About Jean-Louis Gassée


Posts by Jean-Louis Gassée:

Puzzling Over Google’s Nest Acquisition


Looking past the glitter, big names, and big money ($3.2B), a deeper look at Google’s last move doesn’t yield a good theory. Perhaps because there isn’t one.

Last week’s Monday Note used the “Basket of Remotes” problem as a proxy for the many challenges to the consumer version of the IoT, the Internet of Things. Automatic discovery, two-way communication, multi-vendor integration, user-interface and network management complexity… until our home devices can talk to each other, until they can report their current states, functions, and failure modes, we’re better off with individual remotes than a confusing — and confused — universal controller..

After reading the Comments section, I thought we could put the topic to rest for a while, perhaps until devices powered by Intel’s very low-power Quark processor start shipping.


A few hours later, Google announced its $3.2B acquisition (in cash) of Nest, the maker of elegant connected thermostats and, more recently, of Nest Protect smoke and CO alarms. Nest founder Tony Fadell, often referred to as “one of the fathers of the iPod”, takes his band of 100 ex-Apple engineers and joins Google; the Mountain View giant pays a hefty premium, about 10 times Nest’s estimated yearly revenue of $300M.


Tony Fadell mentioned “scaling challenges” as a reason to sell to Google versus going it alone. He could have raised more money — he was actually ready to close a new round, $150M at a $2B valuation, but chose adoption instead.

Let’s decode scaling challenges. First, the company wants to raise money because profits are too slim to finance growth. Then, management looks at the future and doesn’t like the profit picture. Revenue will grow, but profits will not scale up, meaning today’s meager percentage number will not expand. Hard work for low profits.

(Another line of thought would be the Supply Chain Management scaling challenges, that is the difficulties in running manufacturing contractors in China, distributors and customer support. This doesn’t make sense. Nest’s product line is simple, two products. Running manufacturing contractors isn’t black magic, it is now a well-understood trade. There are even contractors to run contractors, two of my friends do just that for US companies.)

Unsurprisingly, many worry about their privacy. The volume and tone of their comments reveals a growing distrust of of Google. Is Nest’s expertise at connecting the devices in our homes simply a way for the Google to know more about us? What will they do with my energy and time data? In a blog post, Fadell attempts to reassure:

“Will Nest customer data be shared with Google?
Our privacy policy clearly limits the use of customer information to providing and improving Nest’s products and services. We’ve always taken privacy seriously and this will not change.”

What else could Fadell offer besides this perfunctory reassurance?  “[T]his will not change”… until it does. Let’s not forget how so many tech companies change their minds when it suits them. Google is no exception.

This Joy of Tech cartoon neatly summarizes the privacy concern:


The people, the brands, the money provide enough energy to provoke less than thoughtful reactions. A particularly agitated blogger, who can never pass up a rich opportunity to entertain us – and troll for pageviews – starts by arguing that Apple ought to have bought Nest:

“Nest products look like Apple products. Nest products are beloved by people who love Apple products. Nest products are sold in Apple stores.
Nest, in short, looked like a perfect acquisition for Apple, which is struggling to find new product lines to expand into and has a mountain of cash rotting away on its balance sheet with which it could buy things.
[...] Google’s aggressiveness has once again caught Apple snoozing. And now a company that looked to be a perfect future division of Apple is gone for good.”

Let’s slow down. Besides Nest itself, two companies have the best data on Nest’s sales, returns, and customer service problems: Apple and Amazon. Contrary to the “snoozing” allegation, Apple Store activity told Apple exactly the what, the how, and the how much of Nest’s business. According to local VC lore, Nest’s Gross Margin are low and don’t rise much above customer support costs. (You can find a list of Nest’s investors here. Some, like Kleiner Perkins and Google Ventures, have deep links to Google… This reminds many of the YouTube acquisition. Several selling VCs were also Google investors, one sat on Google’s Board. YouTube was bleeding money and Google had to “bridge” it, to loan it money before the transaction closed.)

See also Amazon’s product reviews page; feelings about the Nest thermostat range from enthusiastic to downright negative.

The “Apple ought to have bought Nest because it’s so Apple-like” meme points to an enduring misunderstanding of Apple’s business model. The Cupertino company has one and only one money pump: personal computers, whether in the form of smartphones, tablets, or conventional PCs. Everything else is a supporting player, helping to increase the margins and volume of the main money makers.

A good example is Apple TV: Can it possibly generate real money at $100 a puck? No. But the device expands the ecosystem, and so makes MacBooks, iPads, and iPhones more productive and pleasant. Even the App Store with its billions in revenue counts for little by itself. The Store’s only mission is to make iPhones and iPads more valuable.

With this in mind, what would be the role of an elegant $249 thermostat in Apple’s ecosystem? Would it add more value than an Apple TV does?

We now turn to the $3.2B price tag. The most that Apple has ever paid for an acquisition was $429M (plus 1.5M Apple shares), and that was for… NeXT. An entire operating system that revitalized the Mac. It was a veritable bargain. More recently, in 2012, it acquired AuthenTec for $356M.

With rare exceptions (I can think of one, Quattro Wireless), Apple acquires technologies, not businesses. Even if Apple were in the business of buying businesses, a $300M enterprise such as Nest wouldn’t move the needle. In an Apple that will approach or exceed $200B this calendar year, Nest would represent about .15% of the company’s revenue.

Our blogging seer isn’t finished with the Nest thermostat:

“I was seduced by the sexy design, remote app control, and hyperventilating gadget-site reviews of Nest’s thermostat. So I bought one.”

But, ultimately, he never used the device. Bad user feedback turned him off:

“[…] after hearing of all these problems, I have been too frightened to actually install the Nest I bought. So I don’t know whether it will work or not.”

He was afraid to install his Nest… but Apple should have bought the company?

So, then, why Google? We can walk through some possible reasons.

First, the people. Tony Fadell’s team is justly admired for their design skills. They will come in handy if Google finally gets serious about selling hardware, if it wants to generate new revenue in multiples of $10B (its yearly revenue is approximately $56B now). Of course, this means products other than just thermostats and smoke alarms. It means products that can complement Google’s ad business with its 60% Gross Margin.

Which leads us to a possible second reason: Nest might have a patent portfolio that Google wants to add to its own IP arsenal. Fadell and his team surely have filed many patents.

But… $3.2B worth of IP?

This leaves us with the usual questions about Google’s real business model. So far, it’s even simpler than Apple’s: Advertising produces 115% or more of Google’s profits. Everything else brings the number back down to 100%. Advertising is the only money machine, all other activities are cost centers. Google’s hope is that one of these cost centers will turn into a new money machine of a magnitude comparable to its advertising quasi-monopoly.

On this topic, I once again direct you to Horace Dediu’s blog. In a post titled Google’s Three Ps, Horace takes us through the basics of a business: People, Processes, and Purpose:

“This is the trinity which allows for an understanding of a complex system: the physical, the operational and the guiding principle. The what, the how and the why.”

Later, Horace points to Google’s management reluctance to discuss its Three Ps:

“There is a business in Google but it’s a very obscure topic. The ‘business side’ of the organization is only mentioned briefly in analyst conference calls and the conversation is not conducted with the same team that faces the public. Even then, analysts who should investigate the link between the business and its persona seem swept away by utopian dreams and look where the company suggests they should be looking (mainly the future.)
There are almost no discussions of cost structures (e.g. cost of sales, cost of distribution, operations and research), operating models (divisional, functional or otherwise) or of business models. In fact, the company operates only one business model which was an acquisition, reluctantly adopted.”

As usual — or more than usual in current circumstances — the entire post is worth a meditative read. Especially for its interrogation at the end:

“The trouble lies in that organization also having de-facto control over the online (and hence increasingly offline) lives of more than one billion people. Users, but not customers, of a company whose purpose is undefined. The absence of oversight is one thing, the absence of an understanding of the will of the leadership is quite another. The company becomes an object of faith alone.  Do we believe?”

Looking past the glitter, the elegant product, the smart people, do we believe there is a purpose in the Nest acquisition? Or is Google simply rolling the dice, hoping for an IoT breakthrough?



Internet of Things: The “Basket of Remotes” Problem


We count on WiFi and Bluetooth in our homes, but we don’t have appliances that provide self-description or reliable two-way communication. As a result, the Internet of Things for consumers is, in practice, a Basket of Remotes.

Last Friday, I participated in a tweetchat (#ibmceschat) arranged by friends at IBM. We discussed popular CES topics such as Wearables, Personal Data, Cable and Smart TV, and the Internet of Things. (I can’t help but note that Wikipedia’s disambiguation page bravely calls the IoT “a self-configuring wireless network between objects”. As we’ll see, the self-configuring part is still wishful thinking.)

At one point, the combined pressures of high-speed twittering and 140-characters brevity spurred me to blurt this:

Remotes Basket Case

A little bit of background before we rummage through the basket.

