About Jean-Louis Gassée

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Microsoft mesh — Caught Between The Desktop And The Cloud, Part II: The Markitecture Solution

Last week’s column asked how you’d like to be Microsoft’s CEO, caught between the aging desktop and the emerging cloud. How do you grab a significant (Microsoft likes “dominant”) share of Cloud Computing. without cannibalizing your desktop business? Imagine shutting off the Divine Earnings Stream, the immense profits from desktop applications, Microsot Office, mostly before the Cloud applications profits kick in. Immense? In one quarter, Microsoft Office makes as much money as Google does in one year.

This week, we have the answer: Live Mesh.

We The People, are going to get the best of both worlds, the Desktop and the Cloud, without any disruption whatsoever. It is so beautiful, so obvious that I wonder: How come I didn’t think of it before? Actually, I did. I once was a corpocrat, we told stories like this all the time. Chief, no problem, here is how we get the best of both worlds. Same thing in politics, a French president campaigned on Change With Continuity. In the US, we have More Spending With Less Taxes.

The Theory Of Everything: Live Mesh synchronizes everything on all your devices — through the Cloud. An offer we can’t refuse. See, you keep using your PC, meaning Office the way you always did. But we, Microsoft, know you’ve been seduced by these sirens: smartphones, laptops, Macintosh and, soon, MID, Mobile Internet Devices (small pocketable computers not running Windows and using Cloud applications through non-Microsoft browsers). No need to feel guilty, my son, come back to our embrace — and don’t forget your wallet. Live Mesh connects all these devices and applications in a synchronized mesh. Here, synchronized means your data are kept identical, up-to-date, everywhere. Let’s say you have a PC at the office, a laptop and a smartphone. The PowerPoint presentation you write at the office will automagically propagate to your other devices. So, when you’re on the Eurostar going to London, you edit the same presentation on your laptop and the changes appear everywhere on your universe of devices and applications. And, while you’re at it, make sure to create different Meshes: one for your work and one for your family. This way, the pictures from your smartphones will propagate to your wife’s iMac, just like that. [Sorry, I've just been advised by Microsoft there is an update for Silverlight to be downloaded: Click Here. And, sorry again, "We Were Unable To Service That Request".... Just happened as I'm writing this on Google Docs.] The problem with this story? Too perfect. Who can disagree with keeping everything synchronized, consistent? In Valley argot: When it’s all pros and no cons, it’s a con! We’re being framed, the proposition is couched in an artfully arranged perspective leaving annoying details in the dark and no room for disagreement. Still in Valley-speak, we also call such discourse markitecture, architectural discussions for marketing purposes only. No need to worry about the Mere Matter Of Implementation. Which is where the ugly details lurk.

Examples: Do I want to replicate everything everywhere? Do all my company documents belong into my smartphone, or even my personal laptop? Does my home iTunes music and video library belong to my PC at the office? Away from industry conference slideware, pedestrian reality intrudes: the dream of seamless (another much abused word) synchronization becomes a complicated reality of segregation and permissions. Where can this file go and not go, who owns it, who can see it, modify it. Nothing new here, these are old, known computer systems problems without simplistic solutions. Things get even more complicated when what you really want isn’t synched copies of presentations but calendars, address books and more delicate data structures, think real-time business data for a mobile organization, running on incompatible systems. Ask the folks at RIM/Blackberry, it’s close to black magic — and a reason why Microsoft should buy a winner like RIM instead of a Yahoo!

And there is another “mere matter”, the matter of making money, the business model. At an industry conference this week, one of the Mesh evangelist, Amit Mital, was asked by a French journalist, Dominique Nora: What about the business model? In substance, the answer is it’s still very early to talk about money. Here, “it” refers to the availability of Live Mesh. In other words, we’re being conceptual here, folks, this is not a product announcement. Just an attempt to cloud the Cloud. Don’t worry about this Google stuff, keep using our desktop applications, we’ll protect and extend your investment as you use more and more connected devices.
Pure, undliluted markitecture, a clever attempt by Microsoft to finesse the Cloud vs. Desktop dilemma.

