Wednesday, December 28, 2011

Jeff Bezos wins again

After Christmas, I wanted to do a meeting with one of my LinkedIn friends, Sasha Cole, an economics PhD student who (like me) was home to visit family during the Christmas break (but unlike me is Jewish and not observing Christmas).

We met at the Pannikin, the well-known local chain of gourmet coffee shops started by Bob Sinclair in 1968 (before Starbucks). In addition to running coffee shops, as a coffee roaster he supplied hundreds of local restaurants and cafés. Both my friend and I recalled hanging out at the Pannikin in high school (long before Starbucks came to California), because it was one of the few places you could spend a small amount of money and sit around and talk for several hours (e.g. at the end of a Friday night date).

Long before every Barnes & Noble had a built-in Starbucks, Sinclair found a natural complementarity with independent booksellers who colocated with his coffee shops. (I had always assumed that they were under the same ownership, but instead the two businesses were independent). The two Pannikins I have visited most — the original in La Jolla and the nearby Del Mar location — eventually added funky bookstores next door where you could buy a book to read while sipping your coffee.

The La Jolla venue still has DG Wills, a used bookshop that proudly proclaims past appearances by leftist literary luminaries like Norman Mailer, Maureen Dowd, Christopher Hitchens and Oliver Stone. For Del Mar, it was the Book Works, located in the Flower Hill mall. However, when we met Monday in Del Mar, the Book Works was gone, having closed over the summer after 35 years in business.

Both locations serve students and faculty at UCSD, and local tech workers at Qualcomm and other firms. The nearest Barnes & Nobles are 7 and 9.5 miles away, where they have been for 15+ years. So it was clear that if anything killed the Book Works, it was Amazon.

In noting the bookstore’s passing, we recognized our own complicity (as Amazon patrons) in its death. Even yesterday, when browsing through a couple of bookstores with my family, I realized I was unlikely to buy any books in the store, because the two books I wanted were a) a novel I’d download for my e-reader and b) music books for my biggest Christmas gift (a handmade ukelele) that were not going to be found in a bookstore inventory.

Next to Steve Jobs, Jeff Bezos is the most brilliant and transformative tech executive of the past two decades (even if two Stanford grad students stumbled into better margins). He effectively created e-commerce, then leveraged that to become an online seller of everything, and now is leading the shift of cultural content from atoms to bits.

However — like Google and Apple and Microsoft and others — Amazon aspires to be a monopolist by forestalling rival entrants and growing (in the case of entertainment downloads) or maintaining (for books) his marketshare. Much like patrons of Walmart (or Target), in our search for convenience and low cost we customers of Amazon are reducing our options for the future: not just quirky (and often badly run) independent bookstores, but also physical bookstores of all sorts.

This seems to go unremarked in the US — at least in tech circles. A rare exception comes from a New York-based correspondent for Britain’s Financial Times, John Gapper. Earlier this month he wrote a scathing column about Amazon’s two-faced attitude towards antitrust as it uses price (and its superior scale economies) to squeeze out its competitors.

On the one hand, Amazon developed a plan to crowdsource spying on its competitors pricing, using a $5 bribe for customers to use a special price-check smartphone app to report prices of competitors. (To its credit, the NYT quickly covered the literary backlash.)

Beyond this, however, Gapper decried Amazon’s efforts to seize pricing power for ebooks — rather than allow publishers to set the same price for all ebook downloads — and then use that to push out all rivals:

While Amazon is blithely using its rivals’ property as a storefront, it wants antitrust authorities in Europe and the US to help it control the ebook market. The European Commission and the Department of Justice have launched twin probes, provoked by deals under which publishers set prices for their ebooks rather than letting Amazon, Apple and Barnes & Noble do so.

Amazon is eager to discount ebooks on the Kindle in the same way that it discounts everything else but has been stymied by publishers who fear it will eliminate all ereader competition. As Mike Shatzkin, a publishing industry analyst, says: “It is an incredible irony that antitrust law is being used to protect the biggest monopolist.”

Other things being equal, lower prices are good for consumers, but I fear a world in which Amazon squeezes out the Nook; pushes B&N into the same fate as Borders, which was forced to liquidate in July; marginalises all independent stores; and dominates the industry from publishing to printing to distribution. That would be a dystopia for both readers and authors.

Minimum prices deals helped to erode Amazon’s initial dominance in ereaders by encouraging competition from B&N and others. Even so, the Kindle still accounts for 60 per cent of ebook sales. It is not the job of antitrust officials to hand Amazon back its monopoly.
In physical retailing, Target has created a different shopping experience and higher quality brand to provide meaningful alternative to Walmart — much as the quirky independent bookstores next to the Pannikin gave booklovers a chance to browse when they were relaxing with their coffee.

For online purchases of digital goods, ambience isn’t going to be a differentiating factor. Much as I love price competition, I agree with Gapper that this is one choice we don’t want to have — a short-term price war that lads to a long term monopoly.

Jeff Bezos will still get richer, as his shareholders have doubled their money in the past three years. However, as with Steve Jobs competition will force him to continually innovate, while (limited) antitrust regulation will maintain consumer choices of technology and vendors.

Sunday, December 18, 2011

Gambling with OPM

From the San Jose Mercury News, Sunday December 18:

If state Treasurer Bill Lockyer, union leaders and the state's largest government employee retirement funds have their way, they'll continue betting against the odds. It's not surprising. It's not their money at risk. They won't have to cover the losses. Taxpayers will.

Last week, a study led by Joe Nation, a Stanford public policy professor and former Democratic assemblyman from Marin County, made explicitly clear the magnitude of the risk. He found that there's a better-than-even chance we're going to lose the wager.

The assumption about the investment returns is critical. The higher the expected return, the less money must be contributed now. But here's the kicker: If investments don't meet expectations, the employer -- the taxpayer -- must make up the entire shortfall. The employee has no risk.

So labor groups typically push for high return-rate assumptions. That means less pressure on workers and employers to kick in more now, and that frees up government funds to hire workers and pay for salaries and benefits. But unrealistically high assumptions mean we're shortchanging the system, creating a debt for future taxpayers.

Currently, the UC system uses an annual assumed rate of return of 7.5 percent, while CalPERS and CalSTRS use 7.75 percent. Defenders say those rates are based on past performance. Nation, like many academics, thinks they're irresponsible. Investment guru Warren Buffett has called them "crazy."

Nation, using CalPERS' own data going back as far as it would provide, 1982, ran statistical simulations to forecast the odds of meeting several investment targets. He found there was only a 42 percent chance of meeting or exceeding our current wager on the 7.75 percent rate.

Here's another way of thinking about it: Assuming future annual returns of 7.75 percent, the three pension systems combined were short $143 billion, or $11,703 for each California household. At a more realistic 6.2 percent investment assumption, they're short $291 billion, or $23,852 per household. Thus, the higher assumptions hide the magnitude of the problem.
The temptation to spend Other People’s Money is irresistible, especially when you can legally bind others to spend the money in the future.

Our system is supposed to provide checks and balances to prevent such problems. But public employees pay more attention to (and contribute more money to) state and local elections than do the average voter. An additional problem in California is that with 8 year term limits, many politicians don’t worry about tomorrow because they expect to be long gone (in Congress, a local mayorship, lobbying or private practice).

Thursday, December 15, 2011

Best-run companies are not the best to work for

The Merc did a Silicon Valley take on the November 2011 “Best Places to Work” list prepared by Glassdoor.

Here are the top 5 overall:

  1. Bain (of Mitt Romney fame)
  2. McKinsey (the high end strategy consultants)
  3. Facebook with a 4.3 out of 5.0
  4. MITRE (alongside RAND, the elite DoD consultant)
  5. Google - 4.0/5.0
This is yet more evidence proving my career maxim to my undergraduate students: all things being equal, you’ll be much happier at a high gross margin company than a low gross margin company.

Other Bay Area companies listed
  • Apple (10) - 3.9/5.0
  • Salesforce.com (13) - 3.9
  • Chevron (16)
  • NetApp (30) - 3.7
  • Intel (32) - 3.6
  • Groupon (40) - 3.6
  • Intuit (42) - 3.6
  • Nvidia (49) - 3.5
But what was really interesting was the losers in the beauty contest:
  • Yahoo,eBay,Oracle: 3.2
  • HP: 2.5 (Note: HP Pavillion, the ice hockey arena, rates 3.4)
(The Merc said Netflix ranked below Yahoo, but the numbers are not on the Glassdoor site.)