In practice, there are two Internets of Things: One version for Industry, and another for Consumers.

The Industrial IoT is alive and well. A gas refinery is a good example: Wired and wireless sensors monitor the environment, data is transmitted to control centers, actuators direct the flow of energy and other activities. And the entire system is managed by IT pros who have the skill, training, and culture — not to mention the staff — to oversee the (literal) myriad unseen devices that control complicated and dangerous processes.

The management of any large corporation’s energy, environment, and safety requires IT professionals whose raison d’être is the mastery of technology. (In my fantasy, I’d eavesdrop on Google’s hypergalactic control center, the corporate Internet of Things that manage the company’s 10 million servers…)

Things aren’t so rosy in the consumer realm.

For consumers, technology should get out of the way — it’s a means, not an end. Consumers don’t have the mindset or training of IT techies, they don’t have the time or focus to build a mental representation of a network of devices, their interactions and failure modes. For example, when my computer connects to the Net, I don’t have to concern myself with the way routers work, how the human-friendly mondaynote.com gets translated into the IP address.

Not so with a home network of IoT objects that connect the heating and cooling systems, security cameras, CO and fire sensors, the washer, dryer, stove, fridge, entertainment devices, and under-the-mattress sleep monitoring pads. This may be an exaggerated example, but even with a small group of objects, how does a normal human configure and manage the network?

For an answer, or lack thereof, we now come back to the Basket of Remotes.

I once visited the home of an engineer who managed software development at an illustrious Silicon Valley company. I was shocked, shocked to see a basket of remotes next to the couch in front of his TV. ‘What? You don’t use a programmable remote to subsume this mess into one elegant device and three of four functions, TV, DVR, VoD, MP3 music?’

‘No, it’s too complicated, too unreliable. Each remote does its separate job well, with an easy mental representation. These dumb devices don’t talk back, there’s no way for a unified remote to ask what state they’re in. So I gave up — I have enough mental puzzles at the office!’

Indeed, so-called “smart” TVs are unable to provide a machine-readable description of the commands they understand (an XML file, also readable by a human, would do). We can’t stand in front of a TV with a “fresh” universal remote – or a smartphone app – touch the Learn button and have the TV wirelessly ship the list of commands it understands…and so on to the next appliance, security system or, if you insist, fridge and toaster.

If an appliance would yield its control and reporting data, an app developer could build a “control center” that would summarize and manage your networked devices. But in the Consumer IoT world, we’re still very far from this desirable state of affairs. A TV can’t even tell a smartphone app if it’s on, what channel it’s tuned to, or which devices is feeding it content. For programmable remotes, it’s easy to get lost as too many TVs don’t even know a command such as Input 2, they only know Next Input. If a human changes the input by walking to the device and pushing a button, the remote is lost. (To say nothing of TVs that don’t have separate On and Off commands, only an On/Off toggle, with the danger of getting out of sync – and no way for the TV to talk back and describe its state…)

Why don’t Consumer Electronics manufacturers provide machine self-description and two-way communication? One possible answer is that they’re engaged in a cost-cutting race to the bottom and thus have no incentive to build more intelligence into their devices. If so, why build unbearably dumb apps in their Smart TVs? (Korean LG Electronics even dug up WebOS for integration into its latest TVs.)

A look at Bang & Olufsen’s Home Integration page might give one hope. The video demo, in B&O’s usual clean luxury style, takes us through from dining to sleep to waking up, opening curtains, making coffee, morning news on TV, and opening the garage door. But it only provides a tightly integrated B&O solution with the need for one or more IT intervention (and it’s expensive — think above $100K for the featured home).

This leaves middle class homes with an unsolved, mixed-vendor Basket of Remotes, a metaphor for the unanswered management challenges in the Consumer IoT space.




The Hybrid Tablet Temptation


In no small part, the iPad’s success comes from its uncompromising Do Less To Do More philosophy. Now a reasonably mature product, can the iPad expand its uses without falling into the hybrid PC/tablet trap?

When the iPad came out, almost four years ago, it was immediately misunderstood by industry insiders – and joyously embraced by normal humans. Just Google iPad naysayer for a few nuggets of iPad negativism. Even Google’s CEO, Eric Schmidt, couldn’t avoid the derivative trap: He saw the new object as a mere evolution of an existing one and shrugged off the iPad as a bigger phone. Schmidt should have known better, he had been an Apple director in the days when Jobs believed the two companies were “natural allies”.

I was no wiser. I got my first iPad on launch day and was immediately disappointed. My new tablet wouldn’t let me do the what I did on my MacBook Air – or my tiny EeePC running Windows Xp (not Vista!). For example, writing a Monday Note on an iPad was a practical impossibility – and still is.

I fully accept the personal nature of this view and, further, I don’t buy the media consumption vs. productivity dichotomy Microsoft and its shills (Gartner et al.) tried to foist on us. If by productivity we mean work, work product, earning one’s living, tablets in general and the iPad in particular have more than made the case for their being productivity tools as well as education and entertainment devices.

Still, preparing a mixed media document, even a moderately complex one, irresistibly throws most users back to a conventional PC or laptop. With multiple windows and folders, the PC lets us accumulate text, web pages, spreadsheets and graphics to be distilled, cut and pasted into the intended document.

Microsoft now comes to the rescue. Their hybrid Surface PC/Tablet lets you “consume” media, play games in purely tablet mode – and switch to the comfortable laptop facilities offered by Windows 8. The iPad constricts you to ersatz folders, preventing you to put your document’s building blocks in one place? No problem, the Surface device features a conventional desktop User Interface, familiar folders, comfy Office apps as well as a “modern” tile-based Touch UI. The best of both worlds, skillfully promoted in TV ads promising work and fun rolled into one device.

What’s not to like?

John Kirk, a self-described “recovering attorney”, whose tightly argued and fun columns are always worth reading, has answers. In a post on Tablets Metaphysics – unfortunately behind a paywall – he focuses on the Aristotelian differences between tablets and laptops. Having paid my due$$ to the Techpinions site, I will quote Kirk’s summation [emphasis mine]:

Touch is ACCIDENTAL to a Notebook computer. It’s plastic surgery. It may enhance the usefulness of a Notebook but it doesn’t change the essence of what a Notebook computer is. A keyboard is ACCIDENTAL to a Tablet. It’s plastic surgery. It may enhance the usefulness of a Tablet, but it doesn’t change the essence of what a Tablet is. Further — and this is key — a touch input metaphor and a pixel input metaphor must be wholly different and wholly incompatible with one another. It’s not just that they do not comfortably co-exist within one form factor. It’s also that they do not comfortably co-exist within our minds eye.

In plain words, it’s no accident that tablets and notebooks are distinctly different from one another. On the contrary, their differences — their incompatibilities — are the essence of what makes them what they are.

Microsoft, deeply set in the culture of backwards compatibility that served it so well for so long did the usual thing, it added a tablet layer on top of Windows 7. The result didn’t take the market by storm and appears to have caused the exit of Steve Sinofsky, the Windows czar now happily ensconced at Harvard Business School and a Board Partner with the Andreessen Horowitz venture firm. Many think the $900M Surface RT write-off also contributed to Ballmer’s August 2013 resignation.

Now equipped with hindsight, Apple’s decision to stick to a “pure” tablet looks more inspired than lucky. If we remember that a tablet project preceded the iPhone, only to be set aside for a while, Apple’s “stubborn minimalism”, its refusal to hybridize the iPad might be seen as the result of long experimentation – with more than a dash of Steve Jobs (and Scott Forstall) inflexibility.

Apple’s bet can be summed up thus: MacBooks and iPads have their respective best use cases, they both reap high customer satisfaction scores. Why ruin a good game?

Critics might add: Why sell one device when we can sell two? Apple would rather “force” us to buy two devices in order to maximize revenue. On this, Tim Cook often reminds Wall Street of Apple’s preference for self-cannibalization, for letting its new and less expensive products displace existing ones. Indeed, the iPad keeps cannibalizing laptops, PCs and Macs alike.

All this leaves one question unanswered: Is that it? Will the iPad fundamentals stay the way they have been from day one? Are we going to be thrown back to our notebooks when composing the moderately complex mixed-media documents I earlier referred to? Or will the iPad hardware/software combination become more adept at such uses?

To start, we can eliminate a mixed-mode iOS/Mac device. Flip a switch, it’s an iPad, flip it again, add a keyboard/touchpad and you have a Mac. No contraption allowed. We know where to turn to for that.

Next, a new iOS version allows multiple windows to appear on the iPad screen; folders are no longer separately attached to each app as they are today but lets us store documents from multiple apps in one place. Add a blinking cursor for text and you have… a Mac, or something too close to a Mac but still different. Precisely the reason why that won’t work.

