Tuesday, December 30, 2014

Web standards exist for a reason

Back at the end of the browser wars — i.e. the late 20th century — it looked like Microsoft had won and Netscape had lost. A number of Windows-centric shops designed their websites for Internet Explorer, either in terms of full functionality (“works best with Internet Explorer") or actual access (“requires Internet Explorer”). Microsoft encouraged this by promulgating APIs for Visual Basic, .Net and DirectX and the like.

Fast forward to today. Over the past five years, Microsoft’s desktop market share has been in a freefall. Statcounter — the widely cited arbiter of browser usage — chronicles how Google Chrome has come from nowhere to take share from IE and (to a lesser degree) Firefox (heir to Netscape’s customers and developers). At 55% in January 2010, the IE share is now under 22%:

When you include all platforms — tablets, mobile phones and consoles — the news for Microsoft is even worse — with an IE share of 13.5%:

Yes, as a Mac owner this was particularly galling, since Microsoft had a Mac version of IE (as one MS employee pointed out to me) only as long as it served its purposes during the browser wars. MS discontinued IE for OS X in 2003. Fortunately, with IE now a small fraction of the web audience, it no longer matters — except at one site crucial for business professors, as I discovered today working on a paper.

The Virtue of Bad Design
One of the more popular proprietary business databases is called Thomson One, from Thomson Corporation (later Thomson Reuters). For entrepreneurship scholars (like me), the most relevant content is VentureXpert, a database of investments by VCs, angel networks, corporate VC and other private equity investments. This data is used by PWC and its partners to announce their quarterly VC funding stats at the PWC MoneyTree site.

Unfortunately, Thomson One is only compatible with Internet Explorer. Worse yet, it is not supported (and doesn’t fully work) with any version of IE greater than IE 8 (as documented by IT support desks at Wharton, Harvard, Columbia, and other schools).

Internet Explorer 8 was introduced in 2009 and last updated in February 2011 (almost five years ago), just before IE 9 was released in March 2009. IE 8 is not compatible with Microsoft’s current desktops, laptops, tablets or mobile phones, which require Internet Explorer 10 or 11. StatCounter estimates the November 2014 market share of IE 6+7+8 at 4.03% of the desktop market.

For Windows users, there is an IE Tab plug-in that helps Chrome and Firefox imitate IE, but not all the Thomson One features are available in this emulation mode.

Customers Lose, and (So Far) Thomson Still Wins
So to recap, here is where we are:
  • The virtue of the web (particularly HTML 4+) is interoperability between browsers.
  • One or more IT architects at Thomson Corp. decided years ago to lock their database to specific features of one browser, rather than support Internet standards.
  • Those features are so non-standard that they are not supported by Microsoft browsers released since March 2011.
  • The company has done nothing to upgrade their site to support the 96% of the world that uses other browsers.
I'd like to think that whoever made this architecture design error was fired for his (it was most likely a he) mistake, but that would assume a level of IT competence that the legacy team of Thomson Corp has not yet demonstrated. (Meanwhile, other Thomson Reuters sites seem to work with a wider range of IE versions and in some cases even have a mobile client).

One thing that is clear is that Thomson Reuters is pretty confident of their monopoly position in this particular niche: if not, their customers would be defecting in droves, and fixing this broken IT infrastructure would finally become a priority. I’m not holding my breath (on either competence or customer orientation suddenly breaking out).

Monday, December 15, 2014

Retailers' Hobson's choice: crushed by Amazon or exploited by Google

It’s no secret that during the e-commerce era, the local (and even chain) retailer has lost its hold over local customers — particularly in the face of an ever-expanding variety of online merchandise, first from Amazon and later from the clicks-and-mortar chain retailers such as Target and Wal-Mart.

Meanwhile, the tyranny of the local newspaper has been replaced by the tyranny of the search engines (i.e. Google) in controlling the ability of retailers to get their message to potential customers.

Now the Wall Street Journal reports that retailers are facing a Hobson’s choice of being exploited by Google to avoid being crushed by Amazon. (Merriam-Webster defines a Hobson‘s choice as “the necessity of accepting one of two or more equally objectionable alternatives”).

The report says that to capture more product search — advertising and purchases — Google is testing a “buy” button for its search results to reduce the number of searches that begin on Amazon:

In the third quarter, 39% of U.S. online shoppers began researching their purchases on Amazon and only 11% started on search engines like Google, according to Forrester Research . That’s a reversal from 2009, when 24% started on search engines and 18% on Amazon.

“Amazon is increasingly running away with online retail in North America, which poses a huge problem for Google,” said Jeremy Levine, an e-commerce investor at Bessemer Venture Partners. “Google has to get in front of this and create a reasonable alternative.”
That Google chose to fight back is not surprising, nor is it surprising that it did so without consulting retailers. Given its data-driven culture, it’s also not surprising that it ran a live experiment. However, the nature of the experiment alarmed some retailers:
Retailers’ concerns about Google’s initiative were heightened in November when digital-marketing agency RKG spotted an unannounced Google test. Google users searching for “anthropologie,” the women’s clothing retailer owned by Urban Outfitters Inc., were also shown a link to a Google Shopping page with dozens of the retailer’s product ads. Anthropologie didn’t give its permission, according to a person familiar with the matter.
Or as search engine guru Larry Kim explained:
Is Google Shopping Becoming A Competitor To Retailers?

Based on this test, it would appear that's a real possibility.

Essentially, this would cut out the middleman and drive searchers to make their purchasing decisions within Google Shopping. It adds competition to what began as a branded search – rather than being presented with David Yurman rings for sale by David Yurman, the searcher sees David Yurman rings for sale at Nordstrom, Bloomingdale's and other retail sites.

If Google adopts this test as a permanent feature, it has the potential to drive up CPC's for branded search terms, as people searching for a particular type of product from a specific brand will now be presented with competitor options, as well.

Further, users can do comparison shopping right within Google Shopping, without having to go the retailers’ websites, whether they were searching for a specific retailer/brand or not. It’s another example of Google stealing traffic from your website, like they do with Knowledge Graph and vertical results like weather and flight comparisons.

This could be a welcome change for searchers; this is why Google runs all these tests. But advertisers may be annoyed to learn that searches on their brand name are being used to drive traffic to Google Shopping. … As for advertisers, I’m pretty sure they won't appreciate Google creating competition for them where it didn't exist before.

In this regard, Google is seeking revenue growth by taking traffic from those who created the content it indexed. It doesn’t have to integrate to generate the content or be able to fulfill orders, but instead can control the eyeballs (selling more ads and having more stickiness) while commoditizing retailers.

So in a fight for Total World Domination (or at least North American retail domination), Google will take away visibility and revenue from its most profitable customers.

Why does Google do this? Because it can. It’s not quite a monopoly, but it’s almost without viable competition: in the US, it has a 3:1 market share lead over its nearest competitor on PCs, and a 5:1 lead in mobile. In Europe, it has a nearly 10:1 lead, which is prompting calls for competition authorities to end its vertical integration.

The web brings a scale to retailing that never existing in the turn of the century (or Calvin Coolidge) Main Street USA era. Local retailers (and their commercial landlords) will continue to pay the price.

Tuesday, December 9, 2014

Is Samsung the next Sony or next Apple?

Tonight I ended another quarter teaching MBA again at my alma mater, the second time teaching IT innovation strategy this year. There isn’t a great fit of the topic to my current employer, so it’s nice to be able to moonlight (with permission) to revisit the course I created at UCI more than 13 years ago.

The students did a number of final projects, and since I’ve been too swamped to blog here (while rarely blogging at my academic blog) — I thought I’d share a few observations here.

One topic that hit me near the end of the last class is that Apple sort of looks like the next Sony. Sony was the great consumer electronics innovator of the 1960s through the 1980s (Trinitron, Walkman) that failed to keep up its innovation as the rate of technological change and is now losing money badly in a commodity business. So with Steve Jobs gone, I have been wondering if Apple will also slow its rate of innovation and become an undifferentiated premium producer in a commodity business.

But my students suggest that however quickly Apple becomes a commodity producer, Samsung is getting their first. 2014 has brought various headlines about how Samsung’s smartphone market leadership is producing losses not cash cows.