A few observations
  • Having a good boss helps, but isn’t enough. NetApp’s CEO got 100% rating from employees but his company is only 30th. Apple CEO Tim Cook is liked by 96% of Apple employees vs. 89% for Mark Zuckerberg, but Facebook is still preferred overall
  • Being a winner certainly helps, but again isn’t everything. Apple stock options from 2005 or 2008 are worth far more than those from Google, but Google wins out overall.
  • Being a loser certainly hurts. Then high-flying Netflix was #3 on the 2009 list, but this year employees seem demoralized by wave upon wave of bad news.
  • Some results are puzzling. Yahoo is perpetually up for sale, but does well compared to two companies that are in no danger of going away. It’s equal to Oracle, which has $26 billion in working capital — more than the GDP of half the world’s countries. Yahoo ranks well ahead of HP, the once great company whose total assets are 50% more than Oracle’s
Young high growth companies are exciting, but what happens when the growth (and stock returns) disappears? Groupon employee satisfaction will collapse when (as with Netflix) the high-flying stock comes crashing down to earth. Will a mature Facebook become another Google, more like Intuit (down 31 slots in 3 years), or end up like Adobe (which is no longer on the top 50 list).

It also confirms what I've observed since Steve Jobs took over at Apple in 1997. Apple is the Valley’s most valuable and (among Fortune 500) highest growth company, but it’s not a worker’s paradise. People work hard, and unlike at Google, it’s all about business. As long as their run continues, it will be a good place to work, but it remains very demanding.

Meanwhile, Google seems to me to be like IBM 40 years ago — a dream job living off monopoly profits. What will the working conditions be like when the rents from search dissipate the same way that they did from mainframe computers? Like IBM, I think the company will make a fair and ethical transition in how it handles its employees, but like IBM (and HP) it will be unable to treat them as generously as it did during its salad days.

Tuesday, December 13, 2011

Open source doesn't repeal laws of economics

After failing in its webOS strategy, HP has announced plans to use it to create an open source project. This is an example of what (in our 2006 paper) Scott Gallagher and I called a “spin-out” strategy by firms to find a home for a technology they no longer wish to control.

Some might hope this would be as successful as IBM was with Eclipse. Others compare it to Fedora, the Red Hat desktop variant of its core Linux server product. However, with more than a decade of open source research and consulting, I don’t think it will be successful.

I take HP at their word that they will work with the open source community to set up appropriate licensing and governance. Unlike other firm-sponsored communities, letting go is not likely to be a problem.

However, open source only works when you have enough contributors. WebOS is not desktop Linux. Before a project launches, the best proxies are developer interest and user demand (“scratching your own itch”), and it’s no secret that webOS — although technically sophisticated — was already an also-ran when HP bought it in spring 2010.

The fact that when software has failed as a proprietary technology, it nearly always fails as an open source technology. From my research, I’d say a major reason is timing: firms don’t let go until the technology has clearly failed on the market.

The other problem that the world really only wants (or needs) a single open source product in each category. Eclipse was the first open source tools platform, so that Sun’s subsequent efforts to let go were too late (see #1 above). The BSD variants of Unix predated Linux but were swamped and the Netscape server never caught on against Apache. It doesn’t have to be all that open, as the success of MySQL (and Android) has shown.

(Some would argue that Chrome and Mozilla are an exception to this rule. Perhaps — but the competition is not over yet.)

In fact, with webOS HP seems doomed to repeat history — in this case, Nokia’s failed efforts with open source Symbian. In addition to being late and competing against Android, Symbian began open source life with a raft of problems that caused it to lose its once-dominant market share in the category it created. The prospects for webOS seem similar — except that webOS never had 60% of the global smartphone market.

Does webOS have a chance? Over a decade ago, Shane Greenstein and Tim Bresnahan showed that the only way a new platform succeeded was by identifying an unserved niche (that hopefully became a big market). So if webOS is going to succeed, the answer is the same as a year or two ago: not by competing head-to-head with Android and the iPhone, but serving a market that they’ve ignored. Since HP hasn’t found this market in the past 18 months, I can’t see how open source will change things.

Sunday, December 11, 2011

Strategy is choosing what not to do

Strategy is making trade-offs in competing. The essence of strategy is choosing what not to do. Without trade-offs, there would be no need for choice and thus no need for strategy.
— Michael Porter, “What is Strategy?”
Harvard Business Review, 1996
As an entrepreneur — with limited resources and a finite period of time before we ran out of money — this is a lesson I had to learn the hard way. It is something I emphasize in my consulting, in my business analysis and my teaching.

I don’t recall seeing the original Porter quote, but the version I normally use in class is
Choosing what to do means choosing what not to do.
Thus, I was pleasantly surprised to read Dilbert this morning. For at least a decade, I didn’t care for Scott Adams emphasizing the cynical over the insightful. But in lampooning the foolish overconfidence of the pointy head boss, he makes the point in a way that will stick with students far better than anything I’ve ever said in class.

Tuesday, November 29, 2011

Big pharma hasn't solved commoditization

Cross posted from Bio Business Blog.

Many reporters, analysts and other observers over the past decade have remarked on how the traditional big pharma business model has been running out of steam. Proposed solutions have included buying biotech companies (as Roche did) and forming generic divisions (as has Sanofi). Still, from outside, the (in)actions of big pharma resemble the controlled flight into terrain of other IP companies.

Last week, two consultants from Booz & Company published their own analysis of the problems in the Booz house journal, strategy+business.

Alex Kandybin and Vessela Genova deduced the strategic choices of 10 major pharma companies (Abbott, AstraZeneca, Bayer, GlaxoSmithKline, Johnson & Johnson, Merck, Novartis, Pfizer, Roche, Sanofi) through their acquisitions and divestitures from 2004-2010. Nine of the 10 have bet on biologics, five on OTC, four on generics and one (Sanofi) on animal health.

They draw an analogy to the choices of the computer industry:

Most industries go through periods of both deterministic and stochastic development. For instance, the computer industry in the 1960s and ’70s had all the characteristics of a deterministic process. IBM, Burroughs, Cray, and others pursued similar strategies, selling giant data processing machines known as main- frames. The personal computer changed the dynamics of the industry, triggering a turbulent stochastic period. It became impossible to predict where the computer industry was going, and in the early 1980s the incumbent players’ strategies diverged significantly.
This is, alas, an inaccurate revisionist view of the industry: in the 1980s, it was quite clear that the PC was democratizing computers and that standardized microprocessors enabled market entry and reduced margins.

More importantly, the computer industry of the 1970s has significant a priori heterogeneity: it was not for nothing that people referred to IBM and the Seven Dwarfs (or IBM and the BUNCH). Cray was in a very narrow and dangerous niche diametrically opposed to commoditization trends and desperately dependent on Cold War spending.

One place where the authors clearly have it right is that big pharma is fleeing from the highest margins in the life sciences (and among the highest margins anywhere) towards average or sub-average margins. The operating margins of pharmaceuticals is 29%, vs. 12% for generics, 8% for services and 2% for drug wholesaling.

This is utterly consistent with the 15-year-old observations of Clay Christensen: lower cost solutions eventually supplant higher cost solutions, destroying margins. Or, as my former colleagues Jason Dedrick and Ken Kraemer showed in their 1998 book, IBM’s shift from hardware to services dramatically grew revenues but cut margins.

What to do? The authors offer fairly generic (i.e. undifferentiated) advice: firms should embrace change, consider multiple scenarios, and assess the firm’s unique capabilities.

In the end, the old model of one-size-fits-all drug is breaking down. What will replace it? One prediction is personalized, genomic-based medicine. But even if that’s true, many uncertainties remain, including how quickly that future will get here and which part of the value chain will be the most unique and thus valuable.

Friday, November 11, 2011

Are firms serious about open innovation?

Cross posted from the Open Innovation Blog.

Given the popularity of open innovation, it was inevitable that companies — and researchers — would seek to wrap themselves in the term to leverage its cachet to legitimate their otherwise unremarkable efforts.

One way that I’ve seen this is through a Google news watch on “open innovation” that lands in my inbox every night around midnight ET (9pm Pacific.) Every day there are 1-5 stories about companies (and increasingly the government) trumpeting their latest “open innovation” breakthrough. I am convinced that half the PR people (or execs sponsoring the underlying initiatives) couldn’t articulate a recognizable definition of open innovation.

