About Jean-Louis Gassée

http://

Posts by Jean-Louis Gassée:

Apple Market Share: Facts and Psychology

 

Remember netbooks? When Apple was too greedy and stupid to make a truly low-cost Macintosh? Here we go again, Apple refuses to make a genuinely affordable iPhone. There will be consequences — similar to what happened when the Mac refused to join netbooks circling the drain. 

My first moments with the iPad back in April 2010 were mistaken attempts to use it as a Mac. Last year, it took a long overdue upgrade to my eyeglasses before I warmed to the nimbler iPad mini, never to go back to its older sibling.

With that in mind, I will withhold judgment on the new iPhone until I have a chance to play customer, buy the product (my better half seems to like the 5C while I pine for a 5S), and use it for about two weeks — the time required to go beyond my first and often wrong impressions.

While I wait to put my mitts on the new device, I’ll address the conventional hand-wringing over the 5C’s $549 pricetag (“It’s Too Damned High!” cry the masses).

iphone5c copie

Henry Blodget, who pronounced the iPhone Dead In Water in April 2011, is back sounding the alarm: Apple Is Being Shortsighted — And This Could Clobber The Company. His argument, which is echoed by a number of pundits and analysts, boils down to a deceptively simple equation:

Network Effect + Commoditization = Failure

The Network Effect posits that the power of a platform is an exponential function of the number of users. Android, with 80% of the smartphone market will (clearly) crush iOS by sucking all resources into its gravitational well.

Commoditization means that given an army of active, resourceful, thriving competitors, all smartphones will ultimately look and feel the same. Apple will quickly lose any qualitative advantage it now enjoys, and by having to compete on price it could easily fall behind.

Hence the preordained failure.

As a proof-of-concept, the nay-sayers point to the personal computer battle back in the pre-mobile dark ages: Didn’t we see the same thing when the PC crushed the Mac? Microsoft owned the personal computer market; PC commoditization drove prices into the bargain basement…

Interpret history how you will, the facts show something different. Yes, the Redmond Death Star claimed 90% of the PC market, but it failed to capture all the resources in the ecosystem. There was more than enough room for the Mac to survive despite its small market share.

And, certainly, commoditization has been a great equalizer and price suppressant — within the PC clone market. Microsoft kept most of the money with the de facto monopoly enjoyed by its Windows + Office combo, while it let hardware manufacturers race to the bottom (netbooks come to mind). Last quarter, this left HP, the (still) largest PC maker, with a measly 3% operating profit for its Personal Systems Group. By contrast, Apple’s share of the PC market may only be 10% or less, but the Mac owns 90% of the $1000+ segment in the US and enjoys a 25% to 35% margin.

After surviving a difficult birth, a ruthlessly enforced Windows + Office platform, and competition from PC makers large and small, the Mac has ended up with a viable, profitable business. Why not look at iDevices in the same light and see a small but profitable market share in its future?

Or, better yet, why not look at more than one historical model for comparison? For example, how is it that BMW has remained so popular and profitable with its One Sausage, Three Lengths product line strategy? Aren’t all cars made of steel, aluminium (for Sir Jony), plastic, glass, and rubber? When the Bavarian company remade the Mini, were they simply in a race to the bottom with Tata’s Nano, or were they confidently addressing the logical and emotional needs of a more affluent — and lasting — clientèle?

Back to the colorful but “expensive” 5C, Philip Elmer-DeWitt puts its price into perspective: For most iPhone owners, trading up to the 5C is ‘free‘ due to Apple’s Reuse and Recycle program. We’ll have to see if The Mere Matter of Implementation supports the theory, and where these recycled iPhones end up. If the numbers work, these reborn iPhones could help Apple gain a modest foothold in currently underserved price segments.

Still thinking about prices, I just took a look at the T-Mobile site where, surprise, the 5C is “free“, that is no money down and 24 months at $22 — plus a $10 “SIM Kit” (read the small print.) You can guess what AT&T offers: 24 months at $22/month (again, whip out your reading glasses.) Verizon is more opaque, with a terrible website. Sprint also offers a no-money-down iPhone 5C, although with more expensive voice/data plans.

This is an interesting development: Less than a week ago, Apple introduced the iPhone 5C with a “posted price” of $99 — “free” a few days later.

After much complaining to the media about “excessive” iPhone subsidies, carriers now appear to agree with Horace Dediu who sees the iPhone as a great “salesman” for carriers, because it generates higher revenue per user (ARPU). As a result, the cell philanthropists offer lower prices to attract and keep users — and pay Apple more for the iPhone sales engine.

Of course, none of this will dispel the anticipation of the Cupertino company’s death. We could simply dismiss the Apple doomsayers as our industry’s nattering nabobs of negativism, but let’s take a closer look at what insists under the surface. Put another way, what are the emotions that cause people to reason against established facts, to feel that the small market share that allowed the Mac to prosper at the higher end will inevitably spell failure for iDevices?

I had a distinct recollection that Asymco’s Horace Dediu had offered a sharp insight into the Apple-is-doomed mantra. Three searches later, first into my Evernote catchall, then to Google, then to The Guardian, I found a Juliette Garside article where Horace crisply states the problem [the passage quoted here is from a longer version that's no longer publicly available; emphasis and elision mine]:

“[There's a] perception that Apple is not going to survive as a going concern. At this point of time, as at all other points of time in the past, no activity by Apple has been seen as sufficient for its survival. Apple has always been priced as a company that is in a perpetual state of free-fall. It’s a consequence of being dependent on breakthrough products for its survival. No matter how many breakthroughs it makes, the assumption is (and has always been) that there will never be another. When Apple was the Apple II company, its end was imminent because the Apple II had an easily foreseen demise. When Apple was a Mac company its end was imminent because the Mac was predictably going to decline. Repeat for iPod, iPhone and iPad. It’s a wonder that the company is worth anything at all.”

This feels right, a legitimate analysis of the analysts’ fearmongering: Some folks can’t get past the “fact” that Apple needs hit products to survive because — unlike Amazon, as an example — it doesn’t own a lasting franchise.

In the meantime, we can expect to see more hoses attached to Apple’s money pump.

Next week, I plan to look at iOS and 64-bit processing.

JLG@mondaynote.com

Apple’s Wearables Future

 

Wearable technologies have a huge future. For Apple, they’ll create a new product category with an iPhone-like revenue stream! No so fast. Smartwatches and other wearable consumer products lack key attributes for breaking out of the novelty prison. 

‘I Think the Wrist Is Interesting’ Thus spake Tim Cook on the opening night of last May’s D11 conference.

When pressed to discuss his company’s position on wearable technologies, Cook was unusually forthcoming: Instead of pleading Apple’s Fifth, Cook launched into a substantial discussion of opportunities for his company to enter the field, calling wearables “a very key branch of the tree”.

But when asked about the heavily publicized Google Glass he parried the question by suggesting that people who don’t otherwise wear glasses might be reluctant to don such an accoutrement.

I don’t find Tim Cook’s dismissal of eyewear very insightful: Just go to a shopping center and count the eyewear stores. Many belong to the same rich Italian conglomerate, Luxottica, a company with about ten house brands such as Oakley, Persol, and Ray-Ban, and a supplier to more than twenty designer labels ranging from Armani to Versace. (As the perturbing Sixty Minutes exposé on Luxottica pointed out, the company nicely rounds out its vertical dominance of the sector through its ownership of EyeMed, a vision insurance business.)

Eyewear, necessary or not, is a pervasive, fashionable, rich product category, a fact that hasn’t escaped Google’s eye for numbers. The company is making an effort to transmute their geeky spectacles into fashion accessories. Courtesy of Counternotions I offer this picture of Sergey Brin and fashionista Diane von Furstenberg proudly donning the futuristic eyewear at the NY Fashion Week:

Glass Fashion Brin

On a grander scale, we have a Vogue article, Google Glass and a Futuristic Vision of Fashion:

Glass en Vogue 2

The company’s efforts to make Google Glass fashionable might be panned today for pushing the envelope a little too far but, in a not-too-distant future, they stand a chance of being viewed as truly visionary.

If eyewear doesn’t excite Tim Cook, what does? To him, the wrist feels more natural, more socially acceptable. We all wear one or more objects around our wrist(s).

