My 2012 Watch List

When it comes to cracking the digital media code, 2011 involved more testing than learning. Media companies seem to be locked in a feverish search mode. Their sense of urgency is reinforced by the continuous depletion of worldwide fundamentals: digital advertising’s encephalogram remains flat (at best); and when audiences grow, revenues do not necessarily correlate. As for legacy media such as large quality newspapers which still draw 70-80% of their revenue from print, they are still caught in a double jeopardy: losing circulation plus looming downward price pressure on ads. We see an unforgiving mechanism at work: on mature markets such as Europe or North America, print media currently absorbs about 25% of ad spending while time spent on newspapers falls well below 10%. On digital media the balance is just the opposite: the web takes roughly 20% of ad investments for 25% of time spent; as for mobile devices, there is almost no ad money spent (<1%), but people spend about 10% of their time on their smartphones — and the growth is exponential.

Last year, we saw many efforts in the “right” direction—”right” being a rapidly redefined. Below is a subjective list of moves, trends, innovations, attempts that burgeoned in 2011 and are likely to become more sharply defined with this coming year.

#1 Paid-for news. Many are trying, but no one has cracked the code—yet. Part of the problem is we are in a model that’s just the opposite of one-size-fits-all. We are likely to witness the emergence of many different ways of charging readers for quality content. Variables in the equation are many and sometimes hard to quantify:

- National vs. local
- General news vs. specialized
- Typologies of contents
- Most Likely Prime time reading
- Most Likely Prime device use
- Target group structure.

Go figure a reliable business model with a so many factors in the formula…

Paywalls come in different flavors. The prize for complexity goes for the New York Times’ Digital Subscription Plan launched March 17. According to the Times, its crystal-clear equation can be summed-up as follow:

Once readers click on their 21st [in a 4 weeks period], they will have the option of buying one of three digital news packages — $15 every four weeks for access to the Web site and a mobile phone app (or $195 for a full year), $20 for Web access and an iPad app ($260 a year) or $35 for an all-access plan ($455 a year). All subscribers who take home delivery of the paper will have free and unlimited access across all Times digital platforms except, for now, e-readers like the Amazon Kindle and the Barnes & Noble Nook.

Weirdly enough, this overly complex and pricey scheme seems to work: by the end of Q3, the Times had harvested 324,000 paid digital subscribers. This has to be viewed in the context of a site getting 47 million Unique Visitors per month on average, and 33 million in the US alone. As for mobile access, 11 million iPhones apps and 3 million iPads have been downloaded.

To watch in 2012: how fast the NYT will recruit new paid digital subscribers. To get a good view of the key elements in NYT’s digital revenues, see Ken Doctor’s analysis in Newsonomics. Plus, after the sudden resignation of its CEO (Janet Robinson), the NYT might be entering a new era; she could be replaced by a predominantly digital person.

#2 The Web App Movement. The boldest move of the year was made by The Financial Times: in June, it unveiled a web app for iPad and iPhone, independent of Apple’s closed ecosystem. Among its many advantages, the web app allows the FT.com to foster a close relationship with all its customers. In five months, the FT.com has collected over 250,000 paying digital subscribers. Its entire digital operations now accounts for 30% of its revenue. (More on the FT.com’s economics in this PaidContent story.)

To watch in 2012: The outlook seems quite good for the FT.com. Its marketing division is working hard to tap into a huge database of 4 million registered users, including 1 million for the independent web app, half of them putting it on the home screen of their device.

#3 The Apple’s Newsstand is another item of the 2012 watch list. The project responded to publishers’ wish to see their prestigious titles rise over the crowd of garage apps, and to be able to propose long term subscription plans. In October, Apple came up with its digital kiosk, which is essentially a shortcut for publishers apps displayed in a wooden shelf. For good measure, Apple added an exclusive feature: automated downloading. In short, it is a success for magazines who register massive hikes in their digital sales, but much less so for dailies which remain a bit shy. (We been through this in a previous Monday Note)

==> To watch in 2012: the key issue for a massive move to Apple’s Newsstand remains customer data. Either Apple and the publishers will be able to work out a scheme in which about 70% of the customers will agree to provide their coordinates (see Apple’s Newsstand: Wait for 2.0), or the independent web app movement (FT.com-like) is likely to gain traction.

#4 The switch to Digital Editions, as opposed to dumb PDF, might play a critical role in the development of tangible revenue for the industry. Here, I spoke highly of great examples of tablet-specific applications such as BloombergBusinessWeek+ or the Guardian’s iPad version.

To watch in 2012: the adoption of Digital Editions will depend on three factors: 1) The publisher’s willingness to invest significantly on projects not profitable in the short-term, 2) The advertising community’s ability to understand that digital editions will bring their clients much higher benefits than PDF versions or even web sites will do, 3) The acceptance by various Audit Bureaus of Circulation that reader engagement is incomparably higher for designed-for-tablets editions (for more on the subject, read our recent column Unaccounted For Readers.) If these three items are checked, 2012 is likely to be The Year of Digital Editions.

#5 The Huffington Post contagion. Its acquisition by AOL for $315m has propelled the HuffPo to new highs. The content—largely based on unabashed aggregation and legions of unpaid bloggers—remains mediocre, but no ones really seems to care. As in the pre-bubble era, only eyeballs and hype count. The HuffPo has plenty of both. (OK, when you look at the numbers, as Ken Doctor did in this piece, you’ll see a HuffPo visitor brings 3.5 times less money than the NYT does…).

To watch in 2012: This is the year where the Huffington Post will go legit. Everyone is now kissing Arianna’s ring. Including large media company, such as Le Monde, ElPais, DieZeit and a couple of others in Europe that will help Arianna to go global. As appetizing as an alliance between Alain Ducasse and McDonald’s. Sometimes the search for strategy goes haywire…

frederic.filloux@mondaynote.com

2011: Shift Happens

Whatever 2011 was, it wasn’t The Year Of The Incumbent. The high-tech world has never seen the ground shift under so many established companies. This causes afflicted CEOs to exhibit the usual symptoms of disorientation: reorg spams, mindless muttering of old mantras and, in more severe cases, speaking in tongues, using secret language known only to their co-CEO.

Let’s start with the Wintel Empire

Intel. The company just re-organized its mobile activities, merging four pre-existing groups into a single business unit. In a world where mobile devices are taking off while PC sales flag, Intel has effectively lost the new market to ARM. Even if, after years of broken promises, Intel finally produces a low-power x86 chip that meets the requirements of smartphones and tablets, it won’t be enough to take the market back from ARM.

Here’s why: The Cambridge company made two smart decisions. First, it didn’t fight Intel on its sacred PC ground; and, second, it licensed its designs rather than manufacture microprocessors. Now, ARM licensees are in the hundreds and a rich ecosystem of customizing extensions, design houses and silicon foundries has given the architecture a dominant and probably unassailable position in the Post-PC world.