By offering slightly nicer Android phones, Samsung is competing within a standard rather than between standards. So while Americans will pay a premium for minor improvements, developing country Android buyers are quite happy to buy Xiaomi, ZTE, Huawei, or some other generic brand.

Samsung does compete in some capital-intensive markets with high entry barriers, but (as with the DRAM of the 1980s) such businesses are prone to commodity price wars. Samsung’s attempt to create unique technology (notably Tizen) has failed: they are a long way from being the next Apple. It has a high rate of R&D spending but not a high rate of R&D outcomes.

Quoting from Geoff Moore’s book (a required text), the students recommend that Samsung compete on integration abilities. I think it’s a plausible idea (if they can ever learn to do UI and software) — they have an unprecedented scope of products, and so if anyone (beyond Apple) has the opportunity to do this, they do.

One thing that is clear: Apple is not the next Sony — yet. And this gives me a chance to quote from a newspaper clipping that I set aside a month ago. Here is an excerpt of an interview with CEO Tim Cook:

MR. [Gerard] BAKER: I want to ask about some of the broader strategic questions for Apple. This phenomenally successful iPhone, which continues to churn out extraordinary profits. You’ve got a very high margin, relatively low volume in terms of total share of the smartphone market.

Now you’re about 15%, 16% globally of the smartphone market. That model has been compared to the Mac versus PC model of old. You have these beautiful devices, which you were first with, which people adopted very, very quickly, but which were a smaller and smaller share of the market.

In the end, the Windows model blew away the Mac, in terms of market share. Is that a risk here?

MR. COOK: I don’t think all market share is created equal. Our objective has never been to make the most. We’ve always been about making the best.

The analogy to the Mac isn’t a good one. It’s clear when you look back what was happening in terms of the Mac platform was there weren’t enough apps on the Mac platform. Customers began to leave, because there weren’t enough apps. Look at iPhone and iPad. I get more customer notes than any CEO alive, I’m sure. I’ve gotten zero saying, “You don’t have enough apps on your platform.”
So Cook makes two crucial points. First, for decades its identity and positioning have been about being better, not cheaper. Secondly, there is no evidence (even with Android’s superior share) that Apple has any problems with developer loyalty (at least in developed countries).

But the most important point is the one that he hinted at but didn’t finish: “I don’t think all market share is created equal.” Samsung’s smartphone profits are dropping while Apple’s rise. Every year, I have to remind my students that unprofitable growth destroys value for firms — if necessary, reciting the old adage “losing money on every unit, but making it up on volume.”

So while Sony is losing to commoditization, and Samsung is fighting it, Apple (thus far) is keeping at bay. For now, Samsung looks more like it's trailing Sony 10-15 years behind than it is catching up to Apple.

Thursday, November 13, 2014

Music titans, like European royalty, pine for a bygone era

In reading a summary this morning of the record industry’s latest fight with free streaming services, I was struck how much it’s like the laments of former European nobility in the 19th and 20th centuries. Maybe no one lost their head — or had his family wiped out by Boslehvik bullets — but the loss of power is similarly irreversible.

I first researched the industry economics in 2002 while a consultant to Live365 (the earliest free streaming music service). For my technology strategy class at UCI, I wrote a teaching case on the Napsterization of Hollywood, and how both CD unit sales and revenues peaked in 2000 in the face of MP3 piracy.

At the same time, the big six (later five, now three) recording companies consolidated market share from 79% to 83%. They had a cozy oligopoly, the ability to unilaterally set prices, and (as Michael Porter would say) low rivalry. With their limousines and executive suites they were the capitalist equivalent of the 17th and 18th century royalty of Europe.

This morning’s article in the Wall Street Journal was about how the record labels are trying to phase out the access that free streaming services (e.g. Pandora) have to their catalogs:

One major-label executive said he regretted ever having agreed to allow licensees to offer any on-demand listening features free. “In hindsight we made a mistake,” he said.
But one paragraph perfectly summarized the economics of what has happened to the industry in the last 15 years:
An average user of free, ad-supported streaming services generates revenue of around $4 a year to record companies, according to one label executive, compared with between $50 and $75 a user in the record-buying age. Spotify subscribers currently pay $120 a year, of which about 70% goes to record labels and music publishers. Users of free services such as Pandora Media Inc. ’s custom radio service far outnumber those paying for Spotify and its competitors.
In other words,
  • the labels used to have a reliable income stream from the music-buying (teen and young adult) of around $60/year; according to my notes, that totaled $14 billion in the US in 2000
  • that has been replaced by customers who listen to free streaming and pay 93% less.
  • the labels hope the current generation of customers will be nice enough to upgrade to a membership model that pays as much as their former business model. ($84 in 2014 $61 in 2000)
One small problem: customers aren’t interested. The WSJ shows the stats for streaming music
  • Spotify (global) 12.5m paid, 25m unpaid
  • Pandora (US) 3.5m paid, 73m unpaid
  • Beats Music (US) < 0.5m paid
In other words, there are about 6 freeloaders for every paid customer. Google’s new YouTube Music Key (at $10/month) will increase the number of paid users, but probably not appreciably change the ratio. Meanwhile, the services say claim that if they lose the ability to provide a 30 day free trial, they won’t get new paying subscribers.

There does appear to be one royalty that is doing well: the elite entertainers. The article reports Taylor Swift asked Spotify to limit her new album (1989) to the paid service, but the company refused. So instead, Swift pulled her album from Spotify and sold 1.7 million copies in its first two weeks — half of those as physical CDs — and perhaps the only album that will be RIAA platinum this year.

Similarly, Garth Brooks (3rd in US record sales after the Beatles and Elvis) created a new download service called GhostTunes — to host his own latest album. (It also has music by Swift, Pink Floyd and the Foo Fighters). The many zombie bands from the 60s and 70s also seem to be able to generate sales — perhaps from price-insensitive geriatric baby boomers — that insulate them from the pressures of the current market.

So — as my class used to conclude 12 years ago — the ability to set your prices without fear of competition is something every firm aspires to. (PayPal alum Peter Thiel has been saying the same thing recently in his new book, Zero to One). The problem is, there’s no way that Hollywood will ever get their monopoly pricing power back — any more than Luke Skywalker will get back his hand, his dad and his innocence, or that the original Beatles will be finally reunited in the flesh.

Tuesday, August 19, 2014

Google Show Greed Trumps Values Every Day

Google once promised that is mission was “to organize the world’s information”. Nominally that remains its mission today.

On the 10th anniversary of its IPO, in this morning's WSJ, Rolfe Winkler shows how that all changed:

Just before Google Inc. went public 10 years ago, co-founder Larry Page said he wanted to get the search engine's users "out of Google and to the right place as fast as possible."

Today, Mr. Page's Google often is doing the opposite: Providing as much information as possible to keep users in Google's virtual universe.
At first, leveraging its dominant share in search, Google was content to have people linger longer (ala Yahoo or later Facebook) to sell them to more advertisers. Now they want to monetize that customer hold directly by doing transactions and taking a piece of the action. The dead tree (and online edition) shows the before and after — Google the indexer of the Internet vs. Google the horizontally diversified Internet portal:

In other words, Google once created an ecosystem (including APIs and a two-sided advertising market) and wanted to make its ecosystem partners successful. Now, in its relentless pursuit of growth, it is crowding aside its onetime partners and trying to take more money from its customers.

This is exactly what DEC, Apple, Microsoft, Oracle and countless other tech companies have done over the decades. Joining an ecosystem is a viable startup business until the ecosystem sponsor wants to take that business away. The book Keystone Advantage refers to this as an ecosystem “dominator.” Among tech companies, only IBM seems to be a reliable partner for win-win alliances, in part because its integration services business model allows it to make money with almost any sort of component.

Of course, this was inevitable. Companies like Google want to grow, because it supports the stock price and puts more money into the hands of shareholders, employees and executives. Since Larry Page and Sergey Brin are now worth $32 billion apiece, I’m guessing it’s less about the money and more about the control, the ego, the success of making the world’s most dominant influential company of all time.