The wristwear genre isn’t new (recall Microsoft’s 2004 Spot). Ask Google to show you pictures of smartwatches, you get 23M results and screen after screen like this one:

smartwatch_ggl

The genre seems to be stuck in the novelty state. Newer entries such as Samsung’s Gear have gotten mixed reviews. Others contend a 2010 iPod nano with a wristband makes a much nicer smartwatch.

Regardless, by comparison, pre-iPod MP3 players and pre-iPhone smartphones were getting better press – and more customers. Considering the putative iWatch, the excitement about Apple getting into this class of devices appears to be excessive.

The litmus test for the potential of a device is the combination of pervasiveness and frequency of use. Smartphones are a good example, they’re always with us, we look at their screens often (too often, say critics who pretend to ignore the relationship between human nature and the Off button).

The iWatch concept makes two assumptions: a) we’ll wear one and, b) we’ll only wear that one.

Checking around we see young adults who no longer wear watches — they have a smartphone; and middle-agers use watches as jewelry, possessing more than one. This defeats both pervasiveness and frequency of use requirements.

Then there’s the biometry question: How much useful information can a wearable device extract from its wearer?

To get a better idea about what’s actually available (as opposed to fantasized), I bought a Jawbone UP wristband a little over a month ago. With its accelerometers and embedded microprocessors, UP purports to tell you how many steps you took, how long you’ve been inactive during your days, it logs your stretches of light and deep sleep, and even “makes it fun and easy to keep track of what you eat”.  Once or twice a day, you plug it into your smartphone and it syncs with an app that displays your activity in graphic form, tells you how well you’re doing versus various goals and averages. It also suggests that you log your mood in order to “discover connections that affect how you feel.”

At first, I found the device physically grating. I couldn’t accept it the way I’m oblivious to my watch, and I even found it on the floor next to my bed a couple of mornings. But I stuck with it. The battery life is as promised (10 days) and I’ve experienced none of the first versions troubles. I traveled, hiked and showered with it without a hitch other than the cap covering the connecting pin getting a bit out of alignment.

Will I keep using it? Probably not.

Beyond the physical discomfort, I haven’t found the device to be very useful, or even accurate. It’s not that difficult to acquire a useful approximation of hours slept and distance walked during the day — you don’t need a device for these things.

As for accuracy, the other day it declared that I had exhibited a substantial level of physical activity… while I was having breakfast. (I may be French, but I no longer move my hands all that much as I speak.)

The app’s suggestion that I log my food consumption falls into the magical thinking domain of dieting. A Monday morning step on a scale tells us what we know already: Moderation is hard, mysterious, out of the reach of gadgets and incantations.

For a product to start a new worthy species for a company as large as Apple, the currency unit to consider is $10B. Below that level, it’s either an accessory or exists as a member of the ecosystem’s supporting cast. The Airport devices are neat accessories; the more visible Apple TV supports the big money makers — Macs, iPads and iPhones — by enhancing their everyday use.

With this in mind, will “wearables” move the needle, will they cross the $10B revenue line in their second or third year, or does their nature direct them to the supporting cast or accessory bins?

Two elements appear to be missing for wearable technologies to have the economic impact that companies such as Apple would enjoy:

  • The device needs to be easily, naturally worn all the time, even more permanently than the watch we tend to take off at night.
  • It needs to capture more information than devices such as the Jawbone do.

A smartwatch that’s wirelessly linked to my smartphone and shows a subset of the screen in my pocket…I’m not sure this will break out of the novelty category where the devices have been confined thus far.

Going back to Tim Cook’s oracular pronouncement on wearables being “a very key branch of the tree”, I wonder: Was he having fun misdirecting his competition?

JLG@mondaynote.com

—————————————–

PS: After two July Monday Notes on the company, I’ll wait for the Microsoft centipede to drop one or two more shoes before I write about the Why, When, How and Now What of Ballmer’s latest unnatural acts. There in an Analyst Day coming September 19th — and the press has been disinvited.

PPS: In coming days, to keep your sanity when trying to drink from the Apple kommentariat fire hydrant, you can safely direct your steps to three sites/blogs:

  • Apple 2.0 , where Philip Ellmer-DeWitt provides rational news and commentary, skewers idiots and links to other valuable fodder.
  • Asymco, where Horace Dediu provides the absolute best numbers, graphs and insights into the greatest upheaval the tech industry has ever seen. Comments following his articles are lively but thoughtful and civilized.
  • Apple Insider. You might want to focus on learned, detailed editorials by Daniel Eran Dilger such as this one where he discusses Microsoft and Google (partially) shifting to an Apple-like business model. Daniel can be opinionated, animated even, but his articles come with tons of well-organized data.

Culture War: Jeff Bezos and The Washington Post

 

by Jean-Louis Gassée

After predicting the death of newspapers, that was last year, Jeff Bezos, the Amazon founder, now buys himself the The Washington Post. Necrophilia or the beginning of another spectacular transformation of an old genre?

A successful business man reaches the dangerous age of 50, looks at his fortune and makes a decision: He’s going to plough a few of his millions into a restaurant. In the past 25 years, he’s been to many of the best dining places around the world. Power lunches, closing dinners, gastronomy road trips with the family, he’s done it all.

He knows restaurants.

But he keeps failing. He fires the chef, changes suppliers, hires a new dining room manager, looks for a classier sommelier, fights city inspectors, calls on his acquaintances and asks them to bring their celebrity friends… nothing works.

He was blinded by his command of his true calling: being a customer. He saw the show from a comfortable box seat and only went backstage when invited by a knowing proprietor eager to glad-hand a moneyed patron. Our gastronome failed to see he knew very little about being a restaurateur, the intricacies, the people challenges (theft, drugs and sex), the politics that are involved in running a real restaurant.

(During my psychosocial moratorium, before I joined the high-tech industry in 1968, I worked in a bar, a food-serving strip-joint, and a restaurant. I thought these places were deranged. Decades later, I read Anthony Bourdain’s Kitchen Confidential and realized the “people challenges” I witnessed aren’t so unusual after all. Enjoy the book and think about the goings-on back there next time a maitre d’ looks down his aquiline nose at you.)

Failed restaurants are common in Silicon Valley, with its crowd of affluent and well-traveled business people who think they can master the trade. A few of them subsidize the great dinners we get to enjoy — for a while. They have our fleeting gratitude and end up with a painfully depleted bank account.

Is this a valid parable for Jeff Bezos plowing $250M (so far) into The Washington Post? To start, the price paid for the DC “paper of record” amounts to less than 1% of the Amazon founder’s fortune. Even if he has to double or triple his initial investment while he turns the paper around, it won’t trouble Bezos’ pocketbook much — he can eminently afford the bet.

And, unlike our failed restaurateur, I don’t think Bezos’ purchase was made in a mid-life fit of vanity. (Although see this delicious piece of Internet satire that contends he bought the paper as a result of a mistaken click.) Read Bezos’ Wikipedia bio, or his letters to shareholders… you’ll see he’s a deep-thinking geek (now a term of respect. The Urban Dictionary updates the meaning: people you pick on in high school and wind up working for as an adult). He’s justifiably famous for taking the very long view, and he’s quotably willing to be “misunderstood” for a long time.

But can he win?

Personally, I hope so. I used to love newspapers, I remember how much I enjoyed breakfast with two local and two national papers, all delivered to my doorstep, an unimaginable luxury in France.

Once upon a time, for their advertising revenue, newpapers enjoyed an oligopoly. With three or four dailies in each market, prices were contained. And we, the readers, certainly didn’t mind that advertisers paid 75% of the cost of our daily fix.

Then, the Internet that Bezos has ridden so well intervened and newspapers lost the news race. The Internet won on velocity and, too often, on relevance. In a Fortune Tech piece offering “5 hacks for Jeff Bezos“, Ryan Holmes, CEO of Social Media Management company HootSuite, points to the speed and tone of social media as sources of fixes for the Post:

Perhaps the greatest criticism of newspapers today is that they have lost relevance to their own readers. Writing on the decline of the Post, New York Times media columnist David Carr points out that “[the] days when people snapped open the daily paper to find out the things they should care about were long past …” Big newspapers, in particular, have proven startlingly inept at delivering timely, relevant news to the people they serve. So, naturally, readers have gone elsewhere, to myriad online sources that better cater to their interests.