We’ll see if Intel recognizes the futility of trying to dominate the new theatre of operations with its old weapons and tactics, or if it goes back and reacquires an ARM license. This alone won’t solve its problems: customers of ARM-based Systems On a Chip (SOC) are used to flexibility (customization) and low prices. The first ingredient isn’t in evidence in the culture of a company used to dictate terms to PC makers. The second, low prices, is trouble for the kind of healthy margins Intel derives from its Wintel quasi-monopoly. Speaking of which…

Microsoft. The company also reorged its mobile business: Andy Lees, formerly President of its Windows Phone division just got benched. The sugar-coating is Andy keeps his President title, in “a new role working for me [Ballmer] on a time-critical opportunity focused on driving maximum impact in 2012 with Windows Phone and Windows 8”. Right.

Ballmer once predicted Windows Mobile would achieve 40% market share by 2012, Andy Lee pays the price for failing to achieve traction with Windows Phone: according to Gartner, Microsoft’s new mobile OS got 1.6% market share in Q2 2011.

Microsoft will have to buy Nokia in order to fully control its destiny in this huge new market currently dominated by Android-based handset makers (with Samsung in the lead) and by Apple. In spite of efforts to ‘‘tax” Android licensees, the old Windows PC licensing model won’t work for Microsoft. The vertical, integrated, not to say “Apple” approach works well for Microsoft in its flourishing Xbox/Kinect business, it could also work for MicroNokia phones. Moreover, what will Microsoft do once Googorola integrates Moto hardware + Android system software + Google applications and Cloud services?
In the good old PC business Microsoft’s situation is very different, it’s still on top of the world. But the high-growth years are in the past. In the US, for Q2 2011, PC sales declined by 4.2%; in Europe, for Q3 this time, PC sales went down by 11.4% (both numbers are year-to-year comparisons).

At the same time, according to IDC the tablet market grew 264.5% in Q3 (admire the idiotic .5% precision, and consider tablets started from a small 2010 base). Worldwide, including the newly launched Kindle Fire, 2011 tablets shipments will be around 100 million units. Of which Microsoft will have nothing, or close to nothing if we include a small number of the confidential Tablet PC devices. The rise of tablets causes clone makers such as Dell, Samsung and Asus (but not Acer) to give up on netbooks.

In 2012, Microsoft is expected to launch a Windows 8 version suited for tablets. That version will be different from the desktop product: in a break with its monogamous Wintel relationship, Windows 8 will support ARM-based tablets. This “forks” Windows and many applications in two different flavors. Here again, the once dominant Microsoft lost its footing and is forced to play catch-up with a “best of both world” (or not optimized for either) product.

In the meantime, Redmond clings to a PC-centric party line, calling interloping smartphones and tablets “companion products’’. One can guess how different the chant would be if Microsoft dominated smartphones or tablets.

Still, like Intel, Microsoft is a growing, profitable and cash-rich company. Even if one is skeptical of their chances to re-assert themselves in the Post-PC world, these companies have the financial means to do so. The same cannot be said of the fallen smartphone leaders.

RIM: ‘Amateur hour is over.This is what the company imprudently claimed when introducing its PlayBook tablet. It is an expensive failure ($485M written off last quarter) but RIM co-CEOs remain eerily bullish: ‘Just you wait…’ For next quarter’s new phones, for the new BlackBerry 10 OS (based on QNX), for a software update for the PlayBook…

I remember being in New York City early January 2007 (right before the iPhone introduction). Jet-lagged after flying in from Paris, I got up very early and walked to Avenue of The Americas. Looking left, looking right, I saw Starbucks signs. I got to the closest coffee shop and saw everyone in the line ahead of me holding a BlackBerry, a.k.a. CrackBerry for its addictive nature. Mid-december 2011, RIM shares were down 80% from February this year:

Sammy the Walrus IV provides a detailed timeline for RIM’s fall on his blog, it’s painful.

On Horace Dediu’s Asymco site, you’ll find a piece titled “Does the phone market forgive failure?”. Horace’s answer is a clear and analytical No. Which raises the question: What’s next for RIM? The company has relatively low cash reserves ($1.5B) and few friends, now, on financial markets. It is attacked at the low end by Chinese Android licensees and, above, by everyone from Samsung to Nokia and Apple. Not a pretty picture. Vocal shareholders demand a change in management to turn the company around. But to do what? Does anyone want the job? And, if you do, doesn’t it disqualify you?

Nokia: The company has more cash, about 10B€ ($13B) and a big partner in Microsoft. The latest Nokia financials are here and show the company’s business decelerates on all fronts, this in a booming market. Even if initial reactions to the newest Windows Phone handsets aren’t said to be wildly enthusiastic, it is a bit early to draw conclusions. But Wall Street (whose wisdom is less than infinite) has already passed judgment:

Let’s put it plainly: No one but RIM needs RIM; but Microsoft’s future in the smartphone (and, perhaps, tablet) market requires a strong Nokia. Other Windows Phone “partners” such as Samsung are happily pushing Android handsets, they don’t need Microsoft the way PC OEMs still need Windows. Why struggle with a two-headed hydra when you can acquire Nokia and have only one CEO fully in charge? Would this be Andy Lees’ mission?

All this stumbling takes place in the midst of the biggest wave of growth, innovation and disruption the high-tech industry has ever seen: the mobile devices + Cloud + social graph combination is destroying (most) incumbents on its path. Google, Apple, Facebook, Samsung and others such as Amazon are taking over. 2012 should be an interesting year for bankers and attorneys.

JLG@mondaynote.com


The Best of Curation

I love talking about the things I enjoy using. The emerging ecosystem in which a bunch of smart people curate long form journalism is definitely one of those things. The companies are called Instapaper, Longreads, Longform. I love the material they find for me and I’m in the debt of developers who wrote neat applications that help me manage my very own library of great stories.

My reading selection process for long articles (say above 2500 words) goes like this. It starts with installing the Read Later bookmarklet, developed by Instapaper, on all my internet browsers. When I stumble on something I have no time to dive into, I hit the ReadLater tab in the by browser’s bookmarks bar (below):

This causes the piece to be stored in the cloud. (There is another service/app of the same kind called Read it Later. I just got it this weekend and haven’t had much time to use it yet.)

Then, I loaded the Instapaper app on my iPhone and my iPad, it works just fine. The stories I don’t have time to read at work are now available on my two nomad devices for my daily commute, my chronic insomnia, after-dinner relaxation or long flights. Unsurprisingly, topics center around business stories, medias, tech; but they also extend to neurosciences, and in-depth profiles of creative people in a wide range of fields. In doing so, I have re-created my own serendipitous environment; as I open the app, I always find something interesting I put aside a couple of weeks earlier.

