About Jean-Louis Gassée

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Facebook: The Revenge of the Nerds

We’ll look at the other side of the coin in a moment, but first let’s give credit where it’s due and admire the obverse: I’m delighted to see Facebook going public, just deserts for Mark Zuckerberg and his group of very smart techies.

If you have the time and inclination, take a walk through Facebook’s SEC S-1 filing in preparation for its IPO, you won’t regret it. Pay particular attention to the manifesto Zuckerberg calls The Hacker Way and allow this aging geek (I’ll soon be 28) to sing its praises. Consider this verse:

We have a saying: “Move fast and break things.” The idea is that if you never break anything, you’re probably not moving fast enough.

Where others have stumbled as they shuffled, Zuckerberg and his gang have raced to create a technical giant. The infrastructure required to support 845M “monthly active” users that upload 250M photos each day might not be Google-size (yet), but it’s definitely Google-class. To show off this plumbing, Zuckerberg & Co. took a few pages from Apple’s (and Google’s) stylebook: They stuck to a simple, clean UI, unlike Myspace and their pavement pizza chic.

Facebook’s success isn’t just a sweet retort to Zuckerberg’s critics, it’s a confirmation of what makes Silicon Valley tick: techies, geeks, and nerds. While the technoïds aren’t always right — far from it — the great ones end up making and running great companies. The establishment bluestockings may roll their eyes at the hoodies and bare feet, but look at what happens when the suits take over. Look at HP, Yahoo!, or Cisco; regard Apple during its dark age

It wasn’t very long ago, I recall gleefully, that the kommentariat cluck-clucked disapprovingly over the founder’s “obvious’’ immaturity, his tactless management style, his poor public-speaking manner. But when you read Facebook’s S1, you’ll realize how good a negotiator Zuckerberg must have been early on. Since its inception, the company has raised about $1.5B, an unusually large amount for a start up, and well above the threshold that usually translates into management castration as investors demand a bigger share of the spoils, ransom for their assumption of greater risk.

Instead, Zuckerberg got investors to go for the radius of the pizza as opposed to the angle of the slice, their ownership percentage. Zuckerberg may own “only” 28% of Facebook, but he manufactured agreements that give him effective control of the company with 57% of voting rights

Some will downplay the achievement: ‘He must have gotten good advice’ . Of course…but he followed it. When you’re in charge, the quality of the advice is no excuse for bad performance; conversely, good advice shouldn’t be used to dismiss good results.

Speaking of which, in 2011, the company’s revenue was $3.7B, with a tidy $1B profit and $3.8B in cash – to which they’ll be adding at least $5B in the upcoming IPO. This is a nicely profitable company. The Washington Post’s Wonkblog put Facebook’s performance in graphic perspective:

Take a look at the number of employees: a mere 3,200. With 3.7B in revenue, that works out to $1.2M per worker. Turning to cash per worker ($3.9B / 3,200 = $1.2M), Facebook is about as rich as Uncle Apple’s $1.3M cash per “full-time equivalent” employee. It’s a remarkable achievement for any company, and unheard of for one so young.

But it’s not all roses.

As Zuckerberg’s Letter To Investors properly contends, Facebook can “change how people relate to their governments and social institutions” and “improve how people connect to businesses and the economy”. Making tons of money in the process is totally legit…as long as a key condition is met: informed consent. And “informed consent” mean just that: Information that a reasonably attentive individual — as opposed to an Apple patent attorney — can understand.

On this count, Facebook’s actions have been less than transparent. Perhaps it’s a consequence of the Hacker Way: Ship first, ask questions later. Or perhaps Facebook is betting we’re too lazy and ignorant to read the fine print, just like wireless carriers who try to dazzle us with their sleight-of-plan hoodwinks.

Furthermore, Facebook’s ubiquity and power raises the spectre of yet another Walled Garden: Is Zuckerberg’s company killing the Open Web by superimposing a proprietary lattice of connections between users, including companies that use Facebook to do business with its community? Many have noted that Google can’t really index the Facebook web. As John Batelle puts it:

Sure, Google can crawl Facebook’s “public pages,” but those represent a tiny fraction of the “pages” on Facebook, and are not informed by the crucial signals of identity and relationship which give those pages meaning.

