:
This is what we in the biz know as cojones. I looked up WSJ subscriptions for Web and print today. It turns out that getting the WSJ on the iPad is more expensive than a subscription to; or WSJ the paper; or and WSJ the paper combined.
To me, it seems like a futile attempt to avoid commoditization by yet another news organization (a possibility Thompson also suggests).

I don’t see how the price is tenable in the long haul — it seems like wishful thinking by Rupert Murdoch (who’s been much exorbitant in his pricing than the previous owners.)

The WSJ is creating a great opening for the FT, Thompson Reuters, Bloomberg’s Business Week or Yahoo to create an advertising-supported alternative to the WSJ product. The WSJ has great depth, but by partnering with other sources, it seems straightforward that someone could create something that serves the business news interests of the masses.

Finally, this suggests that the ambiguity about the iPad will be as much about the content business models as the form factor and applications. Fortunes are made in situations of high ambiguity, although right now the iPad content (and application) business seems a bit overcrowded for anyone entrant to make a lot of money.

Wednesday, April 14, 2010

Economic lessons from across the pond

Although the US is held out as the most affected by the current recession, apparently many of the same problems apply to the UK as well.

Martin Wolf, the oft-honored dean of British economics correspondents, went straight to the point in his column this morning in the FT (emphasis mine):

How ill is the UK economy? What are the challenges for economic policy? These questions seem to me to be far more urgent than before any general election since 1979, when Margaret Thatcher came to power.

The one point on which everybody agrees is over the depth of the fiscal hole: the government is borrowing a pound for every four it spends. But nobody wants to discuss what might need to be done. This is not surprising: today’s fiscal deficits exceed those of any previous period in peacetime.
The rest of his column is about the need to reign in deficit spending before deficits can no longer be financed, while stimulating trade and investment: he promises answers in his next column.

Wolf is relatively restrained in his criticism of current British deficit spending compared to another FT columnist, entrepreneur-turned-equity-investor Luke Johnson. In the same issue of the dead tree paper, Johnson began his column:
Should entrepreneurs get involved in politics? In general I think not, but last week I added my name to a list of business executives who objected to increased taxes on jobs in Britain – which the Labour government has proposed. The list was compiled by the Conservatives, who are locked in a titanic struggle to win the UK election on May 6. I participated because the stakes could not be higher.

Unquestionably this is no ordinary election. Britain has suffered 13 years of Labour rule, and the country is in a desperate state. It is like a company slithering towards bankruptcy. And, like any business that has to be turned round, there is one absolute rule to fix the mess: change the management. If there is no transformation at the top, then I fear we could become a bigger version of Argentina in 2001.

It is hard to comprehend how much damage Labour has done to our economic prospects, but I suppose that, like a frog in simmering water, if the heat is increased gradually, you almost fail to notice the pain – until it’s too late. The most damning statistic is the following: the state’s percentage of gross domestic product in Britain has risen from about 38 per cent in 1997 to perhaps 52 per cent today. Funding this vast amount of public largesse means the UK borrows 25 per cent of all its state spending. Clearly the country is living beyond its means.
Lest there be any doubt about where he stands, he concludes his column:
In a capitalist economy, investors and entrepreneurs make the entire system function. If the state alienates them to an excessive degree, then they opt out, and jobs and tax revenues evaporate. Labour is an entirely fraudulent organisation that pretends to believe in business, then buries it in bureaucracy and tax. Five more years of Gordon Brown would leave Britain an economic wasteland.

Anyone who even begins to understand enterprise or economics should see that a new government with fresh leadership and a working majority must be given power next month. The alternative of a hung parliament will lead to capital flight, a slumping currency, rising inflation, higher interest rates, higher unemployment, a gilt strike, runs on British banks, and a crisis perhaps as bad as the rolling collapse in Greece.

So although I am neither a donor nor member of the Conservative party, nor do I have any party political ambitions, on this occasion I feel passionately that Labour must be thrown from office and a government formed with an adequate mandate – because more Labour is a form of national suicide.
While this blog does not advocate any specific candidate or party — on either side of the pond — I second Johnson’s indictment of the eventual consequences of indefinite deficit spending and the crowding out (particularly for entrepreneurs) caused by the massive increase in the size and cost of government.

The latest in outsourced economic criticism, instituted as a cost saving measure in these difficult financial times.

Monday, April 12, 2010

Cybersquatters abuse the Valley

The Merc ran a story Sunday about all the odd startup company names among recent Silicon Valley Startups, due to the problem of cybersquatters having all the good names. No word on whether the startups used the “Web 2.0 Name Generator,” which sounds better the stories they told reporter Patrick May.