My second source of good stories is the Editor’s Pick on three long forms curation sites. Instapaper has it own Browse section and my two favorites are Longreads and Longform. There are two other such sites I use less often: The Browser and Give Me Something to Read. They’re all built on the same idea: a self-organized community of thousands people (see graph below) who pick up articles they like and put them on Twitter (and also on Facebook and Tumblr); the feeds are then re-aggregated and curated by the sites’ editors. The process looks like this :

This system combines the best of Twitter (gathering a community that selects relevant contents) with the final responsibility of human editors. Just as important, Read Later and Read It Later rely on hundreds of third party applications that use their APIs (a piece of code that allows apps to talk to each other).

Then two questions arise :
– Does this model benefit publishers ?
– What kind of business models can the aggregators hope for ?

To the first question, the answer is yes and no. From their respective sites, these companies play a referrer role as they send traffic back to the original publishers. But when it comes to apps for smartphones or mobiles, these services become value killers: their content is displayed in the apps without advertising. See screenshots from the iPhone Instapaper app below:

As for Read it Later application, it proposes (below) a web view and a reformatted text-view. No need to be a certified ergonomist to guess which one will be used the most:

For good measure, let’s say Apple is not the last entity to add features that kill value by removing ads; below the same NYT web page in normal and “Reader” mode:

For now, publishers don’t seem to care much about this type of value hijacking. The rationale is such apps are still limited to early adopters. In a study released last week, Read it Later said it recorded a total of 47 million “saves” between May and October 2011 (and 36% growth between the first and the last month.) Weirdly enough, most of the “saves” recorded involve tech-related stories from blogs such as LifeHacker, Gizmodo (both are part of Gawker Media) or TechCrunch. Long form journalism appears too small to be accounted for. Equally weird, when Read it Later gives a closer look at data coming from the New York Times, we see this:

Great writers indeed, but hardly long form journalism. We would have expected a predominance of long feature stories, we get columnists and tech writers instead.

Similarly, Longreads.com gets about 100,000 unique visitors a month, founder Mark Armstrong told me. For this last week, publishers altogether got 21,230 referrals form Longreads’ curated picks. Despite this modest volume, Longreads’ 40,000+ community of referrers is growing rapidly at the rate of a thousand every two weeks or so.

Let’s talk business model. The Longreads team includes former McCann Erickson creative director Joyce King Thomas (story in AdAge here). She seems more interested in good journalism rather than in loading the elegant Longreads with a Christmas tree of ads. In short, Longreads’ business future lies more in a membership system than in anything else — maybe some sponsorship, Armstrong acknowledges. The contents Longreads promotes through its links addresses a solvent audience, one that knows great journalism comes with a price and so do good tools to mine it. It shouldn’t be a problem to extract €10 or $20 a year, directly or via an app.

Having said that, I remain a bit skeptical of Longreads’ avoidance (for now) of the classic startup venture capital mechanism. Because barriers to entry into its type of business are low, Longreads ought to quickly build on its momentum and on the undisputed quality of its product. This means promotion and also technology to extend the reach of the service and to secure control of the distribution channel–and to make it more mainstream.

frederic.filloux@mondaynote.com

HP Kicks webOS To The Kerb

We strongly believe that the best days for webOS are still ahead.

Thus spake Meg Whitman in her memo to the troops, an intramural rendition of HP’s official announcement that webOS will be “contributed” to the Open Source community.

…the executive team has been working to determine the best path forward for this highly respected software. We looked at all the options in the market today…By providing webOS to the open source community…we have the potential to fundamentally change the landscape.

Either she thinks we’re dimwits, or she’s being cleverly cheeky. Does she think we’ll fall for the tired corpospeak? “Victory! WhatWereWeThinking v3.0 has been released to the Open Source community”. Or is she slyly fessing up? “After much abuse inside the HP cage, it’s clear that webOS can only be restored to health if released into the wild.”

Releasing a product as Open Source isn’t always an admission of failure; see exhibits Linux or, more recently, WebKit. But the successful Open Source offerings were created in Open Source form. They weren’t “contributed” in a last-ditch effort to save face after unsuccessful attempts to monetize a proprietary version.

Furthermore, there’s real money to be made with an Open Source product…if you know what you’re doing. Look at Red Hat: nicely profitable, with nearly a $10B market cap. They make a lot of money selling Linux…or, more accurately, by selling a Linux “distro”, a suite of products and services that surround the free Linux kernel. They make money the iTunes way: Customers won’t pay for tunes that are otherwise (more or less legally) freely available, but they will pay for services around the music.

So is Open Source the way to go for webOS? I don’t think so.

Let’s look at Symbian, a product that’s similar to webOS in its complicated history: Born at Psion; moved to a Nokia-Motorola-Ericsson-Matsushita-Psion joint venture; thrown into Open Source by the Symbian Foundation, an even more complicated JV. Lately, things have become even murkier as Symbian appears to have been “outsourced to Accenture”.

Adobe’s Flex is another kicked-to-the-kerb example. When HTML5 appeared to displace Flash, Adobe officially open-sourced Flex to the non-profit Apache Software Foundation.

Even the success of Firefox, certainly the most visible Open Source application, might not be as indisputable as we first thought.  With net assets of $120M at the end of 2009, the “non-profit” Mozilla Foundation, Firefox’s progenitor, has been the great Open Source success story. 2009 revenues were $104 million, most of which was generated by sending searches to Google from the Firefox browser. In other words, Google has been Firefox’ sugar daddy as the Mountain View company battles Microsoft’s Internet Explorer quasi-monopoly.

But things have changed. Google Chrome is in its ascendancy; Google points to security holes in Firefox. Firefox served at Google’s pleasure, but is no longer needed.

Not exactly a bona fides Open Source success.

(Ironically — or at least amusingly — Meg Whitman singled out Firefox as an example of Open Source success in a post-announcement interview. To add tech credentials to appearance, she had HP director, venture investor, and Netscape founder Marc Andreessen sitting by her side. We won’t dwell on the admission that trotting out Andreessen represents.)

A closer look at HP’s official statements makes things even less clear:

HP will engage the open source community to help define the charter of the open source project under a set of operating principles:
. The goal of the project is to accelerate the open development of the webOS platform
. HP will be an active participant and investor in the project
. Good, transparent and inclusive governance to avoid fragmentation
. Software will be provided as a pure open source project
HP also will contribute ENYO, the application framework for webOS, to the community in the near future along with a plan for the remaining components of the user space.
Beginning today, developers and customers are invited to provide input and suggestions at http://developer.palm.com/blog/.

This is language designed to obfuscate rather than clarify, filled with qualifiers and weasel words. Read it again and ask yourself: Is there even one actionable sentence? are we given numbers, dates, some measurable commitment?

No. Instead, we get lame HR-like phrases:

. HP will engage the open source community — in what kind of embrace?
. active participant and investor — by how much and when?
. transparent and inclusive governance — why not opaque and exclusionary?
. a pure open source project — as opposed to yesterday’s impure and proprietary?
. near future… along with a plan — we don’t know, we’re just saying

Nowhere does Whitman state how much money, how many people, or when things might coalesce.