(True. But does Google want to index Facebook? Behind the Open posture stands Google’s real aim: Bulldozing anything and anyone standing between their ad engines and their targets.)

Lastly, let’s consider the Web 2.0 proverb: If the product is free, You are the product. With that in mind, I couldn’t help wince at the opening of Zuckerberg’s Letter To Investors:

Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected.

It reminded me of the Don’t Be Evil puffery in Google’s own S-1:

Don’t be evil. We believe strongly that in the long term, we will be better served — as shareholders and in all other ways — by a company that does good things for the world even if we forgo short term gains. This is an important aspect of our culture and is broadly shared within the company.

When I read those words back in 2004, I thought Google was either incredibly naive or a little too obvious in their do-good posture. Either way, we know what has happened: Google needs to be all things to all people, all the time, everywhere, on every device, in order to irradiate us with their advertising photons. Google’s motto should be Disintermediation R’Us. Instead, their mission statement reads:

Organize the world’s information and make it universally accessible and useful.

…all in the name of selling ads.

In his letter, Zuckerberg comes up with a similarly lofty sentiment:

There is a huge need and a huge opportunity to get everyone in the world connected, to give everyone a voice and to help transform society for the future.

I don’t mean to diminish Zuckerberg’s accomplishments. He’s built an epoch-making company, I’m delighted by the team of highly skilled technologists he’s assembled — a team that includes some dear friends of mine — and the tech culture they evince. He’s surrounded himself with sharp business people and extracted oodles of money from strong investors; he’s Bill Gates/Larry Ellison/Page+Brin caliber or above…and I’m thrilled to see the former naysayers now eating out of his hand.

So why not just say something like…

We help people connect in safe, convenient, and innovative ways. In doing so, we’ve built a business of historic proportions. We make money selling advertising that is finely tuned to reach our users in cost-competitive ways. Because we believe in Facebook’s unlimited potential, we will manage ourselves for the long term rather than for short-term profit. We have built an ownership and control structure to accomplish this goal.

There’s good evidence that the people who buy Amazon, Google, and Facebook shares are willing to let these companies run for the long term rather than for the next quarter. Smart people don’t need lofty mission statements to guide their investments, they watch what the execs do and decide if they’re using “the long term” as an excuse or if they’re really aiming for it.

JLG@mondaynote.com

Apple Post-Quartum Thoughts

As if you haven’t heard, Apple posted its Q4 earnings last week. I’ll spare you my own encomium and refer you to these links:

For complete numbers, you can go to SEC filings 8-K and 10-Q. If you have the time and inclination, I recommend a walk through the MD&A (Management Discussion & Analysis) in the 10-Q. Never boring, it’s filled with meaningful details and decently written — I couldn’t find a single instance of whereas, forthwith, or insofar.
With this out of the way, a few thoughts and questions are prompted by the earnings release fever:

What happened to the “Android Is Winning” meme?

No question, Google’s Trojan Horse has made tremendous headway, powering more than 50% of all smartphones worldwide. It’s a technically robust product (comrades of mine from a previous OS war work on Android, so I could be biased) and the “free and open” pitch works wonders with handset manufacturers.

Rev 1.0 of the meme held no hope for Apple: Android will kill iOS just like Windows crushed the Mac. (We’ll deal with the Windows vs. Mac part in a moment.) But where’s the evidence Android is in any way ‘‘killing’’ the iPhone? It’s certainly not happening in the US: The iPhone Accounted for 80 Percent of AT&T Smartphone Sales Last Quarter; for Verizon the portion was closer to 70%. Apple sold 62 million iOS devices last quarter; reports of Apple’s imminent demise are greatly exaggerated. (The actual numbers might include some statistical double dipping due to activations, but that applies equally to all brands so the picture remains the same.)

In the meantime, an ABI Research study shows that Android is losing market share. As with all such research, we’ll keep the usual caveats in mind…and wait for the next study.

Let’s not forget the usual litany: Ah, yes, this is great, but Apple’s success can’t last. Some day, they’ll ship a dud; their arrogance will blind them; the toxic waste of success will kill them.

Sure, we all die. But when?