As we teach in strategy, there’s only two ways to grow: reach more customers or make more money out of your existing customers. If Google is serving almost everyone on the Internet, it either has to connect more people to the Internet (who will be less profitable than their existing customers) or sell more stuff to those already locked into Google. Obviously (with its $50 billion in cash horde and 60+% gross margins) it’s doing all of these things.

Unfortunately, a dominant vertically integrated (and horizontally diversified) monoculture is bad for the economy, bad for consumers and bad for society. It takes transactions that should be happening in the market and internalizes them into an internal hierarchy. Europe has been trying to nibble at the edges of Google’s efforts at Total World Domination for years, but had little impact. The U.S. seems disinterested, because the GOP believes in free markets and the Democrats receive millions in campaign donations from Google's wealth.

Normally we can count on the curse of success to eventually kick in: big companies either become complacent, bureaucratic or otherwise lose their way (cf. GM, Microsoft). The Google founders seem determined to make sure this doesn’t happen during their lifetime, which could be 30 years (with a normal retirement) or 50 (if they last like Warren Buffett). Since I’m older than both men, I may not live to see the end game — which is a depressing thought.

Wednesday, July 16, 2014

Upstream vs. downstream complementarities in Apple-IBM deal

Despite coverage to the contrary, Tuesday's announcement that IBM will help sell Apple products to enterprise customers is long overdue and merely the latest example of cooperation between the firms spanning more than two decades.

The new thing is that — unlike previous deals — the cooperation announced by Apple CEO Tim Cook and IBM CEO Virginia Rometty reflects downstream complementarities rather than upstream ones.

In their seminal book Co-opetition, Brandenburger and Nalebuff defined complementarity between products X and Y as meaning that if someone bought X, then Y would be more valuable (and vice versa). This basic principle is behind nearly any positive-sum (“win-win”) strategic alliance today.

Yes, Apple’s early successes began to fade when IBM introduced its PC in August 1981, and its 1984 Macintosh introduction was aimed squarely at Big Blue and its user-unfriendly DOS PC. But the two companies have been cooperating far longer than they competed, largely through their cooperation in upstream components.

The big cooperation surprise came not in July 2014 but October 1991. Then Apple CEO John Sculley and IBM President Jack Kuehler announced that Apple would be using PowerPC CPUs based on IBM's proprietary RISC chips (Motorola was the third partner in the alliance).

At the same time, Apple and IBM launched two Silicon Valley-based software joint ventures based on a common rivalry with Microsoft. Taligent nearly killed Apple (and thus helped me find a new career) by siphoning off Apple’s top engineers to work on an operating system that it never shipped. Kaleida was intended to solve CD-ROM scripting challenges, but was swept aside by the emergence of Java and the commercial Internet.

A few years later — at the depth of Apple’s self-inflicted slide towards irrelevance — IBM helped Apple with problems creating hardware in its fastest-growing and most profitable segment, laptop computers. It sold its unique laptop hard disk to Apple (but not to HP) and also built the 1997 PowerBook 2400c for Apple at its IBM Japan division.

Fast forward to the 21st century. IBM could have begun selling Apple's hardware at any point since it divested its PC division in 2005. This is exactly why the company exited the market segment that it had created 24 years earlier: to get rid of a low-margin commodity hardware business and give it more flexibility to sell higher-margin integration services to large corporations.

The question is: what took them so long? The iPad came out in April 2010 and Steve Jobs has been gone for nearly three years. Ever since the Macintosh (1984) and particularly the LaserWriter (1985), Apple has been making products that would appeal to large companies, but lacked the sales, support and integration capabilities needed to address their customer’s complete requirements. (Only us Mac graybeards remember the 1988 Apple/DEC alliance that was intended to address these problems.)

Today, the two companies are not just looking over their shoulders at Microsoft, but also Google as well. The iPhone and iPad have already been widely adopted in big companies — spawning the IT acronym BYOD — but the new alliance should (like other successful downstream complementaries) generate incremental revenue growth for both parties.

However, there was one glaring omission in the latest Apple-IBM collaboration announcement: cloud computing. Apple has a retail presence with its true believers that is central to its integration strategies, but lacks the scale to compete with the industry leaders, Amazon and Google. IBM is their major competitor as a wholesale supplier, but (unlike Amazon and Google) does not compete with Apple’s retail offerings.

In the long run, Apple will unable to go it alone in cloud computing. We’ve all seen the risks that companies take relying on Amazon (cf. Netflix) or Google (cf. Samsung) as a supplier who is also a competitor. As in the PowerPC days, Apple should not only be leveraging IBM’s scale but working to attract others to its platform as the last honest broker in cloud computing.

Sunday, July 13, 2014

Nation-states, city-states and the World Cup

Productivity the world over will improve starting tomorrow with the end of the 2014 World Cup. ESPN and Nike will celebrate the unprecedented interest by American TV viewers, buoyed in part by the unexpectedly long run by Team USA.

Within Europe (at least outside of Russia) national rivalries are fought on the football field and not the River Somme, Ardennes Forest, or Fulda Gap.

Unlike in the Olympics, success seems only imperfectly correlated to depth of talent or national resources. None of the world’s 10 largest countries made it into the championship, although Brazil (#5) earned 4th place and USA (#3) made it to the round of 16. The top country in Europe (Germany) was the largest, but the top country in South America was only the 3rd largest (Argentina, with 10% of the population vs. 49% for Brazil).

But before there were nation-states, Europe in the Middle and early Modern period of Europe was organized as city states. In many cases, they were small principalities organized around a capital (like Monaco and Liechtenstein today). Even in today's German republic, three of the 16 Länder are historic city-states (Berlin, Hamburg and Bremen).

Norman Jewison’s dystopian 1975 movie Rollerball imagined a world when nation-states were gone and rivalries were channeled through city-states. The hero (James Caan) and his Houston team have a violent match against Tokyo that leaves his best friend brain-dead, the brutal climax of the movie comes when Houston fights New York in a match that ends with only Caan left standing.

While the German players tonight are exulting and the Argentineans (and Brazilians and Belgians and Americans …) are heartbroken, for most of the next 47 months their allegiance will be to the city- rather than nation-state in their full-time (professional) sports careers.

Finals hero Mario Goetze and Golden Glove winner Manuel Neuer plays for Bayern München, but World Cup record holder Miroslav Klose plays for Lazio in the Italian Serie A league. Meanwhile, Mesut Ozil and Per Mertesacker play for Arsenal in the English Premier League. Arsenal also lists players for Belgium, Costa Rica, England, France, Spain and Switzerland. For archival Manchester United, Robin van Persie scored the winning goal for the Netherlands 3rd place finish, with other players playing for France, Mexico, Japan and Portugal. ManU also provided Team USA’s record-setting goalie, Tim Howard.

Despite (or because) of their common position in the English Premier League, Arsenal fans have no more love for ManU than American baseball fans outside NYC have for the Yankees. (Germans are similarly divided between those who love Bayern München and those who detest the team and its fans).

So for less than 5% of every four year cycle, European soccer fans are rabid nationalists, and the rest of the time they are loyal to their local city-state. In some ways, we are well along are way to Jewison’s vision (but hopefully not the dystopian part).

Note to readers: apologies for not blogging recently, but due to travels, office meetings and research deadlines (including WOIC 2014) I’ve been unable to finish several posts during the past month.

Tuesday, May 27, 2014

Fractalization (and trivialization) of technological innovation

My friend Frank Piller this morning shared a witty story from last week’s New Yorker. The title and subtitle say it all:

“Let’s, Like, Demolish Laundry”
Silicon Valley is in a bubbly race to wash your clothes better, faster, and cooler. This is not a metaphor. Unless, you know, it is.
The story about IT-enabled laundry delivery services focuses on Washio, a LA-based seed-funded startup. The three founders cruise along confident in the brilliance of their idea until they run across three Bay Area rivals (Laundry Locker, Prim, Rinse) — one incubated by Y Combinator — and eventually five more from NYC and two from Chicago.

Author Jessica Pressler makes only a feeble effort to restrain her sarcasm. In commenting why so many other tech entrepreneurs are addressing the same need:
In reality, when people in a privileged society look deep within themselves to find what is missing, a streamlined clothes-cleaning experience comes up a lot. More often than not, the people who come up with ways of lessening this burden on mankind are dudes, or duos of dudes, who have only recently experienced the crushing realization that their laundry is now their own responsibility, forever. Paradoxically, many of these dudes start companies that make laundry the central focus of their lives.
But even in this segment, “new innovations are dying from the day they are born… There’s a term for this. It’s called the hedonic treadmill.”

