Monday, May 30, 2011

In remembrance

The 30th day of May, 1868, is designated for the purpose of strewing with flowers or otherwise decorating the graves of comrades who died in defense of their country. …

What can aid more to assure this result than cherishing tenderly the memory of our heroic dead, who made their breasts a barricade between our country and its foes? Their soldier lives were the reveille of freedom to a race in chains, and their deaths the tattoo of rebellious tyranny in arms. We should guard their graves with sacred vigilance. All that the consecrated wealth and taste of the nation can add to their adornment and security is but a fitting tribute to the memory of her slain defenders. …

Let no vandalism of avarice or neglect, no ravages of time testify to the present or to the coming generations that we have forgotten as a people the cost of a free and undivided republic.

If other eyes grow dull, other hands slack, and other hearts cold in the solemn trust, ours shall keep it well as long as the light and warmth of life remain to us. …
— General John A. Logan, May 5, 1868

Saturday, May 28, 2011

Life after San Jose State

It was with decidedly mixed feelings that I sat on the stage Friday for my final SJSU graduation ceremony. For those who want to feel part of something big, I can think of few opportunities for a college professor that would surpass the graduation ceremony at a large public university like San Jose State.

(Technically, Friday was only the College of Business convocation ceremony. Most of the business faculty prefer our ceremony with 700 graduates in the basketball arena over Saturday’s all-SJSU ceremony with ten times as many students baking in the football stadium.)

As always, it was a happy day for the graduates, family and friends. Alumna Jenny Ming returned to keynote the commencement 33 years after she graduated. She gave an abbreviated version of her career in retail, including founding president of Old Navy and current CEO of Charlotte Russe. She said she enjoyed most all the opportunities she had for learning and growing in her 20s and 30s, including eight years at the local Mervyn’s.

Her admonishment for students to keep growing — much like industry speakers earlier this month in an SJSU business class — was music to my ears. I would both second that advice to my students but also — over the last year or two — have concluded that it is advice I should live by.

I had a small role and a seat on the dais as one of six faculty reading the names of graduates. I read names for one of the most popular majors — over 100 Management students — as well as for the smallest major, 4 students from our Entrepreneurship program. It’s always challenging to have a split-second to correctly pronounce an unfamiliar name. I was helped by three years of junior high spanish, plus the familiarity with Vietnamese names that every SJSU faculty member quickly masters. Still, after stumbling over a few difficult names I was always grateful to return to something simple like Garcia or Nguyen.

What made it more difficult were the presentations of certificates to the families of three business students killed during the past year. For these three young people, there will be no life after San Jose State.

One, Cindy Caliguiran, was in the Sbona Honors Program. She and accounting student Kyle Williams were the victims of a May 10 murder-suicide that marked the first murder of a student on campus in its 154 year history. (I had not previously heard about the third student, Jason Santiago, nor did Google shed much light on his life or death.)

Although I never met any of the students, I was choked up by the observance of their families’ tragic and irrevocable loss. While I had plenty of time to get over it, I don’t know how Bill Devincenzi and Howard Turetsky were able to resume reading names after introducing the Caliguiran and WIlliams families. (The sight of Williams’ young widow was particularly poignant).

Honors faculty: Rob Vitale,
Bill Devincenzi and Joel West
Finally, the event was bittersweet as my second and final appearance on the podium. I was surrounded by many of my best friends in the College of Business — i.e., those who cared enough to give up four hours of a Friday morning to honor and celebrate the graduation of our students. On the other hand, it was my last public appearance as a San Jose State professor and one of my last official acts — as I have already started transitioning to my new job.

Entrepreneurship Faculty: Joel West and Steve Bennet
As it turns out, a week ago I watched the commencement webcast for my new employer — about 50 students graduating from the college instead of 800. The smaller school will allow  much more opportunity for a personal touch, but perhaps without the group identity that a large university provides.

Monday, May 16, 2011

Regulated duopoly vs. real competition

Last week, a Senate subcommittee held a hearing entitled “The AT&T/T-Mobile Merger: Is Humpty Dumpty Being Put Back Together Again?” The CEOs of three of the four major cellular companies got a chance to present their positions in between political grandstanding.