(This might pose the question of an A7 or A8 processor replacing the Intel chip inside a MacBook Air. It can be done – a “mere matter of software” – but how much would it cut from the manufacturing cost? $30 to $50 perhaps. Nice but not game-changing, a question for another Monday Note.)

More modest, evolutionary changes might still be welcome. Earlier this year, Counternotions proposed a slotted clipboard as An interim solution for iOS ’multitasking‘:

[...] until Apple has a more general solution to multitasking and inter-app navigation, the four-slot clipboard with a visible UI should be announced at WWDC. I believe it would buy Ive another year for a more comprehensive architectural solution, as he’ll likely need it.

This year’s WWDC came and went with the strongest iOS update so far, but no general nor interim solution to the multitasking and inter-app navigation discussed in the post. (Besides  the Counternotions blog, this erudite and enigmatic author also edits counternotions.tumblr.com and can be followed on Twitter as @Kontra.)

A version of the above suggestion could be conceptualized as a floating dropbox to be invoked when needed, hovering above the document worked on. This would not require the recreation of a PC-like windows and desktop UI. Needed components could be extracted from the floating store, dragged and dropped on the work in process.

We’ll have to wait and see if and how Apple evolves the iPad without falling into the hybrid trap.

On even more speculative ground, a recent iPad Air intro video offered a quick glimpse of the Pencil stylus by Fifty-Three, the creators of the well-regarded Paper iPad app. So far, styli haven’t done well on the iPad. Apple only stocks children-oriented devices from Disney and Marvel. Nothing else, in spite of the abundance of such devices offered on Amazon. Perhaps we’ll someday see Apple grant Bill Gates his wish, as recounted by Jobs’ biographer Walter Isaacson:

“I’ve been predicting a tablet with a stylus for many years,” he told me. “I will eventually turn out to be right or be dead.”

Someday, we might see an iPad, larger or not, Pro or not, featuring a screen with more degrees of pressure sensitivity. After seeing David Hockney’s work on iPads at San Francisco’s de Young museum, my hopes are high.



Shameless Carriers


Wireless carriers used to rule smartphone suppliers. In 2007, Steve Jobs upended such rules. Why can’t the carriers accept the change and enjoy the revenues the iPhone generates for them… and why do tech journalists encourage their whining?

Until about two weeks ago, it seemed that our major wireless carriers had given up whining about the unjust subsidies imposed by a certain overly-confident (they said) handset maker. I hoped that their silence on the topic meant that they had finally realized that the extra revenue (ARPU) generated by these smartphones more than made up for the “subsidy burden”, for the exorbitant amounts of money that (they thought) ended up in the wrong coffers.

Then, I saw this this headline:

Everyone Pays No 5c

The article’s lede promises to reveal secret Apple deals that squeeze rivals and tax you. According to the piece’s “logic”, Apple’s one-sided agreements force carriers to swallow inordinate numbers of iPhones, an arrangement that produces all-around nefarious results. To meet their volume commitments, carriers allocate disproportionate amounts of shelf space to iPhones, thus crowding out competitors. And because the Apple contracts drain their finances, carriers are forced to price other handsets higher than they otherwise would. Hence an “iPhone Tax” that everyone must pay, even when using another brand.

In the same piece, we find dark suggestions that Verizon is threatened by a $12B to $14B shortfall in meeting it’s $23B commitment to purchase Apple handsets. A bit of googling led me to a pair of July 2013 articles (here and here) that back up the prediction by pointing to an anal-ist’s write-up of Verizon’s SEC filings (a medium that, as Regular Monday Note readers know too well, I happily wallow in, especially the always-rich MD&A [Management Discussion and Analysis] section where execs are supposed to help us navigate the filing’s sea of numbers).

I went to Verizon’s SEC Filings page and looked up quarterly and annual reports. The first mention of an Apple agreement appears in the 10-K (annual) filing of February 28th, 2011. Since then, no word whatsoever of any purchase commitment, whether for the iPhone or any other device. If you search for “purchase” and “commitment” in the latest October 2013 SEC document, you’ll only find talk of pension funding and share-repurchase obligations:

Verizon 10-Q Oct 2013 Commitments

One would think that a looming $12B to $14B shortfall — more than a third of Verizon’s $30B quarterly revenue — would be mentioned to shareholders. The worried articles fail to explain Verizon’s silence.

This is both novel and familiar.

The novelty is finding Apple guilty of forcing carriers to raise prices on competitors‘ handsets. I hadn’t seen this angle before.

The familiar is the carriers’ use of journalists who present themselves as independent observers/reporters when, in fact, these practitioners of access journalism carry water for their corporate connections. During a lunch conversation some years ago with a Wall Street Journal repentito, I pointed to a fellatious Microsoft article in his old paper and questioned the excessive reverence: ‘Access, Jean-Louis, access. It’s the price you pay to get the next Ballmer interview… ‘

We saw the process at work in a December 2011 WSJ article titled How the iPhone Zapped Carriers, a devotional piece that makes the key points in the carriers’ incessant complaint:

Carriers do all the grunt work while handset makers and software developers take all the money.
The $400 subsidy per iPhone (and now a similar amount for its best competitors as well) is clearly excessive and must stop.
We need a new business model to account (to monetize) the shift from voice to voracious use of data.

Let’s rewind the tape. Once upon a time, there was The Way of The Carrier. Verizon, Sprint, AT&T treated handsets makers the way a supermarket chain treats yogurt suppliers: We’ll tell you the flavors and quantities we want to carry, we’ll set the delivery schedule, dictate the marketing/branding arrangements, define the return privileges and, of course, we’ll let you know what we want to pay for your product — and when we want to pay it.

Then Steve Jobs hypnotized AT&T’s management. He convinced them to let Apple set the terms for iPhone distribution in exchange for AT&T’s “running the table”. This meant no AT&T fingerprints on Apple’s pristine iPhone, no branding, no independent pricing, no pre-installed crapware — content and software would be downloaded via iTunes, only.

In this arrangement, the iPhone helped AT&T steal customers from its main competitor, Verizon. When Verizon finally signed up with Apple in 2010, they were in a much weaker position than if they had obliged at the very beginning of the Smartphone 2.0 era.

Apple is master of the slow-but-steady, surround-from-below approach. First, sign up a weaker player who will accept Apple’s stringent control in exchange for the opportunity to take business away from the dominant player who balks at Cupertino’s terms. After enough customers have switched to the smaller competitor, the market leader changes its mind and signs up with Apple — on Apple’s terms.

The drill has worked in Japan. The smaller SoftBank signed up with Apple while DoCoMo, Japan’s largest wireless carrier, refused. DoCoMo wanted to install its own software on the iPhone; Apple wouldn’t budge. Subscribers migrated to Softbank in numbers significant enough to change DoCoMo’s mind. The happy ending is DoCoMo and its competitors now appear to sell large numbers of iPhones.

Turning to China, the same maneuver is at work. China Unicom and China Telecom have been selling iPhones with the expected result: They’re taking customers from the giant China Mobile. (There are rumors of an Apple-China Mobile agreement, but it’s unclear when this will happen. We should know soon.)

This only works if – and only if – the iPhone is a great salesman for the carrier. Apple extracts a higher price for its iPhone for two reasons: strong volumes and higher revenue per subscriber compared to other sets. In Horace Dediu’s felicitous words [emphasis mine]:

‘I repeat what I’ve mentioned before: The iPhone is primarily hired as a premium network service salesman. It receives a “commission” for selling a premium service in the form of a premium price. Because it’s so good at it, the premium is quite high.’

Carriers should stop whining; these are robust companies run by intelligent businesspeople with immense resources at their disposal. As explained in previous Monday Notes (here and here), there’s no rational basis for their kvetching. Assuming they bleed an extra $200 when subsidizing an iPhone (or a top Samsung handset, now that the Korean giant followed suit), they only need $8/month in extra subscriber revenue from the “offending” smartphone. And yet here we are: Randall Stephenson, AT&T’s CEO, predicts the end of subsidies because  “wireless operators can no longer afford to suck up the costs of customers’ devices”.

I don’t know if Stephenson is speaking out of cultural deafness or cynicism, but he’s obscuring the point: There is no subsidy. Carriers extend a loan that users pay back as part of the monthly service payment. Like any loan shark, the carrier likes its subscriber to stay indefinitely in debt, to always come back for more, for a new phone and its ever-revolving payments stream.

I was told as much by Verizon. In preparation for this Monday Note, I went to the Palo Alto Verizon store and asked if I could negotiate a lower monthly payment since Verizon doesn’t subsidize my iPhone (for which I had paid full price). Brian, the pit boss, gave me a definite, if not terribly friendly, answer: “No, you should have bought it from us, you would have paid much less (about $400 less) with a 2-year agreement.” My mistake. Verizon wants to be my loan shark.