Allow me to translate:

We tried and tried and found no takers for webOS. Android is too strong, our old partner Microsoft leaned on us, and webOS is seen as damaged goods. We used the Open Source exit to get kudos from vocal enthusiasts. We know it’s cynical, but what do you want us to say? Good bye and good luck?

The charade (and cynicism) doesn’t stop there. Now we’re told HP might make webOS-powered tablets. Not in 2012, that year’s roadmap has been inked, HP is committed to Windows 8 tablets. Maybe in 2013. That, ladies and gentlemen, attests to HP’s unwavering commitment to webOS.

By 2013 there will be tablets coming from all the usual suspects (except RIM): Samsung, Googorola and other Android players, Amazon, Microsoft’s OEMs and newly acquired subsidiary Nokia…and, of course, Apple’s iPad HD2.

When I hear Whitman make such statements, I’m reminded of the old joke about the difference between a computer salesperson and a used-car salesman: The used-car gent knows he’s lying. For my alma mater’s sake, for HP’s good, let’s hope Meg Whitman knows she’s putting us on.

JLG@mondaynote.com

Datamining Twitter

On its own, Twitter builds an image for companies; very few are aware of this fact. When a big surprise happens, it is too late: a corporation suddenly sees a facet of its business — most often a looming or developing crisis — flare up on Twitter. As always when a corporation is involved, there is money to be made by converting the problem into an opportunity: Social network intelligence is poised to become a big business.

In theory, when it comes to assessing the social media presence of a brand, Facebook is the place to go. But as brands flock to the dominant social network, the noise becomes overwhelming and the signal — what people really say about the brand — becomes hard to extract.

By comparison, Twitter more swiftly reflects the mood of users of a product or service. Everyone in the marketing/communication field becomes increasingly eager to know what Twitter is saying about a product defect, the perception of a strike or an environmental crisis. Twitter is the echo chamber, the pulse of public feelings. It therefore carries tremendous value.

Datamining Twitter is not trivial. By comparison, diving into newspaper or blog archives is easy; phrases are (usually) well-constructed, names are spelled in full, slang words and just-invented jargon are relatively rare. By contrast, on Twitter, the 140 characters limit forces a great deal of creativity. The Twitter lingo constantly evolves, new names and characterizations flare up all the time, which excludes straightforward full-text analysis. The 250 million tweets per day are a moving target. A reliable quantitative analysis of the current mood is a big challenge.

Companies such as DataSift (launched last month) exploit the Twitter fire hose by relying on the 40-plus metadata included in a post. Because, in case you didn’t know it, an innocent looking tweet like this one…

…is a rich trove of data. A year ago, Raffi Krikorian, a developer on Twitter’s API Platform team (spotted thanks to this story in ReadWriteWeb) revealed what lies behind the 140 characters. The image below…

…is a tear-down of a much larger one (here, on Krikorian’s blog) showing the depth of metadata associated to a tweet. Each comes with information such as the author’s biography, level of engagement, popularity, assiduity, location (which can be quite precise in the case of a geotagged hotspot), etc. In this WiredUK interview, DataSift’s founder Nick Halstead mentions the example of people tweeting from Starbucks cafés:

I have recorded literally everything over the last few months about people checking in to Starbucks. They don’t need to say they’re in Starbucks, they can just be inside a location that is Starbucks, it may be people allowing Twitter to record where their geolocation is. So, I can tell you the average age of people who check into Starbucks in the UK.
Companies can come along and say: “I am a retail chain, if I supply you with the geodata of where all my stores are, tell me what people are saying when they’re near it, or in it”. Some stores don’t get a huge number of check-ins, but on aggregate over a month it’s very rare you can’t get a good sampling.

Well, think about it next time you tweet from a Starbucks.

DataSift further refined its service by teaming up with Lexalytics, a firm specialized in the new field of “sentiment analysis“, which measures the emotional tone of a text — very useful to assess the perception of a brand or a product.

Mesagragh, a Paris-based startup with a beachhead in California plans a different approach. Instead of trying to guess the feeling of a Twitter crowd, it will create a web of connections between people, terms and concepts. Put another way, it creates a “structured serendipity” in which the user will naturally expand the scope of a search way beyond the original query. Through its web-based application called Meaningly, Mesagraph is set to start a private beta this week, and a public one next January.

Here is how Meaningly works: It starts with the timeline of tens of thousands Twitter feeds. When someone registers, Meaningly will crawl his Twitter timeline and add a second layer composed by the people the new user follows. It can grow very quickly. In this ever expanding corpus of twitterers, Meaningly detects the influencers, i.e. the people more likely to be mentioned, retweeted, and who have the largest number of qualified followers. To do so, the algorithm applies an “influence index” based on specialized outlets such as Klout or Peer Index that measure someone’s influence on social medias. (I have reservations regarding the actual value of such secret sauces: I see insightful people I follow lag well behind compulsive self-promoters.) Still, such metrics are used by Meaningly to reinforce a recommendation.

Then, there is the search process. To solve the problem of the ever morphing vernacular used on Twitter, Mesagraph opted to rely on Wikipedia (in English) to analyze the data it targets. Why Wikipedia? Because it’s vast (736,000 subjects), it’s constantly updated (including with the trendiest parlance), it’s linked, it’s copyright-free. From it, Mesagraph’s crew extracted a first batch of 200,000 topics.

To find tweets on a particular subject, you first fill the usual search box; Meaningly will propose a list of predefined topics, some expressed with its own terminology; then it will show a list of tweets based on the people you’re following, the people they follow, and “influencers” detected by Meaningly’s recommendation engine. Each Tweet comes with a set of tags derived from the algorithm mapping table. These tags will help to further refine the search with terms users would have not thought of. Naturally, it is possible to create all sorts of custom queries that will capture relevant tweets as they show up; it will then create a specific timeline of tweets pertaining to the subject. At least that’s the idea; the pre-beta version I had access to last week only gave me a sketchy view of the service’s performances. I will do a full test-drive in due course.

Datamining Tweeter has great potential for the news business. Think of it: instead of painstakingly building a list of relevant people who sometimes prattle endlessly, you’ll capture in your web of interests only the relevant tweets produced by your group and the group it follows, all adding-up in real-time. This could be a great tool to follow developing stories and enhance live coverage. A permanent, precise and noise-free view of what’s hot on Twitter is a key component of the 360° view of the web every media should now offer.

frederic.filloux@mondaynote.com

Behind RIM’s $485M Write-off

On December 5th, three days ago, RIM announced a $485M write-off “related to its inventory valuation of BlackBerry PlayBook tablets”. Wall Street didn’t like the news and dumped the stock, it went down 9.7% in one session. One of the last analysts supporting RIM, Scotia Capital’s Gus Papageorgiou, finally gave up and turned vocally bearish. Others, as in this Reuters summary, grumble and suggest “necessary changes at the top of the company.”
Those are rote comments over an half-expected development: everybody knew PlayBook tablets weren’t selling well and the latest stock movement was but another step in a year-long descent:

But a second look at the numbers and at RIM’s communiqué itself raises more questions, ones I’m surprised analysts didn’t ask. Was it because RIM’s disclosure took place on a Friday, an oft-used maneuver to limit the spread of bad news?
We’ll focus on the $485M number and a look at RIM’s two previous quarters. As the company’s fiscal year starts March 1st, we have Q1 (ending in May 2011) numbers here and Q2 (ending in August 2011) results here.
For Q1 the company claims it sold 500,000 PlayBooks; for Q2, RIM says it sold 200,000 of the same tablets. Sold, in accounting parlance, is a precise term: this isn’t just a shipment, it’s a financial transaction whereby the buyer now owes RIM money, and RIM counts this as revenue and, after costs, profit.