Some of it has an anthropologist-visits-the-strange-tribe-of-Silicon-Valley feel. Even though their main office is in Santa Monica, Washio has the same (post-Amazon) disrupting of the physical world that brought us Pets.com and Uber. Their goal is to be “the Uber of laundry," and their share a common seed stage investor.

But early on, Pressler raises a more fundamental question:
We are living in a time of Great Change, and also a time of Not-So-Great Change. The tidal wave of innovation that has swept out from Silicon Valley, transforming the way we communicate, read, shop, and travel, has carried along with it an epic shit-ton of digital flotsam. Looking around at the newly minted billionaires behind the enjoyable but wholly unnecessary Facebook and WhatsApp, Uber and Nest, the brightest minds of a generation, the high test-scorers and mathematically inclined, have taken the knowledge acquired at our most august institutions and applied themselves to solving increasingly minor First World problems.
Certainly Amazon and Google and Facebook (mostly) allow us to do things we did before, just more quickly and cheaply and conveniently. Yesterday, my sister-in-law could have mailed pictures of her daughter’s graduation to her friends and relatives, but instead she posted them on Facebook and they were instantly available.

Like Pressler, many of these activities seem trivial when I compare this to other “big” innovations, like trying to get mankind back into space or provide enough food and energy to bring 5 billion of the world’s 7 billion people up to developed world living standards. After changing jobs three years ago, life at my new employer reminds me that the life sciences have many important unsolved problems, whether it be preventing deaths from malaria and tuberculosis in sub-Saharan Africa or finding a cure for cancer.

But on another level, Pressler’s article would come as no surprise to my innovation strategy students of the past eight years (whether at KGI, UCI or SJSU). The pattern is straight out of Dealing with Darwin, the grand unified theory of innovation by Geoff Moore (best known for Crossing the Chasm).

One reason I use the book is that it offers a cogent explanation of the role of innovation in mature industries. He subdivides such innovation into two categories, operational excellence (cheaper) and customer intimacy (better). For the latter, he uses the metaphor of “fractalization”, as illustrated by this diagram from Chapter 6:
As Moore explains (p. 111-112)
Figures 1 through 3 represent the early, middle, and late stages of a growth market. ... As the figures indicate, the driving dynamic at this point is a single-minded attempt to acquire new customers and claim market share.

By the time we hit figure 3, however, the market for the basic offering has become saturated. One can no longer grow simply by adding new customers to the category because the bulk of them have already been added. After virtually every home has a phone, every garage a car, every child a personal sound system, what do you do next?

Thus, from the mass-market Model T car, for example, the automotive industry first generated line extensions: a sedan, a station wagon, a truck, a couple, a limousine.

Increasingly fine-grained fractalization can and will continue as long as there are discretionary dollars to spend in the system and the category as a whole has not become obsolete.
We do need to recognize the contributions of the laundry app innovators (even if they go the way of the sock puppet). By moving the realm of innovation from the physical world to the digital world, they are enabling new form of experimentation and innovation — as happened in retail, communications, advertising, journalism and other established industries.

Pressler makes clear that the laundry apps still depend heavily on their contract laundry suppliers who do all the work. But if such apps catch on, it would seem obvious that the laundry market will be rapidly consolidated, with the tiny corner dry cleaners replaced by a handful of regional factories. One would expect (as with Web 1.0 and 2.0) the adoption will be most rapid in Silicon Valley, with the shops in Palo Alto or SoMa served by ecofriendly delivery trucks driving from large plants in Morgan Hill or Livermore.

Tuesday, May 13, 2014

Why some fear Google -- and others should, too

Excerpts from a 4,000 word letter by the CEO of a leading German publisher to the company that once promised “don’t be evil”:

An open letter to Eric Schmidt
Why we fear Google
17.04.2014, von MATHIAS DÖPFNER
Frankfurter Allgemeine
Dear Eric Schmidt,

In your text “Die Chancen des Wachstums” (English Version: “A Chance for Growth”) in the Frankfurter Allgemeine Zeitung, you reply to an article which this newspaper had published a few days earlier under the title “Angst for Google” (“Fear of Google”). You repeatedly mention the Axel Springer publishing house. In the spirit of transparency I would like to reply with an open letter to highlight a couple of things from our point of view.

Google doesn’t need us. But we need Google
Google’s employees are always extremely friendly to us and to other publishing houses, but we are not communicating with each other on equal terms. How could we? Google doesn’t need us. But we need Google. And we are also worlds apart economically. At fourteen billion dollars, Google’s annual profit is about twenty times that of Axel Springer. The one generates more profit per quarter than the revenues of the other in a whole year. Our business relationship is that of the Goliath of Google to the David of Axel Springer. When Google changed an algorithm, one of our subsidiaries lost 70 percent of its traffic within a few days. The fact that this subsidiary is a competitor of Google’s is certainly a coincidence.

Not only economic, but also political

We are afraid of Google. I must state this very clearly and frankly, because few of my colleagues dare do so publicly. And as the biggest among the small, perhaps it is also up to us to be the first to speak out in this debate. You wrote it yourself in your book: “We believe that modern technology platforms, such as Google, Facebook, Amazon and Apple, are even more powerful than most people realize (...), and what gives them power is their ability to grow – specifically, their speed to scale. Almost nothing, short of a biological virus, can scale as quickly, efficiently or aggressively as these technology platforms and this makes the people who build, control, and use them powerful too.”

The discussion about Google’s power is therefore not a conspiracy theory propagated by old-school diehards. You yourself speak of the new power of the creators, owners, and users. In the long term I’m not so sure about the users. Power is soon followed by powerlessness. And this is precisely the reason why we now need to have this discussion in the interests of the long-term integrity of the digital economy’s ecosystem. This applies to competition, not only economic, but also political. It concerns our values, our understanding of the nature of humanity, our worldwide social order and, from our own perspective, the future of Europe.

The greatest opportunity in the last few decades

As the situation stands, your company will play a leading role in the various areas of our professional and private lives – in the house, in the car, in healthcare, in robotronics. This is a huge opportunity and a no less serious threat. I am afraid that it is simply not enough to state, as you do, that you want to make the world a “better place.”

You say in your article that those who criticize Google are “ultimately criticizing the Internet as such and the opportunity for everyone to be able to access information from wherever they happen to be.” The opposite is true. Those who criticize Google are not criticizing the Internet. Those who are interested in having an intact Internet – these are the ones who need to criticize Google.

Google is to the Internet what the Deutsche Post was to mail delivery or Deutsche Telekom to telephone calls. In those days there were national state monopolies. Today there is a global network monopoly. This is why it is of paramount importance that there be transparent and fair criteria for Google’s search results.

However, these fair criteria are not in place. Google lists its own products, from e-commerce to pages from its own Google+ network, higher than those of its competitors, even if these are sometimes of less value for consumers and should not be displayed in accordance with the Google algorithm. It is not even clearly pointed out to the user that these search results are the result of self-advertising. Even when a Google service has fewer visitors than that of a competitor, it appears higher up the page until it eventually also receives more visitors. This is called the abuse of a market-dominating position. And everyone expected the European antitrust authorities to prohibit this practice. It does not look like it will.

Is it really smart to wait?
Historically, monopolies have never survived in the long term. Either they have failed as a result of their complacency, which breeds its own success, or they have been weakened by competition – both unlikely scenarios in Google’s case. Or they have been restricted by political initiatives. IBM and Microsoft are the most recent examples.

Another way would be voluntary self-restraint on the part of the winner. Is it really smart to wait until the first serious politician demands the breakup of Google? Or even worse – until the people refuse to follow? While they still can? We most definitely no longer can.

Sincerely Yours
Mathias Döpfner
Via John Paczkowski at re/code

Sunday, May 11, 2014

Apple's curious acquisition

Apple’s reported efforts to buy Beats Electronics for $3.2 billion have been the subject of endless speculation since it was first reported Thursday. We don’t know Apple’s actual reason for interest — or even if the deal will happen — since Apple has yet to make any official announcement. (As with all such leaks, this leak seems intended to influence the deal — presumably by the sellers to force Apple to follow through.)