In the meantime, AT&T has finally followed T-Mobile’s initiative and has unbundled the service cost from the handset. If you pay full price for your smartphone, an AT&T contract will cost you $15 less than with a subsidized phone on a 2-year agreement. This leads one to wonder how long Verizon can keep its current indifferent price structure.

All this leaves carriers with conflicted feelings: They like their iPhone salesman but, like short-sighted bosses who think their top earner makes too much money, they angle for ways to cut commissions down.

On the other side, Apple’s teams must be spending much energy finding ways to keep generating high monthly revenues for their “victims”.


Other carrier news: Sprint, now owned by SoftBank’s Masayoshi Son, is said to be preparing a $20B bid for T-Mobile. We barely avoided excessive concentration when the Department of Justice nixed AT&T’s attempt to acquire T-Mobile; now we again risk a three-way market and its unavoidable collusions. As much as I admire SoftBank’s founder and am happy he took control of Sprint, I hope our regulators won’t facilitate more concentration.

This might be the last Monday Note for 2013. I’ll soon be in Paris where jet-lag and various (legal) substances will conspire to make writing more difficult. If so, Happy Holidays to Monday Note readers and their loved ones. –

Microsoft CEO Search: Stalemate


The Microsoft CEO succession process appears to be stalled. This is a company with immense human, technical, and financial resources; the tech industry is filled with intelligent, energetic, dedicated candidates. What’s wrong with the matchmaking process?

Blond, Japanese, 25 years old, 15 years experience – and bisexual. This is a caricature, but only barely, of the impossible CEO job specs that executive recruiters circulate when on a mission to replace the head of a large company.

The real list of requirements describes a strategist with a piercing eye for the long term… and daily operational details; a fearless leader of people, willing to inflict pain… but with a warm touch; a strong communicator, a great listener, and an upstanding steward of shareholder interests…and of the environment.

When I gently confront a recruiter friend with the impossibility of finding such a multi-talented android, he gives me the Gallic Shrug: “It’s the client, you know. They’re anxious, they don’t know what they want. So, to tranquilize their Board, we throw everything in.”

I ask the distinguished headhunter what character flaws will be tolerated in a candidate. The query is met with incomprehension: “What? No, no, we can’t have character flaws; this situation requires impeccable credentials.” And perfect teeth, one assumes.

Still in a caustic mood, I prod the gent to picture himself driving to Skyline Boulevard and walking to the top of Borel Hill, a great place to meditate. Turning away from the hills that gently roll down to the Pacific, he faces the Valley. Can he sit, quiet his mind, and visualize the gentle crowd of pristine CEOs down there?

No. He’ll see a herd of flawed men and a few women who regularly exhibit unpleasant character traits; who abuse people, facts, and furniture; and who are yet successful and admired. Some are even liked. There are no Mother Theresas, only Larry Ellisons and Marisa Mayers, to say nothing of our dearly departed Steve Jobs. (Actually, the diminutive Albanian nun was said to have had a fiery temper and, perhaps, wasn’t so saintly after all.)

For a large, established company, having to use an executive recruiter to find its next CEO carries a profoundly bad aroma. It means that the directors failed at one of their most important duties: succession planning. Behind this first failure, a second one lurks: The Board probably gave the previous CEO free rein to promote and fire subordinates in a way that prevented successors from emerging.

Is this the picture at Microsoft? Is the protracted search for Steve Ballmer’s successor yet another sign of the Board’s dysfunction? For years, Microsoft directors watched Ballmer swing and miss at one significant product wave after another. They sat by and did nothing as he lost key executives. Finally, in January of this year, Board member John Thompson  broke the bad charm and prodded Ballmer to accelerate the company’s strategic evolution, a conversation that led to the announcement, in August, of Ballmer’s “mutually agreed” departure.

Having badly and repeatedly misjudged the company’s business and its CEO, is the Board looking for an impossibly “well-rounded” candidate: the man or woman who can draw the sword from the stone, someone with a heart and mind pure enough to put the company back on track?

For some time now, we’ve been hearing rumors that Ford’s current CEO, Alan Mulally,  could become Microsoft’s new CEO. Mulally is well-respected for his turnaround experience: Since 2006, he’s been busy reviving the family-controlled Ford, the only Detroit automaker that didn’t need (or take) bailout money. Before Ford, Mulally spent 37 years in engineering and executive management positions at Boeing, where he rubbed elbows with Microsoft royalty in Seattle.

As the rumor has it, Mulally would be appointed as a transitional leader whose main charge would be to groom one of Microsoft’s internal candidates and then step aside as he or she assumes the throne. Will it be (the rumor continues) Satya Nadella, Exec VP of  Cloud and Enterprise activities? Or former Skype CEO Tony Bates, now a post-acquisition Microsoftian? Both are highly regarded inside and outside the company.

(I’m surprised there aren’t more internal candidates. Tech pilgrim Stephen Elop is sometimes mentioned, but I don’t see him in the running. Elop has served his purpose and is back in Redmond — some say he never really left — after a roundtrip to Finland during which he Osborned Nokia, thus lowering the price of acquisition by his former and again employer.)

On the surface, this sounds like an ideal arrangement.

And yet…

For all his intellectual and political acumen, his people and communication skills, Mulally possesses no domain knowledge. He has none of the bad and good experiences that would help him understand the killer details as well as the strategic insights that are needed to run Microsoft — insights that, in retrospect, Ballmer lacked.

But, you’ll say, this is no problem; he can rely on the CEO-in-waiting to evaluate situations for him and make recommendations. No. Mulally would have no way to really weigh the pros and cons outside of the streamlined charts in a fair and balanced PowerPoint presentation.

In addition, the grooming process would prolong the company’s confusing interregnum. The people who have to perform actual work at Microsoft will continue to wonder what will happen to the party line du jour when the “real” CEO finally assumes power. The uncertainty discourages risk-taking and exacerbates politics — who knows who’ll come in tomorrow and reverse course?

Fortunately, the Mulally proposition no longer seems likely. The latest set of rumors have Mulally staying at Ford until the end of 2014. Let’s hope they’re right. Wall Street seems to think so… and expressed its disappointment: After regularly climbing for weeks, Microsoft shares dropped by 2.4% on Thursday, Dec 5th, after Mulally declared that he wouldn’t jump ship.

So where does Microsoft turn, and why are they taking so long? Once you put aside the Mr./Ms. Perfect fantasy, there’s no dearth of capable executives with the brains and guts to run Microsoft. These are people who already run large corporations, or are next-in-line to do so. Exec recruiters worth the pound of flesh they get for their services have e-Rolodexes full of such people — some inside the company itself.

Now, place yourself inside the heart and mind of this intelligent candidate:

‘Do I want to work with that Board? In particular, do I want Bill Gates and his pal Steve Ballmer hovering over everything I do? I know I’ll have to make unpopular decisions and upset more than a few people. What’s in it for me – and for Microsoft – in a situation where unhappy members of the old guard would be tempted to go over my head and whine to Bill and Steve? How long would I last before I get fired or, worse, neutered and lose my mind?’

Consider it a litmus test: Any candidate willing to accept this road to failure is automatically disqualified as being too weak. A worthy contender makes it clear that he or she needs an unfettered mandate with no Office Of The Second Guessing in the back of the boardroom. Bill and Steve would have to go — but the Old Duo doesn’t want to leave.

It’s a stalemate…and that’s the most likely explanation for the protracted recruitment process.

We’ll soon know where Microsoft’s Board stands. Will it favor a truly independent CEO or will it cling to its past sins — and sinners?

Or, as a Valley wag asks: Which elephantine gestation will end first, that of Microsoft’s new CEO, or Apple’s equally well-rounded Mac Pro?



Sound Holiday Thoughts


Nothing too serious this week. No Microsoft CEO succession, no Samsung $14B marketing budget exceeding Iceland’s GDP, no Apple Doom. Just Holiday – or Cyber Monday – audio talk.

I used to listen to sound. Now I enjoy music. It started with explosives. I was lucky to be born at a time and place (an arch-communist suburb of post-war Paris) where a 9-year old kid could hopscotch to the drugstore around the corner and buy nitric, sulfuric, or hydrochloric acid, sulfur, potassium chlorate, hydrogen peroxide… and other fascinating wares – among which a flogger with short leather lashes I was also acquainted with. Imagine this in today’s California…

After a minor eye-burn incident, I was firmly redirected towards electronics and started building crystal radios, rudimentary AM sets using a galena (lead sulfide) crystal.

My good fortune continued. In 1955, my parents decided to send their increasingly restive child to a Roman Catholic boarding school in Brittany. What awaited me there, besides a solid classical education, was a geeky Prefect of Discipline who had a passion for hobby electronics. After hours, I would go to his study to read Radio Plans and Le Haut-Parleur — the French equivalents of Nuts and Volts — and salivate over the first OC71 transistor that had just landed on his desk (amazingly, the transistor is still available). This was exciting: Fragile, noisy, power hungry vacuum tubes that required both high and low voltages were going to be replaced by transistors. Numerous, randomly successful projects followed: radios, mono and stereo amplifiers, hacked surplus walkie-talkies.