In talking about this in conjunction with the creation of the Open Innovation Community, I found that Henry Chesbrough has a similar news watch. I’m concerned that faux open innovation will muddy the waters and confuse the market; also, from a research standpoint, a theory of everything is a theory of nothing. However, Henry is more inclined to give them the benefit of the doubt, perhaps because he is a more optimistic person.


The issue came up earlier this year in a press interview. Orange Silicon Valley (a branch of the French mobile phone company) hired a former WSJ technology writer to prepare a 48-page report on the future of Silicon Valley. This included interviews with 10 Silicon Valley experts, including California’s second most famous open innovation researcher. Here is an excerpt:
Do you think the phrase is being overused?

We don’t have a term for it, but there is an Open Innovation equivalent of “greenwashing.” Greenwashing is where people wrap themselves in claims of environmental-friendliness, but don’t change their actual practices to make their products more marketable.

When I use Google to see how corporations use “Open Innovation,” I’d say only about a third of it is really legitimate; the rest of it is just people want a buzzword to make themselves seem more innovative and more trendy.

In many cases, when they appoint a VP for Open Innovation, there is an attitude change and they really are being more collaborative. At other times, it’s just a new name for something they’ve always done, and they’re just calling it something else.
I was thinking of a particular example three years ago when one of Silicon Valley’s most respected companies renamed their university relations office to be their open innovation office.

However, I was a little more encouraged in looking through the news articles that Google emailed to me in November (thus far) — perhaps more encouraging than when I started the news watch four years ago.

Two sorts of articles have been there consistently throughout. One is for the crowdsourcing companies that are seeking to match firms with external suppliers of ideas — certainly a form of open innovation, but (as I’ve found in my research) tending to be narrowly focused on just the sourcing aspect.

The other common thread are stories that treat “open source” as synonymous with “open innovation.” The two terms are not synonymous: there’s an overlap in some cases but they are disjoint in other cases. This is the sort of misuse of the term I’m trying to discourage.

And yes, I saw a certain amount of greenwashing-type usages, using the buzzword for PR purposes. Alas, some of this is being done by the US government: small high-visibility innovation efforts don’t make a $3.5 trillion/year bureaucracy innovative — any more than banning iPad purchases make it efficient.

Still, what I found in this month’s data was more encouraging than I expected to find. One example was this news item from last week:
XYZ Corporation has announced a new Web portal to support its existing Open Innovation program. The new Web portal will increase the pace of innovation, in targeted areas, by improving XYZ Corporation's ability to leverage outside resources.
At the one level, this is the same as hiring Innocentive or Nine Sigma to find new technologies. On the other hand, the effort of setting up a portal demonstrates a greater level of commitment to OI — and perhaps to act upon these ideas — than a few experiments with outsourced crowdsourcing vendors.

Overall, I think the trend line is encouraging. There’s more real open innovation happening in practice, and perhaps even a higher proportion of it is real.

Thursday, November 10, 2011

Bill still wants to be Steve

Bill Gates still wants to be Steve Jobs — even though Steve is dead.

How else can we explain why Chairman Bill (or rather, his trusty sidekick and CEO, Steve Ballmer) is opening a new Microsoft store today in Valley Fair, the same Silicon Valley mall as one of the earliest Apple stores — the store where the media go to take photos of people lining up to buy an iPhone.

Today’s opening marks the 12th Microsoft store. (With a decade-long head start, Apple now has more than 300.) In 2009, Microsoft bragged it would open up retail stores “right next to Apple,” and 6 miles away from Apple HQ certainly counts.

However, Microsoft is bribing people (or rather celebrities) to generate traffic at both ends of the age spectrum. On Thursday, the QB of the first decent 49er team, 55-year-old Joe Montana, is making a 5pm appearance. On Friday, the 30-something duo The Black Keys is performing a free concert (free to customers, not to Microsoft) while on Saturday one of the teen heartthrob Jonas Brothers is doing the same.

I don’t see the point, but then I’ve never seen a Microsoft store and (other than an office suite) haven’t used their products for a decade. However, after visiting the LA store, Greg Sandoval of CNET wrote:

Offering techies a stage to show off power points isn't a bad way to get people in the store.

Still, Microsoft has a long way to go before challenging Apple. Not only does Apple dominate in the number of stores, but some doubt whether Microsoft possesses Apple's sense of style or can create the same first-class shopping experience—even with all the mimicking. There's also this: consumers shop at Apple because for decades now they have loved Apple products.

Microsoft hasn't been anywhere near so successful at duplicating that kind of customer loyalty.
Some “experts” claim we should want our kids to emulate Bill and not Steve. I think Steve did a better job of understanding — and more importantly, anticipating — what excited people, while Bill produced credible incremental improvements funded by monopoly rents. Now Bill is semi-retired to count his money and (ala Carnegie and Rockefeller) burnish his reputation for posterity.

Apple sans Steve Jobs will eventually lose that élan. That’s little consolation to shareholders of Microsoft, who’ve watched Steve Ballmer (charitably) lead the company sideways since taking over as CEO.

The retail strategy that worked for Steve Jobs is not going to work for Steve Ballmer. Apple store’s worked because (as Elaine Misonzhnik put it) “The stores are experiential rather than simply a machine for moving goods.”

Sony failed at retail stores because their products failed to excite people. With the important exception of Kinect, Microsoft has also failed to excite people as customers slowly defect from its platform to the Mac, tablets, Android, the iPhone and other non-Windows platforms. Among the 4Ps, Microsoft needs to focus on product, not place.

Wednesday, November 9, 2011

Steve was right and so was I

Danny Winokur, Adobe vice president of interactive development, posting at blogs.adobe.com, Wednesday 6am:

Over the past two years, we’ve delivered Flash Player for mobile browsers and brought the full expressiveness of the web to many mobile devices.
However, HTML5 is now universally supported on major mobile devices, in some cases exclusively. This makes HTML5 the best solution for creating and deploying content in the browser across mobile platforms.

We will no longer continue to develop Flash Player in the browser to work with new mobile device configurations (chipset, browser, OS version, etc.) following the upcoming release of Flash Player 11.1 for Android and BlackBerry PlayBook.

These changes will allow us to increase investment in HTML5 and innovate with Flash where it can have most impact for the industry, including advanced gaming and premium video. … Flash developers can take advantage of these features, and all that our Flash tooling has to offer, to reach more than a billion PCs through their browsers.
Steve Jobs, Apple CEO, April 29, 2010:
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.

New open standards created in the mobile era, such as HTML5, will win on mobile devices (and PCs too). Perhaps Adobe should focus more on creating great HTML5 tools for the future, and less on criticizing Apple for leaving the past behind.
Back in February 2008, I wrote about how Apple was trying to discourage Flash on the iPhone and finding work-arounds to having it pre-installed: “Apple is gambling that Adobe needs the iPhone more than the iPhone needs Flash.”

Steve Jobs has won last battle. RIP.

Friday, November 4, 2011

What have we learned?

A decade ago, the dot-bomb era was ending, and with it the destruction of billions of dollar of investor wealth.

Three years ago, the financial markets were collapsing after the popping of a housing bubble fueled by subprime lending and liar loans.

Today, Groupon raised $700m in an IPO in “the largest IPO for a U.S. Internet-related firm since Google Inc. raised $1.66 billion in August 2004.”

The stock rose 30% in first day trading over its offering price, although it dropped 13% since its opening price of $30. The total shares traded Friday were 142% of those issued — meaning on average every share was sold once and 40% of shares were sold twice. Presumably some of that comes from the “greenshoe” of the offering bankers flipping their shares in addition to their $50 million in fees.

Today, Groupon has a market cap of over $16 billion.

In its S-1, Groupon claims competition is not an issue:

If there's a question I've received from Groupon skeptics more than any other, it's, "how will you fend off the competition—especially massive companies like Google and Facebook?" I could give a dozen reasons to bet on Groupon, but it's impossible to predict the future or the actions of others. Well, now the sleeping giants have woken up—and the numbers are showing that what was proven true with literally thousands of other competitors is just as true with the incumbents of the Internet: it's kind of hard to build a Groupon. And since anyone with an Internet connection can track the performance of our competitors, I can be more specific:
  • Google Offers is small and not growing. In the three markets where we compete, we are 450% of their size.
  • Yelp is small and not growing. In the 15 markets where we compete, our daily deals are 500% of their size.
  • Living Social's U.S. local business is about 1/3rd our size in revenue (and smaller in GP) and has shrunk relative to us in the last several months. This, in part, appears to be driving them toward short-sighted tactics to buy revenue, like buying gift certificates from national retailers at full price and then paying out of their own pocket to give the appearance of a 50% off deal. Our marketing team has tested this tactic enough to know that it's generally a bad idea, and not a profitable form of customer acquisition.
  • Facebook sales are harder to track, but are even less significant at present.
Normally, we’d wonder how much the shares will fall after the other 96% come out of lockup. However, insiders have already dumped $943 million in shares after capturing 84% of the VC proceeds. So perhaps the large insiders will be patient, holding out for a higher price in the long run.