As part of efforts to sell the dead tree-version — or perhaps just laziness on running the website — the online story left out the two best parts of the story. One element is a crossword puzzle with 16 new startup names.

The other part was a quick quiz:

Guess which one of these five company names is fake:
Since you are all reading this on the Internet, the answer is left to the readers as an exercise.

Saturday, April 10, 2010

Cornered Adobe comes out swinging

While a dog that didn’t bark helped Sherlock Holmes solve a case, normally something not happening is not news. However, the saga of Apple not allowing Adobe’s Flash on the iPhone (and now the iPad) seems to provide no shortage of fodder for bloggers, reporters and industry analysts.

Adobe has been seeking a work-around by creating a cross-compiler from Flash to the iPhone. However, on Thursday Apple unveiled its new SDK with a clause that banned such cross-compilers.

As I have argued, Flash needs the iPhone more than the iPhone needs Flash. Apple wants Flash to provide portability between the iPhone and its rivals about as much as Microsoft wanted Java to provide portability between Mac and Windows.

The frustration of Adobe being shut out from the popular smartphone bubbled over a blog entry Friday by Flash platform evangelist Lee Brimelow. The headlines are over Brimelow’s final sentence: “Go screw yourself Apple.”

Brimelow argued:

What is clear is that Apple has timed this purposely to hurt sales of CS5. This has nothing to do whatsoever with bringing the Flash player to Apple’s devices. That is a separate discussion entirely. What they are saying is that they won’t allow applications onto their marketplace solely because of what language was originally used to create them. This is a frightening move that has no rational defense other than wanting tyrannical control over developers and more importantly, wanting to use developers as pawns in their crusade against Adobe.
(Brimelow was told to redact the first sentence by his Adobe bosses, but it was captured by various news sites.)

The nominal reason for Apple to ban Flash is that it’s a buggy, and a resource pig. In a pointed and often funny posting blasting the “Flash Brigade,” Daniel Dilger argues on RoughlyDrafted that Flash for mobile phones requires computing power beyond 2 of the 3 iPhone models shipped to date. (Update: In another posting, Dilger theorizes that the prohibition relates to the iPhone 4.0 implementation of multitasking.)

(Flash is a resource pig even on a personal computer. My laptop browser crashed frequently until I installed ClickToFlash freeware).

Brimelow expresses surprise at the Apple move:
Adobe and Apple has had a long relationship and each has helped the other get where they are today. The fact that Apple would make such a hostile and despicable move like this clearly shows the difference between our two companies. All we want is to provide creative professionals an avenue to deploy their work to as many devices as possible. We are not looking to kill anything or anyone.
I think this is silly at best, and disingenuous at worst. Apple and Adobe haven’t been friends for a decade, and really haven’t seriously helped each other in 20 years.

In speaking to my class on Monday, Michael Mace thinks Apple has a bad taste from helping Adobe get where it is today — a company that until very recently made most of its money on Windows. (Mace was Director of Competitive Analysis and Director of Mac Platform Marketing for Apple in the early 1990s.)

Mace recalled that in the late 1980s, Apple spent millions promoting early Macintosh applications — including Adobe’s first major application, Adobe Illustrator. Then it woke up one morning and found all found these applications (and companies) that it had helped promote were now selling on Windows.

I have my own vivid memory of how Apple suffered here, almost 20 years later. In the summer of 2001, I went to the Big Island of Hawai‘i to participate in the Macintosh Technology and Issues conference. In a room full of the leading Mac developers, someone (perhaps host Jerry Borrell or co-host David Ushijima) asked who was developing for Windows: I was the only person to not raise my hand.

Almost everyone in the room had gotten into the software business as Mac developers, and (with Windows 3.0) they were all shifting over to Windows.

Apple knows that the same process will repeat itself, with many iPhone developers targeting Android as well. But Apple has no reason to eliminate switching costs to its rivals: as long as that’s Adobe’s goal, it’s childish to expect Apple will want to help someone slit its throat.

John Gruber of Daring Fireball came to a similar conclusion when he analyzed the logic of Apple’s strategy — an analysis Steve Jobs himself endorsed.
So what Apple does not want is for some other company to establish a de facto standard software platform on top of Cocoa Touch. Not Adobe’s Flash. Not .NET (through MonoTouch). If that were to happen, there’s no lock-in advantage. If, say, a mobile Flash software platform — which encompassed multiple lower-level platforms, running on iPhone, Android, Windows Phone 7, and BlackBerry — were established, that app market would not give people a reason to prefer the iPhone.
Fortunately, there are still some grownups at Adobe. Responding to Apple’s licensing move, CTO Kevin Lynch wrote:
First of all, the ability to package an application for the iPhone or iPad is one feature in one product in Creative Suite. CS5 consists of 15 industry-leading applications, which contain hundreds of new capabilities and a ton of innovation. We intend to still deliver this capability in CS5 and it is up to Apple whether they choose to allow or disallow applications as their rules shift over time.
Apple is not going to put Adobe out of business, even if it slows its growth. At best, Apple can accelerate the adoption of HTML5 as a substitute for Flash, but any significant impact on Adobe’s revenues is years off.