We now turn to the cost of the PlayBook tablet. We know it’s made by Quanta, a reputable Taiwanese ODM, with approximately the same contents as Amazon’s Kindle Fire, also made by Quanta and, reportedly costing around $200 to make. Other reports peg the Playbook’s manufacturing cost around that same $200 number
Accounting rules say inventories are to be valued at the “lowest of cost or market”. If my widget costs $100 to make and sells for more, the accountants will value the inventory at $100 per unit. If, sadly, I can only sell it for $50, the inventory valuation must be $50. And, if an optimistic valuation of $100 was once used, it must now be “written down” to $50, causing a loss, even in the absence of commercial transaction. This is an inventory write-off or write-down. (This type of cashless loss mystifies normal humans who have trouble with the notion you can be profitable and go bankrupt. It’s ‘‘easy”: You make a profit the moment you sell a product for more than it costs. And you go bankrupt if your customers don’t pay but your suppliers insist on being paid. And there’s Uncle Sam to whom you owe tax on your “profit’’.)

Turning back to RIM’s $485M write-off, how many PlayBook tablets does it represent? Using the $200 cost figure as an assumption, we get 2.4 million tablets all written down to zero! This doesn’t quite make sense.
First, why write the inventory down to zero? HP’s TouchPad fire sale demonstrated the existence of demand at the $99 price level. Admittedly, Amazon’s $199 price for its Kindle Fire makes it difficult for RIM to get to that price at this stage of the PlayBook life and tattered reputation.
Second, even if we accept a write-down to zero, 2.4 million tablets is a strange number. How could RIM have accumulated such large inventory? And if the inventory hit is less than $200 per device, this increases the number of tablets in RIM’s cellar: $100 write-off per tablet yields 4.8 million devices. Impossible.

A possible explanation lies in the way ‘‘sales’’ were reported in previous quarters. Perhaps these transactions weren’t totally final, meaning they shouldn’t have been recorded as revenue because the buyer had the right to return Playbooks to RIM. Faulty reporting of revenue could spell trouble with shareholders, the SEC and hungry attorneys.
Still, RIM only reported a total of 700,000 tablets “sold” for the Q1 and Q2, they can’t have all been returned and massive returns would have been disclosed previously, one hopes.
RIM’s Q3 numbers will be released in a week, on December 12th, giving the company an opportunity to explain this strange $485M number. This should be interesting.
There’ll be more to watch, such as the year-to-year change in smartphone sales, the state of relations with applications developers and, crucially, how much cash is left in RIM’s coffers. For the last reported quarter, it was $1.15B, down from $2.1B the previous period. This isn’t much to wage today’s smartphone wars.

JLG@mondaynote.com

Unaccounted For Readers

Newspaper publishers need to quickly solve a troublesome equation. As carbon-based readership keeps dwindling, the growing legion of digital readers is poorly accounted for. This benefits advertisers who pay less for their presence.

Putting aside web sites audience measurement, we’ll focus instead on the currently ill-defined notion of digital editions. A subject of importance since digital editions are poised to play a key role in the future of online information.

First, definitions. The International Federation of Audit Bureaus of Circulation (IFABC) makes several distinctions that are adopted by most certification agencies around the world. The most straightforward is the “Digital Version” of a publication based on PDF. To be counted in the paid circulation of a newspaper or a magazine, a Digital Version must carry the same editorial content as well as the same advertising (volume and placement) as the paper version.

The second category, “Digital Edition”, is much fuzzier. Digital Editions come in different sizes and shapes, tailored for tablets or smartphones. Examples include The Guardian for iPad, Bloomberg Business Week+ and The Economist versions for iPad or iPhone (see previous Monday Note The Capsule’s Price). These editions have little to do with the print version. They are usually loaded with the same set of stories as their paper sibling, but add more pictures and, sometimes, animated infographics and video. The layout is designed to fit gesture-based navigation. Ads are different, too: far fewer modules, but with multiple screens and multimedia packages. The idea is less ads carrying more value per unit.

Here comes the absurdity.

Digital Versions (in PDF) are often hosted by digital kiosks carrying hundreds of publications, most often magazines in PDF facsimile. On many such kiosks, the best-selling product is the all-you-can-eat flat plan; for users, the 20 dollars or euros per month plan encourages indiscriminate downloading. I chose the word users on purpose. Readers would be presumptuous. On their first month, users will download about 60 to 80 publications. After a quarter or so, downloads stabilize to about 30 publications a month. Are those actually read? Maybe some, but the rest of the bulk is barely leafed through. As a result, the value of the advertising carried by these glanced-at publications trends to zero (the value of an ad being — at least in theory — a function of the eyeballs it will capture). It’s ridiculous to expect a “reader” who gulps down 30 publications to memorize a stack of 40 ad pages.

Nevertheless, such Digital Versions fall into the crucial “paid circulation” category which is still, unfortunately, the main gauge of market performance.

Noticing the absurdity of the open-bar kiosks, various circulations bureaus across the world have worked on ways to account for the behavior of this super-fly-by readership. In France, the OJD says that, in order to be counted as sold, the revenue derived from a digital publication must be higher than 25% of the single copy price, all taxes included. As an example, let’s take a user who opted for a €20 monthly unlimited plan, downloading 40 magazines in one month, each priced at €4.00 in a physical newsstand. To be counted as a valid sale, each magazine should bring at least €1.00. But a consumption of 40 magazines for €20 will only yield €0.5, half of the required minimum. Therefore, the OJD will only count half of the volume sold.

These audit agencies efforts are fine but, regardless of all the tweaks in the way copies are counted, they don’t solve the problem of ads that remains vastly inefficient.

Turning now to Digital Editions, their adaptation to the needs of tablets and smartphones much improves advertising performance. Modules will be fewer, but far more engaging. Interactive ads will lead to what marketers call transformation, which is when someone actually orders an item or interacts with a seller (by requesting a test-drive of a car, for instance). All such things are impossible with a static ad embedded in a PDF.

In addition, Digital Editions can point to an individual reader. When I subscribed to the iPad version of the Guardian, or of BusinessWeek, I actually gave permission to what I consider trusted editorial brands to get my coordinates from Apple. (For high quality publications, the rate of opt-in is said to be above 50%. Not bad.) Practically speaking, it means the publisher will be able to directly interact with me. And, in the near future, for my very own digital edition, that same publisher will inject ads tailored to my socio-demographic profile, my location, etc. (don’t rush folks, I can wait for this type of targeting).