Next week, if nothing more pressing presents itself, we’ll examine some of the half-truths in Goggle’s theory of Cloud Computing. And, perhaps, my boss Mr. Filloux will let me take you through an exercise in kremlinology: commenting Ray Ozzie’s BS paragraph by paragraph. For fun, I used to do this for an industry analyst in Paris and it got me my second biggest career break. Who knows what this could lead to now. –JLG

Caught Between The Desktop And The Cloud

How would you like to be the head of Microsoft? Yesterday, you were the emperor of the desktop. Riding Moore’s Law, microprocessors doubling their power every 18 months, microcomputers became personal and made IBM’s mainframes passé. Microsoft Office, Windows on the desktop, Windows servers running Exchange became the industry standards. The resulting dominant position (some say monopoly) gave Microsoft unheard of pricing power and generated billions for shareholders, founders and employees. But, today, we have Cloud Computing. It is often characterized as all applications run on servers in the Cloud, the PC’s browser is merely the interface. Is this a pendulum swing back to the old mainframe and dumb terminals days? No. Is it the passing of Marc Andreesen’s 1996 prophecy: The browser is the operating system? We’re getting closer.

First step: delivering former desktop applications from a server. This is what Salesforce.com pioneered with the leading CRM application. Initially a struggle, Salesforce.com is now a brilliant success with many imitators. The genre is known as Software as a Service, Saas.

Second step: Google’s server farms. Combining technical brilliance, foresight and agile opportunism, Google now runs the largest sever farm on the planet, more than one million servers on three continents. Building on this infrastructure, on its engineers and on its brand, Google enters the Saas business buying applications such as Writely. We now have Google Docs. Essentially, this is Microsoft Office delivered from the cloud. Who cares which PC and which OS you run, all you need if Firefox (Linux, Mac or Windows) and a Net connection. I’m writing this column on Google Docs in Palo Alto, for my boss Mr. Filloux editing it in Paris.

Third step: working off-line. It’s nice to store data and run applications in the Cloud but what do you do when you’re on a plane? Google (and others) have thought about it and we see an off-line version of applications coming to us. Edit on-line, go off-line, write some more and re-sync with the server when you reconnect. The idea isn’t exactly new, a good sign. Consider Outlook/Entourage and Exchange in Cache Mode: you “own” a local version of the server data on your machine. You answer mail, edit your calendar locally. Then, you send/receive mail, re-sync you calendar when you reconnect.

Fourth step: offering the server farm to application developers. Again, not the newest of ideas: Amazon has been offering very good server services, AWS, Amazon Web Services. Small start-ups delight in using AWS to host their applications. Now, building again on its infrastructure, engineers and brand, Google tells entrepreneurs: Come and build your cloud on our cloud. You see the idea: getting it both ways, autonomy when off-line, full power, world reach when connected. I’m leaving many other examples and companies aside to go back to Microsoft. Today, Microsoft gets more than $300 (at retail) for a copy of Microsoft Office. That copy costs a few dollars to make. That’s pricing power. But what I called The Divine Earnings Stream is doomed to run dry.

Microsoft cannot and doesn’t ignore the threat but what can it do? In theory, they should do what Google does, deliver Office in Saas mode, cached locally and run form a server farm. In practice, they’re caught in three concentric prisons. First: servers. Windows Server works reasonably well for enterprise applications. But using it for a million servers farm is out of the question. Second: the Office code base. Big and heavy. Can it be adapted to an on-line/off-line Saas delivery model? Third: Wall Street. Free is a four-letter for Microsoft shareholders. How do you earnings trouble when converting from $300 per copy to a free or freemium Saas Office? This is what Microsoft is timidly testing with Albany. Not a Saas version yet, but Office by rental subscription. In the meantime, Salesforce.com and Google join forces, Google Apps now available with the leading CRM application. As for the question at the beginning: Bill Gates answered it by passing the baton to Steve Ballmer. –JLG

Microsoft vs. Yahoo!– Covering yourself with feces…

“That seems sort of like trying to keep a wild animal from eating you by covering yourself with feces.

It might make awful sense for about a second, but it’s just a bad, bad idea. First, it’s unlikely to work — and, second, it’s just pathetic.”