Years later, in June 1968, I landed a dream job launching HP’s first desktop computer, the 9100A, on the French market. I distinctly recall the exultant feeling: After years of the psycho-social moratorium referred to in an earlier Monday Note, I had entered the industry I love to this day.

With more money, I was able to afford better turntables, tape decks, receivers, amplifiers and, above all, speakers. For a while I started to listen more to the sound they produced than to the music itself. The Lacanians have a phrase for the disease: Regressive Fixation On Partial Objects…

HP had installed an über-geek, Barney Oliver, as head of its Research organization, HP Labs. Adored for his giant intellect and free spirit, Oliver decided stereo amplifiers of the day (early 70′s) were either expensive frauds or noisy trash. Or both. So he raided the HP parts bin and built us a real stereo amplifier. (The manual and schematics are lovingly preserved here.) Four hundred were built. I bought two, because you never know. This was a vastly “overbuilt” device that used high-precision gas chromatograph attenuators with .1dB steps as volume controls. (Most of us have trouble perceiving a 1dB difference.) The power supply had such enormous capacitors that the amplifier would keep “playing” for 25 seconds after it was turned off.

HP, the old, real HP, truly was technophile heaven.

As years passed, I became uncomfortable with the audio arms race, the amps that pushed out hundreds or even thousands of watts, the claims of ever-vanishing .1%, nay. .01% distortion levels, the speakers that cost tens of thousands of dollars. (The Rolls-Royce of audio equipment of the time was…McIntosh.)

A chance encounter with The Audio Critic helped me on the road to recovery. Peter Aczel, the magazine’s publisher and main author is a determined Objectivist Audiophile, a camp that believes that “audio components and systems must pass rigorously conducted double-blind tests and meet specified performance requirements in order to validate the claims made by their proponents”. Committed to debunking Subjectivists‘ claims of “philosophic absolutes” and ethereal nuance, Aczel has attracted the ire of high-end equipment makers who hate it when he proves that their oxygen-free copper cables with carefully aligned grains are no better than 12-gauge zip wire at 30 cents per foot.

(A helpful insight from Aczel: In an A/B audio comparison, the louder gear inevitably wins, so loudness needs to be carefully equalized. This “sounds” like the reason why, over the last two or three decades, wines have increased their alcohol concentration to 14% or more: In tastings, the stronger wine is almost always preferred.)

The real turning point from sound fetishism to music appreciation came in early 2002 when I bought an iMac G4 that came with two small but surprisingly good external loudspeakers:

iMac G4 w Speakers

They won’t fill a concert hall, they can’t compete with my old JBL speakers but coupled with iTunes, the iMac had become a pleasant stereo. (Due, of course, to the improvements in magnetic alloys such as neodymium compounds, more efficient Class D amplifiers, and… but I’ll stop before I relapse.)

A decade later — and skipping the politically incorrect jokes about married men experiencing premature hearing impairment in the high-frequency region of the spectrum — I’m now able to focus on music and expect the reproduction equipment to stay out of the way, in both practical and auditory terms.

Today’s “disk drives” are solid state and store hundreds of gigabytes; CDs and DVDs have all but disappeared; iPods, after a few years in the sun, have been absorbed into phones and tablets. (And we watch iTunes on the road to becoming Apple’s Windows Vista.)

After years of experiment, I’ve come to a happy set of arrangements for enjoying music at home, at work, and on the go. Perhaps these will help your own entertainment. (Needless to say, I bought all the following – and many others – with my own money, and the Monday Note doesn’t receive compensation of any kind.)

At home, I use a Bose Companion V desktop set-up. It consists of two pods, one on each side of the screen, plus a bass module anywhere under the desk. Bose’s idea is to take your PC’s output from a USB port and process it to add an illusion of depth/breadth when sitting at your desk. For me, it works. And the output is strong enough for a family/kitchen/dining room.

That said, I’m not fond of all Bose products. I find the smaller Companion units too bass-heavy, and I didn’t like (and returned) their AirPlay speaker. As for the company’s design sensibility, Amar Bose gave me the evil eye more than 15 years ago when I dared suggest that the industrial design of his Wave System could use updating (I was visiting his Framingham Mountain office with a “noted Silicon Valley electrics retailer”). The design hasn’t changed and is selling well.

At the office, I followed advice from my old friends at Logitech and bought two Ultimate Ears Bluetooth speakers. With a (recently improved) smartphone app, they provide very good stereo sound. At $360/pair, the UE system costs about the same as the Companion V; what UE lacks in the Bose’s power, it makes up for in portability. The only knock is that the mini-USB charging port is under the speaker’s bottom — you have to turn it on its head to charge it..

Speaking of portability, Bose’s Soundlink Mini, another testament to modern speaker and amplifier technology, fits in a bag or roll-aboard and shocks unprepared listeners with its clean, powerful sound and clean design. No discounts on Amazon, which we can attribute to Bose’s unwavering price control and to the system’s desirability.

I kept the best for last: Noise-reducing earphones. The premise is simple: A microphone captures ambient sound, embedded circuitry flips the waveform and adds it into the signal, thus canceling the background noise and allowing us to enjoy our music undisturbed. This is a consumer application of Bose’s first noise-canceling headphones for aviation applications, still considered the domain’s standard. A “pro” set cost about $1,000. Consumer versions are $300 or less.

To my ears, early models were disappointing, they introduced small levels of parasitic noise and featured indifferent music reproduction. Nonetheless, sales were strong.

Later models, from Bose and others, improved both music playback and noise cancelation, but still felt big, unwieldy. Again, a matter of personal preference.

Yielding to the friendly bedside manner of an Apple Store gent, I recently bought a pair of Bose QC 20i “noiseless” earphones (about $300). The earbuds are comfortable and so “skin-friendly” that you forget you’re wearing them (I mention this because comfort will always trump quality). They’re also more secure, less prone to falling out of your ears than are Apple’s own devices.

Now, as I take my evening walk in the streets of Palo Alto enjoying the Bach Partitas, the street noise is barely a whisper, cars seem to glide by as they were all Teslas. For civility and safety, there’s a button to defeat noise reduction, and the mandatory Pause for phone or street conversations. There are other nice details such as a spring-loaded clip for your shirt or lapel, or a dead-battery mode that still lets music — and noise —  come through.

Next week, we’ll return to more cosmic concerns.


The Internet of Things: Look, It Must Work


For twenty-five years, we’ve been promised a thoroughly connected world in which our “things” become smarter, safer and save energy. But progress doesn’t seem to match the glowing predictions.

The presentation is straightforward and enticing:

Picture this: A 25¢ smart chip inside a light-bulb socket. Networked through the 110V wires, it provides centralized on-off control and monitors the bulb’s “health” by constantly measuring electrical resistance. Imagine the benefits in a large office, with thousands, or even tens of thousands of fixtures. Energy is saved as lighting is now under central, constantly adaptable control. Maintenance is easier, pinpointed, less expensive: Bulbs are changed at precisely the right time, just before the filament burns out.
Now, add this magic chip to any and all appliances and visualize the enormity of the economic and ease-of-use benefits. This is no dream. . . we’re already working on agreements in energy-conscious Scandinavia.

When did this take place?

There is a one-word giveaway to this otherwise timeless pitch: filament. Incandescent lights have been regulated out of existence, replaced first by CFLs (compact fluorescent lamps — expensive and not so pleasant) and then by LEDs (still expensive, but much nicer).

The pitch, reproduced with a bit of license, took place in 1986. It’s from the business plan of a company called Echelon, the brainchild of Mike Markkula, Apple’s original angel investor and second CEO.

The idea seemed obvious, inevitable: The relentless physics of Moore’s Law would make chips smaller, more powerful, and less expensive. Connected to a central household brain, these chips would control everything from lightbulbs and door locks to furnaces and stoves. Our lives would be safer and easier. . . and we’d all conserve energy.

The idea expresses itself in variations of the core Home Automation concept, the breadth of which you can visualize by googling “home automation images”:

Home Automation Pics copy

In 1992, Vint Cerf, our beloved Internet pioneer, posed with his famous IP On Everything t-shirt:

Vint Cerf T-Shirt IP On Everything copy

This was a modern, ringing restatement of Echelon’s vision: The objects in our homes and offices will have sensors and actuators. . . and a two-way connection to the Internet, to a world of data, applications, people (and, inevitably, marketing trolls).

It’s been a quarter century since Echelon started, more than two decades since Vint Cerf’s pithy yet profound prophecy. We now speak of the Internet Of Things and make bold predictions of billions of interconnected devices.