I was fortunate to catch the replay Sunday on C-SPAN (one of the few channels my monopolist cable company still provides on basic cable.) A low resolution version of the 2½ hour hearing is also available on the Senate website.

The expert (if self-interested) testimony confirmed what I already knew. As with any consolidation of four major firms down to three, the merger is about reducing rivalry, supplier power and buyer power — good for the surviving companies, bad for suppliers, customers and the smaller rivals.

The Case Against the Merger

The most enlightening testimony came from Victor Meena, CEO of small rural carrier (Cellular South) that (according to Wikipedia) is the 8th largest in the US (after Verizon, AT&T, Sprint, T-Mobile, MetroPCS, US Cellular and Cricket/Leap).

As someone who has spent 15 years studying the history of the US cellular industry — from the prehistory of the 60s and 70s to the boom era of the 90s — I believe Meena has it exactly right. Reducing competition back to a duopoly will bring us back to duopoly-style pricing and duoopoly-style non-competition.

Meena described the merger as a major step backwards for the industry and its customers:

When I began in this business in the late-1980s, there was a local duopoly in every market.… Carriers had virtually no market incentive to innovate or improve service offerings.… In a duopoly, the market can quickly reach equilibrium and, if both providers are reasonably happy with their position, innovation stagnates and prices rise.

The industry changed for the better in the late 1990s, when the FCC, pursuant to Congressional mandate, auctioned off PCS licenses and a substantial number of competitive carriers entered markets—launching a new, healthy competitive era of wireless in the U.S.

But this all began to change in the middle of the last decade. Through unfettered mergers and acquisitions, it has become clear that our industry is on a glide path toward Ma Bell reconstituting herself into the 2 Bell Sisters of the wireless industry: AT&T Wireless and Verizon Wireless.

Not surprisingly, this concentration of market power has led to less choice for consumers and the routine abuse of market power in an effort to prevent competition at every turn. Specifically, AT&T has used its enormous acquired scale to
  1. restrict competitive carrier and consumer access to devices,
  2. withhold roaming agreements, and
  3. leverage its control over device and infrastructure vendors to Balkanize new spectrum and slow the deployment of 4G LTE technology in the U.S.
Meena and Sprint CEO Dan Hesse identified two other negative impacts of increased market power. As chairman of the CTIA, Hesse has been attempting to negotiate lower rates for wireline backhaul for cellular base stations — rates that AT&T and Verizon want to be high but the rest of the industry want to be low. And by consolidating carriers, Meena notes there will be fewer options for smaller carriers to find roaming agreements for 3G and 4G data, as mandated by the FCC last month.

Supporting Cast

As expected, AT&T CEO Randall Stephenson said little to convince me that the merger is good for anyone other than AT&T, while T-Mobile USA CEO Philipp Humm seemed intent on deferring to his new boss. Verizon’s CEO was strangely absent, either to avoid making arguments that would haunt him when he wants to buy Sprint, or to avoid reminding people that two companies will control 80% of the market if the merger goes through.

Among the leftist activists, the self-appointed “consumer” representative was far more persuasive and honest than the union president. At least she knows what a Herfindahl-Hirschman Index is. Tellingly, she also asked: “have you ever seen AT&T advertise against Metro PCS or Cricket?”

The quality of dialog from the top of the dais was also mixed. The two ranking members of the subcommittee — Sen. Kohl and Sen. Lee — asked intelligent questions that attempted to draw out the witnesses. Two other senators (Franken and Grassley) were dim bulbs acting like a prosecutor and defense attorney for the accused. (Sens. Klobuchar and Cornyn were only slightly better — but at least viewers were spared Chuckie Shumer).

If Not Competition, then What?

Meena offered a stark (and I believe accurate) contrast between the two paths forward:
The prospect of this transaction brings us to a critical decision point for policy-makers: are we are going to continue down the path toward an era of nationwide duopoly, or are we going to lay the foundation for a second competitive era in wireless. There is no third option – either AT&T will be allowed to acquire T-Mobile (paving the way for Verizon to acquire Sprint and cementing a national wireless duopoly); or it will not.