Summing-up: We have Digital Versions that are basically PDF images of the original print publications and Digital Editions that are more sophisticated and built — for obvious reasons — on different structure.

And guess what? Most circulation bureaus segregate the two products; static ones are counted in the paid-circulation line — and consolidated with the paper’s global  circulation — but the tablet or smartphone-designed versions appear in a separate line.

No big deal, you might say. But it actually is.

Problem is, media buyers almost exclusively consider the aggregated figure. They tend to overlook the value of itemized lines. As a consequence, the most sophisticated products, the ones able to deliver engagement and value to advertisers are simply ignored.

Hence the publishers’ furious lobby to convince circulation bureaus to include Digital Editions in their global circulation numbers.

The British Audit Bureau of Circulation was quick to understand the importance of aggregating all forms of circulations on the sole basis of the editorial content. Probably because many UK publishers developed good tablet and smartphone editions. Just a year ago, they issued this unambiguous communiqué:

ABC announced today that it has agreed new Reporting Standards that will allow publishers to present both print and digital editions on one certificate. This offers more flexibility to publishers in how they can claim digital editions.

The new Cross Platform Certificate of Circulation enables publishers to provide a single view of their circulation figures. This includes the circulation of digital editions of magazines designed especially for mobile devices such as Apple’s iPad.

In many countries the issue is still on the table. To their consternation, newspapers and magazines publishers see the constant erosion of their paper versions; at the same time, they are required to serve the booming tablet and smartphone markets with dedicated digital editions that remain undervalued by the advertising community. Frustrating.

frederic.filloux@mondaynote.com

A Facebook Smartphone – Why?

At the end of last week’s Monday Note, I briefly wondered about the rumored Amazon smartphone. Would it follow the Kindle Fire strategy: Pick Android’s lock and sell the device at or below cost in order to lubricate the wheels of Amazon’s e-commerce of tangible and intangible things?

This week, we have the rebirth of another story: the Facebook phone. All Things D, the Wall Street Journal’s site dedicated to… All Things Digital, aired a series of posts focused on Facebook’s hypothetical jump into the smartphone fray. Given the site’s reputation for reliable sources and real writing, this must be more than idle speculation floated for pageviews.

But what’s going on? Why would Facebook — or Amazon — create its own smartphone?

(For the time being, I’ll set aside the 4-year parade of “Google phones”: T-Mobile’s G1 and G2; the ill-fated Nexus One built by HTC and sold by Google; Samsung’s Nexus S and now the Galaxy Nexus. Sign up here; Steve Wozniak got his a few days ago, my turn will surely come soon.

What HTC thinks of its erstwhile beautiful friendship with Google isn’t known, neither is Samsung’s view of being last year’s model now that Google owns Motorola. Nor is Moto’s serenity, or lack of it, when competing with the muscular Korean for the sultan’s favors. This brings back memories of the sorry parade of companies touting their shiny new partnerships with Microsoft, only to be discarded for the next pony in the carousel. We need a little time to figure out who’s playing whom.)

Looking at the PC market, we wonder: There’s no Amazon PC, or Facebook notebook, so why would these companies launch their own Really Personal Computer? What changed?

Google.

When Microsoft unified the PC industry under its tender care, the Web — and thus Web advertising — didn’t exist. For Microsoft, the game was the two-way Windows/Office leverage; the rest of the industry picked up the crumbs that fell from the Wintel table.

When the Web changed the game in the mid-90s, Netscape emerged as the dominant player, at least until Microsoft added Internet Explorer to the Windows/Office engine. Then Google entered the market with what initially looked like a search engine but turned out to be a huge, highly efficient advertising money pump. This left Microsoft (and others) reeling. The Redmond company’s online business keeps losing large amounts of money: $8.5B in the last 9 years!

Although Google confused things by attacking the Office franchise with its Google Docs service, the company’s true M.O. is nonetheless very clear. Advertising generates 95% of Google’s revenue and, probably, 105% of its profits. Google will say and do everything needed to ensure we’re exposed to its advertising radiation pressure at all times, in all venues, and on all devices. Everything is either a means to that end, or an obstacle that must be leveled, disintermediated.

Enter the smartphone.

Google saw it coming. Whether it did or didn’t get the idea because Eric Schmidt, Google’s CEO at the time, sat on Apple’s Board of Directors doesn’t matter for today’s purpose. In August 2005, Google bought Android, a company started by Andy Rubin and others after they sold Danger (no pun) to Microsoft. Google’s first smartphone, the aforementioned G1, looked a lot like Danger’s Sidekick device. After the iPhone came out in 2007, Google’s products took a distinctly Apple bent. Unsurprisingly, Google disagrees with Steve Jobs’ strongly expressed opinion of their “sincere flattery.”

Regardless, Google was right, the smartphone wars are on: This is the new PC, only bigger because it’s smaller, more ubiquitous, more connected, more personal.  Google doesn’t want anyone (but themselves) to control the smartphone market the way Microsoft dominated the PC; they don’t want anyone to stand between the viewer and the ads they serve up. With Android, they engineered a Trojan Horse: The ‘‘free and open” smartphone OS came with mandatory Google applications that guarantee the vital revenue-generating exposure to advertising. As Bill Gurley explains in his memorable “The Freight Train That Is Android” post, Google wants its smartphone OS to flatten everything in its path — and they’re succeeding: Android now has more 50% of the smartphone market. That dominant position was taken from Nokia, the former king; from Palm, now deceased; from RIM, sinking fast; and from Microsoft, struggling to get in third place with its truly modern but late to the game Windows Phone 7, this after losing the market because of its creaky Windows Mobile.

(Apple plays a different game. In the quarter ending in September 2011, they had a mere 14% smartphone share, but managed to get more than 52% of smartphone profits.)

Back to Facebook. Both Google and Zuckerberg’s company vie for the same advertising dollars. This makes Google Facebook’s biggest, most direct competitor. The Trojan Horse applications on Android-powered smartphones are a direct threat to Facebook’s advertising business. Just like Google, Facebook wants to maximize our exposure to ads that are finely-tuned using the personal data we provide as a payment for the service. For this, the company needs a well-controlled smartphone.

Apparently, Facebook’s first home grown project was ditched and a manufacturing partner such as HTC is now being considered. For the software, let’s assume that Facebook will following Amazon’s lead and develop an Android “fork”: Open Source code without the Android license and obligations.

The Amazon parallel is useful when considering the technical solution, but it breaks down when we think about revenue generation. Amazon’s forked-Android device, the Kindle Fire, is a way to sell more content by lubricating the purchase and consumption processes. They sell more physical goods as well, all integrated into their very successful Prime deal. We see no such processes and revenues for Facebook. The only justification for a Facebook smartphone would be a better user experience and a more effective vehicle for its advertising business.

