About Jean-Louis Gassée

http://

Posts by Jean-Louis Gassée:

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

Google and Apple are robbing us!

That’s the cry of anguish heard in the executive suites of cellular carriers, poor things. Why the sorrow?

Nuances removed, it boils down to this:
. ISP (Internet Service Providers) don’t sell content, they bill at a flat rate regardless of what you download, music, e-mail, video. ISP don’t decide which computer you can and cannot connect to the network.
. Cellular carriers charge a different price for voice, SMS, data; they play all sorts of games to sell content. In addition, they lose their customers in an impenetrable jungle of agreements and billing plans. Cellular carriers decide (this is much less true in Europe) which computer, pardon, phone you can connect to their network.
Yes, but why the anguish? Because Google and Apple are two reasons why the future of cell carriers is to become ISP — of the wireless kind. Flat rate, no content games, no control over devices. All this “converging”, to use a fashionable word, towards smaller profits.

A Silicon Valley wag suggests we build seven statues to Steve Jobs: for the orignal Apple II, the Mac, Pixar, coming back and reviving Apple, iPod/iTunes, Apple stores and the last (latest, we hope) one for the iPhone. Steve’s feat here isn’t so much the phone as it is showing how to break the control US carriers still exert on what paying customers can connect to their network and what the phones are allowed to do. For example, in order to maximize profits, Verizon forced Motorola to remove one Bluetooth feature, file transfers.

The result? No way to transfer music from your laptop to your Verizon phone, use the network and pay us. Another (more fortunate) result is Verizon and Moto lose a class action lawsuit.

With the iPhone, Steve wrestles control from the carriers and dictates how things work. And, an unheard feat, he gets a piece of the carrier’s revenue. To be fair, knowing our Steve, dictate is the right verb here. We’ll see in a few days how Apple decides the future of third-party applications on the iPhone. We also remember how tightly Apple controls iTunes content – much to the chagrin of the previous generation of extortionists. In any event, Apple shows how carriers can lose their grip.
Next, Google. They bid for open spectrum, spectrum where you decide what you connect. And they show an operating system for smartphones, Android. The result within a year? Tens of different Android-based phones, hundreds of applications. Smartphones become cheaper and richer at the same time. The result is pressure on carriers to offer flat-rate plans, something they do already, sort of, reluctantly, with dissuasive rates.

Google reveals a striking statistic: the iPhone performs 50 times more search traffic than the next brand, a number initially viewed as a mistake. But no, the numbers are correct and show the iPhone is the first real Internet smartphone. Others, many, are ready to follow. With their help, cell carriers won’t be able to avoid their future: wireless providers of Internet connections.Voice is but one of many types of Internet data. Cellular carriers have no choice but to embrace that fact. Wired ISP already did.

- JLG

Microsoft / Yahoo! : Week 2 — The BS Flies

It’s all about advertising! No, it’s applications! No, search is king! No, think new media! No, it’s about freedom and competition!
With such high stakes, $40 billion or so, who’s counting, no wonder the BS flies. The Microsoft propaganda staffel is in full battle order led by their usual henchmen and women at Waggener Erdstrom. See their Corporate motto: You innovate. We communicate. Give your PR career a voice today.
The reality is more like: You innovate, we help Microsoft crush you. So, these days, Microsoft plays the aggrieved party, the friend of free market competition selflessly warning us of the danger of Google’s monopoly. Chutzpah aside, they have a point. Google enjoys a dominant position, no dirty tricks involved as in Microsoft’s adjudicated cases, but problematic nonetheless. Microsoft’s next point is a smoke screen: It’s the advertising market we’re interested in. No, we’re afraid of losing the gigantic profits of desktop applications and Windows licenses. In 1994, we all (yours truly included) dismissed Marc Andreessen’s “The Browser Is The Operating System”. All of us but one, Microsoft. Bill Gates promptly added one word: In. As in “The Browser Is In The OS”. Netscape died. Not quite, Firefox should be called Phoenix. Firefox, based on parts of the old Netscape, runs on Linux, Macintosh and Windows. And Google Apps run on browsers, Firefox, Safari and Microsoft’s Explorer. Google Apps aren’t yet and probably never will achieve the same “rich” set of features available with Microsoft Office. So rich we call it bloatware, obese software that more and more gets in the way of getting most things done.