To save itself from Microsoft’s jaws, Yahoo! considers buying AOL, the fallen leader of the consumer Internet. Crudely but accurately stated by Techdirt, the idea is to cause Microsoft to give up the chase, turned off by the smell. Complications piling upon an already convoluted deal. More incompatible systems, more hostile cultures, more risk of customer going “elsewhere”, meaning Google. To say nothing of added anti-trust scrutiny and talent flight.
But Microsoft isn’t any saner. Steve Ballmer wants the deal really badly: he’s willing to get in bed with Rupert Murdoch. News Corp’s wily patriarch got snookered into buying MySpace only to find the epicenter of social networking moving to Facebook.
Wait, there is more: Yahoo!, the deposed Internet king, wants to outsource search to Google. Better search results get a higher price for Yahoo! ads. According to our favorite Internet Bubble repentito, Henry Blodget, the putative outsourcing deal is worth $5 per share to Yahoo!

So….

First, this mess shows again how far Silicon Valley is from Wall Street. Yahoo’s management, led by its founder Jerry Yang, opposes the deal: It will kill the company they care so much about. Never mind the years of mismanagement, delusion or neglect, never mind the sinking market share, the number one position lost to Google, the bad decisions made by the board of directors, the string of CEOs, Tim Koogle, gone, Terry Semel and his Hollywood connections, gone, Sue Decker and her consultant-speak memos, out of sight…. Is this really about the company, about shareholders? Or is it a few people trying to keep their phallus extender?

Speaking of Wall Street, all shareholders want is for the pain to stop: they lost 50% between January 2006 and January 2008, right before Microsoft’s offer at a 25% premium. How can they trust management’s promises to right the ship when the rosy predictions came as a reaction to the ogre’s appetite? Now, if Yahoo’s posturing results in Microsoft adding another 10-15% to their opening offer, I take back the sarcasm: management played a weak poker hand well, the bluff worked. In “real life”, we’re told, Jerry Yang is a good poker player….
Still on shareholders, those owning Microsoft shares aren’t so thrilled. They don’t distrust the directors and the CEO, Steve Ballmer, but they don’t see what the board sees either, that cloud computing spells the end of the Divine Earnings Stream, profits from desktop applications, mainly Microsoft Office. Microsoft shareholders see the short-term threat of the messy acquisition, not the longer term trouble with Google becoming the new Microsoft in the cloud.

Second, I wonder if there is another bluff taking place. Let’s assume Ballmer and his advisers hadn’t expected this much hostility. They now see the deal as substantially riskier than planned, they want out. Microsoft secretly welcomes Yahoo’s intransigence, postured and real. Ballmer doesn’t raise the offer and hopes Yahoo won’t budge. The deal dies of a “natural” death. Yahoo’s fault.

We’ll know soon whose bluff worked. –JLG

TV on Internet Protocol: Advertisers Salivate

Here’s the BFD: TV programs come as IP packets, just like any other Internet content. The results? Advertisers target me with unprecedented precision, TV finally becomes interactive, huge profits on the horizon. Is this another Web 3.0 pitch? No, your honor, let me explain. For this I start with a small epiphany. Two years ago, I buy one of the first Intel Mac Minis. This is a BYO deal, I find a no name keyboard and mouse in a closet and decide to use my brand new Sharp “Full HD” TV for the monitor. All I need is a DVI ti HDMI adapter in the back of the Mac and a HDMI cable to the TV. The Mac boots and sets itself up automagically to the TV’s resolution, 1920 by 1080. [I can proudly report it's also "possible" in Windows, this Mac also runs it, I did it and I have the new hair on my chest to prove it.] So what? Well, the Mac Mini is now on the Internet, I watch YouTube, Joost and others. With the browser in Full Screen mode, how do I know I’m watching the Net vs. cable TV? This is the future, the Internet devours TV.