Wednesday, April 7, 2010

FCC should fold its losing hand

The proponents of “net neutrality” have done a great job of convincing the world that future of mankind — or at least USA’s national competitiveness — depends on the ability of the Federal government to tell broadband carriers what they can or cannot do to manage their networks.

Thus, the media has been predicting catastrophe for net neutrality after the unanimous decision Tuesday by the D.C. Court of of Appeals on Comcast v. FCC, in which the reversed the FCC order that Comcast not block BitTorrent. (Unlike most, CNET managed to find two sides to the story.)

The problem for the FCC is that there was no legal basis for its action. The 3-0 Appeals ruling concluded:

Yet notwithstanding the “difficult regulatory problem of rapid technological change” posed by the communications industry, “the allowance of wide latitude in the exercise of delegated powers is not the equivalent of untrammeled freedom to regulate activities over which the statute fails to confer . . . Commission authority.” NARUC II, 533 F.2d at 618 (internal quotation marks and footnote omitted). Because the Commission has failed to tie its assertion of ancillary authority over Comcast’s Internet service to any “statutorily mandated responsibility,” Am. Library, 406 F.3d at 692, we grant the petition for review and vacate the Order.
Translation: the FCC gave a laundry list of reasons why it had authority to regulate Internet carriers, but in no cases did Congress ever give them statutory authority.

This was, in fact, predicted by the dissent in the sharply divided 3-2 FCC vote in August to go after Comcast. As CNET reported at the time:
In an unusually pointed dissent, Commissioner Robert McDowell, a Republican, said the FCC's ruling was unlawful and the lack of legal authority "is sure to doom this order on appeal." …

The is the FCC's "journey into the realm of the unknowable," McDowell said, saying that the outcome "may result in slower online speeds" for most Americans.
The problem is, despite all the lawyers involved, the FCC majority and its allies are pursuing an end-justifies-the-means strategy: it is right that the government regulate carriage of data over broadband carriers, no matter what the law says.

The FCC is now considering two options around the ruling. One is to appeal to the Supreme Court, while another is to reclassify broadband as a different type of service and try again. Both could end up with the same result.

To an outsider, the answer is obvious: if the law says the FCC doesn’t have authority over Internet services, then the FCC should stop trying to weasel out of the law and instead go through the Constitutional process to change the law.

After C-SPAN and the other media cover the Congressional hearings, our elected representatives will come up with something that considers all the competing perspectives. That’s what a democracy is about, not having an unelected regulatory agency interpret, stretch or ignore the law as it sees fit. (The solution won’t be perfect, but then neither will any FCC order).

In the meantime, the market will do what it usually does: solve problems on its own, with both competitors and the real threat of regulation prevent excesses. As the Merc quoted one trade group leader:
"The idea that this ruling will invite bad behavior is nonsense," said Bruce Mehlman, a former assistant secretary of commerce for technology policy during the Bush administration and now co-chair of the Internet Innovation Alliance. "Companies need to manage their networks to handle high volumes of traffic and bona fide threats out there, but we're simply not going to see blocking or degrading of disfavored sites. It would be bad business and it would beg for regulatory overkill."
There was similar sturm und drang over mobile carriers blocking VoIP services such as Skype. But in the face of overwhelming consumer demand, the carriers have given up their futile fight against VoIP.

One radio account said that a possible outcome of the Comcast decision is variable-rate pricing, in which home broadband users pay more for faster or greater data transfer. What’s wrong with that? That’s the only thing that’s going to save 3G data services from negative externalities, and home broadband — or at least the shared bus cable TV internet — will similarly collapse in download of multi-gigabyte HD movies.

Monday, April 5, 2010

Carly reconsidered (III): Craig Barrett's testimonial

The editorial page of this morning’s Merc had an interesting business/political tidbit: a glowing testimonial to former HP CEO Carly Fiorina from former Intel CEO Craig Barrett. The dead tree headline was

Fiorina was architect of Hewlett-Packard’s success
while the online version says “History straightens out facts: Carly Fiorina positioned HP for success.” A few excerpts:
Under Carly Fiorina, Hewlett-Packard recognized that the computer industry needed consolidation and engineered the largest high-tech merger in history, combining HP and Compaq. There were plenty of skeptics to the bold actions taken by HP. But history has a way of straightening out the facts and the noted opinions of outside experts.