If AT&T’s takeover of T-Mobile is approved, all that will remain is the endgame, where the remaining non-Bell carriers wait their turn to be acquired or bled dry by the biggest two carriers.
And, Meena notes, the likely consequence of returning to duopoly is returning to FCC micromanagement:
[I]f the takeover goes forward, policymakers must begin preparations to regulate every aspect of the day-to-day business of the duopolists. Without effective competition as a check on market abuses, the government will have to interject itself to ensure that consumers – the true owners of wireless spectrum – are protected. This means subjecting a future wireless communications duopoly to the same type of regulatory oversight that wireline telephone and electrical power utilities have operated under for decades.

This idea was echoed by Sen. Klobuchar, who suggested that a more concentrated US market — like the rest of the world — would be a more tightly regulated market.

Of course we know that government (or any central command-and-control bureaucracy) usually does a bad job of assuring either innovation or efficiency. So if the choice for consumers — and app developers and handset makers and website owners — is real competition or regulated duopolists, the best option is obvious.

Saving T-Mobile

If the merger is killed, it still leaves the question of maintaining T-Mobile as an effective competitor. It will take more than just a cute spokesmodel and dishonest branding to have it maintain its market share.

In particular, both Stephenson and Humm pointed to T-Mobile’s looming quandary in the 4G era, given that it hasn’t bought new spectrum in the recent auctions. Actually, the solution for the #4 carrier is relatively simple: do what the #3 and #7 carriers are doing for a 4G network: rent one.

Clearly T-Mobile is not going to join Sprint using Clearwire’s WiMax network, but if Clearwire switches to LTE, it would be an attractive option.

If not, it can follow the lead of Leap Wireless (dba Cricket) in renting the LightSquared network. It’s LTE, it promises to be nationwide, and the T-Mobile/Cricket customer base would be enough to make an attractive business (at least until MetroPCS buys Leap).

Sunday, May 15, 2011

California: a tale of two states

California is both the best and the worst place to do business, according to a ranking of state business climates by CNBC. The rankings call attention to our ongoing problems — not likely to be solved anytime soon — in retaining and growing local businesses.

The state is worst (tie with Hawai‘i) in terms of cost of living, 49th in business friendliness (regulatory obstacles) and 48th in the cost of doing business.

However, it’s tops in access to capital — as defined by venture capital — and technology & innovation.

As the Orange County Register notes, the former is no great distinction:

The access to capital measure is extremely narrow. California benefits from having the Silicon Valley, which received 42 percent of venture capital in the first quarter, according to the Moneytree Report by PricewaterhouseCoopers and the National Venture Capital Association based on Thomson Reuters data. But only 212 companies received money. California has more than 1.3 million employer businesses, according to the Employment Development Department.
In other words, this “access” to capital is no great consolation to the 99.5% of companies that never get any VC: they still have the high cost of living and excessive regulation without any of the benefits.

In other words, there are two California business climates. For high tech companies — particularly young ones — it’s a great place to be. For the rest of the companies, it’s awful, although if you’re a doctor or a dry cleaner or a home builder, it’s where 12% of the country lives.

Not surprising were the two states on top — Texas and Virginia — with some of the most pro-growth policies in the country and relatively healthy economies. (Economist Arthur Laffer argues that it’s no coincidence that these and other right-to-work states have higher economic growth than more pro-union states.)

What I considered somewhat surprising was how badly California fares on the education rankings — 31/50. The state’s onetime dominance in higher education is jeopardized by the ongoing economic mismanagement in Sacramento, while the problems of the K-12 system are well documented.

If the findings of the survey are to be believed, those companies that have a choice will continue to vote with their feet, which does not bode well for an economic recovery.

While the problems are not new, I would have thought somewhere along the way there would be more of a sense of urgency to change what’s being done. Instead, politicians are voting the same way they voted 8 years ago, public employees are digging in their heels, and the big companies are largely sitting this fight out.

Certainly within the Silicon Valley bubble, the haves in the elite companies continue to assume life will go on as usual, while those with incomes under $100K wonder how they will afford a tax increase (if the legislature has its way) or private schools for their kids (if public schools continue to suffer).

It’s not like I have a choice: I was born in California and will likely die here. I wish there was a way out of the declining business climate, but it appears the voters (and thus their elected representatives) have been seduced by the myth that “tax the rich” is a painless way to spend money without having to pay for it. (Until of course the rich move elsewhere.)