Earlier this year, Cisco invited us to “capture our share” of the $14.4T (yes, T as in trillion) business opportunity that The Internet of Everything (IoE) will create in the coming decade. Dave Evans, Cisco’s chief futurist, tells us that within ten years we’ll see “50 billion connected things in the world, with trillions of connections among them“.

Maybe. . . but that’s a lot of “things”.

As Network World points out, “[m]ore than 99 percent of physical objects are not now connected to the Internet”. The exact percentage matters less than the existential truth that the obvious, attractive, inevitable idea of a universe of interconnected objects is taking a long, long time to materialize.

Does the concept need a Steve Jobs to coalesce the disparate components into a coherent, vibrant genre? Are important pieces still missing? Or, like Artificial Intelligence (rebranded as Machine Learning in an attempt to soothe the pain of repeated disappointments), are we looking at an ever-receding horizon?

Echelon’s current state (the company went public in 1998) serves as a poster child for the gulf between the $14.4T vision and today’s reality.

First, some context: Mike Markkula, who is still Vice Chairman of Echelon, has assembled a strong Board of Valley veterans who have relevant experience (I know several of them well — these aren’t just “decorative directors”). The company’s Investor Overview offers an impressive Corporate Profile [emphasis mine]:

“Echelon Corporation is an energy control networking company, with the world’s most widely deployed proven, open standard, multi-application platform, selling complete systems and embedded sub-systems for smart grid, smart city and smart building applications. Our platform is embedded in more than 100 million devices, 35 million homes, and 300,000 buildings and powers energy savings applications for smart grids, smart cities and smart buildings. We help our customers reduce operational costs, enhance satisfaction and safety, grow revenues and prepare for a dynamic future.”

But the latest Earnings Call Presentation paints a different picture:

Echelon Q3FY13 Highlights Edited copy

The Gross Margin is good (58.5%), as is the company’s cash position ($56.7M). . . but Echelon’s business is a tiny $18M — about a millionth of Cisco’s predicted motherlode. That’s a decrease of 38% compared to the same quarter last year.

So, we have a company that’s in the hands of competent technologist who have deep knowledge of the domain; a company with real, proven products that have been deployed in millions of homes and offices— but with little revenue to show for its technology and experience.

This seems to be the case for the Everything Connected industry in general. There’s no General Electric, no Microsoft, no Google (the latter abandoned its PowerMeter initiative in 2011).

Why not? The answer might lie in the Echelon presentation already mentioned:

echelin ioT

After more than 25 years of developing devices and platforms, Echelon concludes that the Internet of Things isn’t going to be felt as a direct, personal experience. Instead, it will be mostly invisible: components and subsystems in factories, warehouses, fleets of trucks and buses, office buildings. . .

Consumers certainly don’t have to be sold on the benefits of connected devices. We can’t function without our smartphones, tablets, and PCs. But once we stray outside the really personal computer domain, the desirability of connected devices drops dramatically.

The dream of giving sensors, actuators, and an Internet connection to everyday objects feels good, until one looks at matters of practical and commercial implementation. Will the software in my smart toaster be subject to a licensing agreement? Will it stop toasting if I don’t renew my subscription? (This isn’t just a dystopian strawman; one electric car manufacturer says it can remotely disable the battery if you don’t pay up.)

And then there are the (very real) security and privacy concerns. Could our appliances be hacked? Could my toaster spy on me, collect more data to be used to peddle related goods?

Home automation and security systems seem like a natural fit for the Internet of Things, but they’re still expensive, complicated, and fragile – if not hopelessly primitive. Some connected thermostats, such as the Nest (with its smoke and carbon monoxide detector), work well, but most of them are stubbornly user-hostile.

When we wander into the realm of connected appliances what we see are novelties, fit only for hobbyists and technofetishists (do we really need a toaster that sends a tweet when it’s done?). This is nothing like the smartphone wave, for a simple reason: Appliances are just that, appliances. It’s word we use as an insult to describe a boring car.



Amazon and Apple Business Models


Amazon “loses” money, Apple makes tons if it. And yet, Wall Street prefers Jeff Bezos’s losses to Tim Cook’s. A look at the two very different cash machines will help dispel the false paradox.

The words above were spoken by an old friend and Amazon veteran, as three French émigrés talked shop at a Palo Alto watering hole. The riposte would fit as the epigraph for The Amazon Money Pump For Dummies, an explanation of Amazon’s ever-ascending stock price while the company keeps “losing money”.

(I don’t like the term Business Model, and Bizmodel even less so. I prefer Money Pump with its lively evocations: attach the hose, adjust the valves, prime the mechanism, and then watch the flow of money from the customer’s pocket to the investor’s purse).

Last quarter, Amazon’s revenue grew by 24% year-on-year, and lost about 1% of its net sales of $17B. This strong but profitless revenue growth follows an established pattern:

AMZN No Profit Growth copy
Despite the company’s flat-lined profits, Wall Street loves Amazon and keeps sending its shares to new heights. Since its 1997 IP0, AMZN has gone from $23 to $369/share:

298 share 21x
How come?

[Professional accountants: Avert your eyes; the following simplification could hurt.

Profit isn't cash, it's merely an increase in the value of your assets. Such increase can be illiquid. Profit is an accountant's opinion. Cash is a fact.]

Amazon uses its e-commerce genius to prime the money pump. The company seduces customers through low prices, prompt delivery, an ever-expanding array of services and products, and exemplary customer attention. What keeps the pump going is the lag between the moment they ding my credit card and the time that they pay Samsung for the Galaxy Note tablet I ordered. Last quarter, Amazon’s daily revenue was about $200M ($17B divided by 90 days). If it waits just 24 hours to pay its suppliers, the company has $200M to play with. If it delays payment for a month, that’s $6B it can use to invest in developing the business. Delay an entire quarter…the numbers become dizzying.

But, you’ll say, there’s nothing profoundly original there. All businesses play this game, retail chains depend on it. Definitely — but what sets Amazon apart is what it does with that flow of free cash. The company is relentless in building the best services and logistics machine on Earth. Just this week, we read that Amazon has hired the US Post Office to deliver Amazon packages (only) on Sundays.

Amazon uses cash to build a better Amazon that keeps bringing in more cash.

Why do suppliers “loan” Amazon such enormous amounts of cash? Why do they let the company grow on their backs? Because, just like Wall Street, they trust that the company will keep growing and give them ever more business. Amazon might be a hard taskmaster, but it can be trusted to pay its bills (eventually) — the same cannot be said of some other retail organizations.

Amazon doesn’t care that it doesn’t make a “profit” on the sale of a box of Uni-Ball pens that it ships for free. Rather, it focuses on pumping enormous amounts of cash into the virtuous spiral of an ever-expanding business. Wall Street rewards the company with an equally expanding market cap.

How long can Amazon’s expansion last? Will the tree grow to the sky? If we consider a single line of business — books, for example — saturation will inevitably set in. But one of the many facets of Bezos’ genius is that he’s always been able to find new territories. Amazon Web Services is one area where the company is now larger than all of its competitors combined, and shows no sign of slowing down or of approaching saturation.

In the end, we mustn’t be fooled by the simplicity of Amazon’s money pump. Bezos’ genius is in the implementation, in the details. Like a chef who’s not afraid to disclose his recipes, Bezos writes to his shareholders every year — his missives are all here — And he always appends his first 1997 letter, thus reminding everyone that he’s not about to lose the plot.

The other friend in this conversation, an old Apple hand, happily nodded along as our ex-Amazon compatriot told stories from his years in the Seattle trenches. When asked about the Apple money pump and why Wall Street didn’t seem to respect Apple’s huge profits, he started with an epigraph of his own:

The simplest encapsulation of Apple’s business model is the iPod.

To paraphrase: The iPod is the movie star, it brings the audience flocking to the theatre; iTunes is the supporting cast.

iTunes was initially perceived as a money-losing operation, but without it the iPod would have been a good-looking but not terribly useful piece of hardware. iTunes propelled iPod volumes and margin by providing an ecosystem that comprised two innovations: “music by the slice” (vs. albums,) and a truly new micro-payment system (99 cents charged to a credit card).

That model is what powers the Apple money pump today. The company’s personal computers — smartphones, tablets, and laptops/desktops — are the movie stars. Everything else exists to make these lead products more useful and pleasant. Operating systems, applications, stores, Apple TV, the putative iWatch…they’re all part of the supporting cast.

Our Apple friend offered another thought: The iPod marked the beginning of the Post-PC era. By 2006 — a year before the introduction of the iPhone — iPod sales had exceeded Mac revenue.

Speaking of cash, Apple doesn’t need to play Amazon’s timing games. Product margins range from 20-25% for desktops and laptops (compared to HP’s 3-5%), to 65% or more for iPhones. With cash reserves reaching $147B at the end of September 2013, Apple has had to buy shares back and pay dividends to bleed off the excess.