Carly Fiorina, the architect of the HP-Compaq merger and now a candidate for U.S. Senate, deserves great credit for her actions while CEO of HP. She understood the challenges of the marketplace, the dangers of the status quo, and the need for companies to move forward with bold actions to ensure their success.

As CEO of Intel at the time, I remember watching those plans unfold with more than casual interest, as HP and Compaq were two of Intel's largest customers. It was a ringside seat to an industry-changing event. It wasn't always pretty, but it was carefully planned and well-executed, and the bottom-line result was exactly on target.
As one of those skeptical “outside experts,” I’ve freely admitted that Carly was right and I was wrong. Barrett’s comments also fit what current HP employees say about her role in setting up the implementation being overseen by Mark Hurd.

Barrett concludes with a political defense of Fiorina, in (futile) hopes of inoculating her against the mud that Barbara Boxer allies will dredge up if she survives the primary.
In the current political campaign, many accusations have been leveled against her and her tenure at HP. As someone who knows the industry well and was there watching all the details, I have to respectfully disagree.

Carly Fiorina, who started her career as a receptionist and rose to be the first woman to run a Fortune 20 company, tackled the most difficult issues and brought exactly the right approach to a company that would have faced a more uncertain future otherwise.
I found the column remarkable, because normally Intel CEOs have commented on things important to Intel, not its customers or partners. Apparently Barrett got to know Fiorina well during their overlapping tenures: Fiorina was HP CEO from 1999-2005, while Barrett was Intel CEO from 1998-2005, succeeding Andy Grove.

While Barrett is entitled to his opinion, I would take issue with one claim: “HP has always been and still is an innovative company bringing great products into the market.” The New HP (both Fiorina and Hurd) is about cost-cutting, including cutting materials costs (ala Toyota) in hopes of reducing costs without noticeably reducing quality.

News headlines also implied that Hurd cut the HP Labs from 700 employees in 2005 to 500 employees in 2009. This makes sense if (as I concluded in February), Fiorina-Hurd decided that HP’s future lay as an efficient commodity IT producer rather than a high margin differentiated one — but it’s hard to argue that HP is as innovative as it was 20 years ago.

Saturday, April 3, 2010

iPad: Credo ergo sum

The wondrous Apple hype cycle has been working overtime in winning coverage for today’s iPad rollout. In the 144 hours leading up to the actual availability, the iPad won the covers of Newsweek and Time, nightly stories on the evening news, even a full hour on Charlie Rose.

The iPad is not just a new revenue source for Apple, but the salvation of the publishing and other content industries desperately searching for a business model — at least according to CBS, the San Jose Mercury and Paid Content. If to prove this point, Time, ABC, CBS and New York Times have created apps to monetize the iPad/iPhone success — despite dire predictions of failure due to the lack of Flash.

True believers lined up today to be first on their block to own an iPad. One Apple founder lined up to join them, while the skinnier one came to watch them. The pre-launch consensus forecasts seem to be about 300,000 units this weekend, but one estimate now places the sales at 700,000 on the first day. Another analyst raised the 2010 forecast from 3 million to 7 million.

[2004 cover]Such publicity must be the norm for his Steve-ness, who among other successes made it on Newsweek with the iPod and at least seven times on the cover of Time.

Three years ago, as we were writing our iPhone article, Michael Mace and talked about writing an article about Apple’s consistent success at creating buzz and getting free publicity. Given the failure of Apple’s many imitators, it’s not clear how transferrable these competencies are, but I imagine there would be a market for what we have to say.

Update Monday noon: Actual day one sales were 300,000, not 700,000. The analyst who made the mistake lowers his 2010 predicted sales to 4.3 million.

Friday, April 2, 2010

Sponsored Communities: Letting Go is Hard to Do

While preparing to teach my Thursday night technology strategy class, I saw a tweet by Santa Clara University professor Terri Griffith (and then by others) reporting that Business Week had posted my column on the difficulty firms have in managing sponsored open source communities.

Entitled “Open Innovation's Challenge: Letting Go Is Hard To Do,” the column was requested by Michael Arndt of Business Week as part of a special report on open source, open innovation and related topics. I used the column to link the research on open source and open innovation to the specific issues that big companies are having in surrendering control in sponsored open source communities.