Friday, May 13, 2011

Perils of diversification

Thursday was the first of my honors student presentations to their industry sponsors. This team — Kevin Dines, David Hsu, Clifford Jung and Vanessa Silveira — gave the concluding presentation of their three-month consulting project to researchers at IBM’s Almaden Research Center.

The student project was to find an eventual market for a research project by the PhD researchers. To do so, their project required interviewing government agencies and associated private firms such as real estate developers and urban planning consultants.

When for their project they contacted the various consultants on behalf of — large and small — the initial reaction was almost always “IBM is a potential competitor.” The scientists were amused at this, but if you put “urban planning consulting” into Google, you get an IBM-sponsored link:

I think IBMers would see the company as a supplier of IT and integration services to these consultants. However, as a multinational that increasingly supplies everything to everyone, it’s understandable that existing firms would worry that sharing information would enable further diversification or forward integration.

Oracle has spent the last 20 years buying some downstream customers and competing with others. Its market footprint in databases — approaching an monopsony — allows it to dictate terms or at least force these customer-partners to the table, even for big companies like HP, IBM or SAP.

Still, it makes sense that seeing everything as your potential market would cause everyone to see you as a potential competitor. This is not a risk of diversification we normally teach in strategy, although it’s commonly mentioned as a risk for upstream or downstream diversification.

Aside: as with my previous visits to ARC, the facility strikes me as a gorgeous site where the employees are as well treated as anywhere in any company in the world. As I tell my students, it’s always best to work for a high-margin company.

Note: This was ready to post Thursday afternoon, but posting was delayed due to Google’s 20-hour failure in running Blogger.

Monday, May 9, 2011

Keep swimming or die

Tonight we had two Silicon Valley veterans come talk to SJSU business honors students about how to maintain and develop their careers. Last fall, I heard these same speakers — Matt Ready (BSBA, San Jose State) and Steve Erickson (BSEE, New Mexico State) — give solid advice on building a startup management team.

Both speakers emphasized to the graduating seniors the importance of (as Matt said), being a “self-motivated team player that will be a leader rather than a follower.” Or as Steve said, “If you show initiative, you will be rewarded with more work and more responsibility.”

The lessons of high-performance SV tech companies resonated with my own experience in San Diego-area tech companies.

The culmination was Matt’s observation that “once you're in your comfort zone, you’re stagnant.” His signs of being stagnant:

  • “only doing what is asked of you”
  • “not learning anything new”
  • “no initiative to help others outside your job scope”
He advised students: "make sure you're leaning forward, not sitting back.”

Two of my older management honors students offered related observations. One said it‘s time to leave when you dread going to work. The other said that if you try to solve a problem of the company, it will be recognized in a future round of promotions or layoffs.

Together, the speakers supported two of our faculty insights from last week regarding the nature of Silicon Valley — its dynamism and the vibrant corporate culture of the most successful firms. Or as Matt said, “the dynamic in this valley is change.”

To which Steve added two pieces of advice to students: “Those that adapt to change quicker will move up quicker” and that students should "pick the opportunity that fits you: you have to like what you do."

This resonated not only with our faculty discussion last week, but also with my own career. This philosophy described my first decade of work experience, before I started my own company — including the restlessness that caused me to quit a good well-paying job because I felt blocked for promotion.

This also brings to mind the familiar metaphor that “Sharks have to keep moving forward or else they will die.” Apparently this is not strictly true*, but it does capture the image of a restless, ambitious innovator who seeks continuous improvement.

Or, as the old HP ad campaign claimed: “We never stop asking ‘What if?’ ”

* Apparently some sharks must swim forward or they will drown, while others can breath just fine.

Friday, May 6, 2011

Capturing Silicon Valley in a bottle

As part of meetings today at San Jose State about shaping a new Silicon Valley-specific business program, one of the key questions that came up was “what is Silicon Valley?”

At the SJSU College of Business, we have been quite successful in preparing firms for careers with Silicon Valley companies, supplying more graduates to these companies than any other university. To a large degree, this has been a serendipitous benefit of our location — and the sort of ambitious, first-generation college students we attract.