Since the Net offered a seemingly unconstrained amount of billboard space, the price that newspapers could charge for ads was quickly cut by a factor of ten and, more recently, sixteen.

But it wasn’t just the emergence of the Internet as a news medium that dealt newspapers a near fatal blow. They also lost the race because of internal, cultural circumstances.

In another case of the Incumbent’s Curse, newspapers looked down on the Internet and those annoying high-tech people and things.  Kara Swisher, co-head of AllThingsD (a Wall Street Journal enterprise), recounts her trouble with the old, arrogant culture at the Post in her Dear Jeff Bezos, Here’s What I Saw as an Analog Nobody in the Mailroom of the Washington Post letter:

“It happened every day — other reporters playfully mocking me for using email so much or for borrowing the Post’s few suitcase cellphones, or major editors telling me that the Internet was like the CB-radio fad, or sales people insisting that the good times would never end for newspapers as long as there were local businesses that needed to reach consumers. (In truth, they still do, but that’s another letter.)”

Sadly, the Post’s cultural reluctance isn’t unique. In another country, two prominent dailies I know exhibit very similar symptoms, print journalists who actively despise or even obstruct the Internet side of their house.

Much has been written about Jeff Bezos’ personal (not Amazon’s) purchase of the Post. For example: Good Luck With That – Pew Research Graphs Bezos’ Stunning Challenge, where Tom Foremski steps us through the Post’s business challenges, starting with the inexorable decline in Print revenues:

Post Revenue Decline

Another comment well worth reading, Stop the Presses: A New Media Baron Appears, comes to us courtesy of Michael Moritz, a.k.a. Sir Michael, a journalist who went over to the Dark Side and is now Chairman of Sequoia Capital, a leading venture firm. The article reminds us of Bezos’ foremost preoccupation with customers [emphasis mine]:

“It won’t come as a surprise that Bezos explains that pleasing, if not thrilling, customers is Amazon’s most important task. In his 2009 letter he provided a peek into the internals of Amazon explaining that of the company’s 452 detailed goals for the ensuing year 360 had an impact on the customer, the word ‘revenue’ was used just eight times, ‘free cash flow’ only four times and ‘net income’, ‘gross profit’, ‘margin’ and operating profit were not mentioned. Even though there is no line item on any financial statement for the intangible value associated with the trust of customers this is, by far and away, Amazon’s most important asset.

Elsewhere, Moritz reminds us of another source of Amazon’s prosperity, Free Cash-Flow, a frequent topic in Bezos’ letters to shareholders:

“Since inception Amazon has generated $20.2 billion from operations almost half of which ($8.6 B), has been used for capital expenditures such as new distribution centers, which improve life for the customer.”

With this and more in mind, we now turn to the letter Bezos wrote to employees at the newspaper. While he professes no desire to “be leading The Washington Post day-to-day”, he nonetheless makes no mystery of his goal to be an agent of change, of modernization, of adapting to the Internet Age:

“There will, of course, be change at The Post over the coming years. That’s essential and would have happened with or without new ownership. The Internet is transforming almost every element of the news business: shortening news cycles, eroding long-reliable revenue sources, and enabling new kinds of competition, some of which bear little or no news-gathering costs. There is no map, and charting a path ahead will not be easy. We will need to invent, which means we will need to experiment. Our touchstone will be readers, understanding what they care about – government, local leaders, restaurant openings, scout troops, businesses, charities, governors, sports – and working backwards from there. I’m excited and optimistic about the opportunity for invention.”

This comes from a man who, last year, said ‘People Won’t Pay For News On The Web, Print Will Be Dead In 20 Years‘.

Changing business models as a publicly traded company is impossible in practice. The old model dies faster than the new one kicks in and Wall Street runs away from the transition’s “earnings trough”. By buying the Washington Post, Bezos is afforded a privacy that the old public ownership structure doesn’t permit. (That’s exactly why Michael Dell wants to take his own company private, so he can perform surgery behind the curtains.)

Which leaves the new owner with his biggest challenge: Understanding and changing the culture at the old “paper” — which sounds harder and more expensive than a gastronome trying to become a restaurateur.

There will be blood.

This is no reflection on Bezos’ truly amazing diversity and depth of skills, but a sincere concern borne of Culture’s ability to devour anything that stands in its way, sometimes silently until it’s too late. As the saying goes, Culture Eats Strategy for Breakfast.

Of course, we have examples of people performing seemingly impossible feats. Steve Jobs’ Apple 2.0 comes to mind, a turnaround of monumental proportions to which Bezos’ Amazon achievements could be fairly compared. So, why couldn’t Bezos build a WaPo 2.0?

As Aaron Levie, the founding CEO of Box, tweeted last week:

“Industries are transformed by outsiders who think anything is possible, not insiders who think they already know what is impossible.”

One more thing, a thought I can’t suppress: Unlike Steve Jobs, who gained insight from his tribulations and then spread the benefits on the largest of scales, Bezos hasn’t been burned and tempered by failure.

JLG@mondaynote.com

 

Surveillance: The Enemy of Innovation

 

by Jean-Louis Gassée

When we think of government surveillance, we worry about our liberties, about losing a private space where no one knows what we do, say, think. But there is more. Total Surveillance is the enemy of innovation, of anything that threatens public or private incumbents.

No apocryphal levity this week. Instead, a somber look into an almost-present future. For once, Tim Cook isn’t holding his cards close to his chest; he makes no secret of Apple’s interest in wearable technologies. Among the avenues for notable growth (in multiples of $10B), I think wearable devices is a good fit for Apple, more than the likable but just-for-hobbyist TV, and certainly more than the cloudy automotive domain where Google Maps could be a hard obstacle.

Apple isn’t alone, every tech company seems to be developing smart watches, smart glasses, and other health and life-style monitoring devices. (Well, almost every tech company…we haven’t heard from Michael Dell, but perhaps he’s too busy keeping his almost-private company out of Carl Icahn’s clutches.)

To gather more facts for a future Monday Note on wearable devices, I took my usual Play Customer route and followed the example of friends who sport activity-monitoring bracelets such as the popular Jawbone UP wristband (see Frédéric’s experience in a recent MN). I look up on-line review and find more than a few negative comments, but I choose to ignore them and listen, instead, to users who say the bugs have been squashed.

At the nearby Palo Alto Apple Store, a sales gent performs the fitting and the cashectomy with equal competence. Five minutes later, I download the required smartphone app, read a few instructions, and complete a first sync. I’m ready to monitor both my daytime activities and nighttime sleep patterns.

That was three days ago. It’s too early to say much about the product experience, which has been uneventful so far, but a dark, nagging thought comes to fill the void. Here is yet another part of my life that’s monitored, logged, accessible. The somber ruminations of a recent Privacy: You Have Nothing To Fear Monday Note are rekindled. At the time, I wondered if perhaps I was being paranoid. That was before the flow of Edward Snowden’s revelations to The Guardian’s Glenn Greenwald.

This is what we think we know so far: The State, whatever that means these days, monitors and records everything everywhere. We’re assured that this is done with good intentions and with our best interests in mind: Restless vigilance is needed in the war on terror, drug trafficking, money-laundering. Laws that get in the way — such as the one that, on the surface, forbids the US to spy on its own citizens — are bent in ingenious ways, such as outsourcing the surveillance to a friendly or needy ally.

If this sounds outlandish, see The Guardian’s revelations about XKeyscore, the NSA tool that collects “nearly everything a user does on the internet”. Or read about the relationship between the NSA and the UK’s GCHQ:

…the Guardian has discovered GCHQ receives tens of millions of pounds from the NSA every year…In turn, the US expects a service, and, potentially, access to a range of programmes, such as Tempora [GCHQ's data storage system].

Those campaigners and academics who fear the agencies are too close, and suspect they do each other’s “dirty work”, will probably be alarmed by the explicit nature of the quid-pro-quo arrangements.

Every day there’s another story. Today, the WSJ tells us that the FBI has mastered the hacking tools required to remotely turn on microphones and cameras on smartphones and laptops:

Earlier this year, a federal warrant application in a Texas identity-theft case sought to use software to extract files and covertly take photos using a computer’s camera, according to court documents. 