It boils down to a comparison. On the one hand, an Android-powered smartphone — a Samsung Galaxy device, perhaps — with one good Facebook application and all the Google applications, the “evil” Google+ insinuating itself everywhere. On the other, a Facebook smartphone, with the Facebook experience on top of everything, its own app store, a Facebook browser, and Facebook Cloud Services.

I can’t help but think that there’s more to this hypothetical Facebook phone than a play against today’s Google+ in defense of today’s Facebook money pump. There must be something else in Facebook’s future, a new revenue stream that it will eventually need to promote/protect. But what?

JLG@mondaynote.com

PS: If we needed confirmation of the impact of smartphones on e-commerce, we just got early reports on Thanksgiving shopping behavior. According to Forbes and IBM Mobile Sales Hit It Out of the Park on Black Friday.


Apple’s Antitrust Problem (Part 2)

Last’week’s Part 1 column about Apple’s dominant’s position in the tablet market triggered an abundance of comments and emails, both on the Note’s blog and on the Guardian. All interesting, most well reasoned. But, for some people, it’s always funny to see how an Apple topic can turn religious. Question a few basic facts and you’re automatically labeled as a foe, as a member of the anti-innovation camp.

At the risk of repeating myself, here’s my perspective: my day job is to try and find sustainable news media business models in the digital world. No more no less. I set aside the fact that I’ve been a big fan of Apple products since 1986 and that I’ve always admired Steve Jobs. I don’t let such feelings impair my judgement or my ability to question Apple’s ways in the digital world…
And I’ll begin by reviewing the latest statistics documenting Apple’s dominance over the tablet market. The numbers are compelling: according to hosting provider Pingdom, which monitors global traffic, the iPad controls 88% of the tablet-based internet traffic worldwide; in the US, it’s 95.5%. For a device that represent only 1.2% of the worldwide web usage (desktop + tablets), that’s not bad. Then, setting aside the hectoring of zealots, we’ll examine what this position means for content providers and end-users.

Today, we’ll take a closer look at  two issues:
#1 Apple’s publishing business models
#2 Customer data

The 30% Fee

Let’s settle this one quickly: according to a lawyer I spoke with, regulatory bodies have nothing to say about how much a company charges its partners. Apple can charge whatever it wants to media providers willing to be on its platform, the market is supposed to regulate this, and judging by the number of apps and books in the iTunes Store, it has voted.

Ok, then, it’s legal. But is it fair and, more importantly, sustainable for Apple?

The 30% fee is part of Apple’s simplicity obsession. It undoubtedly played a key role in  the iTunes Store’s success. But this system essentially favors the vast market of small to medium-size companies unencumbered by legacy products and unwilling to bother with the tasks of distributing, marketing, and invoicing their customers. As for the news business, I keep telling my journalism school students who consider an e-publication based pay-for model: ‘Go for it! In your case, 30% is fair and convenient’.

It’s a very different story for large established companies. When probed about the 30% for online media, Apple cinder-block answer is: don’t complain fellows, we charge much less than you’re used to spend in the physical world.

Wrong answer, for three reasons: ad-related ARPU, retail price and distribution costs. On the Average Revenue per User side, we know that advertising revenue, as calculated per digital user, fall to a fifth or a tenth from what it is (soon: was) for print. Two, ask a twenty-something how much s/he’ll be ready to pay for the convenience of a digital edition landing on her iPad. I did it with my Sciences-Po students as I was showing a variety of digital products ranging from the precambrian PDF to brand new iPad design-for publications. They’d accept to pay no more 30-50 Euro cents per copy. Take 30% of this — actually, 39% with taxes — and you end up with 18 or 30 cents — again with a largely depleted advertising revenue. Plus, still worth mentioning, the cost of distributing a file is negligible compared to printing and shipping physical product to users’ doorsteps.

What about market trends? A good agency-model deal (in which the publisher sets the price) can land around a 20% commission fee and Google will be more like 10%.At some point, my take is Apple will have to adjust its fees to market conditions. Again, while 30% is fair for a startup with no marketing and distribution system whatsoever, it remains quite high for big companies who already have large infrastructures.

The same goes for its applications review system. $99 for a developer account wether you are the Wall Street Journal or some students e-zine makes little sense. Large companies should be asked to pay way more and to get different services, such as an interoperable transaction system instead of iTunes passage obligé. As long as it pays Apple for its apps-related service, the publisher should have the right to use the transaction system of its own choosing. If Google, PayPal, or some local system is cheaper, the content provider should be entitled to direct its customer to it — at least antitrust lawyers believe so. For Apple, the problem is it won’t collect precious customer data, which brings us to the next point.

Accessing the Customer

The genesis of this hot issue between Apple and the publishers is to be found in Walter Isaacson’s biography of Steve Jobs. The author recounts the meeting with Time Warner CEO’s Jeff Bewkes. The discussion focused on publishing Time Inc.’s magazines on the iPad. Bewkes had agreed on the 30% (this was early 2010, Jobs was not ready to yield anyway), then the main subject arose:

“I have only one question,” Bewkes continued. “If you sell a subscription to my magazine, and I give you the 30%, who has the subscription—you or me?”

“I can’t give away all the subscriber info because of Apple’s privacy policy,” Jobs replied.

“Well, then, we have to figure something else out, because I don’t want my whole subscription base to become subscribers of yours, for you to then aggregate at the Apple store,” said Bewkes. “And the next thing you’ll do, once you have a monopoly, is come back and tell me that my magazine shouldn’t be $4 a copy but instead should be $1. If someone subscribes to our magazine, we need to know who it is, we need to be able to create online communities of those people, and we need the right to pitch them directly about renewing.”

In fact, access to the customer could be another antitrust issue. Specialized attorneys I spoke with say Apple has no right to retain customer data the way it does and it should make the transfer customer information much easier. Today, you can’t engage into a direct relationship with a customer via the application. Furthermore, the opt-in system Apple sets up for apps-subscribers yields meager results and, when it comes to use the info, “some restrictions apply”. That’s a double jeopardy.

Some readers of the Monday Note liked to refer to Wal-Mart in defense of Apple’s position. First of all, I don’t see the comparison as particularly flattering. To me, Wal-Mart is one of the worst companies on Earth, built on below-poverty-level wages and third-world enslavement (I encourage the reading of this 2003 Pulitzer Prize winning series in the Los Angeles Times). Compared to Wal-Mart’s founder Sam Walton, Steve Jobs was Mother Teresa.

Except for one thing. Wal-Mart allows a box of corn-flakes sitting in its shelf, to be loaded with everything needed by the brand to engage a relationship directly with its customer: coupons, games, toll-free numbers, emails and web addresses, samples, all sorts of incentives designed to further tie the customer to the products whether or not they are sold in Wal-Mart stores. On the contrary, in the app-world, you can’t even have a link sending the user to a customer-relation pages. On this specific matter, Apple is doing worse than the worst retailer in the physical world.