As part of our brand-building and shift to fee-supported (rather than taxpayer-supported) programs, the college is working to increase the Valley differentiation of our programs. Much like Evian, Perrier, Arrowhead or Calistoga, our challenge is to bottle what’s special about our backyard and export it to the rest of the world.

In today’s discussion, my friend and colleague Dr. Michael Merz, described Silicon Valley as a brand used to market the region to the rest of the world. This is not surprising, given that he’s in the marketing department — and given that he came to Silicon Valley three years ago from Germany (via Honolulu).

Michael noted the three pillars of the Silicon Valley brand
  1. Technology
  2. Innovation
  3. Entrepreneurship
The latter perspective is also not surprising, since he’s the professor for our entrepreneurial marketing class (and we both serve together on the Silicon Valley Center for Entrepreneurship)

Although I completely agree with Michael’s list — exactly the list of why I came to San Jose State almost nine years ago — my immediate reaction was that he left something out: dynamism.

4. Dynamism

Silicon Valley is not just about technology entrepreneurship. It’s also about the Schumpeterian “gales of creative destruction” bringing both corporate death and new life.

Yes, the Valley headlines and headcount and revenues and tax dollars are disproportionately tied to the proven Fortune 500 tech companies such as HP and Intel and Apple and eBay. But other places in the world (Boston, Seattle, Seoul, Tokyo) also have successful tech companies.

What makes us unique is how common to find a middle-aged professional who’s worked for four or five companies, with at least one company that’s no longer around. Around here, working for a dead company is not a mark of failure but a badge of honor.

This was brought home last month at the COB alumni banquet last month, where one of our alums talked about how he took his business degree and stumbled into a 25-year career running tech companies. Dan Doles has been CEO or founder of three software companies so far, in between working at Ernst & Young and running Oracle’s sales operations.

He’s hardly alone: in my nearly nine years, I’ve met many others who fit the same profile (in part because the COB development officer makes a point to bring them back to campus to speak). At the same banquet was Melissa Dyrdahl, whose tech career spanned HP, Claris and Adobe. Another bachelor’s alum who’s spoken at SJSU is Dave Wickersham, then COO of Seagate. Two other tech veteran speakers I’ve heard were MBA grad Larry Boucher and Amir Mashkoori (who has both undergrad and graduate degrees from us).

These and other alumni exemplify a career driven by (as one colleague put it) “the hunt for ‘what’s the next challenge’.” This is the path our top students will take, and our challenge is to figure out how to prepare them for this path.

In one of my more tactless moments today (in an academic career filled with tactless moments), I wondered how unionized tenured public employees can prepare themselves to capture this dynamism for students. We are the antithesis of what we want to convey. I fear that even the most enthusiastic and talented teacher (of which we have many) will eventually be worn down under the weight of bureaucracy and serving in the same job at the same rank with the same responsibilities for 20 or 30 years.

Our dean, David Steele, spent 25 years in roles ranging from IT and finance to operations before becoming president of Chevron Latin America. I wish there was some way for university faculty to similarly be cross-trained on various disciplines so that we could prepare our students for similar careers.

5. Corporate Culture

The other thing about Silicon Valley that gradually came up was the corporate culture. It was (and is) not something found in all local companies, but it was/is found in the best ones. I argued that we should teach our OB intro class around running one of these companies, rather than the more generic model of corporation captured by the MBA textbooks.

This Silicon Valley culture treated its people as its greatest assets, and empowered them to do great things. In retrospect, it was associated with high-margin businesses supported by successful innovation-based differentiation strategies, and epitomized by what some consider Silicon Valley’s first startup: HP.

Bill and Dave: How Hewlett and Packard Built the World's Greatest CompanyThe engineering paradise of Bill & Dave may be gone for good. However, Cisco and Google still treat their full-time employees very well, as do other tech companies like IBM and Qualcomm.

Apple — founded explicitly to replicate the HP culture that Steve and Steve so admired — in the Jobs II era seems to have created a new lean production version of this culture. This may not make the “best places to work” list, but it does enable its employees to concentrate on making insanely great products (and capturing insanely great stock gains) rather than fighting stultifying bureaucracy.

Of course the key here is margins. DEC and Motorola and Nokia were all great places to work when the margins were good, but became miserable when they crashed due to the rise of strong competitors or substitutes.