And aren’t those supposed to defeat Apple exposed to the same hubris, creeping mediocrity and belief in their own BS?

Another question: Where are Nokia, Motorola, RIM? The short answer: They’re all hurting:

  • Nokia just posted a steep loss for the quarter, its smartphone revenue declined by 38%.
  • Motorola (in the Android camp and soon part of Google) posted an $80M quarterly loss, selling only 200,000 tablets and 5.3M smartphones.
  • As for RIM, we know they’re in a tailspin. RIM just kicked Messrs. Lazaridis and Balsillie upstairs and got itself a new CEO (actually, a recycled co-COO). Last year, RIM’s share of the US smartphone market fell from 19.7% to 16.6%. (I don’t know how market research firms justify the digit after the decimal point…)

And there’s more: It now looks like Nokia has taken the lead in a race to the bottom. According to Forbes, Nokia’s “feature phones” (aka “dumbphones”), make more money than mid-market Androids.

Nokia‘s $40 feature phones are vastly more profitable than Sony Ericsson‘s $200 Android models. This is not how the smartphone revolution was supposed to turn out.

This would explain why Nokia acquired Smarterphone AS, a Swedish company specializing in “highly advanced functionality on very moderate hardware.” Goodbye Symbian and Meego, hello Windows Phone and Smarterphone. This is going to be interesting.

Speaking of Microsoft, the Redmond company stubbornly refuses to recognize that it’s a Post-PC world. Frank X. Shaw, Microsoft’s articulate chief propagandist, contends that we’ve entered the “PC-Plus” era: The PC still holds center stage, and is enhanced by these new “companion devices’”.

With 15 million iPads and large numbers of Kindle Fires and other tablets, Microsoft’s PC For Ever cant is wearing thin. In 2012, Apple will sell between 50M and 60M tablets; we can assume that total industry sales will be in the neighborhood of 100M units. Tim Cook, Apple’s CEO, openly admits that the iPad cannibalizes Mac sales – and quickly points out that there’s much more to cannibalize on the Windows side.

Last quarter, the Windows business declined by some 6%. Worldwide PC sales were, at best, stagnant; if we remove the nicely growing Mac business from global numbers, Windows PC units actually declined by 8.5%. One you’re over the hill, you pick up speed…

But this shouldn’t be news. Read Paul Robinson’s comment on a Fraser Speirs’ blog post:

There will still be computers and laptops but we will return to a time when they are bought by programmers, hobbyists and tinkerers. Everyone else will buy a ‘computing device’ of some sort and be all the happier for it.

This was written exactly two years ago, on January 29th, 2010. The iPad had just been announced — and criticized for [insert your favorite faults here]. Fraser’s own post, aptly titled Future Shock, deserves to be read in its entirety. I’ll quote two choice morsels:

For years we’ve all held to the belief that computing had to be made simpler for the ‘average person’. I find it difficult to come to any conclusion other than that we have totally failed in this effort.

Secretly, I suspect, we technologists quite liked the idea that Normals would be dependent on us for our technological shamanism. Those incantations that only we can perform to heal their computers, those oracular proclamations that we make over the future and the blessings we bestow on purchasing choices.

…and…

If the iPad and its successor devices free these people to focus on what they do best, it will dramatically change people’s perceptions of computing from something to fear to something to engage enthusiastically with. I find it hard to believe that the loss of background processing isn’t a price worth paying to have a computer that isn’t frightening anymore.

In the meantime, Adobe and Microsoft will continue to stamp their feet and whine.

(See also Fraser’s concise explanation of iOS multitasking here and here.)

Microsoft isn’t stupid. They’re just saying what they have to say for today’s business. We’ll see how their PC-Plus story evolves when their ARM-based Windows 8 tablets ship later this year.

Third and last for today: Macintosh.

Although it now plays third fiddle to its iPhone and iPad siblings, the “historic” Macintosh looks hale: +26% in units, +22% in revenue. That’s $6.6B with an operating margin in the 25% range. Compare this to HP, the world’s largest PC maker. In its last reported quarter, HP booked about $10B of PC revenue, with a 6% margin.