Elusive Attitude

What’s next for Apple regarding the anti-competitive issue? Not very much. First of all because Apple is cornering only one segment of the digital devices. And, unlike Microsoft in the nineties, Apple is playing a clever chess game. “They have a well-defined elusive strategy”, said a European antitrust lawyer, “their goal is avoid the European Commission opening the case. They are closely monitoring the other players’ moves, and they will budge accordingly, one inch at a time. In doing so, they are buying time. And six months here and there is a big deal in the digital business.” On the publishing side and the customer relationships irritant, I bet the Cupertino guys will calm everyone down with minor adjustments in the coming few months.

frederic.filloux@mondaynote.com

The Apple Wireless Carrier (Part 2)

Spurred by years of frustration with AT&T, Verizon, Orange and the like, I wrote a half-serious Monday Note a few months ago (Steve, Please Buy Us A Carrier!) that imagined an Apple wireless universe. Simple pricing, no-surprise phone bills, no-tricks agreements. There would be dancing in the streets…

Unfortunately (I concluded), if Apple were to acquire a carrier — T-Mobile, say, to keep it out of AT&T’s clutches — they’d be saddled with a legacy business, its infrastructure, its people, its culture. That’s not the Apple way. They didn’t get into retail by buying up and remodeling Circuit City stores; the company builds from the ground up.

There are other problems. A single carrier – any carrier — would have limited geographic impact; the potential billions in service revenue is attractive, but it doesn’t serve Apple’s #1 business: selling hardware; wrestling with the FCC over regulatory issues would be intolerable.

Give us a carrier…It’s a nice fantasy but Apple isn’t going to spend tens of billions to buy a headache.

A few weeks later, I was politely but firmly admonished by my daughter’s significant other: Yes, buying a carrier – or a string of carriers – probably isn’t in Apple’s playbook, but let’s not be so quick to kick them out of the game. There is, he said, a better, simpler way for Apple to indulge their iPhone customers.

Today, Apple uses its cash to buy capacity from parts suppliers and manufacturing contractors. Why not do something similar with wireless carriers? The Cupertino company could buy “capacity” (minutes and gigabytes) from Verizon, AT&T, Sprint, or even China Mobile, Vodafone, and the intriguingly-named Tata Teleservices. Apple would become a Mobile Virtual Network Operator, a company that provides cell phone services that ride on someone else’s infrastructure.

There are dozens of MVNOs operating in the US: Virgin Mobile, Firefly, Straight Talk… Even 7-Eleven, the convenience store giant, offers its “own” cellular network: 7-Eleven Speak Out Wireless. I found one MVNO, H2O Wireless, that claims to “work” with iPhones and Android devices, although keep in mind the (in)famous “Some Restrictions Apply”.

This is a much livelier scene than I imagined. In 2006, according to the felicitously named mobileisgood.com, there were only 330 MVNOs. Wiki the term today and you’ll read that “there are 645 active MVNO operations in the world.” (For the modest sum of $1,125, you can buy a PDF copy of the MVNO Directory 2011 which lists all 645 companies. One free detail: 205 new companies in one year!)

Add Apple’s new “worldphone”, the iPhone 4S straddling GSM and CDMA networks, and you have the ingredients for a virtuous virtual Apple carrier

Insiders tell me this is easier said than done. They’re right. Wireless networks are complicated. Picture the attempt to superimpose Apple-style simplicity on top of layers upon layers of old hardware and patchwork software that span several “somewhat compatible” networks. Once again, an idea that sounds good is, in practice, unfeasible. Worse, the beautiful theory might lead to the sorriest kind of mediocrity: The product that’s impossible to fix and can’t be killed.

Still, I’m optimistic. I find the froth, the growth of MNVO companies exciting, encouraging. Whether they admit it or not, the incumbents know their culture isn’t going to foster innovation, only incrementation. For them, MVNOs might be a way to wage a proxy war against the competition by attracting innovators to their side — until the unruly mercenaries kill the overlord that engaged them.

Back to Apple, they could buy, rather cheaply, a number of MVNOs or even build their own. If 7-Eleven can do it…

Now we find out that as far back as 2005, “Jobs initially hoped to create his own network with the unlicensed spectrum that Wi-Fi uses rather than work with the mobile operators…” This came out in a talk given last week by John Stanton, a cellular industry pioneer, at a Law Seminars conference in Seattle. No real surprise: Jobs wasn’t fond of carriers. He considered them to be obstacles rather than instruments of progress and was naturally inclined to look for ways around them. We know what happened. Jobs ended up working with carriers — but only if they accepted Apple’s control over the handset features and iTunes and App Store content sales.

End of story? Not quite.

Take a look at the recently-announced Republic Wireless, a hybrid carrier that rides on a combination of WiFi networks and cellular infrastructure. The phone, a LG Optimus Android device, costs $199 upfront and the service goes for $19/month, with unlimited minutes, data, and text. No hidden fees, just sales tax. Free roaming in the US over Sprint’s network. Free WiFi calls to the US from anywhere in the world. No contract, no termination fee, cancel when you want. This is far from the $100+/month, two-year indentureship that AT&T offers its iPhone users.

Reactions to the new service, one of a broad array offered by Bandwidth.com (a Carolina company that presents itself as a “Complete BUSINESS Communications Provider”) range from guarded to enthusiastic. As Ina Fried of All Things D points out, Some Restrictions (Still) Apply:

“…the company wants to deliver most of its service over Wi-Fi, using cellular more as a backup for when Wi-Fi isn’t available. Customers who…gobble up too much cellular data or wireless minutes will be asked to find another carrier.”

The company buys 3G network capacity from Sprint. Return too often to the “all you can eat” network buffet and management will escort you out.

We’ll have to wait a few months to see what happens next. Will Republic Wireless grow into a viable, disruptive business, proving Jobs was right to look for a way to build a hybrid carrier? Will its business model fail because $19/month won’t be enough to pay the Sprint bill? Or will Republic Wireless end up as a beta for Apple’s own hybrid network?

———–
An afterthought before we close.

Last week, we heard a titillating rumor: an Amazon smartphone would come out late next year. At first, I dismissed it as unrealistic. Then, I looked at my brand new Kindle Fire and marveled again at the way Amazon “picked Android’s lock”. The company took the Android Open Source code, added its own UI, applications, services and app store. The result is an ‘‘unofficial” Android device without any Google control on it, without the Trojan Horse apps. Further, by slotting its own browser between the Amazon customer and the Google search engine, Bezos & Co. keep accumulating user data without sharing any of it with their Mountain View frenemies. Why not apply this newly developed arrangement to an Amazon smartphone?
I also realized that, in order to feed data to its Kindles, Amazon developed Whispernet, a 3G network riding other carriers‘ infrastructure — which sounds like an MVNO of sorts.
We know the Kindle Fire model of being sold at cost or at a small loss because it boosts the company’s real business: selling things and content. The hypothetical Amazon smartphone (hardware + MVNO contract) would be priced in the same spirit.

More disruption on the way?

JLG@mondaynote.com