Certainly this is out of character for Apple, since its largest previous deal was $0.4 billion to buy NeXT, the basis of its OS X. But the press frenzy about how precedented the deal is seems a bit exaggerated. After all, there’s always a first time for anything, including its successful acquisitions such as the purchase of NeXT, PA Semi, and Siri. (Google got a lot of flack in 2006 for spending $1.65 billion to buy YouTube).

Is the acquisition a good idea? When we (i.e. strategy professors) teach related diversification by acquisition, there is a standard list of pros and cons.

On the pro side, an acquisition is usually about time to market — accomplishing something more quickly than you could do on your own. It can acquire technology, customers, distribution, products and people. For the latter, Silicon Valley normally thinks in terms of engineers. However, an acquisition can also bring new executives: the NeXT purchase brought in the new management team of Apple — not only Steve Jobs, but essentially it’s entire management team other than the CFO that Gil Amelio installed (Fred Anderson) and the COO Jobs stole from Compaq (Tim Cook).

Finally, there is the opportunity for the newly acquired company to be more successful under its new owner than as a stand-alone company. This might be due to better management, better distribution or more available capital. For example, in our recently completed business plan competition at KGI, most of the proposed startups would sell out to a large pharma or biotech company before bringing products to market, rather than build a global retail sales force from scratch.

On the con side, there is the question of strategic fit: do the new assets fit with the organization, how will the products, people and culture be integrated — and are the business models compatible? The post-acquisition integration can be a huge distraction (but usually when buying a larger company, as with Microsoft-Nokia, Oracle-Sun or HP-Compaq).

And with any acquisition, there’s always the risk of over-paying. Perhaps the assets are valuable, but CEOs have a tendency to overpay — whether to put their mark on their company, grab the headlines or just to run a larger company.

In Beats Electronics, Apple is buying two lines of business. One is Beats by Dre, the headphones division that has nearly two-thirds (61.7%) of the US premium headphone market — nearly 3x that of Bose, which created the segment.

It’s a monstrously successful brand, but there’s little technology there. The two music industry execs who formed Beats outsourced their initial headset design to the father-son team that runs Monster Cable Products (which, lacking negotiating savvy, failed to get an equity stake in the venture they helped create). The success of the company (even more so than for Bose) is based on marketing rather than technology:

"They certainly don’t need the headphone company, which makes second rate headphones based on marketing," says music industry analyst Bob Lefsetz. He thinks Apple would be a lot more interested in Beats’ music streaming service. Steve Jobs famously opposed the subscription music model and, instead, championed iTunes' current model, where you buy a song outright.
This points to its other line of business. The nascent Beats Music steaming service leverages the value of the Beats brand with teens, but (like Apple and Amazon) is far behind market leader Spotify.

By one standard, Apple is certainly overpaying. The company’s exponential growth is not sustainable and its revenues are less than $2 billion. As a company with little technology and strong emphasis on style and brand, Beats is essentially a fashion company. Any fashion acquisition is a risky acquisition.

Will Beats by Apple seem as authentic or appealing to teens as Beats by Dre (when Dre was still the owner)? For that matter, how many fashion companies are able to sustain their position of a period of decades? In my adult lifetime, I can only think of one firm that has been successful: Nike.

Which brings us to the final possible value of Beats. The company has shown it has been able to understand teen fashion and create markets that didn’t exist. Is that because of the cofounders, Dr. Dre (aka Andre Romelle Young) and music mogul Jimmy Iovine? Or is there a depth of marketing — both market sensing and market creating — within Beats that could help Apple better sell unnecessary luxuries to middle class teens and college students?

Although it’s a large deal for Apple, it’s essentially a minor bet — hardly on the scale of Google buying YouTube or WhatsApp, let alone Microsoft’s purchase of Nokia.. Apple has more than $150 billion in cash (mostly offshore), and has few other options to create meaningful growth. With annual revenues of more than $170 billion, the Beats sales would not be material to Apple any time in the near future — if ever.

So if Apple gains an additional window into the soul of the 13-25 year-old set — or rebuilds its foothold in the music industry — then the deal could prove to be a shrewd one. As it is, it’s a gamble — but Apple didn’t get to where it is without taking gambles (such as the iPhone). It may be Tim Cook’s largest gamble to date, but it won’t be the last one he takes as CEO.

Thursday, March 20, 2014

Cold Fusion

This week, I got to revisit the IT world through the efforts of my students. In a class on innovation strategy that I recently completed at UCI, four MBA student teams presented final projects on the current business dilemmas of tech companies.

The most intriguing was that of Fusion-io (FIO), a company that provides faster solid state disc (SSD) systems for server farms — 40x faster than a conventional SSD. The company was founded in 2005 and IPO'd in June 2011.

The story sounds pretty daunting. Although it has plenty of cash, the company has lost money the last two years (on revenues of $432 million and $359 million, respectively). It historically has depended on Apple and Facebook server farms for the majority of its revenue, and has been unable to land another comparable sized customer. It’s also competing with a number of much bigger and more diversified rivals in a segment (like any IT) that is commoditizing.

At a $11.88 close Wednesday, the stock is up 40% from a historic low of $8.32 in January. Still, the company has lost nearly 40% of its market cap since the IPO. Stock coverage is thin and mixed. Pac Crest rates the stock as a outperform with a $14 target. The Street rates it “as a Sell with a ratings score of D.”

Appointed last August, CEO Shane Robison (former Compaq and HP CTO) has brought in Yelp and some other moderately large clients. He’s resisted calls to sell the company: it’s not clear whether he likes being CEO or really thinks he can turn things around.

The students think that a sale is inevitable, and I find their logic persuasive. They suggest three potential buyers: Seagate, EMC and NetApp. They say EMC is best positioned to buy the company, but I think Seagate has the more urgent need to diversify as its core HDD business continues to decline. With 27% of the shares held by large institutional investors, I think the pressure to sell will eventually become irresistible (unless they decide to use the recent runup to bail out).

Either way, it points to a problem that I’ve remarked almost since the first days of this blog: it’s really hard to build a stand-alone tech business nowadays. The complete offering that firms need to provide are complex and diversified, and the incumbents have strong distribution channels and financial positions to keep out any newcomer. Unlike in the early PC era, they are no longer complacent and ignoring new threats and opportunities.

Wednesday, March 12, 2014

Apple can't replace Steve Jobs - but it must try

It's no secret (and no surprise) that Apple has not been the same since the retirement and death of Steve Jobs in 2011. But with the stock stalled, now some are calling for Jobs' hand-picked successor, Tim Cook, to get the axe.

The public challenge came this week from Trip Chowdhry, head of a small (and little-known) Bay Area stock analyst firm. From my PR background, it appears to be a (successful) attempt to gain publicity by getting ahead (or fueling) a change at Apple.

His March 8 analyst note is direct and to the point:

RESEARCH: Every month we attend 8 to 11 Technology conferences, Summits and User Group Meetings, and speak to no less than 300 people. Here is the converged view on Apple

• Apple Shareholders, Apple Employees and the Developer Community at-large have lost confidence is Apple’s current leadership
• Apple’s CEO Tim Cook is being incentivized to operate in a comfort zone of complacency until August 2016
• To prevent further destruction of shareholder value, Apple’s CEO and CFO need to be replaced sooner rather than later
• The team of Jon Rubenstein [sic] (Father of iPod) as CEO and Fred Anderson as CFO, may be best to revive Apple
He notes that Apple stock has fallen since its 2012 peak, while the NASDAQ has risen. While comparing to the stock's (any stock's) peak is unfair, Apple has lost ground to Google over the past 2 years (although Apple out gained Google over the past 5 years).

Apple vs. Google share price, March 2012-March 2014 (source: Yahoo)
While I recommend reading the entire document, I’m not sure how much stake I put in his conclusions, and not just because he misspelled the name of his would-be savior, Jonathan Rubinstein. Let me take the report’s arguments in order.