The Mac has lost the pole position before: In 2006, Apple saw $7.4B in Macintosh revenue versus $7.7B for the iPod. Right before the iPhone introduction, Apple’s halo product was its music player.

Now, Apple is the iOS company. While the Mac first donated its software DNA to iOS, in the latest OS X Lion we witness the iPadification of the elder.

So far, my experience of OS X Lion is mixed. Is it because the gene splicing is still in transition? Or maybe simply Apple committed its elite troops to the iOS front, leaving things half-done on the Mac…

I’ll leave that discussion for another Monday Note.

JLG@mondaynote.com

Why Apple Should Follow Michelin

What’s the use of offering more than 500,000 wares if customers can’t find their way through the gigantic bazaar? I know, I already harped on about the lack of curation in Apple’s App Store, but that was 16 months ago…when the Store contained a “mere” 250,000 apps.

Since then, the iPhone has sold in ever larger numbers (we’ll soon see if the December quarter number crossed the 30 million units line, and by how much) and with more than 18 billion downloads, the App Store is an unmitigated success. If this is what “broken” looks like, why fix it? And how?

To answer the question, let’s take a trip back a hundred years to Clermont-Ferrand, home of Michelin. Known for its tires and tourists guides, Michelin is a very old company (incorporated in 1888), but they’ve always been at the forefront of their technology. Tires are complex products whose role in the safety, comfort, and economy of our driving experience lead Michelin engineers to joke that cars are peripheral to their lovingly engineered creations. (If you find yourself traveling through the center of France, treat yourself to a visit to L’Aventure Michelin, a really interesting museum that recounts the company’s many adventures, most of which are unknown, surprising, or forgotten.)

Edouard and André Michelin weren’t just good techies, they were astute businessmen and marketing geniuses. They seized on an obvious idea: If people take more road trips, we’ll sell more tires. And they shone in the execution that followed this intuition, they went far and well in their efforts to encourage and guide automobile travel. Michelin became famous for its world class roadmaps, for the Red Guides that grade hotels and restaurants, and Green Guides for regions, historic sites, and countries. The company also published literary Guides Bleus, forgoing culinary delights for a more cultural angle in their interpretation of locales. (I’ll skip their other marketing inventions, such as the Bibendum character and the iconic Michelin kilometer stones and road signs.)

Michelin had a staff of agents at the ready to devise an itinerary for your trip, all you had to do was write or call.

Did this “content”, as we would now call it, make money for Michelin? Possibly, but the revenue was negligible compared to the amount their tires generated. Michelin’s maps, guides, and services were created with one goal in mind, one mission: sell hardware. That’s where the real margins were, and still are.

Is Apple’s situation, it’s mission, all that different? Hardware revenue and margins are the sacred business model. Everything else, including the App Store, must support the ultimate goal. (For reference, the App Store generates less than 2% of Apple’s revenue, and much less than 2% of its profits.)

The scale of the App Store’s success, probably unforeseen by its creators, could lead management into complacency: Look at these numbers, ain’t they great? This is an incumbent’s attitude. And we know what happens to those.

But ask developers and, most important, users. For all its demonstrable success, the App Store feels broken. It’s too big and confusing, the app reviews are dry and the ratings are unreliable, search is primitive…

Label me naif, but I think Apple could do well by following the century-old Michelin model. It won’t take billions to implement, nor will it require the administration of the Apple Genii, just competent people and hard work. Here’s what a possible solution looks like:

Apple sets up a team in charge of publishing an App Store Guide. The editorial team writes opinionated (and presented as such) reviews of apps by category: Productivity, Games, Utilities, and the like. Published daily on a blog and accumulated in an on-line Guide, these reviews, one to two pages long, present the writer’s experience and opinion, culminating in a ranking in stars or numbers. It sounds simple, often the sign of a twisty road ahead…

Trouble starts quickly.

First obstacle: It’s already being done. True. How many iOS App Review Sites there are? According to this blog, the answer is…116! This is good news: Apple’s customers have an appetite for reviews, but which sites and reviewers can they trust? How do these reviewers make money? There’s no dispassionate, incorruptible Consumer Reports for apps.

