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 NYTimes.com 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.

Wednesday, November 3, 2010

Android leads inevitable march towards commoditization

Had meant to write Tuesday about the latest quarterly market share data for Android, but it got buried in between grading, meetings and of course watching the election.

Perhaps more significantly, what can you say? Android market share is monotonically non-decreasing, so every quarter the Google-controlled alliance gets more good news.

Still, the Canalys Q3 estimates were impressive:

† “Nokia”, not “Symbian”

Apple’s smartphone share has clearly peaked. The iPhone is losing to Android despite its obvious advantage on two key metrics — ease of use and variety of applications. Instead, all that matters are product proliferation and distribution — there are dozens of Android phones at various price points from all the major carriers. You want a keyboard? Or no keyboard? Big screen or small screen? Android has offers these choices and iPhone doesn’t.

Adding Verizon someday isn’t going to change this. And as the dumbphone dies and every phone becomes a smartphone, Android will gain share in the segments Apple is ignoring. Android has made the smartphone a commodity — an adequate OS is no longer an entry barrier — consigning the iPhone to the top 10% niche of buyers willing to pay a premium for better quality.

Meanwhile, Nokia has knifed the Symbian baby by sacking most of the engineers it hired after losing the allies that once vowed to support it (before Android caught on.) Its current path seems to be using its proprietary QT APIs to migrate developers off Symbian to Meego, its proprietary Linux that competes with Google’s slightly less proprietary Linux.

In the near term, the story for Apple on tablets is much more promising, as latest estimates show it with a 95% worldwide market share. (The figures are misleading since it excludes e-book readers, and the Nook Color shows there is no clear boundary between the two categories.)

In Apple’s favor is that unlike cellphones, there is no need for the needless variants and pseudo-differentiation that we see because network operators control nearly all the cellphone distribution. As with the iPod, Apple could conceivably keep a 50+% market share in tablets, assuming it overcomes its irrational (and Newton-like) aversion to smaller tablets and aggressively engages in product proliferation as it does with the iPod.

Tuesday, November 2, 2010

Sorry, Carly…

…only the best-financed women get to be called “Senator” instead of “Ma’am.”

In a day when the GOP tide swept across the Midwest but failed to reach the Pacific time zone, the former HP CEO appears to have failed in her efforts to dislodge her better financed rival. (Fiorina had noticeably fewer TV ads than her opponent or either gubernatorial candidate.) Longtime incumbent Barbara Boxer won despite (as one otherwise sympathetic reporter put it) having “lower approval ratings than 49ers quarterback Alex Smith.”

What really struck me, however, was an article Monday in the Merc, whose editorials strongly backed Boxer for decades. The front page story offered a surprisingly sympathetic report of a Fiorina unrecognizable in the Boxer attack ads — or even her own:

Several voters who came to see Fiorina in person on the campaign trail last week said they were struck by how different the candidate is in person from how she's depicted on TV. Fiorina warmly recalled her early life, including her amazement at seeing oranges on trees when she moved to California as a girl and her early stumbles finding a career path. With the ease and command of a talk-show host, she went on to describe some of the personal triumphs that eventually brought her to the highest rungs of corporate America.

"She's much more genuine in person than she is on TV," said Raquel Unger, a real estate agent who arrived at a campaign stop in Orange County undecided on the Senate race but left counting herself a Fiorina supporter.

"She wasn't like she's shown on TV -- all the stuff about firing people and sending jobs out of the country," Republican voter Ethel Lover said after a different Fiorina event.
Warm? Genuine? These are not terms I would have used for Fiorina when I moved to Silicon Valley eight year years ago, and had yet to forgive her for destroying the “HP Way” en route to saving the company. But Fiorina demonstrated good humor and even humility in her remarks Tuesday night.

Who knows if Fiorina could have won with a more human strategy? Even in a blue state, Boxer has always been the most vulnerable statewide officeholder (next to Gray Davis), far more so than the widely popular (onetime centrist) Dianne Feinstein. But it’s still a very blue state, as all but one statewide office went to the Democrats Tuesday. And — like all political rookies — we don’t know whether if elected Fiornia would have been effective (like a Bill Frist) or a fiasco (like the Governator.)

With her re-election, Boxer gets to extend her tenure as senator from 18 to 24 years. Sen. Boxer has a few contradictions, such as blasting Fiorina for sending HP jobs offshore while running a campaign event at Cisco, which like HP has also been growing its jobs overseas (something even her hometown paper noticed.) Like most successful politicians, she has successfully managed contradictions before.

A year ago, Boxer famously noted that it’s hard to become a Senator. As AmEx likes to say, Membership Has Its Privileges(™). A six year re-election cycle provides senators a luxury no other elected official in this country enjoys.