The surveillance and snooping isn’t just about computers. We have license plate recorders and federally mandated black boxes in cars. And now we hear about yet another form of metadata collection: It seems that the US Post Office scans every envelope that they process. Not e-mail, “sneaker mail”. Reading someone else’s mail is, of course, a federal offense. No problem, we’ll just scan the envelopes so we know who’s writing to whom, when, how often…

To this litany we must add private companies that record everything we do. Not just our posts, emails, and purchases, but the websites we visit, the buttons we click, even the way movement of the mouse…everything is recorded in a log file, and it’s made available to the “authorities” as well as buyers/sellers of profiling information. It’s all part of the Grand Bargain known as If the Product Is Free Then You Are the Product Being Sold.

When asked why Google doesn’t encrypt the user data that it stores, Vinton Cerf, the revered Internet Pioneer turned Google’s PR person, sorry, VP and Chief Evangelist, serenely admits that doing so would conflict with Google’s business model and disrupt user features.

At public events, Vint Cerf, a Google employee who was an early architect of the Internet, has said that encrypting information while it is stored would prevent Google from showing the right online advertisements to users.

I’m not singling out Google: Facebook and many others would have to make the same statement.

We’re now closer to trouble with innovation. In an almost-present future, we’ll have zero privacy. Many will know what we do, what we say, where we are, at all times. This will cast a Stasi shadow over our lives, our minds, our emotions. (See The Lives Of Others, Florian Henckel von Donnersmarck’s dramatization of state-sponsored surveillance in East Berlin.)

Let’s not dwell on the discredited You Have Nothing To Fear retort and turn to what happens to All Things New under a total surveillance regime.

Personal freedoms, civil rights, new ways of doing, thinking, speaking, dressing or undressing, science and philosophy, religion, fashion or cooking or smoking… Anything really new breaks existing canons, the rules, laws, habits, and understandings of the established order.

Total surveillance protects everything, starting with the status quo. With everything open to scrutiny by our Benevolent Guardians, there’s no safe place to discuss ideas that may seem disturbing at first, but that, given time and privacy, can evolve into new standards, behaviors, and technologies.

Anything that sticks out gets pounded.

Take past 100 years. Behold all the disruptive liberties and the inventions that upended public and private incumbents. Now, imagine how many would have been killed in the womb under a total State and private surveillance blanket.

But, you’ll say, we have a democratic system; if we don’t want our privacy invaded, surely we can voice our objection through our votes. After all, we elect and fire our representatives, the ones who make the laws and who hire and fire government executives for us.

Not really, or not anymore.

Two thousand years ago, Juvenal condemned Roman politicians who tried to buy votes with food and entertainment. It was a panem et circenses culture in which society “restrains itself and anxiously hopes for just two things: bread and circuses.”

The politicking in our current demagocracy is just as unsavory. To get elected one must promise to provide more with fewer taxes — or whatever bread and circus the latest Big Data says we crave. Instead of shedding light, the campaigning makes sick entertainment.

Once in office, our solons need money to be reelected so they promptly sell “our” votes to lobbyists who are eager to finance the reelection campaigns. Even worse, these same lobbyists provide the platoons of lawyers and consultants who inject the “appropriate” loopholes into inscrutable laws.

All of this makes (most) business feel like an oasis of sense and good will. Many otherwise capable people turn up their noses at the cesspool of politics and stick to their cleaner fun.

Is the situation hopeless?

I pray not. But I can’t help but see our laws — the tax code is the prime example — as old operating systems that are patched together, that have accumulated layer upon layer of silt. No one can comprehend these rules anymore, they’re too big and complicated to fit in one’s head…they’re seemingly unfixable.

This could leave us pining for a messiah, an Arthurian pure heart who pulls the sword from the stone and leads a revolution. We know what happens next in this narrative: the Okhrana becomes the NKVD.

Or perhaps technology itself will come to the rescue. Just as terrorism is viewed as an asymmetric threat in which a small, agile, and stealthy enemy can inflict damage on a giant, perhaps technology will provide us with an asymmetric advantage against surveillance and recreate a modicum of private space for us.

What I don’t see is The State simply renouncing its surveillance, it’s so convenient. Nor do I see us paying for truly anonymous Gmail, Google Maps, or Facebook.

JLG@mondaynote.com

 

The Rebirth of Windows Mobile

 

by Jean-Louis Gassée

The decline of PC sales finally caught up with Microsoft, resulting in weak quarterly results that force Steve Ballmer to admit a strategic mistake and propose a radical change of direction.

Last week’s Monday Note focused on Microsoft’s conversion from a divisional to a functional organization. It resulted in interesting discussions in the comments section as well as in e-mail exchanges and conversations around a couple of Valley watering holes. Some thought Microsoft’s statements had the sincerity of a death-bed conversion, others pointed to the challenges in remaking a cricket team into a football squad, most expressed doubts about Microsoft’s ability to successfully adapt to a world where the PC no longer reigns supreme.

On Thursday, Microsoft released its numbers for the quarter ending in June, the last of their 2013 fiscal year. They were not good. MSFT lost more than 11% the following day, taking its long-suffering partner HP (- 4.5%) with it.

Wall Street’s brutal dumping of the stock after “shockingly” bad news isn’t surprising, but what should we make of the dogged complacency of the financial seers leading up to the announcement? Did they really not see this coming? Despite a historic five-quarter decline in PC sales, investors hadn’t wavered in their belief that Microsoft would find ways to compensate for plummeting Windows + Office profits.

Perhaps I ought to have written cronyism instead of complacency, above. Before the SEC frowned on the excesses of “managed earnings“, Microsoft was famous, and comfortable, for always emerging just a penny above its wink-and-nudge guidance. To pull off this funambulist exploit, the company shuffled money in and out of the Unearned Revenue cupboard and other reserves. To paraphrase the old saying, You Didn’t Get Fired For Owning Microsoft.

If you think the accusation of cronyism is too strong, take a stroll through the latest Earnings Call Transcript, courtesy of Morningstar, especially the Q&A section. With such an earnings surprise, you’d expect Wall Streeters to inflict company execs with combative questioning and probing follow-ups; you’d look for Steve Ballmer to be front and center, explaining and hectoring. Instead, we have Amy Hood, the newly appointed (but very experienced) CFO, parrying deferential questions (and very few follow-ups) with mind-numbing answers such as this one:

I think I feel good. I think in some ways the reorg we announced last week along with our increased focus and our single strategy has allowed us to really look and say what are the things we’re going to put behind and focus and to improve our execution and so I feel quite good about our ability to do that. And you have heard us say before many of the reasons we did this reorg are about doing things better and more efficiently.

Pity the long-suffering analyst… and if their suffering continues, perhaps we should expect Ballmer himself to show up at the late September analyst indoctrination event in Redmond.

The Microsoft surprise, dubbed by TechCrunch Its Biggest Drop Of The Century, has infused the discussions of the company’s future, what Ballmer will do with his new organization now that the Redmond Giant (finally!) seems to be aware that it’s playing catch up in a Post-PC era.

As luck would have it, I got a draft of Ballmer’s memo to a small group of Microsoft execs. I can’t vouch for its authenticity — it was “regifted” through a series of contacts, friends and foes of old OS wars — but I hope you’ll find it interesting:

[Confidential - Burn Before Reading]

From: Steve Ballmer
To: Microsoft Leadership Team – Do not Distribute
Date: July 20, 2013, 6 a.m.
Subject: Windows Mobile 9

It’s time for me to confess a serious strategic mistake – and to ask for your commitment to change course and breathe new life into our legacy business.

This is about tablets.

Our own unsuccessful attempts to enter the tablet market (Widows for Pen Computing in 1991, and the Tablet PC in 2002) lured us into thinking there was “no there there”. Because of this, we downplayed the impact of a new wave of devices from Apple and Android licensees.

Neither our PR campaign to negate the advent of a Post-PC era nor Frank Shaw’s valiant efforts to position the new devices as “PC Companions” has had any effect on the market. We even leveraged our long and cosy relationship with IDC and Gartner and got these to firms to create a dismissive category label for these new machines: media-consumption tablets – with the clear implication that they were unsuitable for business uses. All these exertions were for naught. For five consecutive quarters, we’ve watched PC sales decrease and tablet shipments skyrocket.