So this goes back to a point I’ve been making to my best students for the last three or four years: do everything you can to work for a high-margin company. They treat their people better, the working conditions are better, the job is more fun and there will be more opportunity.

The future of Silicon Valley — and its global mindshare as a brand — depends on our ability to create more of these companies, and for the established firms to renew themselves and their product lines.

Monday, May 2, 2011

I dumped Sprint, but they're right

As I threatened more than a year ago, today I finally quit Sprint after more than 13 years. The long term reason was their smartphone surcharge — $80 for any smartphone — which prevented me from using a Palm Pre that I owned without paying the surcharge.

The final impetus came when my third Treo failed exactly the same way, but they refused to replace it (despite a $50/year repair agreement) due to false claims of “water damage”. Hah! More than a decade of loyal service wiped out by a penny-pinching denial of a legitimate claim. (I went 2 weeks without a cellphone before walking into T-Mobile and getting a SIM card for the Symbian phone I only use in Europe.)

Still, I couldn’t agree more with Sprint’s full page ad (which ran Sunday in my copy of the Merc and apparently the San Francisco Chronicle as well) attacking SBC’s ongoing attempts to re-assemble Ma Bell.

Competition is everything

Competition is American, Competition plays fair.
Competition keeps us from returning to a Ma Bell-like, sorry-but-you-have-no-choice past.

As the #3 cellphone carrier, of course Sprint is fiercely opposed to the merger of #1 and #4. Right now T-Mobile is the industry’s sick child, but if the merger happens that dubious honor will pass to Sprint.

It doesn’t help that the early betting is that the Obama administration won’t block the deal, but let the deal happen with conditions.

The problem for consumers — but not Sprint — is that the arguments being used to justify the AT&T/T-Mobile merger would then justify Verizon Wireless buying Sprint.

This means an oligopoly would become a duopoly. After the two mergers, the top two carriers with 152 million and 130 million subscribers — with more than 90% of the US market of some 300 million subscribers. The next seven carriers would total 21 million, led by MetroPCS with slightly more than 8 million.

Independent analysts say that AT&T’s problems are of its own making — delayed LTE rollout, dropped calls, lack of capacity. It also removes T-Mobile scrapping for customers, offering a low priced alternative to the big two vendors.

So while I’m no longer a Sprint customer, I agree with its (self-interested) argument that the merger is bad for the US telecom industry. Unfortunately for Sprint, the new AT&T is the largest corporate donor and lobbyist in the US — and third overall after a Democrat PAC and a public employee union. No how many citizens file complaints, it seems like 2012 will have a very different competitive landscape than what we have today.

Sunday, May 1, 2011

Amar Bose's billion-dollar donation

Former MIT Professor Amar Bose has decided to make a large bequest to his former employer and alma mater, the Massachusetts Institute of Technology. (I give to the same alma mater, but my donations are about about 0.00001% as much).

Bose announced Friday he’s giving to MIT a majority of the shares of his privately held company, Bose Corporation. In the fiscal year ending April 2010, the company had an estimated $2.2b in revenues and 9,300 employees.

The stock comes with restrictions: MIT cannot “participate in the management or governance of the company.” Thus, the NY Times (eager to invent scandal where none exists) imagines this is some sort of tax dodge.

Instead, it’s an attempt to split the economic benefits of ownership from voting control. The Times should understand, since the New York Times Company (like many family owned media companies) has a publicly traded Series A stock and a privately held Series B supervoting shares that give the Sulzberger family control of the company.

The terms of the restrictions have not been publicly revealed, and may never be so revealed. It would make sense for the company to formalize the two classes of stock, which would then make Bose a large ESOP in which the voting shares are held only by current (and former?) employees.

What is Bose Corp worth? Probably at least $3 billion. Harmon International (NYSE: HAR) — a smaller and less profitable specialty audio competitor — seems to sell for about 1.4x trailing sales.

So even with the stock restrictions, a majority of the Bose Corp. shares have to be worth over a billion dollars. Microsoft pays a 2.5% dividend and Intel a 3% dividend, suggesting the Bose shares should pay MIT an annual dividend of $25 million or more.

That’s not a huge number for a nonprofit with a $2.4b annual operating budget, but it is more than 10% of the Institute’s $238m annual tuition revenues.