With real IPTV in theory, the broadcaster knows my IP address, my ZIP code, my credit card number, what I was watching 10 mins ago or last night. Toyota sees Palo Alto proudly features the highest concentration of Prius on the planet, we’re the epicenter of the (caviar) Left Coast. The automaker also knows I owned two generations of Prii. As a result, the next isn’t for the humongous Tundra pickup truck. Instead, I get a very personalized offer to trade my German VC-mobile (they know, they have my DMV record) for the new high-end green-guilt (hybrid) Lexus 600h. Other exercises featuring teenagers or bored seniors are left to the reader’s imagination. One set-top box maker even floated the idea of adding a camera to their device, a “good” way to know who’s actually watching…

This is the advertiser’s green (money, not melting Greenland) dream. TV on IP protocols, as opposed to today’s airwaves or cable, gives a gold mine of information to the advertiser. And, for the viewer, we have more choices. It is now easy to respond to an offer, one click of the mouse/remote. Voting, menus of choices, candidates or pizza toppings, impulse purchases, multiple windows for the ADD-afflicted or the sports addict…

I wrote “in theory” above. Cable networks aren’t there yet but companies such as Comcast are furiously working with huge Cisco routers to deploy their own high-speed IP network. Today, they get no share of Internet advertising revenue. Tomorrow, their IPTV network gives them high-resolution user information and toll booths to convert it into a share of advertising spending. This is the end of the era of “dumb pipes” a France Telecom executive decried when he saw the Internet killing their obscenely (in more ways than one, they once were the largest pornographer in the Western world) profitable Minitel. And, speaking of phone companies: Will they compete with their own fiber network, or will they let the cable companies provide everything, VoIP, IPTV, Internet access. Actually, with an ultrafast IP network, there is no more “triple play”: Telephone, TV, Internet, it’s all IP packets. Still on theory: We The People better wake up and kick our bought and paid for legislators in the rear. Our private data are in play, we can’t let our solons sell us down the river again. At least, get us more “free” channels… – JLG

BFD: In VC parlance, Big Fundable Deal. You may replace Fundable with other F words.
BYO: Bring Your Own. As in BYOB, Bring Your Own Booze. Here it’s Bring Your Own keyboard, mouse and monitor.
IPTV: Television delivered with Internet Protocols (or Packets).
VoIP: Voice Over IP, voice, telephone connection, delivered with Internet Protocols (or Packets).

P2P isn’t the enemy

There is a comical side to the P2P controversy. The ISP philanthropists are whining, music and movie publishers are suing, users cry foul, The Electronic Frontier Foundation (EFF ) jumps to the defense of the oppressed and raises money, pundits gravely contemplate the future of the Net and, of course, smelling a photo (or Web) opportunity, politicians strike poses.

What’s the story here, do we have a dog in that fight?

A quick reminder: P2P stands for Peer To Peer communication, as opposed to the classical client (my PC) server (amazon.com, hotmail.com) configuration. With P2P, users, peers, share files without central server. Using software such as LimeWire on your PC, you share what you have and get what you want. As usual, Wikipedia provides a robust explanation of the ins and outs of P2P. Let’s just say the magic of IP packets makes it work well, much too well.

The first to complain are the owners/publishers of content: for them, P2P is a way to propagate stolen property, it stands for Pirate-To-Pirate. The highs and lows of fights between the RIAA or the MPAA are well documented: google (it’s now a verb) “RIAA lawsuit” or “MPAA lawsuit” for more. How the “majors” think they prevail in the end remains a mystery. They should read Jonathan Swift, it’s free, in the public domain.

Next, we have the ISP. Yes, the potential for P2P was right there in the Internet basic technology, but nobody saw it coming. There are times where P2P consumes 90% of all Internet traffic. Design a finely calibrated business model for your All You Can buffet and, suddenly, a bus full of sumo wrestlers pulls in your parking lot. Comcast and others tried to choke P2P traffic. The result? More of an already bad reputation for gaming their customers and more politicians rooting for an exploit. As recent tests have established, the very sophistication of IP protocols that makes P2P possible also makes it very hard to distinguish a “bad” P2P transmission from a “good” exchange with schibsted.com.

But there is another side to P2P, one that saves money. Consider CDN, Content Delivery Networks. One example is Akamai, $630M in sales, 15% profit margin. One customer is Apple, the company “pushes” more than 100 megabytes of software updates per month, per user as well as large servings of content such as video tutorials or Steve’s much consumed keynotes. All free. Instead of owning and operating servers for that task, Apple offloads it to Akamai. That company, in turn, maintains a network of strategically located and finely tuned servers, hence the CDN moniker. Bandwidth is expensive, before being saved by Google late 2006, YouTube spent about $1M a month feeding free videos.