Or maybe there is no long run. The company lost money for the last four quarters, and by some measures it was technically insolvency before the IPO. As Villanova business professor Anthony Catanach told CNBC:
The picture is even worse if you consider the significant intangible assets recorded by the company (goodwill, intangibles, deferred taxes, etc.).  We still don’t have any reported evidence of the cash generating ability of these “assets”, so future write-downs may be forthcoming.

If you deduct these assets, to get a tangible equity number, the insolvency picture is even clearer.

We still worry about all the red flags that are being ignored.  For example, with all the restatements (revenue, CSOI, etc.) and amendments, this delivers a powerful signal about the quality of internal controls over financial reporting, as well as the competence of the finance function at this company.

What else are we not seeing in the numbers?  Recent senior management turnover does not help, and the rapid growth adds more concern to the internal control issue.  And the working capital deficit (current liabilities greater than current assets) raises further concerns. 
Wikipedia tells us that 1637, a single tulip bulb sold for 10x average annual wages.

A century ago, philosopher George Santayana said: “Those who cannot remember the past are condemned to repeat it.” Nowadays, few philosophers make it to Wall Street, let alone invest in the market, which is why the “wisdom of crowds” is often the “madness of crowds.”

Wednesday, October 26, 2011

Netflix: The bad news keeps on coming

Netflix shares dropped 35% Tuesday, after reporting that it lost rather than gained US subscribers. At $77, stock is now down 74% from its alltime July peak, when it flirted with 300.

It’s down 70% since last April, when I asked:

How long can Netflix's luck last?

The Netflix mania reminds me of the TiVo mania five years ago. All manias reach a peak, but so far the Netflix peak is nowhere in sight.
I referred to “the reality distortion of the SV view of Netflix” — arguing that the enthusiasm for Netflix in the Bay Area might be atypical for Middle America. (A reader also pointed out that Netflix faces relatively low switching costs.)

On Tuesday, analysts downgraded Netflix shares. But why didn’t they downgrade them beforehand — particularly given the ongoing stream of bad news all summer — the ill-advised price increase and the (subsequently reversed) plan to split its businesses.

Some “experts” are now discovering that competition is possible in what has long been a commodity distribution business. As I said in July and again a month ago, that’s particularly true for electronic downloads.

Schmputerian pundit Holman Jenkins argues that all this bad news is good news for Netflix — even as he points out that Netflix has failed to win electronic distribution deals for 90% of the content it has one physical discs. He also argues that the price increases are necessary to pay ever-higher fees to access downloadable content.

Instead, he sees a silver lining out of 100 days of fiascos: a wounded monopolist (or rather monopsonist) is no longer as much of a threat to the movie industry, so perhaps they won’t gouge Netflix so bad in the future.

I see just the opposite lesson. The Netflix (and kiosk) businesses worked because with physical discs, the distributors could arbitrage the studio’s pricing to the sell-through market. For all-electronic content, there is no such gray market reasonableness restraint on studio greed, and so the studios will continue to jack up their prices until (it appears) we will never see a $10/month rental option again.

The fallout for that would be death for the pure-play distribution channels such as Netflix. BlockBuster (owned by Dish) might last a little longer, but is subject to the same pricing cartel. However, Amazon, Apple and Wal-Mart are all going to be around a decade from now — and can afford to be price followers in a commodity market with low switching costs.

The more serious question is how loyal are today’s millennials to full-length Hollywood content? Will they pay more for a Netflix (or equivalent) streaming subscription? Or will they just occupy themselves with free YouTube videos, as seems to be the habit of today’s teenagers?

Certainly any movie industry strategy that forfeits a generation of loyal listeners is as idiotic as ignoring (or suing) the Gen X’ers who were “sharing” MP3 files rather than buying CDs. We all know how that picture turned out.

Monday, October 17, 2011

Strategy straw men

It’s no secret that consultants, academics and other authors are prone to offering pat answers to complex problems, whether in managerial books, textbooks, HBR article or other managerial proscriptions.

(Mr.) Jo Whitehead of the Ashridge business school argues in an FT article Monday that strategy textbooks and strategy classes focus on superficial application of complex theories rather than sophisticated application of basic (and memorable) theories:

The root of the problem is that everyone wants to discuss something new and sexy – leaving the basics behind. Professors have to research frontier issues, which typically mean rather esoteric subjects such as collaborative strategy, stakeholder engagement or Web 2.0. Students want exciting cases and flashy new ideas.
While the direction that he advocates makes sense, there seems to be no evidence for the (mythical)) straw man strategy professor. Another argument
Advice needs to be given on how to make the best use of limited data
First, many MBA classes assume that managers will be working in a large corporation with unlimited resources — while entrepreneurship courses have traditionally been taught in this direction.

He adds:
Without such changes we will continue to churn out business people who can talk about the latest sexy concepts in strategy but, when required to come up with one, default to overly simplistic approaches such as Swot analysis.
Teaching basic application of key concepts to all levels of students was my major goal for 9 years of teaching strategy at SJSU, and most of my colleagues as well.

Another problem with the straw man was the broad brush argument. I've taught undergrads, 20-something MBA students, and executive MBAs. Undergraduates have to understand what a manager does, while an existing manager has to be sold that you have some clue as to what you’re talking about. An approach suitable for one audience is going to fall with another.

Finally, the article concluded with the obligatory plug:
Jo Whitehead is the author of ‘What you need to know about strategy’ (Capstone) and a director of the Ashridge Strategic Management Centre
It turns out, this is the second of his two strategy books for managers. Meanwhile, his bio notes his former role as VP and director of BCG (the people who brought us the infamous if now forgotten 2x2 “cash cow” framework).

So while I am sympathetic to Mr. Whitehead’s desire to improve strategy teaching and make it more realistic, I don’t think his complaint represents the typical business school (or at least the typical US teaching-oriented business school). Plus if one were to investigate where superfluous “new and sexy” theories come from, I’d be inclined to start with consultants, book authors and directors of b-school strategy centers.

Sunday, October 16, 2011

Death of the once-great Motorola

Robert Galvin died last week at aged 89. The second of three generations of Galvin CEOs at Motorola, he was clearly the best, guiding the company to its period of greatest success (1959-1997).

In addition to serving as Motorola president, CEO and chairman, Galvin was chairman of Sematech and helped create the Six Sigma movement in the United States. For more than 20 years, Galvin was a Notre Dame trustee and later fellow. His funeral mass will be held Tuesday in Winetka, Illinois.

I nearly met Galvin at what was likely his last public appearance, a dinner Sept. 8 in San Diego in which the Marconi Society gave him their a lifetime achievement award. Unfortunately, a massive power failure shifted the event from the Scripps Aquarium to become a candle-lit garden party, in which the mingling was cut short when the sun went down and the light disappeared. Galvin was at the event in a wheelchair, but we never spoke.

The Marconi Society prepared a very professional retrospective of Galvin’s life with Motorola, including interviews with Galvin and key associates. The 7-minute video was intended to be shown at the banquet, but without AC it was passed around among the 100 attendees on two battery-powered laptops.


The video included an interview with the (famous) Marty Cooper, who ran the Motorola project that produced the DynaTAC handset that was produced during the 1970s for the licensing trials.

Another interview was with yours truly. My original dissertation plans focused on the efforts of AT&T and Motorola to bring out cellphones during the period 1960-1983. I argued that Galvin brought two key contributions of Motorola to the cellular industry:
  • pushing for competing cellular licensees for every major market, rather than replicating Ma Bell’s landline monopoly
  • the ongoing push for miniaturization of the handset — being the first with a portable handset.
Something I hadn’t previously heard — although it was in the NYT obit — was Galvin’s story of how he got the FCC to approve his proposal for a 2nd license. He brought a portable handset to the Reagan White House, and Reagan himself asked a staffer to direct the FCC to grant Motorola a license.

It’s so very sad how Motorola has lost its way since the days of Bob Galvin. He can’t escape blame entirely, both appointing his son Chris to mismanage the company and greenlighting the $7 billion Iridium boondoggle that sapped the company’s resources at a time when Nokia (and later the Koreans) was eating its lunch.