Second, there’s Apple’s penchant for control. True, again — but irrelevant. Going back to Michelin, their opinion of a restaurant might be controversial, but the company has no financial gain in the number of stars they assign. They sell tires, not meals. Similarly, Apple wants to move hardware, not generate App Store revenue by favoring one app over another.

Third, attempting to sift through 500,000 apps amounts to boiling the ocean. How can one even hope to ‘‘make a dent” in that universe? But that’s no reason to sit on one’s hands. Let’s say that after a year the Apple App Guide has featured “only” 2,500 reviews, an average of 50 reviews a week, ten a day. Is that bad compared to today’s mess?

Fourth, the expense. Let’s do a gross, back-of-the-envelope overestimation: 20 reviewers at $250K/year “fully loaded” with management overhead and office expenses included. This gets us to $5M/year. Apple is notoriously cautious, if not downright stingy with (most) expenses, but $5M would be lost in the income statement noise. And this miniscule investment would exert a healthy influence on the rest of the app review ecosystem, just as the Apple Store raised the game for its independent retailers.

Fifth, the people. Will readers trust the opinions of enlisted Apple employees, or will they insist on “independent” voices? An employee’s loyalty is to the company, and there could be grumblings that a staff of corporate reviewers would choose apps that, above all else, show off the platform and the Apple brand. On the other hand, independent contractors are just that: independent. As such, they’re much more susceptible to “external influences.” There are any number of gadget blogs that smell of greasy palms and astroturfing.

Apple possesses [five s’s in a nine-letter word!] a treasure of closely-guarded user data — off-limits to a contractor — that could prove very helpful in rating apps. It’s “simply” a matter of finding, hiring, training, and managing competent and honest curators.

Today, Apple already demonstrates a type of curation when it decides which apps get featured as New and Noteworthy, or Staff Favorites. They might as well go all the way and please their users with subjective, personal reviews. Encourage the kommentariat to cluck its disapproval, allow dinged developers to rage online. If presented as an honest, competent effort — occasionally wrong but always with the Apple imprimatur — the review process will be as respected as any other high-quality editorial effort.

I hope Apple’s success won’t blind it to the need to give app seekers more than today’s skimpy categories and unreliable user reviews. Who knows, if Amazon or Google were to wake to the opportunity, their moves could spur Apple into action.

JLG@mondaynote.com

Will Microsoft buy RIM or Nokia?

We continue along the lines of last week’s Monday Note kriegsspiel with the latest speculation Will Microsoft, at long last, buy RIM? The idea has been kicked around for at least five years: Days after the iPhone’s introduction in January 2007, Seeking Alpha suggested that the Xbox maker ought to buy RIM in order to build an XPhone. In retrospect, this would have saved both companies a lot of grief.

It’s early 2007 and the BlackBerry maker is riding high. With its Microsoft Exchange integration; a solid PIM (Personal Information Manager) that neatly combines mail, calendar, and contacts; and the secure BlackBerry Messenger network, the “CrackBerry” is rightly perceived as the best smartphone on the market. I love my Blackberry and once I manage to get a hosted Exchange account for the family, I show my un-geeky spouse the ease of over-the-air (OTA) synching between a PC and the BlackBerry. ‘No cable?’ No cable. She promptly ditches her Palm device. One by one, our adult children follow suit. For a brief time, we are a BlackBerry family.

But the Blackberry’s success blinds RIM executives. They don’t see – or refuse to believe – that the iPhone poses a threat to their dominance. A little later, Android comes on the scene. Apple and Google deploy technically superior software platforms that, by comparison, expose the Blackberry’s weaker underpinnings. In 2010, RIM acquires the QNX operating system in an effort to rebuild its software foundations, but it’s too late. The company has lost market share and shareholders see RIM squander 75% of its market cap.

Now, imagine: On the heels of the iPhone introduction in 2007, Microsoft acquires RIM and quickly proceeds to do what they’ve only now accomplished with Windows Phone 7: They ditch the past and build a modern system. This would have saved Microsoft a lot of time and RIM shareholders lots of money. Instead, Microsoft mocks the iPhone and brags that the venerable (to be polite) Windows Mobile will own 40% of the market by 2012.