The result?
We’ll always need an operating system of sorts, that’s not the debate. But combinations of Web-based applications such as Google Apps with browsers such as Firefox make the OS argument less relevant. As discussed last week, this is what Microsoft directors see, this is the threat to the real billions, the Windows and Microsoft earnings stream.
But, yes, it is about advertising, really. Not advertising in itself, but advertising as the source of Goggle wealth. What Microsoft would like to do is cut that oxygen, cut Google’s ability to invest their advertising profits into their server farms, their software development, their ability to build the foundation for businesses that threaten Microsoft’s only interesting profit engine: Windows + Office.
With this in mind, things are, I hope, a little clearer.

But what about Search?
A friend of mine at a noble and worthy (and possibly suffering) US business daily newspaper writes, rather convincingly: Google is a brand. He means there is no objective difference between search results at Ask, Yahoo, Live.com (Microsoft) and Google. I beg to differ, they do differ in two ways.

First, in my admittedly unscientific tests, Google gives me better results, more often and closer to the top of the list. Yes, everyone clones the uncluttered Google look, but Microsoft and Ask sometimes completely fail to yield useful results.

Second, Google provides a richer set of functions around search and does this in a fairly discreet fashion. As we say here, YMMV, Your Mileage May Vary, a way to say I realize what I state here is hotly debated. Anecdotal as my position might be, I’ve seen steady improvements in Google’s search. Refinements here, better results at the top there, nothing striking but more than enough to strengthen Google’s lead position. The dog keeps coming back to that dog food, even after trying other brands.
Again, what Ballmer and the Microsoft Board seem to say is this: Search leads to advertising leads to money leads to investments against our Divine Windows and Applications profits. We failed to do anything of value in search and in advertising. We haven’t done much with a confusing (dis)array of so called Live Web applications. Buying Yahoo! at least help us gain combined search and advertising revenue, thus cutting Google’s ability to compete with our traditional business.
Still, many of us here in the Valley fail to see how the two companies can combine their people and business units. Microsoft, with all its money and competent engineers keeps failing to make any gains on Google’s ground. Why? Could it be Microsoft chose to develop very large scale server farms on its own product, Windows Server? That product is excellent in Enterprise applications, well-understood by many, supported by tools, reasonably easy to deploy with a good UI (User Interface). But, it is utterly unable to “scale” (in English: grow) and support hundreds of thousands of interconnected servers. Think of the human skeleton, it can’t support heights much beyond 7 feet. The weight grows with the cube of dimensions, the bone load-bearing grows with the square of it diameter. The same old architecture reaches an unbreakable limit. Today’s gigafarms are at the edge of computer technology and Microsoft is shackled to its past while Google is free to pick and design whatever fits its future. Google has no architecture or applications past.

Speaking of past, AOL is for sale. Netscape was sold to AOL, late 1998, for $4 billion, soon to become $10 billion by the time the announced transaction became reality. In 2000, AOL bought Time Warner in the biggest merger of all times, $182 billion in stock and debt. Things went downhill from there, the synergies, the media conglomerate, the portal to end all portals, the hypergalactic infotainment and edutainment (a despicable concept and conceit) center never worked. Now, finally, AOL is “freed”. Is this the future for MicroHoo ?

–JLG

Microsoft / Yahoo! — Why the deal won’t fly

Seriously, what possesses Steve Ballmer? Why risk his reputation, to say nothing of his shareholders’ well-being? Let’s forget the easy jibes, big egos, phallic insecurity.
Instead, let’s ask ourselves: What does the Microsoft Board of Directors know we don’t know?
They can’t be ill-informed, ill-advised, ill-intentioned or dumb. And yet, there are many obvious or should be obvious reasons why this forced marriage can’t work.