Even without a happy ending, the world is a better place for people like Bob Galvin, Ken Olsen and others who created something that didn’t previously exist, harnessing technology both to serve customer needs and create economic growth. I’m guessing in my lifetime we will probably say something similar about Steve Jobs, when (like Motorola and DEC) the remnant of Apple has been commoditized into a shell of its former self.

Wednesday, October 5, 2011

Steve Jobs, 1955-2011

Eight years after he was diagnosed with pancreatic cancer, and less than two months after resigning as CEO, Apple Chairman Steve Jobs died today.

Even in his absence, Apple Inc. is showing the perfect sense of style that Steve imbued to the company he co-founded 35 years ago. The website shows a picture of Steve

which then leads to a simple message
Steve Jobs
1955-2011
Apple has lost a visionary and creative genius, and the world has lost an amazing human being. Those of us who have been fortunate enough to know and work with Steve have lost a dear friend and an inspiring mentor. Steve leaves behind a company that only he could have built, and his spirit will forever be the foundation of Apple.

If you would like to share your thoughts, memories, and condolences, please email rememberingsteve@apple.com
The company issued a brief official statement:
October 5, 2011

Statement by Apple’s Board of Directors
We are deeply saddened to announce that Steve Jobs passed away today.

Steve’s brilliance, passion and energy were the source of countless innovations that enrich and improve all of our lives. The world is immeasurably better because of Steve.

His greatest love was for his wife, Laurene, and his family. Our hearts go out to them and to all who were touched by his extraordinary gifts.
The San Francisco Chronicle was the first to post (as is common for newspapers) the pre-written obit, updated with today’s news, and accompanied by seven photos. (The San Jose and New York papers were slower to respond, and the Los Angeles Times obit, while it had interesting tidbits, was not nearly as good.)

Even having read most of the Apple histories, I learned a few things from the Chronicle’s story. While Steve (son of an unwed graduate student) didn’t have a lot in common with his adoptive father,
[Steve Jobs] considered it lucky that his dad, a machinist, moved the family to Mountain View when Jobs was a boy and gave him a workbench in their garage.

"My father, Paul, was a pretty remarkable man," Jobs said in a 1995 oral history for the Smithsonian Institution. "(He) was kind of a genius with his hands (who) spent a lot of time with me ... teaching me how to build things, how to take things apart, put things back together."
Both the LA and SF obits talked about his rivalry with Bill Gates — Gates praising Jobs in the former and Jobs scorning Gates in the latter.

My own life was changed by Jobs and his creation, the Macintosh. From its release in 1984, I sought to make my living around this magnificent machine, which I did for 16 years until becoming a full-time college professor in 2002.

Of course the Jobs I era (1977-1986) at Apple was separated from the Jobs II era (1997-2011) by a string of horrible CEOs who did their best to destroy the company. (Convinced they were going to succeed, I went back to grad school to learn a new trade). Beyond what I’ve said earlier, there is little I can add to these and other testimonials to the contribution Jobs made to the computer, electronics, entertainment and publishing industries.

The Chronicle summarized his contribution thusly:
Jobs was considered by many to be the greatest corporate leader of the last half century, and indeed his numerous successes rank him alongside Ford, Disney and Edison as a giant of American business.
Both the Chronicle and the Times quoted Jobs’ thoughts on death from his famous 2005 Stanford commencement speech as did the local ABC affiliate. Here is the longer quote in context:
No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.
My prayers go out to Steve’s widow, Laurene, his two teenage daughters and his two adult children.

Thursday, September 29, 2011

Amazon emulates deceptive airline pricing

Amazon introduced some new e-readers Wednesday that increasingly look like tablets. The color version, the Kindle Fire, looks a lot like the other 7" tablets out there — with Android and a (modified) WebKit browser. (And like Barnes & Noble, it’s a locked down Android rather than a real Android experience). Jeff Bezos even played the Steve Jobs role, albeit with a collared rather than mock-turtleneck shirt.

As befitting a commodity product category, what’s notable is the aggressive pricing, lower than any previous Amazon or Barnes & Noble product in these categories. The color tablet is hundreds lower than the 7" Android tablets, threatening the (already dubious) future of these products from RIM, Samsung and others.

The Kindle Fire is $199, challenging the existing (and largely unknown) 7" nookColor at $249 both on price and a wider range of content. B&N's Silicon Valley lab is working on a replacement, also due for the Christmas season.

However, for the rest of its products (the black & white e-ink models), Amazon has adopted deceptive pricing worthy of a major American airline, starting with the rollout photo taken by ZDNet:

[Bezos slide]

and continuing with the pictures on the Amazon website:

The problem is, these are the product prices With Spam® — continuing the Orwellian name of “Special Offers”. The actual prices are $30-40 higher:

ProductPriceWith Spam®
Kindle$109$79
Kindle Touch$139$99
Kindle Touch 3G$189$149
Perhaps Amazon truly hopes it will become an advertising-driven powerhouse to someday rival Google. My suspicion is that — like the airlines — this is just a form of bait-and-switch deceptive pricing that so far seems to be working.

How will countless Americans feel about getting a spam-infested e-reader under the Christmas tree this December, all because their loved one was too cheap to buy the real thing? Or will gift-givers be drawn in by the deceptive prices, and then spring for the real product? How much longer will the media enable this deception — describing the features of the spam-free products but touting the low prices of the spam infested versions?

Sunday, September 25, 2011

Insincerity as a business model

I'm spending over a day of my life this week in completely full steel tubes, shuttling back and forth from the West Coast to Old Europe. For that, I am being rewarded with "miles" that may someday allow me to spend more time in cramped steel tubes.

This time, the most convenient routing put me on United-Continental. While once the old Continental provided nice amenities — like seat power in coach — the new merged airline is racing to the bottom with United’s trademarked approach of treating coach passengers like the worst people in the bottom floor of steerage on the Titianic. All the while, they want us to believe the merger is good for service quality.

To that end, the nominal safety video began with a propaganda piece by new United CEO Jeff Smisek trying to convince us that what we were seeing was better service. This is the same message Smisek has been preaching for a year, since Continental disappeared as an independent company.

But when he concluded “Thanks for flying us and have a great flight,” it didn’t match the reality around me. In United Steerage™ there is no leg room, and on a 100% full 757 there is no shoulder room either. Being domestic coach, there was also no food unless you wanted to pony up airport-style prices. Trapped in my seat, I got a lot of work done, but I wouldn’t confuse it with a “great flight.” Thanks to deregulation and commoditization, we have reasonable fares but great service is a distant memory.

Similarly, the stewardess-presenter on the safety part of the video concluded “We ask you to relax, sit back and enjoy your time with us.” Surrounded by humanity and unable to move, in a seat that barely reclines, and without a clear view of the tiny movie screen, I wouldn’t say I ever relaxed, sat back or enjoyed much of anything.

It gets better. After one flight, I got an email asking for my opinion in an online satisfaction survey. After I gave them an earful, the computer said:

Thank you for taking the time to complete this questionnaire! The information you provided will help us ensure we are meeting your needs.
However, I know full well that they’re not going to change their business model or pricing policy based on mere customer complaints — losing market share, maybe, but right now they assume they can make money by being bigger rather than better. This is, after all, the airline that invented a category worse than coach — Economy Minus® — lowering the standard seat pitch to 31", even less than Southwest. This is also the company that pioneered charging for bags, meals and movies.

So as someone with several decades as a consumer (and graduate courses in marketing), I wonder why people say this? Are they just naturally insincere? Have they ever heard of cognitive dissonance? Do they think people won’t notice? Or do they hope people assume that the service is just as lousy on every other competing airline?

Orwell and Goebbels said you could lie to people repeatedly if they had no frame of reality to compare it to. Does any private business (as opposed to the Federal government) think they have enough control over the media to be able to get away with it?

Thursday, September 22, 2011

HP matters, Leo didn't

In the latest example of its incompetence, HP’s board of directors fired CEO Léo Apotheker, the same man it inexplicably hired less than a year ago after it fired its most financially successful CEO in a generation.