Things don’t quite work as planned. Early 2010, Microsoft wisely abandons Windows Mobile for the more modern Windows Phone 7 (a moniker that combines the Windows Everywhere obsession with a shameless attempt to make us believe the new smartphone OS is a “version” of the desktop Windows 7).

And things still keep not working as planned. WP 7 doesn’t get traction because handset makers are much more interested in Android’s flexibility and, particularly, their price. Android’s Free and Open pitch works wonders; the technology is sound and improves rapidly; OEMs see Microsoft as the old guard, stagnant, while Google is on the rise, a winner.

All the while, Nokia experiences their own kind of “domination blindness”. In 2007 Nokia is the world’s largest mobile phone maker, but they can’t see the technical shortcomings of their aging Symbian platform, or the futility of their attempts to “mobilize” Linux. iOS and Android devices quickly eat into Nokia’s market share and market cap (down 80% from its 2007 high).

In 2010, Stephen Elop, formerly a Microsoft exec, takes the helm and promptly states two brutal truths: This isn’t about platforms, we are in an ecosystem war; technically, we’ve been kidding ourselves. Nokia’s new CEO sees that the company’s system software efforts – new and improved versions of Symbian or Maemo/Moblin/Meego – won’t save the company.

Having removed the blinders, Elop looks for a competitive mobile OS. Android is quickly discarded with the usual explanations: We’d lose control of our destiny… Not enough opportunities for differentiation… The threat of a race to the bottom might have entered the picture as well.

This leads Elop back into his former boss’ arms. Microsoft and Nokia embark on a “special relationship” that involves technical collaboration and lots of money. It’ll be needed: By the end of 2011, WP 7 has less than 2% market share. Nokia’s just-announced Lumia smartphone is well received by critics but will it demonstrate enough superior points to gain significant share against the Android-iOS duopoly? I’ll buy one as soon as possible in order to form an opinion.

The “MicroNokia” relationship isn’t without problems. Many Nokia fans are outraged: Elop sold out, Nokia’s MeeGo was unfairly maligned, the company has lost its independence… See Tomi Ahonen’s blog for more. (And “more” is the right word. Ahonen’s learned, analytical, and often rabid posts range between 4,000 and 10,000 words.)

The Nokia faithful have a point. In my venture investing profession, we call an arrangement such as the MicroNokia partnership “buying the company without paying the price.” Right now, Microsoft appears to control Nokia’s future since, at this stage, Nokia is as good as dead without WP 7.

But doesn’t that mean that Nokia also controls Microsoft’s smartphone future? “Statements of direction” aside, there are no notable WP 7 OEMs. (Samsung and HTC ship a few WP 7 phones, but their share is infinitesimal compared to their Android handsets.) With Android growing so fast, why would a smartphone maker commit to WP 7 while Nokia holds a privileged status on the platform?

Microsoft is making smart moves against Android by using their patent portfolio to force Android handset makers to pay (undisclosed) royalties. With LG as the latest licensee, Microsoft appears to have snared 70% of Android OEMs. The (serious) joke in the industry is that Microsoft makes more money from Android than from WP 7.

But success with patents doesn’t translate into more WP 7 OEMs, which leaves us to wonder: Will Microsoft consummate the relationship and acquire Nokia, whether the entire corpus or, at least, the fecund (smartphone) bits? For years, Microsoft has claimed they’re all about choice, and when it comes to the PC, that’s true: Businesses and consumers have a wide choice of PCs running Windows. But their customers have no real choice when it comes to WP 7: It’s Nokia or…Nokia. They might as well tie the knot and call it what it is: Microsoft or Microsoft. It works wonders for Xbox and Kinect.

Going back to RIM, we hear it’s ‘’in play’’, that they’ve hired investment bankers to “look at their strategic alternatives”. In English: They’re looking for a buyer.

But who? Microsoft is otherwise engaged. So is Motorola. And forget Samsung.

With RIM’s market share dropping precipitously, and no sign of a rebound with spanking new models until the second half of 2012, who would want to risk billions in a market that’s controlled by competitors who manage to be both huge and fast-growing? Sure, RIM is still in the black, but its cash reserves are dwindling: the Cash and cash equivalents line went from $2.7B last February to $1.1B in November 2011. What’s left will evaporate quickly if revenue and profits keep dropping, as they’re likely to do for the foreseeable future.