This is where the “good” P2P comes in. Invented in computer science labs at Stanford, variations of P2P automatically distribute content to users who, in turn, propagate it to others on request. “All it needs”, an admittedly dangerous phrase, is cooperating software on PC and a directory that keeps track of the propagating content. The CDN is hierarchical. By contrast, this modified P2P is a mesh network, one where bandwidth is shared between users. One important addition: with P2P, fragments of content come from multiple simultaneous connections, software re-assembles the load on my machine.

This matters to publishers and advertisers. A video on my site gains sudden popularity, Hillary says something true, my servers get “hammered”, I lose advertising revenue, or I have to pay a hefty CDN bill. If I want to deliver movie trailers, a form of advertising, or slick video eye candy to sell cars in Spring, or Summer fashion, or Greek islands vacations, the bandwidth expense hurts my business.

That’s the dog we, users, content designers and publishers, advertisers have in that fight. With a browser plug-in, my computer becomes part of a mesh CDN. Pay for my participation with goodies, discounts, freebies and we’re in business. As for the ISP, it won’t change the amount of traffic they carry and I trust them to invent some freemium variant.

The rest is, as engineers like to joke, a mere matter of implementation.

Smartphone: Huge market – but where are the business models?

This was an important week for carriers: first the $19 billion spectrum auction announcement and then Verizon opening its network. Great, the trillion dollar market is in sight! But do we see any good advertising business models in there? Today, I’m optimistically embarrassed to admit, I don’t.

The market:
John Sculley was right, after all. Shortly before his ouster in a palace coup, Apple’s CEO is ridiculed for predicting a trillion dollars PDA market. This is in 1993 when launching the Newton. In the space of 15 years PDAs gradually become smartphones. In 2008, with more than 3.3 billion cell phone accounts, we’re approaching the magic trillion dollars, $25/month ARPU and we’re there. And that’s just network revenue — which gets us to today’s question: smartphones enjoy a cornucopia of new applications, but do they run any good advertising business models?

The dream:
Let’s yield to the breathless enthusiasm for a moment. Not all phones are smart today but look at the Blackberry and the iPhone, they’re the trendsetters, sure to be followed by legions of imitators. As we wrote here a few weeks ago, cell carriers are going the way of the landline ISP: flat fee regardless of carried content. And, just last week, Verizon embraced its fate instead of fighting it: it will no longer dictate what phone you use or what application you run on its network, mostly. This is a cultural revolution and is likely to force everyone (AT&T, Sprint…) to follow. Add the $19 billion spectrum auction. Smartphones are hot. They are the new PC, only smaller, in size, and bigger, in numbers, precisely because of size, mobility and rising computing power, and applications, and…

iPhone for later:
We’ll leave the study of the iPhone business models for another week, they are very… Apple, they may set widely imitated examples or they may be unique or insular, depending on your views of Steve Jobs ways.

Smartphones advertising dollars? Back to today’s mundane world: Google proves the value of Web advertising. Does this translate to smartphones?

A possible answer comes when we replace Web, The Cloud, by PC. Today’s Web advertising billions are PC advertising dollars. Does that money flow to smartphone? Not today. The small screen doesn’t show much. SMS? Users are asked to pay for the ad, they’re upset. So much so there’s legislation afoot to ban SMS spamming. This leaves most everyone, and that includes us VC philanthropists, some call us visionary sheep, looking for ways to replicate the PC advertising bonanzas. Original thinkers that we are, we forget what happens at every turn of the techno-cultural wheel. Yes, the new generation borrows from the old but it actually is a new genre with new rules. The mini, in spite of its name, wasnt a small mainframe. The PC was wrongly called a micro before the P in Personal won the day. We know, the natural tendecy is to first see the smarphone as a PC, only smaller. Yes, it now navigates the Web and does e-mail like a PC, but its mobility, size, ubiquity, proximity to our body makes it a different genre. Different rules we don’t understand yet. Being the optimist, I expect happy surprises. I just wish to be among the first one to have a retroactive flash of the obvious…
–JLG

Is the e-book reader a product or a feature?