Far from needing a “loan” from its suppliers, Apple heads in exactly the opposite direction. On page 37 of the company’s 2013 10-K (annual) filing, you’ll find a note referring to “third-party manufacturing commitments and component purchase commitments of $18.6 billion“. This is a serious cash outlay, an advance to suppliers to secure components and manufacturing capacity that works out to $50 for every person in the US…

Wall Street’s cautious regard for Apple seems ill-advised given Apple’s ability to generate cash in embarrassing amounts. As the graph below shows, after following a trajectory superficially similar to Amazon’s, Apple apparently “fell from grace” in 2012:

298 fall from grace
I can think of two explanations, the first one local, the other global.

During Fiscal 2012, ending in September of that year, Apple’s Gross Margins reached an unprecedented high of 43.9%. By all standards, this was extremely unusual for a hardware company and, as it turned out, it was unsustainable. In 2013, Apple Gross Margin dropped by more than 6 percentage points (630 basis points in McKinsey-speak), an enormous amount. Wall Street felt the feast was over.

Also, Fiscal 2013 was seen as a drought year. There were no substantial new products beyond the iPhone 5 and the iPad mini announced in September and October 2012, and there was trouble getting the new iMacs into customers’ hands during the Holiday season.

More globally important is the feeling that Apple has become a “hits” business. iPhones now represent 53% of Apple’s revenue, and much more (70%?) of its profits. They sell well, everything looks rosy…until the next season, or the next round of competitive announcements.

This is what makes Wall Street nervous: To some, Apple now looks like a movie studio that’s too dependent on the popularity of its small stable of stars.

We hear that history will repeat itself, that the iPhone/iPad will lose the battle to Android, just as the Mac “lost” to Windows in the last century.

Our ex-Apple friend prefers an automotive analogy. Audi, Tim Cook’s preferred brand, owns a small portion of the luxury car market (about 7.5%), but it constantly posts increasing profits — and shows no sign of slacking off. Similarly, today’s $21B Mac business holds a mere 10% of the PC market, but Apple “uses” that small share to command 45% of market profits. The formula is no secret but, as with Amazon’s logistics and service, the payoff is in the implementation, how the chef combines the ingredients. It’s the “mere matter of implementation” that eluded Steve Ballmer’s comprehension when he called the MacBook an Intel laptop with an Apple logo slapped on it. Why wouldn’t the Mac recipe also work for smartphones and tablets?



New iWork: Another Missed Opportunity To Set Expectations


With the 5.0 iWork suite we revisit Apple’s propensity to make lofty claims that fall short of reality. The repetition of such easily avoidable mistakes is puzzling and leads us to question what causes Apple executives to squander the company’s well-deserved goodwill.

Once upon a time, our youngest child took it upon herself to sell our old Chevy Tahoe. She thought her father was a little too soft in his negotiations on the sales lot, too inclined to leave money on the table in his rush to end the suffering.

We arrive at the dealership. She hops out, introduces herself to the salesperson, and then this kid — not yet old enough to vote — begins her pitch. She starts out by making it clear that the car has its faults: a couple dents in the rear fender, a stubborn glove compartment door, a cup holder that’s missing a flange. Flaws disclosed, she then shows off the impeccable engine, the spotless interior, the good-as-new finish (in preparation, she’d had the truck detailed inside and out, including the engine compartment).

The dealer was charmed and genuinely complimentary. He says my daughter’s approach is the opposite of the usual posturing. The typical seller touts the car’s low mileage, the documented maintenance, the vows of unimpeachable driver manners. The seller tries to hide the tired tires and nicked rims, the white smoke that pours from the tail pipe, the “organic” aroma that emanates from the seat cushions — as if these flaws would go unnoticed by an experienced, skeptical professional.

‘Give the bad news first’ said the gent. ‘Don’t let the buyer discover them, it puts you on the defensive. Start the conversation at the bottom and end with a flourish.’ (Music to this old salesman’s ears. My first jobs were in sales after an “unanticipated family event” threw me onto the streets 50 years ago. I’m still fond of the trade, happiest when well executed, sad when not).

The fellow should have a word or two with Apple execs. They did it again, they bragged about their refurbished iWork suite only to let customers discover that the actual product fails to meet expectations.

We’ll get into details in a moment, but a look into past events will help establish the context for what I believe to be a pattern, a cultural problem that starts at the top (and all problems of culture within a company begin at the executive level).

Readers might recall the 2008 MobileMe announcement, incautiously pitched as Exchange For The Rest of Us. When MobileMe crashed, the product team was harshly criticized by the same salesman, Steve Jobs, who touted the product in the first place. We’ll sidestep questions of the efficacy of publicly shaming a product team, and head to more important matters: What were Jobs and the rest of Apple execs doing before announcing MobileMe? Did they try the product? Did they ask real friends — meaning non-sycophantic ones — how they used it, for what, and how they really felt?

Skipping some trivial examples, we land on the Maps embarrassment. To be sure, it was well handled… after the fact. Punishment was meted out and an honest, constructive apology made. The expression of regret was a welcome departure from Apple’s usual, pugnacious stance. But the same questions linger: What did Apple execs know and when did they know it? Who actually tried Apple Maps before the launch? Were the execs who touted the service ignorant and therefore incompetent, or were they dishonest, knowingly misrepresenting its capabilities? Which is worse?

This is a pattern.

Perhaps Apple could benefit from my daughter’s approach: Temper the pitch by confessing the faults…

“Dear customers, as you know, we’re playing the long game. This isn’t a finished product, it’s a work in progress, and we’ll put your critical feedback to good use.”

Bad News First, Calibrate Expectations. One would think that (finally!) the Maps snafu would have seared this simple logic into the minds of the Apple execs.

But, no.

We now have the iWork missteps. Apple calls its new productivity suite “groundbreaking”. Eddy Cue, Apple’s head of Internet Software and Services, is ecstatic:

“This is the biggest day for apps in Apple’s history. These new versions deliver seamless experiences across devices that you can’t find anywhere else and are packed with great features…” 

Ahem… Neither in the written announcement nor during the live presentation will one find a word of caution about iWork’s many unpleasant “features”.

The idea, as best we can discern through the PR fog, is to make iOS and OS X versions of Pages, Numbers, and Keynote “more compatible” with each other (after Apple has told us, for more than two years, how compatible they already are).

To achieve this legitimate, long game goal, the iWork apps weren’t just patched up, they were re-written.

The logic of a fresh, clean start sounds compelling, but history isn’t always on the side of rewriting-from-scratch angels. A well-known, unfortunate example is what happened when Lotus tried a cross-platform rewrite of its historic Lotus 1-2-3 productivity suite. Quoting from a Wikipedia article:

“Lotus suffered technical setbacks in this period. Version 3 of Lotus 1-2-3, fully rewritten from its original macro assembler into the more portable C language, was delayed by more than a year as the totally new 1-2-3 had to be made portable across platforms and fully compatible with existing macro sets and file formats.”

The iWorks rewrite fares no better. The result is a messy pile of missing features and outright bugs that educed many irate comments, such as these observations by Lawrence Lessig, a prominent activist, Harvard Law professor, and angry Apple customer [emphasis and edits mine]:

“So this has been a week from Apple hell. Apple did a major upgrade of its suite of software — from the operating system through applications. Stupidly (really, inexcusably stupid), I upgraded immediately. Every Apple-related product I use has been crippled in important ways.

… in the ‘hybrid economy’ that the Internet is, there is an ethical obligation to treat users decently. ‘Decency’ of course is complex, and multi-faceted. But the single dimension I want to talk about here is this: They must learn to talk to us. In the face of the slew of either bugs or ‘features’ (because as you’ll see, it’s unclear in some cases whether Apple considers the change a problem at all), a decent company would at least acknowledge to the public the problems it identifies as problems, and indicate that they are working to fix it.”

Lessig’s articulate blog post, On the pathological way Apple deals with its customers (well worth your time), enumerates the long litany of iWork offenses.

Srange Paste Behavior copy

[About that seemingly errant screenshot, above...keep reading.]

Shortly thereafter, Apple issued a support document restating the reasons for the changes:

“…applications were rewritten from the ground up to be fully 64-bit and to support a unified file format between OS X and iOS 7 versions” 

and promising fixes and further improvements:

“We plan to reintroduce some of these features in the next few releases and will continue to add brand new features on an ongoing basis.”

Which led our Law Professor, who had complained about the “pathologically constipated way in which Apple communicates with its customers”, to write another (shorter) post and thank the company for having at last “found its voice”…

Unfortunately, Lessig’s list of bugs is woefully short of the sum of iWork’s offenses. For example, in the old Pages 4.0 days, when I click on a link I’m transported to the intended destination. In Pages 5.0, instead of the expected jump, I get this…

[See above.]

Well, I tried…CMD-CTRL-Shift-4, frame the shot, place the cursor, CMD-V… Pages 5.0 insists on pasting it smack in the middle of a previous paragraph [again, see above].