This has become a significant threat to the very foundation of our business model.

For more than two decades, the Windows + Office tandem has been a source of incredible power and wealth, it has enhanced the life of more than a billion users and has allowed our company to expand into other high-margin Enterprise products and services.

For all these years, we scrupulously followed McKinsey’s “Not A Single Crack In The Wall” advice, we’ve managed to successfully Embrace and Extend each and every possible threat to the Windows + Office combo.

While we initially underestimated these new tablets, their threat soon became obvious and we started thinking of ways to protect our franchise. 

That’s when I took the company in the wrong direction. 

To prevent these tablets from penetrating the Office market, I followed our Embrace and Extend strategy and endorsed the creation of hybrid software and hardware: The dual-mode (Desktop and Touch UI) Windows 8 and Surface tablets.

The results are in. Windows 8 hasn’t taken the market by storm. The Windows 8 tablets manufactured by our hardware partners are sitting in warehouses.  We just took a $900M write-off on our RT tablets, now on fire-sale.

It doesn’t matter who actually proposed or implemented the failed strategy, I endorsed it. What matters most — the only thing that matters — is what we’re going to do now.

I have a plan. It’s conceptually simple but I won’t sugarcoat the situation. It will be extremely difficult to execute, particularly given the urgency.

First, I am tasking Terry Myerson, our EVP Operating Systems, with creating Windows Mobile 9, a tablet-capable version of Windows Phone 8 that will serve all of our mobile products. Until last week’s reorg, Terry was leading our Windows Phone group and is therefore ideally suited to the new task.

Qi Lu, EVP Applications and Services, will work with Tim to deliver a full, real Windows Mobile Office without the limitations imposed by RT. And, in keeping with our strategic need to spread Office everywhere and to provide the widest base for our on-line Office 365, Qi Lu will also produce Office versions for Android and iOS platforms.

Moving to hardware, we cannot rely on Nokia and other hardware partners to create enough momentum for this new platform, so I’ve asked our JLG (Julie Larson-Green) to develop first-party mobile devices — a Microsoft smartphone and a Microsoft tablet — that run Windows Mobile 9. The use of the somewhat damaged Surface name for these products will be evaluated as we go.

Everyone else in the company, from Operations to Evangelism, from HR to Finance is expected to give their full support to this most urgent, most vital initiative. In particular, our most recent hire, Mark Penn, EVP Advertising and Strategy, is tasked to come up with the right narrative for the strategic transition to Windows Mobile 9. Earned in unforgiving Washington politics, Mark’s long experience with complicated situations will help us navigate the troubled media waters ahead of us.

I know you love this company as much as I do. Thanks for pouring all your energy into this effort.

Steve

I know I didn’t fool anyone with this apocryphal memo. While it could be viewed as satirical, it’s actually deadly (that’s the right word) serious. And it raises serious questions.

First, there’s the small matter of implementation. To mangle Brooks’ law, nine engineers can’t gestate an operating system (or an Office Suite) in one month. Coming up with a “sincere” tablet OS and the corresponding Office version will take time, time during which Android and iOS tablets will continue to cannibalize PCs — and gain hardware and software muscle. This leads to the inevitable question: Has Microsoft arrived too late to the tablet feast?

Then there’s the question of price and its impact on Microsoft’s financials. Software on today’s tablets is either free, or priced at a fraction of its desktop PC equivalent. (In retrospect, significantly lower prices for tablet software might have played a role in Microsoft’s “safe” decision to stick with a PC/tablet hybrid.) If they go the real tablet route, Ballmer & Co. will have to tell shareholders to expect lower numbers, even if Office 365 subscriptions partially compensate for the loss in Windows licenses and conventional desktop software.

Another thought arises from Ballmer’s (actual, not mythical) reference to “first-party devices”, meaning smartphones and tablets made by (for) Microsoft and sold by the company, whether through its own stores, its intramural booths at the likes of Best Buy, or through more conventional retail channels. The math could be attractive: 30% Gross Margin on a $500 device sure beats 85% on $50 or less of licensing revenue — as long as the hardware unit volume cooperates.

For Microsoft, going for such a business model apostasy, renouncing software licensing for hardware revenue, is easier said than done: an “earnings trough” looms if the old model collapses faster than expected and if the new profit engine takes too much time to come on line. One might bring up the Xbox as an example of Microsoft successfully moving to a vertically integrated business model, but this would be forgetting there was no perilous transition away from juicy operating system licenses, the Xbox was vertically integrated at birth.

The coming months are going to become even more interesting as Microsoft must progress beyond grand statements about its new functional organization and explain in detail what the new team will actually do.

JLG@mondaynote.com

—————————————-

Additional reading:

 

Microsoft Reorg: The Missing Answer

 

by Jean-Louis Gassée

After repeatedly tweaking its divisional structure, Microsoft tries a more radical realignment  along functional lines like, you know, that other company. The lengthy, bombastic but confusing announcement leaves one big, vital question unanswered: What happens if PC sales keep falling?

In a July 11th, 2013 memo to Microsoft employees, Steve Ballmer announces a “far-reaching realignment of the company that will enable us to innovate with greater speed, efficiency and capability in a fast changing world.”

In a few words: Microsoft will switch from a divisional to a functional organization; from what has often been labeled as silos — or even warring fiefdoms — to a set of functional groups aligned to execute the company’s new “devices and services” strategy.

Inevitably, several observers have called this new structure Apple-like, that it’s a clone of the model developed and ferociously enforced by Steve Jobs, and now shepherded by Tim Cook.

As the healthily satirical Bonkers World visualizes, Microsoft wants to move away from this…

MS Org Chart

and become more like this…

Apple Org Chart

Nick Wingfield’s NY Times article, titled Microsoft Overhauls, the Apple Way, puts it this way:

It is yet another sign of how deeply Apple’s way of doing things has seeped into every pore of the technology industry.

Or see Fortune’s Adam Lashinsky, in Seeing Apple in Microsoft’s reorganization:

I think I’m being completely rational in my shock at Steve Ballmer’s latest reorganization of Microsoft. His long memo explaining it to employees is one long homage to the Apple that Steve Jobs re-created between 1997 and 2011. Everything about the reorg sounds like Ballmer wants Microsoft to behave more like Apple.

The comparisons to Apple, by Mssrs. Wingfield and Lashinsky, aren’t just piquant stabs at a flailing giant. They see the problems.

I’ll add my perspective.

There are enormous differences between the scorched-earth reorganization of Apple ’97 and the “far-reaching realignment” of MS ’13:

  • 16 years ago, Apple was on the ropes. The market numbers spoke loudly and cleared minds.
  • Apple’s business was extremely simple: Macintosh personal computers.
  • A charismatic co-founder returned and told everyone to Think Different – and then he enforced the diktat.

Apple came up with a string of monumental hits after Jobs’ return in 1997– iPod/iTunes, Apple Stores, iPhone, App Store, iPad. All of these offerings were facilitated by the company’s now celebrated functional structure, but none of them were created by the reorganization. Put another way, functional structure is a necessary but not sufficient condition (a point to keep in mind when considering Apple without Steve Jobs).

I greatly admire Ballmer’s determination to never give up, never admit failure, always look forward, attitudes that are well-served by his imposing physical presence, impeccable speech, and unshakable composure. But this change isn’t the sort of organizational tune-up that he has perfected over the last three years, it isn’t another iteration of spring cleaning that has resulted in the high-level departures of Robbie Bach, Ray Ozzie and, earlier this year, Steven Sinofsky (who was found guilty of Windows 8).

Removing a loyal but obdurate contradictor, sanctioning bad performance and foul politics is one thing. Reshaping the culture of a huge organization (97,000 employees) is a qualitatively and quantitatively different task. Habits of the mind and, even more challenging, of the heart are extremely hard to change. And, certainly, Microsoft’s culture needs an overhaul. It has caused the company to miss or mishandle Search, Social Networks, Advertising, Smartphones, and Tablets, and to make a meal of the latest version of their iconic Windows product.

Can a reorg suddenly bestow the vision and agility to regain lost ground, undo (at least) one bad decision, and also win the next land grab?

In attempting to answer these questions, Ballmer’s memo manages to confuse rather than reassure. In the first place, it’s way too long — over 2,700 words — and points to yet another memo that’s even longer.