November 2007, the Amazon’s Kindle is born, rivers of ink flow — electronic and conventional. Today, the riverbed is dry: a Google look at “Kindle sales” shows no new stories since January, highly unusual. Amazon itself has gone quiet and doesn’t brag about Kindle sales.

What is the problem: the e-book reader concept, or the execution, the Amazon Kindle?

My opinion: the flaws in the Amazon execution mask the problem in the concept of a specialized e-book reader. All factors peeled apart , I think of the e-book reader as a feature of smartphones and ultra-mobile PC — as it already is on personal computers.

Why?
Sony has been making e-readers for more than 15 years now, one commercial failure after another.

Amazon comes to the scene with strong advantages: The on-line book seller, a strong customer service reputation. Kindle is a wireless device, independent of a PC.Sony requires a PC to download the ebook, and a cable to move it to your eReader. Amazon has the most titles, more than 100,000. You walk down the street, search a title, click, you turn the street corner, bing, avoid the lamppost, and the ebook came through the wireless (Sprint) network, no connection fee. Speaking of the street, the display technology (shared with Sony) allows reading outdoors as well indoors.

The bad news start with the high price: $399. How come Amazon doesn’t follow the classical model: inexpensive razors and high-margin razor blades, like HP with its inkjet printers and cartridges? $399 is the price of a smartphone or an eeePC, the Kindle-size UMPC. Then we have the gazillions of free e-books available for download on smartphone or browsers. Or I can buy books e-books for smartphones, including my Blackberry. Surprise, one source is Mobitext, an Amazon company… Next, Kindle’s design: the clumsy suede cover, the keys, the user interface all have a “Made In Seattle” feel, say Silicon Valley critics. Microsoft and Amazon live there. But Valley wags are wrong, the Kindle was designed in Cupertino, Apple’s hometown. Neighbourliness is no holiness…

So…Consumers are either cats or dogs. The cat disdainfully tiptoes around the new cat food and, after trying your patience, may condescend to sample it. Dogs joyously stick their nose into the new and improved chow. But does the dog come back the next day? This dog isn’t going back to the Kindle. After reading a three books, Le Monde and the NY Times for two weeks, uploading a Word book manuscript, I stopped using my Kindle.

Back to the question: what’s wrong, idea or execution?

This dog doesn’t mind reading mail, news and blogs on two smartphones: Blackberry and iPhone, this after years of Psion and Palm. I used to religiously read four newspapers everyday, much less now, also because of my laptop. I still love books, they’re here for a long, long time but they no longer hold the same place in our hearts, minds and… wallets.
This said, Amazon can come back with a more elegant, colorful and less expensive Kindle. More likely, the iPhone and its competitors will include e-readers and offer several screen sizes. In other words, smartphones and pocketable tablet computers (UMPC) will dominate e-book reading.
-JLG

Steve Jobs, The Rule Breaker

Oh my god! Steve Jobs breaks rules…

Fortune magazine cannot see the difference between artists and bean counters.

Steve Jobs is on Fortune’s cover again: Apple has become the most admired company in America. Is this another PR job of “oral gratification”? If it is, it comes with bite marks or, in politically correct terms, “balance”. As a counter to the effusive praise, we find a piece where Peter Elkind outlines in great detail what he calls The Trouble With Steve Jobs. To their (author and magazine) credit, the piece is well researched, it provides a good overview of Steve’s orgins and career. The writer ostensibly aims high: “It may be instructive, then, to consider what drives the Steve Jobs adventure.” Unfortunately, instead of insights we get is a compilation of Jobs’ known or alleged infractions, couched in a tone by turns righteous and salacious. Perhaps the writer will understand if we turn the ad hominem argument around and look at his publicly documented appetites: a book about the Enron scandal, another about a murderous pediatric nurse in Texas, and magazine articles covering Wall Street malfeasance. Is Steve Jobs to be nailed by this kind of hammer? Yes, Steve looks like he’s running a business, and the numbers are terrific. But no, he’s a creator, an artist, not a business manager. Yves Saint Laurent made tons of money but couldn’t be accused of being a businessman. And the couturier’s behavior… Steve can’t even begin to approach Yves’ well-documented collection of deportments. (Alicia Drake’s book on Saint Laurent and Lagerfeld is a terrific and instructive read.)
Contemplate for a moment Steve’s unequaled string of creations: the Apple ][, the Macintosh, Pixar (think Ratatouille), reviving the Mac and Apple, iTunes and the iPod, Apple stores and the iPhone. How can we expect such creator to be normal, to follow rules? Musicians, painters, couturiers, designers, where are the normal ones? Creativity is breaking rules, it doesn’t belong to the realm of reason.
Contemplate again: For shareholders, Apple’s stock went up about 20 times in a little more than 10 years. Customers flood Apple stores driving up profits and market share. Employees feel part of a successful company and, through options, partake in the shareholders’ good fortune. On the topic of employees, we hear the tales: Steve Jobs is impossible, he makes people cry, the stress there is unbearable. And the turnover? Negligible. Insert you favorite winning team cliché here.