Into his place comes HP board member (and former eBay CEO) Meg Whitman, who told All Things Digital:

I took this job, because HP really matters to Silicon Valley, to California, to this country and to the world. …This is an icon and the place where the initial spark to create Silicon Valley came from and I am resolved to restore it to its rightful place.
At one level I agree with and admire Whitman. My work as an HP subcontractor in the 1980s and 1990s paid for my house, and I have nothing but respect for the company’s historic role in creating Silicon Valley. Twenty years ago, HP was the best in several segments that mattered. However, the company has largely faded to irrelevance in the past decade: first in some declining businesses, and second, third or worse in growth businesses.

On the other hand, Whitman (seconded by chairman Ray Lane) is promoting the spin that Apotheker was axed because he was a bad communicator. He certainly was awful — more suited for a top-down command and control German bureaucracy (NB: SAP) than an innovative Silicon Valley pioneer. But there was nothing in the latest news to suggest that Whitman is going to repudiate the series of bad decisions promulgated by Apotheker.

In particular, the HP of Apotheker was exactly the opposite of that of Mark Hurd — which was completely consistent with the (controversial) vision of his predecessor Carly Fiorina. A $125 billion company with 300,000 employees can’t turn on a dime — or even as quickly as an aircraft carrier.

As the seventh CEO since 1999, I could easily see Whitman lurching HP into yet another direction with yet another strategy and yet another reorg and yet another grand acquisition and divestiture strategy. This is — and I have to say it — the woman who inexplicability spent $2.5b to buy Skype to complement her online flea market.

Thanks to generous union spending — and daunting party registration figures — Whitman (like Fiorina) failed in her effort to become an elected California official last fall. However, while her skill set is better suited to being appointed HP CEO than being elected governor, I’m not sure the former job is any easier. (I say this as California continues to imitate Greece-style deficit spending without the public employee cutbacks that the latter has reluctantly embraced.)

So running HP is not (as the AllthingsD interview suggests) about better communication skills, or meeting with executing on Apotheker’s inexplicable (and apparently irreversible) $10b acquisition of Autonomy, an obscure UK software company. Nor is it about building upon the unmatched legacy and once vaunted brand name.

It’s about deciding what HP’s unique competencies are, and how they are relevant to today’s highly commoditized, slow growth IT market. Even badly run, the State of California is guaranteed to exist for another 150 years, but the same cannot be said for a private company. Executing an IBM-style turnaround — rather than a Dell or DEC-style slide into oblivion — is longshot prospect for any executive.

Now that HP has a new CEO, it needs a new board. As I wrote a month ago, HP’s board consists of
Two insiders, three private equity investors, a failed startup technologist turned investor (Mark Andreessen), a former consumer products exec (Meg Whitman), execs of two failing telecom companies, the CEO of a successful software lock-in business, CEO of a major consulting company, chairman of a specialty chemicals business, and Larry Elison’s longtime sidekick (turned nemesis and Kleiner Perkins managing partner).
In many ways, it resembles the Apple board during the Jobs-free interregnum, where being on the board was the best job many of these people had ever enjoyed. Apparently others are finally joining Vitaliy Katsenelson of Seeking Alpha and me in noticing the board that can’t shoot straight — as this Reuters article Thursday:
Interviews with insiders, former executives and experts paint a picture of an ever-changing roster of board directors who lacked a good grasp of the company's fundamentals and vacillated over what its business should be.
Having a weak board has suited the goals of the last six HP CEOs, but shareholders have been cheated out of a fair return for their investment. If Whitman is really going to save HP, she needs to swap out the indecisive with actual competence. There should be others that share her (nominal) passion for saving this Silicon Valley legend, rather than just enjoying the sinecure. Let’s see if the institutional investors also push for a better board, or merely mark time for the opportune moment to dump their shares.

But in upgrading the board, Whitman and HP also need to confront a fundamental strategic question that the company has been avoiding for a decade: is it an enterprise company like IBM, or a consumer company like Apple? It has not been effective competing with either. Instead, it become the leader in low-margin consumer PCs — a business both IBM and Apple eschewed and Apotheker said HP should dump.

So where will HP lead? I’m guessing it will try to get there by acquisition, but the next acquisition will have to be transformative, unlike 3Com, Palm, Autonomy — or for that matter, Skype.

Tuesday, September 20, 2011

Netflix continues come-from-ahead strategy

Now the other shoe has dropped at Netflix — the controversial decision to hike prices and charge separately for mailed and downloaded discs was a prelude to separating the two businesses.

The stock price had already dropped more than 25% last week after warning shareholders that subscribers were down due to the price hike. That in itself was not remarkable, since the growth rate (was clearly unsustainable and so eventually the company (like Google, Microsoft and most large tech companies not named after fruits) would have to give up its generous growth multiple.

However, the decision to rebrand its original (physical disc) option as “Qwikster” is puzzling, even by normal standards of Silicon Valley hubris.

Let’s set aside the decision to label its slowest option “Qwik.” Also forget Reed Hastings with the normal CEO ego of wanting to keep the high growth business and (someday soon) dump the slow growth one — as Carly Fiorina did HP’s original instrument business (now Agilent). Even more aggressively, Sam Ginn spun off Pacific Bell’s only growth business —- cellphones — to form AirTouch and then left PacBell for AirTouch — which eventually led to AirTouch being acquired by Vodafone and Ginn’s sidekick Arun Sarin becoming Vodafone CEO.

Nor is it surprising that Hastings wants to leave behind the business of atoms and replace it one of bits. We’ve all been told this for so long that most people might even believe it to be true — and it will be most true during our lifetime for information goods such as words, music and video. This is even though the decision to split the businesses seems to have exacerbated customer objections to the unbundled pricing.

Netflix

No, what I find puzzling is that Netflix is leaving behind a business with high entry barriers for one with much lower barriers. It’s hard to reliably and cheaply ship disc to millions of subscribers: the entry barriers include not only complex operational processes but also inventory and economies of scope (catalog variety). Netflix created the disc-by-mail business, had no serious competitors and now is walking away from it.

Meanwhile, what does it take to do online downloads? Most of all, a fast and cheap Internet connection bad for by the prospective customer. Also, a brand, technology, and good relationships with studios. Amazon and Apple certainly have shown they can match this, and other companies — including Blockbuster, Sony, Walmart — seem to have the will and the resources to also offer a credible alternative.

Back in January 2009, I remarked on Netflix’ remarkable five year run, and suggested that it had a good start on the next decade. Today it’s clear that its original business of renting movies to Americans is running out of steam, and that the NEW Netflix — absent its legacy business — must fine new products and markets if it hopes to resume its growth ways.

Friday, September 9, 2011

Old disasters, new media

An operator error yesterday caused a power failure leaving 5 million people in San Diego and nearby areas in the dark. Although communication efforts used a combination of old media and new media, many of the affected people in my hometown were literally and figuratively in the dark.

Unlike the Gray Davis-Enron-energy mismanagement blackouts of a decade ago, the San Diego outage fit the pattern of the major East Coast summer outages such as the great New York blackouts: a single problem cascaded failure throughout the system. At times of peak air conditioning load, there’s little margin for error in our electric grid.

In this case, an operator error in Arizona around 3:30pm Thursday temporarily shut down one major source of imported power for San Diego. The result would have been brownouts, but when the voltage on the San Diego grid dropped below normal, the 2.2GW San Onofre power plant was taken offline and the system collapsed at 3:40pm. Some 3 million San Diego residents were without power, as were Imperial County, portions of Orange County, the Palm Springs area, and Northern Baja California.

San Diego doesn’t have a lot of experience with disasters. We don’t get hurricanes, tornadoes or blizzards, although the mountain passes are (rarely) closed for snow or wind. None of the state’s major recorded earthquakes have occurred in the region, although the 1971 Sylmar quake did cause me to run to a doorway. Unlike LA, there have been no major riots, although the 2003 Cedar Fire and 2007 Witch Creek Fire each caused scattered deaths and $100+ million in property damage.

As it turns out, at the time of the blackout I was driving to San Diego for a Marconi Society banquet honoring communications pioneers Bob Galvin, Irwin Jacobs and Jack Keil Wolf. Because I was in a car, I was listening to the radio, and heard about the blackout less than an hour later, and heard the 5pm press conference that explained what had happened.

My inlaws were sitting at home with no TV, radio or Internet and didn’t know what was going on. I called them (from my cellphone in San Diego to their landline) and told them what I knew.

I was unable to reach my mom and assumed it was because she had switched from POTS to VoIP for the free long distance. As it turns out, Cox provides for battery backup for the MTA to work during the power failure. (In fact, I didn’t realize I was calling my inlaws on their Cox VoIP rather than Ma Bell’s POTS). However, my mom lives in a large senior complex and while the POTS was reaching the building, none of the phone lines were powered to the individual apartments.