The satirical site, Joy of Tech, had its way with Ballmer’s epistle. First, the executive summary…

Ballmer Memo Joy of Tech Header

Then the details (click to enlarge)…

Ballmer Memo Joy of Tech Body

And their effect…

Ballmer Memo Joy of Tech Ending

Read both memos and ask yourself two questions: Who writes such corpospeak (or is it copro-speak)? And what does it say about its authors’ clarity of thought?

Despite its length, Ballmer’s pronouncement manages to avoid a fundamental question: What happens to Microsoft if PC shipments continue to fall?

According to the usual suspects, PC shipments fell by 11% this past quarter compared to the same period last year, marking the fifth consecutive quarter of the “longest duration of decline in the PC market’s history.” The state of the economy and the tepid reception to Windows 8 are partial explanations, but the primary reason is plain to see: Android and iOS tablets and (to a lesser extent) smartphones are cannibalizing PC sales.

According to a VentureBeat post:

Tablet shipments are expected to grow by almost 70 percent in 2013, sending desktop and laptop computer shipments into a “nosedive.”

When looking at these numbers we should keep in mind that Microsoft’s Windows 8 “tablets” or hybrid devices are counted as PCs while Gartner and IDC keep separate tabs for the PC-devouring devices, which they gingerly call “media-consumption” tablets.

Let’s take a step back and look at the history of Microsoft’s business model.

The company was reasonably prosperous even before DOS/Windows and Office, but its never-before-seen riches came from a division of labor: PC OEM vassals were left to fight among themselves for market share while the licensing overlord enjoyed monopoly pricing for its Windows + Office sales. (When Ballmer cheekily says ‘We’re all about choice’, he means the choice between PC makers racing to the bottom, not choice between Windows/Office and alternatives.)

After Local Area Networks (remember The Year of The LAN?) and then the Internet emerged, the company looked invincible. The Windows + Office stronghold yielded a natural tie to Exchange and Windows Server products.

With this in mind, the decline in Windows PC/tablet sales are bound to have a cascading effect on Microsoft’s business. Fewer PCs means smaller Windows licensing revenue and, in turn, diminishing Office dollars. The once powerful tie-in between Windows and Office now turns against Redmond.

And the cascade continues: Smaller Office volumes result in lower demand for extremely high-margin Exchange and Windows Server products. In the meantime, non-Microsoft tablets and smartphones continue to invade formerly Microsoft-only Enterprise customers. The erstwhile truism You Won’t Get Fired For Buying From Microsoft has lost its lustre.  Permission is now granted to buy from interlopers.

Microsoft greased this downward slope by clinging to its tactic of always having it both ways; that is, doing something new while preserving backwards-compatibility. The approach has been successful in the past… but it foundered Windows 8 and tablets. The step into the future was a different touch-based UI; the foot in the past was the old desktop User Interface. For customers, the result was confusion and frustration; for PC manufacturers, the outcome was lower than expected sales.

Google and Apple took a different route: Instead of shoehorning a desktop OS onto less-powerful and battery-constrained hardware, they designed operating systems that easily slide into the slimmer, sexier footwear. Under the hood, we see a similar “from scratch” approach: Tablets and smartphones aren’t just “smaller PCs”, they’re target-specific devices built around custom (System On a Chip) processors.

The market has voted: Tablets that are just tablets are trouncing Microsoft’s hybrid tablet/PC devices.

To reverse this downward spiral Microsoft needs to come out with a real tablet, not the insincere and unsuccessful ARM-based Surface RT device. This means a tablet that’s powered by Windows Phone with Office applications that are specifically, integrally designed for that OS. Once this is done, why not go all the way by selling iOS and Android versions of the same productivity suite? This would protect the rest of Microsoft’s Enterprise ecosystem, and would be much better than today’s half-baked Office apps on the iPhone, or their absence on the iPad and Android devices.

We’ll see if the new Microsoft regime can really Think Different.

JLG@mondaynote.com

—————————-

PS: Only for the technically inclined, Drew Crawford’s learned, articulate post on the effect of small RAM size on mobile device system and application software. As this long post attempts to cloud the Web vs. Native apps discussion with facts, it brings up a little-discussed fact: PCs easily offer 8Gb of RAM (as opposed to SSD “disk space”), but mobile devices are generally limited to 1Gb or less because RAM needs to be always powered on, thus limiting battery life. This significantly smaller RAM fundamentally impacts the design of the system and application software. Mobile OS and apps are not like PC products only smaller.

Blackberry’s Future

 

by Jean-Louis Gassée

Once the king of smartphones for business uses, Blackberry got a new CEO, a new operating system and new devices, with and without the traditional keyboard. In spite of these changes, the company’s latest numbers don’t paint a picture of revival.

Thorsten Heins doesn’t suffer a lack of enthusiasm. During the run up to the March release of its BlackBerry 10 operating system, RIM’s CEO painted an optimistic picture of a company on the rebound, a company that would correct the mistakes of the industry leaders:

“It’s still the same,” Heins said of the iPhone. “It is a sequential way to work and that’s not what people want today anymore. They want multitasking.”

Rechristened as BlackBerry, Heins told us that the company would energize the develop community and spawn devices that are too exciting to describe:

“There’s one new product I’m really excited about, but I can’t really share it,” Heins told CNET in an interview today.

Last week, the company released its latest quarterly numbers and they are exciting, although not in the sense that Heins would like. The forecast was $3.4B in revenue and $0.07 in earnings per share; the reality was $3.1B in sales and, more important, a loss of $0.13 per share.

The numbers “excited” traders so much that BBRY shares lost 28% of their value in a single trading session, putting them back to their one-year-ago level.

The earnings release was followed by the customary conference call where the CEO and CFO review the numbers and answer questions from Wall Street analysts. Courtesy of Seeking Alpha, the call transcript is here and contains the obligatory pablum, including an excessive abuse of the F-word (22 occurrences):

Embracing our heritage of mobility first is very important as we build our culture and go through this transition. We don’t have to be all things to all people and all markets, and embracing this focus allows us to drive efficiency, be flexible and agile, and to ultimately drive best-in-class innovations. [...] We’re continuing to focus on improving all areas of the business…

Curiously, there’s no breakdown of the sales of BlackBerry devices. How much of their revenue was “energized” by the BB10? Without actual numbers, we’re left in a cloud of doubt about how well the new platform is actually doing.

The disquietude continues: There are no subscriber numbers, and no guidance other than an expectation of more losses next quarter. The glowing comments about cash-flow from operations ($630M, a nice number) are undercut by the disclosure of a substantial tax refund, without which the company would have eaten through $400M to $500M of cash.

As for tablets, the Blackberry PlayBook is no more, says the CEO. He’s unhappy with the device’s performance and is determined to focus on the company’s “core hardware portfolio“. (The company’s website no longer describes the product and only offers a software update for existing customers.)

Inevitably, the How Many Moves Remain? question comes up. Blackberry professes to do more than just devices, it claims to offer strong enterprise services and says it will propagate its BBM (Blackberry Messenger) to other platforms including Android and iOS. It also promotes a form of (limited) compatibility for (some) Android apps on its newer smartphones. But is anyone buying and in numbers that can save the company?

More to the point: Who wants to buy Blackberry (the company), for what reasons, and at what price?

Let’s back up. Last week, we heard that Microsoft had once again given up on its perennial hunt to capture a handset maker. This time, the prey was Nokia, Microsoft’s “special” Windows Phone licensee.

The official explanation for the Nokia blowup was that the price tag was too high, but price clearly wasn’t an issue. Nokia’s $14B market capitalization weighs in at about 5% of Microsoft’s $288B. Even when you tack on a 25% acquisition premium, the purchase should have been a reasonably easy sell, especially given Microsoft’s desire to take the handset business into its own hands, if only to counter (or mimic) the strategy established by Google and Motorola.

There’s really only one explanation, as I speculated last week: The engagement was dissolved because of Microsoft’s bleak view of Nokia’s business, that the Finnish company no longer has the technological acumen and brand loyalty that Microsoft needs to make Windows Phone a legitimate competitor with Android and iOS.