An Impossible Standard
First, no one — no one — could repeat Steve Jobs’ success: Steve Jobs is an impossible act to follow. In the 14 years of the Jobs II era (1997-2011), the company created the iPod, iTunes, iPhone and iPad. (This doesn't even include launching the company and creating the Apple II and Macintosh in his first decade at Apple). While there have been great CEOs in the past 50 years — Jack Welch and Lou Gerstner come to mind — none has the sustained record of innovation and industry transformation to compare to Jobs. (One might argue Intel had more of an impact on the IT industry, but it was under a series of CEOs).

The fact is, hired CEOs can often succeed at squeezing out fat, but are rarely successful at driving innovation. Welch led tremendous improvements in efficiency (which allowed GE to successfully diversify) and Gerstner accelerated a long-overdue shift from high-margin (but increasingly commoditized) hardware to low-margin, differentiated services. It's almost always the entrepreneurs and founders (like Jobs) that create the breakthrough business models and technologies that transform an industry.

A decade ago, the Apple community was speculating who would eventually replace Jobs. One scenario was to buy a Facebook or Twitter and let the acquired CEO take over. (That is, after all, how Jobs rejoined Apple in late 1996 after selling NeXT back to his former employer). But buying an immature (if inspired) leader of a one-trick pony is not going to help the world’s most valuable company create new forms of diversification.

Developer Disinterest
I am inclined to discount the developer reaction, for two reasons. First, developers (particularly Apple developers) tend to be whiny when the platform leader doesn’t give them everything they want — yesterday. That was my world for 15 years, and without visibility into the priorities (and limitations) of the mother ship, we were always good at telling Apple what we wanted but not much help in getting there. (I don’t imagine Microsoft developers are any better).

Second, we know Apple’s developer loyalty had peaked and would peak. As Mike Mace and I showed four years ago, Apple got ahead of its competitors with the iPhone but gave everyone something to copy. At some point, one of its rivals (in this case Android) would match many of its best features, attracting both buyer and developer interest. In addition, as in any platform war, developers who missed out on the first platform will hope to strike it rich on the second, while winners on the first platform look to add other platforms to obtain revenue growth.

Lack of Urgency
A major thesis of Chowdhry is that the stock option grants to Cook do not encourage him to act quickly, but in fact encourage him to wait another two years to stimulate the company’s growth. It’s unfortunate that Chowdhry didn’t make this point two weeks ago, because this would have been a great question for shareholders to ask at the Feb. 28 annual meeting.

I don’t know Cook, his financial situation or motivations, but certainly the whole point of options is to encourage executives to act in the best interests of shareholders. But I do agree with Chowdhry that Apple can’t wait, and if there are new technologies ready to release (iWatch, a new AppleTV) they are long past due.

Jon Rubinstein
Qualcomm Annual Meeting
March 4, 2014
Anointing a Savior
Probably the strongest contribution of the piece is the suggestion of Rubinstein. I don’t know if Rubinstein (former NeXT and Apple exec, former Palm CEO, current Amazon and Qualcomm director) would do a better job that Cook.

However, from having followed him for more than a decade, I think he is a very plausible choice. He is an innovator, he seems to be able to lead large organizations, he knows Apple well. He also seems to have the ego necessary to be a great Apple leader — not the ego of a Jobs or Gates (let alone a Musk or Ellison), but enough to really throw himself into making the company great once again.

Is there a better choice for the next Apple CEO than Rubinstein? Maybe, but I can’t think of one. (Then again, Carol Bartz looked good on paper before joining Yahoo, and we know how that turned out).

A Foolish Consistency
“A foolish consistency is the hobgoblin of little minds”
Ralph Waldo Emerson.
I’d never head of Chowdhry, but then (except for my iPhone research) I haven’t followed Apple as closely as I did before I closed my company in 2004. A quick Google search found two stories about his prior predictions for Apple.

First, a July 2013 story (by an Apple fanboy) in Fortune lambasted Chowdhry for saying innovation at Apple was over. It cites the four points of the latter’s complaint
  1. Apple has not innovated since the passing away of Steve Jobs.
  2. The likelihood of Apple being able to come up with innovative product ... is very slim, given that the Apple Stock is 40% below its high of $705: This lower stock price is prompting some of the smarter Apple employees to leave Apple for other companies such as Google, which is a very serious problem for Apple.
  3. Apple has changed from being an innovative company to a company returning cash to the shareholders; and that has completely backfired: ... Everyone is wondering who is getting all the Cash? ... Some are speculating if Tim Cook and Peter Oppenheimer will remain at Apple.
  4. The current executive team led by Tim Cook and Peter Oppenheimer have destroyed the shareholder value at Apple:
So in some ways, this makes the March 8 report old news, but at least it’s consistent.

However, the other story from January 4 of this year reports:
Global Equities Research analyst Trip Chowdhry came out in support of a bullish perspective on Apple (NASDAQ:AAPL) in a recent research note obtained by Street Insider. The analyst argued that Apple has the ability to continue to expand its gross margins throughout 2014. Chowdhry reiterated his “Overweight” rating on Apple shares and an $800 price target.
Hmmm... The stock closed at $536 on Tuesday, below where it was on January 1. If I were Chowdhry’s customer, this quick flip from bull to bear would cause me to question his competency more than a simple spelling error.

As an Apple shareholder and 30-year Apple user, the questions Chowdhry raises are important ones, and long overdue to be discussed.

Only three directors have the potential to put pressure on Cook. Art Levinson is board chair and was CEO of Genentech from 1995-2009. Bill Campbell was an Apple execs in the 90s (head of Claris) before becoming CEO of Intuit in 1994. Finally, Robert Iger has been CEO of Disney since 2005 and an ABC executive since 1974.

Alas, if Apple holds true to form, it will be like any other Fortune 500 company and fight change tooth and nail. The directors will circle ranks around the CEO, either because they believe in him, because they are cautious, or because they know a new CEO will replace most of the board. (Al Gore, in particular, seems unlikely to be retained by a future board, and so can cash his $54m in Apple shares and move on to something else).

So if there is going to be change at Apple, it will come from BlackRock, the investment firm that is Apple’s largest shareholder (at 5.6%) according to Apple’s most recent proxy statement — a shareholding unchanged from a year ago. Its shareholdings would be worth $8.4 billion more if Apple returned to its September 2012 stock price.

The reality is that Apple must innovate — or stagnate and slowly die (ala HP). Its competitors will copy its best ideas, and thus it must continuously come up with new ideas. That’s the opportunity — and risk — of being an innovator.

As someone who sleeps in a house paid for by Apple’s success from 1998-2002, I’d like to see Apple regain its mojo. But at this point, I’m not optimistic enough to place a major bet on such a revival.

Wednesday, February 26, 2014

If Facebook kills entrepreneurship, what’s next?

Cross-posted from Engineering Entrepreneurship.

The $19b that Facebook paid to buy WhatsApp is shaking up Silicon Valley, as other Internet startups try to figure out how they can get their own inflated multiple.

But for the rest of the world of tech entrepreneurship — such as life sciences — it could further starve the flow of investment capital they need to get off the ground.

Entrepreneurship guru Steve Blank tweeted Monday

steve blank ‏@sgblank Feb 24
Why Facebook is killing Silicon Valley http://steveblank.com/2012/05/21/why-facebook-is-killing-silicon-valley/ … more relevant today
The earlier article talked about his work teaching entrepreneurship for science-based startups:
The irony is that as good as some of these nascent startups are in material science, sensors, robotics, medical devices, life sciences, etc., more and more frequently VCs whose firms would have looked at these deals or invested in these sectors, are now only interested in whether it runs on a smart phone or tablet. And who can blame them.

Facebook and Social Media
Facebook has adroitly capitalized on market forces on a scale never seen in the history of commerce. For the first time, startups can today think about a Total Available Market in the billions of users (smart phones, tablets, PC’s, etc.) and aim for hundreds of millions of customers. Second, social needs previously done face-to-face, (friends, entertainment, communication, dating, gambling, etc.) are now moving to a computing device. And those customers may be using their devices/apps continuously. This intersection of a customer base of billions of people with applications that are used/needed 24/7 never existed before.