Apple is a 30 years-old company. How do you keep it fresh? (compare with Microsoft, only 2 years older.) You need the desire, the fire of an unreasonable, un-ruly creator. Mr. Elkind is confused, he forgot to Think Different — the Jobs 2.0 slogan. Artists aren’t bean counters. Yves Saint Laurent isn’t Michael Dell.
-JLG

> Further reading: Steve has had brushes with failure and death as movingly recounted in his 2005 Stanford Commencement Speech (text here, video here).

The three torpedoes against newspapers

Newspapers are dead — they just don’t know it. Says who? A Zogby poll released last week. 67% find traditional journalism “out of touch” and the Internet is the source of news for nearly half of Americans. Does this mean newspapers are dead? No. TV appears, we predict the death of movies, statist countries prevent TV channels from broadcasting movies on Sundays for fear of empty movie theaters. We know what happened. But this doesn’t mean newspapers will survive the Internet the way movie theaters successfully survive TV. The analogy fails for the following three reasons:

- The user experience difference
- The cost of the delivery medium
- Credibility, Out Of Touch
First, consider a difference of differences. Going (out) to the movies is, we know now, much different from watching a DVD (another threatened medium) from the living room couch (at home). Reading the NYT in paper form vs. on-line is much less different. And there is the annoying (to the incumbents) emergence of bloggers. The messy, shouting, unprofessional world of blogs. Ah, how come readers are so wrong? See the credibility problem below.
Second, the media cost. The law of physics say the market price of content inexorably converges towards the cost of the delivery medium. See music, see desktop software vs. on-line apps such as Google Docs, Microsoft Live or Salesforce.com. Newspapers “overshot” the target: the market price is already below the cost of the printed material thrown on your doorsteps. Advertisers make up the difference. Or they used to. Google now sucks the ad money out of the newspapers coffers. Google offers ways to start with smaller budgets (one of our companies started with $8 per day), better targeting (ads more likely to make sense to the reader), better analytics (what happens to the money I spend) and, of course, the medium du jour, the Internet. (Yes, Google makes noise about selling radio and paper advertising, it’s a sideshow.)
Last torpedo, credibility. Newspaper pros rightly criticize the blogosphere for being messy, noisy, dubious sources, echo chambers, bad writing, no standards. Millions of blogs with two readers each, the author and his mother. Unprofessional say the pros. But we know the establishment’s problem with parvenus: they have arrived. And here, the establishment is making it easy for the parvenus by selling out, by compromising its integrity. We’ll recall how Judith Miller at the NYT sold out to the Bush administration in preparing public opinion to the Iraq invasion. We had the Jayson Blair scandal forcing both the executive and the managing editor out. Did this electrify the paper into raising its standards instead of its nose? Two weeks ago, the NYT got a strong rebuke from its own ombudsman, the Public Editor. The cardinal sin was a whoring attack piece on McCain, with the badly sourced sex talk obscuring a more interesting discussion of money, legislation and lobbies. Just last week, the Technology section sported the kind of lazy journalism that makes the Valley insiders cringe. In essence, the piece explained how Nokia and other smartphone makers were going to listen to customers. Why start now? Do customers lead to real innovation or merely to better/faster/cheaper? None of these questions were asked, leading the reader to suspect what is known as a PR blowjob, an exchange of favors between a PR firm, its clients and the newspaper. Another beautiful example can be found in the Wall Street Journal with a hagiographic report of a Microsoft prince visiting the mujiks in outlying provinces of the empire.
Enough. The list could go on and on.