Pages has changed it’s click-on-a-link behavior; I can get used to that, but…it won’t let me paste at the cursor? That’s pretty bad. Could there be more?

There’s more. I save my work, restart the machine, and the Save function in Pages 5.0 acts up:

Pages 5.0 Autosave Bug copy

What app has changed my file? Another enigma. I’m not sharing with anyone, just saving my work in my Dropbox, something that has never caused trouble before.

Another unacceptable surprise: Try sending a Pages 5.0 file to a Gmail account. I just checked, it still doesn’t work. Why wasn’t this wasn’t known in advance – and not fixed by now?

I have to stop. I’ll leave comparing the even more crippled iCloud version of iWork to the genuinely functional Web version of Office 365 for another day and conclude.

First. Who knew and should have known about iWork’s bugs and undocumented idiosyncrasies? (I’ll add another: Beware the new autocorrect)

Second. Why brag instead of calmly making a case for the long game and telling loyal customers about the dents they will inevitably discover?

Last and most important, what does this new fiasco say about the Apple’s management culture? The new iPhones, iPad and iOS 7 speak well of the company’s justly acclaimed attention to both strategy and implementation. Perhaps there were no cycles, no neurons, no love left for iWork. Perhaps a wise general puts the best troops on the most important battles. Then, why not regroup, wait six months and come up with an April 2014 announcement worthy of Apple’s best work?



This hasn’t been a good week using Apple products and services. I’ve had trouble loading my iTunes Music library on an iPad, with Mail and other Mavericks glitches, moving data and apps from one computer to another, a phantom Genius Bar appointment in another city and a stubborn refusal to change my Apple ID. At every turn, Apple support people, in person, on the phone or email, were unfailingly courteous and helpful. I refrained from mentioning iWork to these nice people.


Intel Is Under New Management – And It Shows


Intel rode the PC wave with Microsoft and built an seemingly insurmountable lead in the field of “conventional” (PCs and laptops) microprocessors. But, after his predecessor missed the opportunity to supply the CPU chip for Apple’s iPhone, Intel’s new CEO must now find a way to gain relevance in the smartphone world.

In last May’s The Atlantic magazine, Intel’s then-CEO Paul Otellini confessed to a mistake of historic proportions. Apple had given Intel the chance to be part of the smartphone era, to supply the processor for the first iPhone… and Otellini said no [emphasis and light editing mine]:

“The thing you have to remember is that this was before the iPhone was introduced and no one knew what the iPhone would do… At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn’t see it. It wasn’t one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.”
“…while we like to speak with data around here, so many times in my career I’ve ended up making decisions with my gut, and I should have followed my gut. [...] My gut told me to say yes.”

That Otellini found the inner calm to publicly admit his mistake — in an article that would be published on his last day as CEO, no less — is a testament to his character. More important, Otellini’s admission unburdened his successor, Brian Krzanich, freeing him to steer the company in a new direction.

And Krzanich is doing just that.

First: House cleaning. Back in March 2012, the Wall Street Journal heralded Intel as The New Cable Guy. The idea was to combine an Intel-powered box with content in order to serve up a quality experience not found elsewhere (read Apple, Netflix, Roku, Microsoft…). To head the project, which was eventually dubbed OnCue, Intel hired Erik Huggers, a senior industry executive and former head of BBC Online.

At the All Things D conference in February, Huggers announced that the TV service would be available later this year. The Intel TV chief revealed no details about how the service OnCue would differ from existing competitors, or how much the thing would cost…but he assured us that the content would be impressive (“We are working with the entire industry”), and the device’s capabilities would be comprehensive (“This is not a cherry-pick… this is literally everything”).

Intel seemed to be serious. We found out that more than 1,000 Intel employees in Oregon had been engaged in testing the product/service.

Then Krzanich stepped in, and applied a dose of reality:

Intel continues to look at the business model…. we are not experts in the content industry and we’re being careful.” [AllThingsD: New Intel CEO Says Intel TV Sounds Great in Theory. But …]

Indeed, to those of us who have followed the uneasy dance between Apple and content providers since the first Apple TV shipped in 2007, the Intel project sounded bold, to say the least.

Late September, the project was put on hold and, last week, the news came that OnCue had been cancelled and allegedly offered to Verizon, whose V Cast media distribution feats come to mind…

Even before OnCue’s cancellation was made official, the well-traveled Erik Huggers appeared to show an interest in the Hulu CEO job. (If Mr Huggers happens to be reading this: I’d be more than happy to relieve you of the PowerPoints that you used to pitch the project to Intel’s top brass, not to mention the updates on the tortuous negotiations for content, and the reports from the user testing in Oregon. These slides must make fascinating corpospeak logic.)

Krzanich quickly moved from doubt to certainty. He saw that OnCue would neither make money by itself, nor stimulate sales or margins for its main act, x86 processors. OnCue would never be an Apple TV “black puck”, a supporting character whose only mission is to make the main personal computers (small, medium and large; smartphones, tablets and conventional PCs) more useful and pleasant.

So he put an end to the impossible-to-justify adventure.

That was easy.

Tackling Intel’s failure to gain a significant role in the (no longer) new world of smartphones is a much more complicated matter.

With its x86 processors, Intel worked itself into a more-than-comfortable position as part of the Wintel ecosystem. The dominant position achieved by the Microsoft-Intel duopoly over two decades yielded correspondingly high margins for both.

But smartphones changed the game. ARM processors proved themselves better than x86 at the two tasks that are integral to personal, portable devices: lowering power consumption and customization. The ARM architecture didn’t have to wait for the iPhone and Android handsets to dominate the cell phone business. Just as Windows licensing spawned a large number of PC makers, ARM licensing contributed to the creation of a wide range of processor design and manufacturing companies. The ARM site claims 80 licensees for its newer Cortex family and more than 500 for its older Classic Arm processors. No monopoly means lower margins.

Intel saw the unattractive margins offered by ARM processors and didn’t want to commit the billions of dollars required by a fab (a chip manufacturing plant) for a product that would yield profits that were well below Wall Street expectations.

The prospect of bargain basement margins undoubtedly figured in Otellini’s decision to say no to the iPhone. In 2006, no one could have predicted that it could have been made up in volume, that there would be a billion smartphone sales in 2014. (I’m basing the 1B number for the entire industry on Horace Dediu’s estimate of 250 million iOS devices for 2014.)

Even if the Santa Clara company had had the foresight to accept lower margins in order to ensure their future in the smartphone market, there would still have been the problem of customization.

Intel knows how to design and manufacture processors that used “as is” by PC makers. No customization, no problems.

This isn’t how the ARM world works. Licensees design processors that are customized for their specific device, and they send the design to a manufacturer. Were Intel to enter this world, they would no longer design processors, just manufacture them, an activity with less potential for profit.

This explains why Intel, having an ARM license and making XScale processors, sold the business to Marvell in 2006 – a fateful date when looking back on the Apple discussions.

But is Intel’s new CEO is rethinking the “x86 and only x86″ strategy? Last week, a specialty semiconductor company called Altera announced that Intel would fabricate some if its chips containing a 64-bit ARM processor. The company’s business consists of offering faster development times through “programmable logic” circuits. Instead of a “hard circuit” to be designed, manufactured, tested, debugged, modified and sent back to the manufacturing plant in lengthy and costly cycles, you buy a “soft circuit” from Altera and similar companies (Xilinx comes to mind). This more expensive device can be reprogrammed on the spot to assume a different function, or correct the logic in the previous iteration. Pay more and get functioning hardware sooner, without slow and costly turns through a manufacturing process.

With this in mind, what Intel will someday manufacture for Altera isn’t the 64-bit ARM processor that excited some observers: “Intel Makes 14nm ARM for Altera“. The Stratix 10 circuits Altera contracts to Intel manufacturing are complicated and expensive ($500 and up) FPGA (Field Programmable Gate Array) devices where the embedded ARM processor plays a supporting, not central, role. This isn’t the $20-or-less price level arena in which Intel has so far declined to compete.

Manufacturing chips for Altera might simply be work-for-hire, a quick buck for Intel, but I doubt it. Altera’s yearly revenue is just shy of $2B; Intel is a $50B company. The newly announced device, just one in Altera’s product lines, will not “move the needle” for Intel — not in 2014 (the ship date isn’t specified), or ever.

Instead, I take this as a signal, a rehearsal.  250M ARM SoCs at $20 each would yield $5B in revenue, 10% of Intel’s current total…

This might be what Krzanich had in mind about when he inked the “small” manufacturing agreement with Altera; perhaps he was weighing the smaller margins of ARM processors against the risk of slowing PC sales.

Graciously freed from the past by his predecessor, it’s hard to see how Intel’s new CEO won’t take the plunge and use the company’s superb manufacturing technology to finally

make ARM processors.