In my open innovation blog, I enumerated the academic research behind these observations. Here I want to look at the second half of the story: the difficulty firms have in letting go, specifically Google, Intel and Nokia.

I thought it was interesting that there are at least five (now four) firm-sponsored open source communities in mobile platforms: Nokia’s Maemo, Intel’s Moblin, Google’s Android, Nokia’s Symbian and the LiMo Foundation; all except Symbian are variations of embeded Linux. In four cases, there is clearly a single firm driving the process to meet its respective strategic goals.

In this blog, I’ve often commented on this topic, such as Nokia’s tight control over the Maemo community and Google’s over Android. That this keeps coming up over and over again suggests that it’s an inherent problem.

As Siobhán O’Mahony and I found in our research, firms that don’t let go will have trouble convincing outsiders to participate, because they don’t know whether or not they will be able to benefit from their contributions.

Of course, maybe this is just a temporary expedient, of holding the reins tight until the community is up and running, but eventually intending to share governance. An encouraging sign is the decision of Nokia and Intel to pool their efforts (forming Meego), and turning over community management to the Linux Foundation, which is much better situated to build a cooperative open source community.

Still, the inescapable truth is that we really have only one example of a big firm creating a sponsored open source community and then really letting go. In the Business Week column I wrote:

But the best role model is Eclipse, formed through IBM's 2001 donation of its Java development software. IBM executives decided to share control when they realized "they needed Eclipse to become independent to achieve their strategic goal to have the broader Java ecosystem adopt Eclipse," says Mike Milinkovich, executive director of the Eclipse Foundation. Since then, the foundation has been able to attract outside participation not only through its formal processes, but also through new bottom-up initiatives created and led by outsiders.
Due to length limits, other insights from my interview with Milinkovich that ended up on the cutting room floor. Here is a missing paragraph:
Concerned about potential for IBM domination, “a lot of companies watched the operations of the Eclipse Foundation with eye towards “is this organization truly independent?’” said Milinkovich. The foundation was able to attract outside participation not only through its formal processes, but by encouraging new bottom-up initiatives that could be created and led by outside members, independent of IBM.
Another factor that was encouraging was that Milinkovich said that other firms and sponsored communities have come to it for advice. As a consultant to Symbian Ltd. during its final two years, I know that the Symbian (and Nokia) folks spent many months studying and talking to Eclipse in setting up the Symbian Foundation, which earlier this year released 40 million lines of source code as open source. Symbian has done a good job of getting the process right, but still the bulk of the resources are being supplied by Nokia — which then, as now, ships the overwhelming majority of Symbian phones.

Milinkovich said that LiMo also came to Eclipse for advice. However, he did not hear from Google (or Intel) in setting up their communities — whether because they consulted someone else or because they thought they knew everything, neither of us can say.

The fact that Eclipse stands alone is an existence proof that letting go is hard to do. But perhaps two or three years from now, we’ll have other examples of firms dispersing control to build a truly open sponsored community.

Thursday, April 1, 2010

Beggar thy neighbor day

Except for those who have been living under a rock, almost any American knows that today is the Census enumeration day, as provided by Article I of the Constitution. At $14 billion, it will be the most expensive Census in history, more than double that of the 2000 census. Of that, $340 million is being spent on advertising and other promotional efforts, including a $2.5 million Super Bowl ad.

As a social scientist, I certainly sympathize with the desire to make the Census as accurate as possible. (Lacking a $14 billion research budget, we academics normally accept a certain amount of imprecision as unavoidable.) And, given that Democrats are in control of two branches of government — and the assumption that uncounted residents are disproportionately in Democrat-leaning districts — it was inevitable that Obama would do everything it could to count every last person.

However, the advertising message has emphasized a “beggar thy neighbor” approach: that people should respond in their narrow parochial interests to win a zero-sum allocation of Federal tax dollars. After dissecting the quirky ad scripts, Advertising Age went straight to the hart of the problem.

There's one issue with the campaign that confounds us, too -- maybe not so glaring, but ultimately more serious. Namely: the premise. In more than 100 pieces of communication in 28 languages, the campaign tells people to fill out the census form because it could mean increased funding for their communities. "We can't move forward till you mail it back."

Oh, really? That proposition is a half truth. The federal-budget allocation is a zero sum game. Yes, the census largely determines who gets more money. It equally determines who gets less money. To present it as unlocking better roads and smaller classrooms for all is just dishonest. Even state lotteries are more candid. What they say is, "You've gotta play to win."
Nothing in the Census contributes to economic growth — or even the availability of funds to disperse to the local governments. It’s just about saying “I want mine, and the government should give it to me” — a perfect metaphor for efforts to increase Nanny State dependency.