Newspapers will be around for a long time. The small number of survivors will be the ones that really straddle paper and the Net, some already do, albeit reluctantly, and replace their hauteur with actually higher quality standards. The cream always rises to the top, it’s just that the old one got stale. –JLG

Cash isn’t Cash Anymore

In our Valley, the so-called subprime mortgage crisis has been more a rumble in the distance than the wolves at the door. We don’t like the noise but local real-estate prices aren’t collapsing and, in any event, we’re in the high-tech business, you see. Entrepreneurs come to us for help in building the next Facebook, Google or Oracle (forgetting Larry Ellison, Oracle’s founder didn’t want VC money…). We don’t speculate in esoteric financial instruments, we don’t leverage, we don’t play derivative games. We do start-ups, a man and a dog growing into a company on the NASDAQ or an acquisition by Google.

2007 turned into a great Valley VC vintage: we invested $10.1bn last year, the highest in 6 years. Better said, the highest since the Bad Bubble days. (See the excellent PWC Money Tree. ) Inevitably, the Cassandras in our midst had to predict another fall. Look at these valuations: Facebook at more than $15bn, VMware’s market cap of more than $40bn, Apple and Google above $200 and $700 per share respectively, market caps approaching $200bn, more than 15 times those of Ford and General Motors (about $13bn each), more than Cisco’s ($150bn) and approaching Microsoft’s own $260bn. This was last November. Today, Apple, Google, VMware and other high fliers have shed about 40% of their value.

Is this The End — again? In a word, No. In two, Perhaps Worse.
No. We see none of the Internet Bubble follies. No smoke and mirror IPOs. No Enron, Qwest or MCI. No Henry Blodgets touting a stock outside and calling it a POS (Piece Of S–t) inside their Wall Street firms. And, above all, no Day Traders, no “widows and orphans”, no ordinary people yielding to the get rich quick temptation, to betting the tree would grow to the sky. For perspective, many Internet Bubble stock lost 90% of their value. Even Cisco, not exactly a vaporware company, fell from $90/sh to $8/sh in the space of 6 months. This is not what’s happening here — we think.

But, immune as we thought we were, the subprime crisis could be reaching us in ways we didn’t predict. As with the Internet Bubble, we’re dealing with normal humans falling for the unlimited growth mirage. But the numbers are much larger. Instead of trading high-tech high-concept stocks, tens of billions of dollars lost, the bets were made on the value of homes, trillions. Current estimates put the loans at risk above one trillion dollars with losses to exceed $500bn this year alone. This, you’ll say, impacts consumer spending, spending based on borrowing against one’s home value, the number that was supposed to climb forever. But how does it impact VC investments? Our funds have money to invest and, in contrast to previous years, we look more attractive than the Private Equity sector. We’re not leveraged (we don’t borrow money we can’t repay), we play a transparent game. Earlier this month, business writers started reporting concerns about the real value of cash. The real value of cash ? Today’s financial system works on a network of interlocking bets, sorry, contracts. See how a trader at Société Générale could buy contracts “worth” (E50bn) many times the total market value of his employer. Some of these bets are “safe”, tax-free municipal bonds come to mind. They are deemed “risk-free” because they are insured against the issuing municipality going bankrupt — it happens. But the data used for evaluating the risk, for calculating the insurance premium are obsolete. The sub-prime crisis has loaded the debt insurers to the breaking point and beyond.

Start-up companies with cash reserves need to park it somewhere safer than under a mattress. The rule is to invest the cash in “ultra-safe” instruments — muni bonds and other less well-known securities. You see where we’re going. We discover no one wants to convert these back into cash because the insurer behind the bond may or may not be solvent. I’ve seen e-mail exchanges where the bank that sold these so-called securities as a way to invest the “idle” cash reserve of a start-up now declares the cash no longer cash. And, of course, takes no responsibility for the advice, or the commission. Read the fine print. I’ll let you imagine how such e-mail propagate in our Valley. The sub-prime crisis finally managed to hit us where it hurts most — cash. — JLG