At dinner, some of the other guests were surfing CNN.com or the local paper to find news of the power outage. Cellular systems were taxed — and sometimes overloaded or some cells were without power — but in general calls were going through better than after an earthquake (when everyone decides to call at once).

Driving around, I heard various authorities said “go to our Twitter feed”. The local utility, SDG&E, did a good job of updating the news as it came in — including a link to the news that all power was restored by 3:25 a.m. Friday. The Twitter feed for San Diego County government never noted that all power was restored, but did say county courts would be in session. The San Diego Airport tweeted problems from Thursday night but had nothing Friday. Similarly, the region’s main emergency preparedness agency had no posts since this one Thursday night:

@ReadySanDiego
RT: @SDGE While we're getting power back on to some areas, it will be some time tomorrow before all power is restored to region. #sdoutage
So as with other web-enabled communications strategies, such efforts are meaningless unless you make the commitment to keep your content up-to-date: daily or weekly for most organizations, but hourly for major institutions in a time of emergency.

In the end, the only communication medium that worked reliably was decidedly old media: news radio. The local news/talk station, KOGO, dates back to 1925. Although they (and other stations) had the cable news election night/disaster syndrome — babbling when there’s nothing new — nonetheless they were able to broadcast accurate up-to-date news to the widest possible audience.

In other words, mass communications run by journalists trumped social media run by amateurs or government officials. Now if only old media could find a business model that keeps them in business.

The outage certainly makes me appreciate the crank-powered Grundig radio that (ironically) my mom gave me one Christmas. However, it takes a lot of cranking to listen to a half hour of radio, so when I got home I plugged in the charger to the wall so I’ll be able to listen for an hour or so before I have to crank.

Wednesday, August 31, 2011

Whither T-Mobile USA?

The Obama Justice Department filed suit Thursday to block AT&T’s proposed acquisition of T-Mobile USA. The case against the merger is compelling, but I never thought the administration would make the political decision to block the merger.

Perhaps the Justice officials bought into a slippery slope argument: if they don’t say “no” to AT&T buying T-Mobile, how could they say no to Verizon buying Sprint. Or maybe it was the strong signs of opposition from the Democrat majority in the Senate.

Even the Wall Street Journal reported that Ma Bell’s efforts to build political support never solved the legal condurum:

If breadth of backers was the main criteria, AT&T's $39 billion purchase of T-Mobile USA would have sailed through regulatory review. … But good corporate citizenry and lobbying expertise aren't the only criteria. And as the Justice Department's court challenge to the deal Wednesday demonstrated, the deal was always long on hype for how it would help consumers, and short on robust legal arguments.

AT&T's problem is that the legal issues aren't on its side. Antitrust lawyers had said in recent days that the company's chances of winning approval rested on political issues trumping legal concerns. The fact that the government challenged—months earlier than observers had expected—demonstrates that the legal issues won the day.

On the most basic level, it was evident before the filing, the combination exceeds concentration of market share levels—as defined by the Herfindahl-Hirschman index—that the federal government generally finds acceptable. Divestitures could resolve the concentration risk, of course. But AT&T will find it harder to get around the reality that a merger would reduce the number of national wireless firms from four to three—in the process eliminating a low-priced competitor.
Given that reality, it’s hard to understand why AT&T claimed to be surprised. Shareholders should demand an immediate investigation as to what Kool-Aid® they’ve been passing out at Whitacre Tower, headquarters for SBC AT&T in San Antonio.

AT&T may fight for half a loaf, but any partial AT&T victory would leave T-Mobile in even weaker shape that when the deal was announced — except for the temporary salve of the $3 billion breakup fee.

The problem is, T-Mobile USA (misleading ads with spokesbabe notwithstanding) has no 4G strategy and has been under-investing in the business as an endgame strategy. It’s too expensive to compete with Metro PCS (or Sprint’s Virgin Mobile) and lacks the phones or service quality to compete with the big three.

Of course, if #2 AT&T can’t buy #4 T-Mobile then #1 Verizon certainly can’t. That leaves #3 Sprint, or perhaps some foreign entrant.

Some may claim that this will force a Sprint-T-Mobile merger, but it’s hard to see how. The two have incompatible technologies, and buying the Nextel incompatible technology almost killed Sprint. Also, Sprint’s market cap today is about $11 billion so there’s no scenario where they could approach AT&T’s $39 billion offer or even the $20-25 billion that analysts estimated last Christmas.

My best guess: T-Mobile AG will run the property further into the ground, with no 4G strategy and its advertising-driven price war. Then in a few years, the world’s richest man (not Mr. Bill) will buy T-Mobile USA for less than half of the $39 billion, and integrate it with América Móvil, Latin America’s most successful mobile phone business. It could put together special roaming agreements for the millions who live and call on both sides of the 30th parallel.

Meanwhile, T-Mobile USA won’t have the spectrum or money to build a 4G network, so someday it will have to rent time on a virtual 4G network, whether Sprint’s partner Clearwire or Leap’s Lightsquared.

I’m (temporarily) a T-Mobile subscriber. I suspect the prices will remain attractive as long as T-Mobile is fighting to preserve its subscriber base and prop up the eventual sale price. I’m curious to see whether T-Mobile will start any price wars, or will remain reactive to MetroPCS and Virgin price wars, but in the end I don’t think it will have any bearing on its survival.

Sunday, August 28, 2011

Insanely Great

Steve Jobs is still retired, but earlier today I heard an interesting commentary on the role that he played not only for Apple but the industry.

The source was Leo Laporte, who hosts a technology-oriented radio show on weekends here. For almost 30 years, I’ve had a love-hate relationship with computer journalists (typically over their bias, lack of technical knowledge and opinionated self-importance) but I’d have to rank Laporte as one of the best — and perhaps the best in the electronic media.

What caught my attention was when Laporte listed all the things that Apple didn’t invent but perfected

  • Apple II (1977) was not the first PC (1975 or perhaps 1974)
  • Mac (1984) was 3 years after the IBM PC (1981)
  • iPod (2001) was not the first MP3 player
  • iTunes was not the first music software
  • iPad (2010) trailed Chairman Bill’s failed efforts at making a tablet by a decade; and
  • the iPhone (2007) was not the first smartphone
Laporte was exactly right — many forget what Apple did to change the world because we forgot what it was like before Apple changed it.

Reading between the lines, none of these Apple breakthroughs happened during the Jobs interregnum (1985-1997). Apple did do a few important things during this period — QuickTime and the first PowerBook — but I think it’s easy to argue that none rise to the level of the Mac, the iPhone or the iPad.

As Laporte noted, Steve Jobs was not about making wads of money but changing the world. He once exhorted his workers to be “insanely great” which is how Apple transformed existing product categories into something new. (Management scholars might say Apple created the Dominant Design.)

Also as Laporte noted, the world that Apple created is probably different than the world that would have existed without Apple.

I’ve read every major book published about Apple in the 20th century, and a few of the later ones. The early histories make clear two things. First, Steve and Steve and the early employees were about changing the world. Secondly, their vision was creating computing for the masses, i.e. making computing personal. (And arguments about whether the Mac stole from PARC miss the point that Xerox was never going to change the world with a $15,000 workstation targeted at the Fortune 500.)

If you look at Atari and Commodore and some of the other early consumer PC pioneers, they had a completely different DNA. They were about selling lots of products, but they didn’t really care whether they got used or not. (The Commodore 64 was a powerful machine for its day, but without decent software I suspect most got stored in a closet as ours eventually did.)

Instead of just peddling boxes, Apple created the K-12 education market, a market they owned until (post-Steve) fears about its future (and the abandonment of the Apple II) created an opening for Dell to sell commodity PeeCees. Of course, much of this success accrued to Apple’s benefit, with half of US college students wanting a Mac over a PC.

Meanwhile, the decentralized third party software ecosystem concept of the Apple II has been replicated over and over — in the IBM PC, Macintosh, Windows, Xbox/PS/Gameboy, the iPhone, iPad and Android to name a future. The idea that you make a cool box, distribute APIs and wait for third parties to provide the missing pieces is now the norm for any software-enabled device.

As someone who now teaches bioscience students — many of whom will go into drug discovery and medical devices — I want to see how we can translate and infuse this passion for making a difference into their careers. People tend to hold up Steve Jobs as a brilliant product designer — and industry strategist — but we tend to forget the part about his focus on changing the world.