JLG@mondaynote.com

Samsung vs. Google

Android is a huge success. Google bought Andy Rubin’s company in 2005 and turned it into a smartphone operating system giant, with more than 50% of the global market and 700,000 activations a day this past December.

Perhaps, as Steve Jobs seemed to think, it was Eric Schmidt’s position on Apple’s Board of Directors that infected Google with an itch to enter the smartphone OS market. Or maybe Larry Page and Sergey Brin simply recognized the Next Big Thing when they saw it. (As Page points out, the company had begun Android development a year before Schmidt joined the Apple Board.)

Regardless of the “authenticity” of Google’s smartphone impulse, it’s the execution of the idea, the integration of Android into Google’s top-level strategy where the product really shines. Android improves quickly; the “free and open” platform is popular with developers and, perhaps even more so, with handset makers who no longer have to create their own software, a task they’re culturally ill-suited to perform. And everyone loves being associated with a technically competent winner. (I might be a little biased in my regard for the Android engineering team: Comrades from a previous OS war work there.)

For the past three years, Android has experienced a kind of free space expansion: The platform has grown without hitting obstacles. I’m not ignoring the IP wars, they’re real and the outcome(s) are still unclear, but these fights haven’t slowed Android’s triumphant march.

As we enter 2012, however, it seems the game may be changing. Looking at last week’s numbers for Motorola, HTC, and Samsung, we see a different picture. Instead of the old “there’s more than enough room for every Android handset maker to be a winner”, we have a three-horse’s-length leader, Samsung, while Motorola and HTC lag behind.

From October to December of last year, a.k.a. Q4CY11, Samsung is said to have shipped 35 million smartphones, taking it to the number one spot worldwide. Citing “competitive reasons”, Samsung no longer makes its sales/shipment numbers public, so we have to rely on ‘‘independent” observers to tally up the score. Having worked in the high-tech industry for decades, I’ve seen how this information game is played: firm XYZ sells its “research” to manufacturer W…and ends up as its mouthpiece. I’d love to follow the money, but these private firms don’t have to reveal who their clients are and how much they pay for their services. (For a more detailed discussion of these shenanigans, read an excellent piece by The Guardian’s Charles Arthur: Dear Samsung: could we have some clarity on your phone sales figures now? Another possible bias: The Guardian re-publishes the Monday Note on its site.)

But even if we “de-propagandize” the numbers, Samsung is clearly the number one Android handset maker, and, just as clearly, it’s taking large chunks of market share from the other two leading players: Motorola and HTC both announced lower than expected Q4CY11 numbers. HTC’s unit volume was 10 million units, down from 13.2 million in Q3; Motorola got 10.5 million units in Q4, down from 11.6 million in Q3.

This leaves us with the potential for an interesting face-off. Not Samsung vs Motorola/HTC, but…Samsung vs. Google. As Erik Sherman observes in his CBS MoneyWatch post, since Samsung ships close to 55% of all Android phones, the company could be in a position to twist Google’s arm. If last quarter’s trend continues — if Motorola and HTC lose even more ground — Samsung’s bargaining position will become even stronger.

But what is Samsung’s ‘‘bargaining position’’? What could they want? Perhaps more search referral money (the $$ flowing when Google’s search engine is used on a smartphone), earlier access to Android releases, a share of advertising revenue…

Will Google let Samsung gain the upper hand? Not likely, or at least not for long. There’s Motorola, about to become a fully-owned but “independent” Google subsidiary. A Googorola vertically-integrated smartphone line could counterbalance Samsung’s influence.

And so it would be Samsung’s move…and they wouldn’t be defenseless. Consider the Kindle Fire example: Just like Amazon picked the Android lock, Samsung could grab the Android Open Source code and create its own unlicensed but fully legal smartphone OS and still benefit from a portion of Android apps, or it could build its own app store the way Amazon did. Samsung is already showing related inclinations with its Music Hub and its iMessage competitor.

Samsung is a tough, determined fighter and won’t let Google dictate its future. The same can be said of Google.

This is going to be interesting.

JLG@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


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

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

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.


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