The potential revenue and profits from these users (or advertisers who want to reach them) and the speed of scale of the winning companies can be breathtaking. The Facebook IPO has reinforced the new calculus for investors. In the past, if you were a great VC, you could make $100 million on an investment in 5-7 years. Today, social media startups can return 100’s of millions or even billions in less than 3 years. …

If investors have a choice of investing in a blockbuster cancer drug that will pay them nothing for fifteen years or a social media application that can go big in a few years, which do you think they’re going to pick? If you’re a VC firm, you’re phasing out your life science division. As investors funding clean tech watch the Chinese dump cheap solar cells in the U.S. and put U.S. startups out of business, do you think they’re going to continue to fund solar? And as Clean Tech VC’s have painfully learned, trying to scale Clean Tech past demonstration plants to industrial scale takes capital and time past the resources of venture capital. A new car company? It takes at least a decade and needs at least a billion dollars. Compared to IOS/Android apps, all that other stuff is hard and the returns take forever.
Two years ago — ironically a few weeks before Blank’s blog posting — I started writing my own posting along these same lines. What I wrote (but never posted):
Did software ruin entrepreneurship?
On Friday, I sat between two entrepreneurs at an office party for my old job. One of the entrepreneurs is in clean tech (hardware) while the other is in IT (software). One is in his 30s and one is in his 50s.

The hardware guy was talking about his challenges raising funds. One VC told him (I'm paraphrasing): “I gave Instagram $5 million and got back $200 million. Why should I give you money?” [after their $1 billion acquisition by Facebook].
The remainder of my (incipient) argument was that software promises abnormally low cap short returns, and the amount of money needed to fund a software company is getting smaller by the week, as VC Mark Suster wrote back in 2011.

How will this play out? I see at least four possibilities:
  1. During the dot-bomb (dot-con) era we had too much money chasing too few good ideas, and what resulted was what economists call excess entry. Eventually the bubble burst — and it could again.
  2. Another possibility is that these other ideas don’t get funded. There are business models that made sense in the 1890s or 1950s that no longer make sense — such as ones that are labor intensive or based on craft work — and new businesses here don’t get launched.
  3. Blank points to the genius philosopher-king model — where a really rich guy (it’s almost always a guy) puts his money where is mouth is (again, almost always a big mouth). In a previous century it was Howard Hughes or Richard Branson, while today Blank points to Elon Musk.
  4. The final possibility is that politicians play kingmaker, not with their own money but with Other People’s Money, i.e. yours and mine. (They will be egged on by a incantations of “market failure” of a few economists.) While this may make sense for public goods such as public health, we saw how such large scale private intervention worked with firms like Solyndra.
Of course, these are not mutually exclusive. Musk depends on public subsidies to support the business models of Tesla and SolarCity, although — unlike Fisker and Solyndra — he’s at least offering something people want to buy. SpaceX depends on public procurement, but I believe his announced plans that this is just a bootstrap to get the business off the group (so to speak).

Is there a happy ending? Like Blank, I think the Facebook effect is going to get worse before it gets better.

Monday, February 24, 2014

Nokia's non-Android Android phone

At Mobile World Congress Monday in Barcelona, Nokia introduced its Nokia X series — three hybrid quasi-Android phones. The phones combine the Android kernel with Windows-style tiles.

The Nokia phones are as much (or little) Android as is Amazon’s Kindle. Like Amazon, Nokia eschewed Google’s proprietary layers and added its own proprietary layers on top of the Android Open Source Project. The new phones have Nokia’s Store, with Nokia’s maps, radio and in-app payments.

According to Nokia

Nokia Store testing has shown that approximately 75% of Android apps will run properly without any modifications; they’re ready to be published in Nokia Store.
For the remainder:
If your app uses Google services for push notifications, maps or in-app payments, you’ll need to make a few changes, but it won’t take long (usually less than 8 hours). Nokia services have been designed to minimize porting effort from apps using corresponding Google services and allow developers develop and distribute a single APK targeting multiple stores.
Nokia even offers a service for testing apps to see if they are compatible. If not, Nokia is doing a road tour (the “Nokia X Porting Bus”) across Europe to help developers to port their apps to provide dual-platform support.

Either way, developers will need to submit their apps to the Nokia Store to have them made available to customers.

The news sites are speculating about how Microsoft feels about this signal undercutting Nokia’s devotion to the Windows platform, in anticipation of the handset business being swallowed by Microsoft.

Microsoft can keep or cancel the platform once it takes control. In the meantime, Nokia and Android developers can attempt a low-cost experiment to see whether app makers will pay the porting costs, and whether Nokia’s hardware competencies are valuable for Android customers in third world countries. Still, it’s hard to imagine a scenario under which this platform is still available for sale in three years.

For me, what is most interesting is what this experiment means for the future of non-Android Android devices. The Nook was first, then the Kindle. Will this encourage other experiments? Will these experiments create a demand for non-Google Android devices? Will developers make dual-platform applications? Will it undercut the market power of the Android compatibility program?

So will this reduce Google’s control of the platform by moving demand to lower layers? Will it promote further dominance by Android? Or will it be the tree that falls in the forest, that no one ever hears?

Monday, February 17, 2014

In the real world, Android is a proprietary platform

Since Android was first released, many of us have wondered how open it really is. Last week, we learned more about Google’s tight control over Android through documents released as part of an European antitrust investigation.

The story was first reported by the Wall Street Journal, based on an analysis by Harvard professor Ben Edelman. (The WSJ said that Google declined to comment). The meat of the revelation were copies of the 2011-2012 “Mobile Application Distribution Agreement” (MADA) that was signed by Android licensees Samsung and HTC. The agreements were exhibits in the Google-Oracle (née Sun Microsystems) Java copyright lawsuit in the Federal District of Northern California.

Ties That Bind

Rolfe Winkler of the WSJ summarized the (MADA) agreements as follows:

The Samsung and HTC agreements specify a dozen Google applications that must be "preinstalled" on the devices, that Google Search be set as the default search provider, and that Search and the Play Store appear "immediately adjacent" to the home screen, while other Google apps appear no more than one screen swipe away.

The terms put rival mobile apps, like AOL Inc.'s MapQuest and Microsoft Corp.'s Bing search, at a disadvantage on most Android devices. Mr. Edelman, who is a paid consultant for Microsoft, said the terms "help Google expand into areas where competition could otherwise occur."

Google has successfully promoted its own apps on Android. Four of the top 10 most-used apps on Android smartphones in the U.S. during December were Google's, according to comScore. On Apple's iPhone, only one Google app—YouTube—was among the top 10.
Calling Edelman a Microsoft consultant seems like a red herring. More relevant is that he embarrassed Google by noting that it tracked user browsing even when users disabled it. Edelman seems an equal opportunity Internet activist, having spent his entire adult life at Harvard (earning an AB, AM, JD, and PhD in econ before becoming an assistant and associate professor at Harvard Business School).

In his own analysis, Edelman shows how Google’s activities constitute tying:
If a phone manufacturer wants to offer desired Google functions without close substitutes, the MADA provides that the manufacturer must install all other Google apps that Google specifies, including the defaults and placements that Google specifies. These requirements are properly understood as a tie: A manufacturer may want YouTube only, but Google makes the manufacturer accept Google Search, Google Maps, Google Network Location Provider, and more. Then a vendor with offerings only in some sectors—perhaps only a maps tool, but no video service—cannot replace Google's full suite of services.

I have repeatedly flagged Google using its various popular and dominant services to compel use of other services. For example, in 2009-2010, to obtain image advertisements in AdWords campaigns, an advertiser had to join Google Affiliate Network. Since the rollout of Google+, a publisher seeking top algorithmic search traffic de facto must participate in Google's social network. In this light, numerous Google practices entail important elements of tying:

If a wantsThen it must accept
If a consumer wants to use Google Search Google Finance, Images, Maps, News, Products, Shopping, YouTube, and more
If a mobile carrier wants to preinstall YouTube for Android Google Search, Google Maps (even if a competitor is willing to pay to be default)
If an advertiser wants to advertise on any AdWords Search Network Partner All AdWords Search Network sites (in whatever proportion Google specifies)
If an advertiser wants to advertise on Google Search as viewed on computers  Tablet placements and, with limited restrictions, smartphone placements
If an advertiser wants image ads Google Affiliate Network
If an advertiser wants a logo in search ads Google Checkout
If a video producer wants preferred video indexing YouTube hosting
If a web site publisher wants preferred search indexingGoogle Plus participation
Not all tying is illegal. But tying by a dominant firm is legally suspect — even more so in Europe, where the competition policies are more aggressive (especially for US firms like Google).