Wednesday, August 24, 2011

End of the Jobs II era

Steve Jobs resigned as CEO today, marking the end of the 3rd and final act of a career that transformed the the computer, consumer electronics, mobile phone and entertainment industries:

  • Apple (Jobs I): 1976-1985
  • NeXT: 1985-1996
  • Apple (Jobs II): 1997-2011 (continuing as non-executive chairman)
In between, he also bought control of Pixar in 1986 for $10 million, making his personal fortune 20 years later by selling the company for a cool $7 billion.

As Walt Mossberg notes, it’s hard to think of a single individual who had as much impact on the business world across the last 30 years. Steve brought us the Apple II, Mac, iPod, iPhone, iPad and even a new campus for Apple. Steve Jobs has had better years (e.g. 2007 or 2010) than most IT industry CEOs have had careers.

Apple has been central to half my life. I was late to the Apple II, not using one until I shared an apartment with a fellow newspaper reporter with an Apple II+. However, I bought my Mac the first week they went on sale in 1984 and have owned one in some form or another for the next 27 years. I also ran a Mac-only software company from 1987-2002, wrote for Mac trade magazines and did my PhD dissertation on the tail end of Apple’s sad decline during the dark ages between the two eras of Steve Jobs.

Despite these long ties to Apple, I didn’t buy Apple stock when Steve returned to Apple. Big mistake: if I’d put in $10,000 — my standard IRA side bet — it would be worth $1.7 million today.

Aged 56, Steve Jobs still isn’t dead, and perhaps he will remain an active chairman for a few years. Apparently he’s remaining on the Disney board as its largest shareholder, monitoring the $4.5b (7.4%) stake that will provide an ample college fund for his three youngest kids. (His out-of-wedlock daughter Lisa graduated from Harvard 11 years ago). He also has 5.5 million Apple shares worth nearly $2b.

As we pundits predicted years ago, the efficient but unexciting Tim Cook gets to be CEO, and the market was not happy. It’s even big news in South Korea. But in 2013 or 2014, Cook will become chairman/CEO and Steve will surrender what is clearly his most precious child, which recently was the world’s most valuable company.

His youngest kids are (approximately) aged 13-20, so they got a few more years with their famous dad. Jobs’ news came on my late father’s birthday, so I’m reminded that even adult children will miss their father and cherish the time that have with him during his final days.

Beyond that, what else can the man do? His first authorized biography is coming out in November, so does he need to write his own memoirs? Set up for Laurene a charitable foundation to rival that run by Melissa Gates?

Whatever it is — and however much time he has — Steve Jobs the man has certainly earned his retirement, and he seems strategic enough in his thinking to figure out how to spend it wisely now that he has nothing left to prove.

Update: YouTube now has video of Steve’s original January 1984 introduction of the Macintosh.

Tuesday, August 23, 2011

HP's acts of desperation

Since last week’s huge news about HP I’ve been hoping to write something, but I was traveling and didn’t time to collect my thoughts. Even after five days, the news still doesn’t make sense, other than as the death throes (or at least mortally wounded throes) of a once-great giant.

Yes, HP has serious problems. It’s been unable to find a decent CEO since its founders (NB: Apple, Microsoft). Simultaneously chasing both Dell and IBM, it caught and passed Dell for a prize it no longer wants, while it seems unlikely to ever catch IBM (at least in my lifetime).

The HP board and CEO Léo Apotheker seem incapable of dealing with the current challenges. It has come to having HP’s chairman bad-mouthing Apotheker’s predecessor for “under-investment” in the core business.

But this is only the latest desperate effort in more than a decade of throwing one Hail Mary pass after another. Its $1.2b purchase of Palm and webOS was (as predicted) a major mistake. It allowed the (previously dying) Palm cellphone business to die, and meanwhile the efforts to establish the TouchPad as a viable iPad rival has failed miserably (much like RIM) with Best Buy selling less than 10% of those ordered and HP writing off $1 billion in losses on the webOS hardware business — most of that on the TouchPad.

Yes, a couple of things make sense from the announcements. Yes it’s time to cut the losses on the webOS acquisition (Perhaps claiming it has a future as a consumer embedded OS postpones the inevitable write-down, but competing against a no-royalty embedded Linux will be difficult at best.)

And at some level, the divorce of the low margin PC business from the potentially high margin software/services business has a business logic. Mark Hurd was the right man to run the commodity business while Apotheker prefers higher margin services, and neither was suited to run both together in a single company.

The problem is that the current HP is a conglomerate of the leading commodity PC maker, the leading (increasingly commoditized) printer maker, and a hodgepodge of largely second-tier software and services businesses.

Under Hurd, the company had embraced commoditization — executing on Carly’s Compaq acquisition and doing an exemplary job of competing in commodity markets. The only cost was the heart and soul of Bill and Dave’s company, ripping it out as the company shed workers, perks and the exemplary culture that once inspired Steve Jobs and Steve Wozniak.

Then the HP board panicked over Hurd’s poor judgement and forced him out, replacing the successful commodity numbers weenie with just the opposite: a software guy that was presiding over the dying SAP franchise. Apotheker had not solved SAP’s problems — coasting on the inertia of its once-invincible lock-in rents in the BPR segment — so he was rewarded with the reins of Silicon Valley’s oldest and most storied company.

A completely different CEO meant a completely different strategy, which in turn requires a different portfolio of businesses. (It also requires different competencies up and down the line, which the latest moves pointedly do not address.)

Even if exiting PCs now makes sense, as others have noted HP has completely bungled the planned PC spinout. IBM’s decision to sell its division came as a bolt from the blue with the buyer already announced. Apparently HP shopped the PC business and didn’t get its desired price, so now the uncertainty around the PC division (the born-again Compaq) will cause it to hemorrhage customers and market value until it’s finally dumped.

In the end, I have to lay the current problems on the board, which brought us the infamous spying scandal, melodrama over the last 3 CEO appointments and of course forcing out its best directors, Tom Perkins (of Kleiner Perkins fame) and George Keyworth. As Perkins noted in a 2007 video and his memoir, the board groupthink forced out any dissenting view — which (to further mangle metaphors) is a recipe for marching lockstep over a cliff.

Who’s on the board? Two insiders, three private equity investors, a failed startup technologist turned investor (Mark Andreessen), a former consumer products exec (Meg Whitman), execs of two failing telecom companies, the CEO of a successful software lock-in business, CEO of a major consulting company, chairman of a specialty chemicals business, and Larry Elison’s longtime sidekick (turned nemesis and Kleiner Perkins managing partner).

Oddly, while the board has exemplary gender diversity it lacks the obligatory university professor or president. I suspect Intel benefitted greatly from the advice of longtime director David Yoffie — even if I didn’t always agree with his analysis. (If HP goes looking for an academic, Tim Bresnahan of Stanford has understood the economics of platform businesses longer than anyone.)

Apparently I’m not the only one fed up with the HP board. After the 20% drop in HP stock Friday, fellow Seeking Alpha contributor Vitaliy Katsenelson wrote:

Anger and frustration are the two emotions pulsing through my veins as I write this. HP (HPQ), once the symbol of innovation, is being dismantled by its high-pedigreed board and the CEO of the hour. … [In] the early 2000s, when Carly Fiorina, then CEO of HP, engineered the HP merger with Compaq. … [N]ine years and two CEOs later HP has announced that the PC business, the one it so desperately wanted just a decade ago, is too hard a business and that it will look for ways to get rid of it. Almost in the same breath HP announced that it will kill WebOS devices, a business it acquired in April 2010 for $1 billion; and management, possibly missing the irony in those two announcements, went ahead and announced another acquisition, which this time will for sure transform the company.

I don’t need to have a great imagination to envision another conference call in August 2015, where a new CEO decides that the software business is too difficult, and HP needs to come back to its roots (maybe going back to making calculators) and will spin off the software business into a new company, take an enormous charge, and then maybe announce an acquisition that the same highly pedigreed board will rubber-stamp.

HP’s stock sold off not because the company disappointed Wall Street but because Wall Street grew tired of the overpriced “must-have” acquisitions. Wall Street has smartened up and assumed that this acquisition, as with many other “transformative” acquisitions, will do nothing of the sort.
I’d like to hope that HP will turn around some day, but I can’t see how to get there from here. It would require an entirely new board, one with more winners than losers and more big company operating experience. HP and its board are too big to be threatened with a hostile takeover, and so will muddle along — acquiring baubles with the shareholders’ checkbook — without a coherent long-term strategy or market niche.