BlackBerry’s market capitalization now stands at about $6B. That’s less than half of Nokia’s. If Nokia, supported by Microsoft, can’t gain ground on Google and Apple devices, what gives us confidence that BlackBerry isn’t sliding into insignificance?

The BlackBerry name, as a brand, is strong. But a brand only exists as the carrier of a promise. A brand writes checks that the product cashes. Without a successful product, the brand dies (go ask Kodak).

While Nokia could be acquired by someone interested in the Windows Phone business, one is hard pressed to form a similar thought for Blackberry. It may be struggling, but there is a Windows Phone ecosystem, including handset makers. There is no such thing around BlackBerry. Developers aren’t writing apps for BB10 in ecosystem-making numbers, carriers have taken a wait-and-see posture, even the core group of dedicated users (I used to be one of them) appears to be losing faith.

This isn’t a brightly optimistic picture. Today, Blackberry finds itself caught between Samsung and Apple at the high end, and a rabidly fermenting crowd of Android (official or not) clones at the lower price range.

So, why not consider heresy, or apostasy: Ditch the newer BlackBerry OS too few developers believe in, and bet on Android devices to support BlackBerry’s enterprise services.

The answer is probably the same as it is for Nokia: It’s too late.

JLG@mondaynote.com

Microsoft and Nokia won’t beget a Googorola clone

 

by Jean-Louis Gassée

Microsoft, after its highly visible 2011 bet on Nokia, could have decided to go one step further and buy Nokia to become a fully integrated smartphone. That it didn’t happen doesn’t portend a great future for Windows Phone.

Last week, the Wall Street Journal outed Microsoft’s unsuccessful attempt to acquire Nokia:

Microsoft recently held advanced talks with Nokia about buying its handset business, people familiar with the matter said, as laggards in the fast-moving mobile market struggle to gain ground.

Many saw an acquisition as an inevitable next step, that by acquiring the Finnish handset maker Microsoft could “finish the job” that they started when they licensed a special Windows Phone to Nokia. It would be a blessed union of two vigilant, watchful companies: Microsoft had watched as Android and iOS made its own OS a distant also ran; Nokia, once the world’s largest cell phone maker, couldn’t help but notice that Google and Apple had killed its handset business from both the high and low ends.

But, according to the WSJ, the parlay came to a negative and apparently definitive end:

The discussions faltered over price and worries about Nokia’s slumping market position, among other issues, these people said. One of the people said talks took place as recently as this month but aren’t likely to be revived.

To call Nokia’s fall a “slump” is more than polite. The company saw its market share fall from 39% in 2009 — more than 100 million handsets per quarter — to an estimated (and angrily debated) 3% by the end of 2012.

Microsoft hasn’t done much better with its mobile software. In 2008, Windows Mobile OS held a 11% market share, even as the underlying Windows CE engine was getting long in the tooth, particularly when compared to the Unix-ish Android and iOS engines. With a modern NT kernel, Microsoft’s mobile OS was reborn as Windows Phone 8 and scored a modest 3.2% market share in Q1 2013.  This number comes from IDC, the “research” group that has assured us that come 2016, Microsoft will be the number 2 mobile OS provider with a 19.2% share:

09-table nokia

Behold the vision and precision of IDC’s psychics: Back in June 2012, they could see four years into the future and predict that Windows Phone would edge out iOS… by two tenths of a percent!

We’ve heard the Microsoft-is-buying-a-handset-maker rumors before. Starting in 2007 and recurring year after year, Microsoft was said to be eyeing RIM/Blackberry. For some, yours truly included in January 2012, the RIM story was compellingly straightforward: RIM’s clientèle of loyal, hardcore Blackberry users in businesses and governments made it an ideal fit for the Redmond giant.

Microsoft’s defenders will argue that RIM ’07 was too expensive. Priced at $200 a share (they’re running at about $14 today), RIM would have cost more than a $100B before any acquisition premium. At the time, Microsoft was valued at approximately $250B (similar to today’s $277B). Ideal or not, the match didn’t make sense for Microsoft shareholders. Then, when RIM’s price began to slide, the Blackberry was seen as having lost too much of its shine, too much of its market momentum. The company was damaged goods. (Or, as we might have forgotten, the two co-CEOs, Mike Lazaridis and Jim Balsillie, the ones who spoke in tongues, may have proved too difficult for even Steve Ballmer to deal with.)

Someday, Microsoft’s inability to grab RIM might be seen as a signal failure, a key episode in the company’s slide into irrelevance in the smartphone market. I doubt anyone will see Nokia in a similar light, as the “one who got away”.

The “MicroNokia” relationship has been challenging from the start. In February 2011, Nokia committed itself to a special partnership with Microsoft. It would ditch its operating systems (Symbian, Meego, QT) and become a beacon and standard bearer for Windows Phone 7. Money changed hands: $250M of “platform support” per quarter was sent from Redmond to Espoo in order to offset the unspecified Windows Phone licensing payments that flowed in the opposite direction.

This messy, technologically and culturally unsound arrangement only got worse when Stephen Elop, the former Microsoft exec now running Nokia, announced the switch to Windows Phone ten months before the company would end up shipping devices that ran the new (and problematic) OS. Unsurprisingly, Nokia’s revenue evaporated, leaving it with losses and a minuscule 5% market share (including Symbian-based smartphones).

Why Elop would make an announcement that effectively Osborned the business still mystifies and enrages Nokia supporters such as Tomi Ahonen who keeps calling for Elop’s head in long, irate blog posts. (In industry lore, to “Osborne” is to prematurely announce a product that so clearly obsoletes your current offering that it kills revenue. The suicidal maneuver is named in loving memory of portable computer pioneer Adam Osborne who destroyed his business by bragging that his next product would be so much better than the current one.)

I’m also mystified, but for another reason. I can’t fathom why Nokia picked Windows Phone instead of Android, whose explosive success was obvious even as early as 2010 when the company ditched its CEO. (I’m a little biased here as, in June 2010, I wrote a tongue-in-cheek piece titled Science Fiction: Nokia goes Android.)

Nokia’s excuses for not adopting Android were vague, ranging from “we don’t want to lose control of our destiny”, to Microsoft being a “stronger partner” (read: They paid us). The potential-loss-of-destiny rhetoric falls flat, especially when you look at Android’s licensing terms and see the freedom Samsung and others enjoy with their interpretations of the platform. (We’ve heard that Nokia and Google once talked, but we don’t yet know the reason for their not becoming highly visible partners.)

Today, investors say Nokia is worth about $15B, a tenth of its 2007 peak (I’m excluding the 2000 Internet Bubble number from the comparison). Even with a “25% acquisition premium”, a Nokia acquisition would cost Microsoft less than 10% of its capitalization. So, contrary to the charitable explanation offered to the WSJ by “persons familiar with the matter”, price couldn’t have been an obstacle. That leaves us with Nokia’s “slump”: Microsoft thinks Nokia would be unable to carry Windows Phone to an influential, sustainable market position.

Now, what?

Nokia’s revenue keeps sliding down and, after a brief incursion into the black, it keeps losing money. Is there anything in sight that will reverse the trend? It’s doubtful that the company can try for the high end by offering better hardware than Samsung, nor can they squeeze into a low end that’s inhabited by official and unofficial Android clones that are swiftly killing off feature phones. This leaves Nokia’s future as an independent company in doubt and logically gives rise to more acquisition speculation.

And what will happen to Windows Phone? We now hear that Microsoft is paying developers as much as $100,000 to write or port an application to the platform. This is a rational move on Microsoft’s part, an attempt to create the critical mass that doesn’t seem to be able to happen naturally. But it can also be seen as desperation, an admission that Windows Phone is having trouble gaining momentum as developers and customers are embraced in a downward spiral.

One can’t imagine that Ballmer will call it a day and cede the field to Google and Apple. Personally, I admire his never-give-up attitude, always talking up the future, unfazed by past bold pronouncements gone wrong, but enthusiasm isn’t a strategy. And in the smartphone market, Microsoft doesn’t have many moves left. Regardless of the technical merits of its new mobile OS, momentum seems elusive; market forces that once worked against Windows competitors in the PC field now seem to confine Windows Phone to an insignificant market share against the two dominant and their complementary business models.