Technically Open, Commercially Not

From a practical standpoint, phone makers have no choice but to comply with Google’s terms (with the exception of China’s domestic market, where Google’s services are blocked). As OSS IP maven Florian Mueller wrote:
Technically you can take the free and open parts of Android (in terms of the amount of code, that's probably the vast majority, though the share of closed, tightly-controlled components appears to be on the rise) and build a device without signing any individual license agreement with Google, and some have indeed done so. If that is so, why did Samsung and HTC sign those agreements that have now come to light? For commercial reasons.

If you want your Android device to sell, you normally want to be able to call it an Android device. To do that, you need a trademark license from Google. Open source licenses cover software copyright, they may come with patent provisions, but licenses like the GPL or ASL (Apache) don't involve trademarks.

The trademark -- the little green robot, for example -- is commercially key. In order to get it, you must meet the compatibility criteria Google defines and enforces, which are mostly about protecting Google's business interests: the apps linked to its services must be included. And those apps are subject to closed-source, commercial licensing terms. That's what the MADA, the document Samsung and HTC and many others signed, is about.

Even if you decided that the trademark isn't important to you, you would want at least some of the apps subject to the MADA. What's a mobile operating system nowadays without an app store? Or without a maps/navigation component? Google gives OEMs an all-or-nothing choice: you accept their terms all the way, or you don't get any of those commercially important components. And if you take them, then you must ensure that the users of your devices will find Google services as default choices for everything: search, mail, maps/navigation, etc.
This “free” software comes at a price. Even if Google doesn’t charge royalties to use its applications, the London Guardian estimated last month that it costs $40k-$75k to test a new handset for compliance with Google’s standards and thus be allowed to ship Google’s applications.

Google Isn't Open About Not Being Open

Most troubling for me has been — since the beginning of Android — the gap between Google’s rhetoric of openness and the reality; for example, see “Open source without open governance” (June 2008), “Perhaps someday Android will be open” (July 2008), “Sharing in faux openness” (October 2009), “Google’s half-full glass of openness (January 2010), “Andy wants you to buy his openness (June 2010) “Semi-open Android getting more closed” (October 2013).

While these agreements have been in place for at least three years, Edelman notes that Motorola redacted the most important provisions of the MADA when it disclosed excerpts in a 2011 SEC filing. Google’s lack of transparency about its non-openness helps it be more successfully non-open:
MADA secrecy advances Google's strategic objectives. By keeping MADA restrictions confidential and little-known, Google can suppress the competitive response. If users, app developers, and the concerned public knew about MADA restrictions, they would criticize the tension between the restrictions and Google's promise that Android is “open” and “open source.” Moreover, if MADA restrictions were widely known, regulators would be more likely to reject Google's arguments that Android's "openness" should reduce or eliminate regulatory scrutiny of Google's mobile practices. In contrast, by keeping the restrictions secret, Google avoids such scrutiny and is better able to continue to advance its strategic interests through tying, compulsory installation, and defaults.

Relatedly, MADA secrecy helps prevent standard market forces from disciplining Google's restriction. Suppose consumers understood that Google uses tying and full-line-forcing to prevent manufacturers from offering phones with alternative apps, which could drive down phone prices. Then consumers would be angry and would likely make their complaints known both to regulators and to phone manufacturers. Instead, Google makes the ubiquitous presence of Google apps and the virtual absence of competitors look like a market outcome, falsely suggesting that no one actually wants to have or distribute competing apps.
With some irony, the WSJ article quoted Google’s former CEO:
"One of the greatest benefits of Android is that it fosters competition at every level of the mobile market—including among application developers," Google Executive Chairman Eric Schmidt wrote to then-U.S. Senator Herb Kohl in 2011.
Peeling Back the Layers of Openwashing

While the most specific and conclusive, this latest revelation is not the only evidence that Android is more openwashing than open source.

For example, in October Ron Amadeo of Ars Technica listed all the cases where “open source” Android once came with a key application available in open source, but then Google orphaned the open source app when it brought out a fully-featured closed-source replacement. This includes the Search, Music, Calendar, Keyboard, Camera and Messaging apps.

At the same time, Google (with great success) sought to convince app developers to use the Google Play APIs rather than the official Android APIs — thus making these apps incompatible with devices that use only the open source part of Android (e.g. Amazon’s Kindle). If you want to use apps from the Google app store, you have to use the Google APIs.

Finally, there’s the matter of the Open Handset Alliance, the organization nominally leading Android development. Amadeo makes clear that OHA is more like the Microsoft Developer Network than the Eclipse Foundation (emphasis in original):
While it might not be an official requirement, being granted a Google apps license will go a whole lot easier if you join the Open Handset Alliance. The OHA is a group of companies committed to Android—Google's Android—and members are contractually prohibited from building non-Google approved devices. That's right, joining the OHA requires a company to sign its life away and promise to not build a device that runs a competing Android fork.
Google: Partly Open and Opening Parts

In the early 2000s, open source was a paradox. When I began researching my second open source article (which I used as a job talk in December 2001 and was published in 2003), it was not clear how firms could make money from something nominally open. Based on a study of Apple, IBM and Sun, I concluded that firms made money off of openness with strategies that were open in one of two ways: they opened parts (leaving other parts close) or they were partly open (granting some rights, but not enough to enable competitors).

Google is clearly doing both. Amadeo emphasizes that with Android, Google is only opening parts — leaving key components under tight control. Meanwhile, the latest news points to Google being only partly open: rights to use the “open source” (actually, a mixed-source) system depend on complying with a series of Google restrictions.

In 2011, mobile analyst Liz Laffan studied the openness of eight mobile-related open source communities. Building on a 2008 study I did with Siobhan O'Mahony, she developed a 13-factor openness score for firm controlled open source communities. In her report (summarized in a 2012 journal article) Laffan assigned scores from 0-100% open. Android was lowest at 23%, and in fact the only project less than 50%. At the other extreme, Linux was 71% and Eclipse (designed to be open from the start) was 84%.

Conclusion: Real World Android is a Proprietary Platform

In the 1980s and 1990s, Microsoft won commercial success by widely licensing its PC operating system to all comers. However, after the initial licenses (with its launch customer IBM), Microsoft largely dictated the terms of these licenses.

When people buy an Android phone, they are not buying the Android Open Source Project but (as Amadeo makes clear) the Google Play Platform. This platform — call it Real World Android — has the following characteristics
  • Like Apple’s OS X (or IBM’s WebKit), it combines open source and proprietary elements.
  • Like Windows, it is licensed to a wide range of hardware manufacturers.
  • Like both OS X and Windows, much of the value comes from bundling a wide range of proprietary, closed-source applications
In short, Real World Android is a proprietary platform: proprietary in that it is a mixture of open source and proprietary elements, but the complete platform (including application functionality and access to the Android app ecosystem) requires licensing proprietary technologies under a restrictive proprietary contract. (For a true open source system, the open source license would be enough).

A few market experiments (notably Kindle and the Chinese market) have been made using the Android open source project (which Amadeo dubs AOSP). For the remainder, as Florian notes, commercial success requires agreeing to Google’s terms to use its proprietary platform. If it was ever accurate to refer to Android as an open source platform, it’s clearly no longer true today.

Yes, by using an ad-supported (two-sided market) approach Google doesn’t have to charge royalties, but that doesn’t make it free (as in speech or as in beer). With 42% of the US mobile ad market — and Android accounting for the majority of US smartphones — Google makes billions off of Android users. Google’s preloaded apps command choice real estate, and if Google didn’t control this real estate, handset makers could sell this real estate to the highest bidder.

So despite all the rhetoric, Google is just another tech company that wants to rule the world and make zillions for its founders and executives. It controls its technology to gain maximum advantage, and (like many firms nowadays) uses openwashing to render spotless its proprietary motivations. This shouldn’t be surprising. It won’t be a surprise for anyone who reviews the how Android evolved (and the strategy emerged) over the first five years.