Technical, first. Microsoft uses Microsoft software, mostly. Yahoo uses Linux servers and applications, some Oracle bits. So, how do you “converge” mail, search, advertising services, shopping, instant messages? In the Valley we joke, at our own expense, saying much money has been lost because we said: It will work because it’d be cool if it did. Well, too often, it doesn’t. Do you want the job of merging two huge and already messy computing infrastructures?
Declaring a winner-take-all is a possible solution. Awright guys, everybody moves on this ship. You tell Yahoo Mail and Messenger customers their accounts are now on the new Hotmail at Live.com. Same user name and password and, for you, we redirect your old yahoo.com login automagically. Sounds easy. But moving millions of email accounts, billions of messages may be of such as scale as to be intractable. Users rarely respond well to being forced to switch. The welcome screens on Yahoo and on Microsoft’s Live.com feel very different and most users are reluctant to change their habits, especially when there is no clear benefit to doing so. So, now, multiply the technical and behavioral difficulties by the number of different platforms, portals, advertising systems, shopping sites, news, maps and search that have to be unified for the merger to work, to help MicroHoo become Number One. Microsoft directors are well aware of the challenge. That’s just the beginning.

We now turn to Culture Wars. Many in the Valley’s venture capital business rub their hand with glee. Boy, we had so much trouble getting engineers, marketing and sales people. We’re philanthropists, you see, this deal makes staffing our start-ups easier – and cheaper. Yes, here too, Ballmer sees the problem: in his letter to Yahoo he mentions “retention packages” for Yahoo “key personnel”. Does Steve refer to executives churning out PowerPoint slides or to the engineer in a cubicle who performs actual work, who knows where the corpses are buried in the source code? Techies have already kick-started the word processor and warmed-up their résumé.In Mountain View, it’s Christmas in January, wags want their company to change its name to Giggle. One individual calls the happy hallway gossip “cluster cluck”, delicate rhyming allusion to a more vulgar expression often used to describe such mergers, a cluster f–k.

Summarizing: Yahoo shareholders (and executives) take the money and run. Merged computer systems won’t run. Culture wars cause an exodus of real workers. VCs rejoice. Goggle giggles.Microsoft directors know this and still support Ballmer’s takeover of Yahoo. Why?
There aren’t many possible explanations. The simplest is this: We’re screwed. One, we can’t catch up with Google as we know it today. Two, we see Google’s long term strategy. They have the best large scale computer system on Earth (more than one million servers early 2008, running better than we know how to). Over time, with this “computer cloud”, Google offers (sells or sells advertising with) everyday services for people and businesses. This takes gold away from the Divine Earnings Stream: Office and Windows. More than $3bn, last quarter for applications alone, as much as Google’s total profit for one year.
One has to admire Microsoft’s Board for doing what too few Boards do: real strategy. Yes, we make tons of money today but, from 10,000 feet high, we see the torpedoes. Too bad doing what we do won’t help, even with more money skill and energy, but that’s the way it is. We’re left with one move: buying the only other competitor left and hope we gain enough muscle to fight the Web’s new Microsoft, Google. It’ll work because it has to work.
“Mere matters of implementation” will get in the way, I’m afraid. – JLG

Further readings :
> The letter from Microsoft board’s to Yahoo’s
> Henri Blodget’s (yes, that’s him, the Internet Bubble repentito) strongly reasoned view, here.
> How Yahoo got lost in rival’s shadow, in the FT.com
> In The New York Times, “A giant bid that shows of how tired the giant is”
> The “Peanut Butter Manifesto”. On November 2006, a Yahoo senior vice-president wrote a memo outlining the company’s flaws. Interesting reading in retrospect. Full text on The Wall Street Journal or TechCrunch
> And, the always entertaining and extremely intelligent satire from Fake Steve Jobs