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 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.


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 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:

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.