We don’t know yet how Google’s acquisition of Motorola will fare, but the Android platform is healthy enough without it. The same can’t be said of Windows Phone without Nokia, which leads one to believe there will be a forced marriage between the once proud Finnish handset maker and an ambitious player, probably Chinese — with Microsoft providing a substantial dowry once again.

In the meantime, we can count on IDC to provide fresh numbers… for 2017.

JLG@mondaynote.com

Goodbye Google Reader

 

Three months ago, Google announced the “retirement” of Google Reader as part of the company’s second spring cleaning. On July 1st — two weeks from today — the RSS application will be given a gold watch and a farewell lunch, then it will pack up its bits and leave the building for the last time.

The other items on Google’s spring cleaning list, most of which are tools for developers, are being replaced by superior (or simpler, friendlier) services: Are you using CalDAV in your app? Use the Google Calendar API, instead; Google Map Maker will stand in for Google Building Maker; Google Cloud Connect is gone, long live Google Drive.

For Google Reader’s loyal following, however, the company had no explanation beyond a bland “usage has declined”, and it offered no replacement nor even a recommendation other than a harsh “get your data and move on”:

Users and developers interested in RSS alternatives can export their data, including their subscriptions, with Google Takeout over the course of the next four months.

The move didn’t sit well with users whose vocal cords were as strong as their bond to their favorite blog reader. James Fallows, the polymathic writer for The Atlantic, expressed a growing distrust of the company’s “experiments” in A Problem Google Has Created for Itself:

I have already downloaded the Android version of Google’s new app for collecting notes, photos, and info, called Google Keep… Here’s the problem: Google now has a clear enough track record of trying out, and then canceling, “interesting” new software that I have no idea how long Keep will be around… Until I know a reason that it’s in Google’s long-term interest to keep Keep going, I’m not going to invest time in it or lodge info there.

The Washington Post’s Ezra Klein echoed the sentiment (full article here):

But I’m not sure I want to be a Google early adopter anymore. I love Google Reader. And I used to use Picnik all the time. I’m tired of losing my services.

What exactly did Google Reader provide that got its users, myself included, so excited, and why do we take its extermination so personally?

Reading is, for some of us, an addiction. Sometimes the habit turns profitable: The hours I spent poring over computer manuals on Saturday mornings in my youth may have seemed cupidic at the time, but the “research” paid off.

Back before the Web flung open the 10,000 Libraries of Alexandria that I dreamed of in the last chapter of The Third Apple my reading habit included a daily injection of newsprint.  But as online access to real world dailies became progressively more ubiquitous and easier to manage, I let my doorstep subscriptions lapse (although I’ll always miss the wee hour thud of the NYT landing on our porch…an innocent pleasure unavailable in my country of birth).

Nothing greased the move to all-digital news as much as the RSS protocol (Real Simple Syndication, to which my friend Dave Winer made crucial contributions). RSS lets you syndicate your website by adding a few lines of HTML code. To subscribe, a user simply pushes a button. When you update your blog, it’s automatically posted to the user’s chosen “feed aggregator”.

RSS aggregation applications and add-ons quickly became a very active field as this link attests. Unfortunately, the user interfaces for these implementations – how you add, delete, and navigate subscriptions — often left much to be desired.

Enter Google Reader, introduced in 2005. Google’s RSS aggregator mowed down everything in its path as it combined the company’s Cloud resources with a clean, sober user interface that was supported by all popular browsers…and the price was right: free.

I was hooked. I just checked, I have 60 Google Reader subscriptions. But the number is less important than the way the feeds are presented: I can quickly search for subscriptions, group them in folders, search through past feeds, email posts to friends, fly over article summaries, and all of this is made even easier through simple keyboard shortcuts (O for Open, V for a full View on the original Web page, Shift-A to declare an entire folder as Read).

Where I once read four newspapers with my morning coffee I now open my laptop or tablet and skim my customized, ever-evolving Google Reader list. I still wonder at the breadth and depth of available feeds, from dissolute gadgetry to politics, technology, science, languages, cars, sports…

I join the many who mourn Google Reader’s impending demise. Fortunately, there are alternatives that now deserve more attention.

I’ll start with my Palo Alto neighbor, Flipboard. More than just a Google Reader replacement, Flipboard lets you compose and share personalized magazines. It’s very well done although, for my own daily use, its very pretty UI gets in the way of quickly surveying the field of news I’m interested in. Still, if you haven’t loaded it onto your iOS or Android device, you should give it a try.

Next we have Reeder, a still-evolving app that’s available on the Mac, iPhone, and iPad. It takes your Google Reader subscriptions and presents them in a “clean and well-lighted” way:

For me, Feedly looks like the best way to support one’s reading habit (at least for today). Feedly is offered as an app on iOS and Android, and as extensions for Chrome, Firefox, and Safari on your laptop or desktop (PC or Mac). Feedly is highly customizable: Personally, I like the ability to emulate Reader’s minimalist presentation, others will enjoy a richer, more graphical preview of articles. For new or “transferring” users, it offers an excellent Feedback and Knowledge Base page:

Feedly makes an important and reassuring point: There might be a paid-for version in the future, a way to measure the app’s real value, and to create a more lasting bond between users and the company.

There are many other alternatives, a Google search for “Google Reader replacement” (the entire phrase) yields nearly a million hits (interestingly, Bing comes up with only 35k).

This brings us back to the unanswered question: Why did Google decide to kill a product that is well-liked and well-used by well-informed (and I’ll almost dare to add: well-heeled) users?

I recently went to a Bring Your Parents to Work day at Google. (Besides comrades of old OS Wars, we now have a child working there.) The conclusion of the event was the weekly TGIF-style bash (which is held on Thursdays in Mountain View, apparently to allow Googlers in other time zones to participate). Both founders routinely come on stage to make announcements and answer questions.

Unsurprisingly, someone asked Larry Page a question about Google Reader and got the scripted “too few users, only about a million” non-answer, to which Sergey Brin couldn’t help quip that a million is about the number of remote viewers of the Google I/O developer conference Page had just bragged about. Perhaps the decision to axe Reader wasn’t entirely unanimous. And never mind the fact Feedly seems to already have 3 million subscribers

The best explanation I’ve read (on my Reader feeds) is that Google wants to draw the curtain, perform some surgery, and reintroduce its RSS reader as part of Google+, perhaps with some Google Now thrown in:

While I can’t say I’m a fan of squirrelly attempts to draw me into Google+, I must admit that RSS feeds could be a good fit… Stories could appear as bigger, better versions of the single-line entry in Reader, more like the big-photo entries that Facebook’s new News Feed uses. Even better, Google+ entries have built in re-sharing tools as well as commenting threads, encouraging interaction.

We know Google takes the long view, often with great results. We’ll see if killing Reader was a misstep or another smart way to draw Facebook users into Google’s orbit.

It may come down to a matter of timing. For now, Google Reader is headed for the morgue. Can we really expect that Google’s competitors — Yahoo!, Facebook, Apple, Microsoft — will resist the temptation to chase the ambulance?

–JLG@mondaynote.com

 

Android vs. Apple. Market Share vs. Profit Share, Part 255

 

Conventional wisdom and badly reconstructed history can lead to seemingly comfortable but in reality fragile conclusions. Prepare to be confused. 

Ever since the Android platform emerged as the only real competitor to Apple’s iOS devices, we’ve been treated to a debate which I’ll oversimplify: If Apple makes all the money but Android gets all the volume, who will win? A cursory survey of tech journals and blogs would lead one to believe that the case is closed: Market Share trumps Profit Share. It always does.

So Apple should call it a day? I’m skeptical. Not about the conclusion — Market Share isn’t exactly a dark horse — but about the arguments that are trotted out. False memories of Apple’s past have become a template for its future. For example, a recent Wall Street Journal article ends thus [and, sorry, you need a subscription to see the entire article]:

“Unfortunately, Apple has seen this movie before. A generation ago, it also had a top product whose market share was undercut by cheap, inferior rivals. It hopes the iPhone’s story isn’t a sequel to the Mac’s.”

(I emailed the WSJ writer asking three simple, clarifying questions. No answer, but that’s standard practice, as witheringly described by Philip Elmer-DeWitt at the end of this post.)

I was there “a generation ago”. In 1981, when IBM introduced the IBM PC, I was starting Apple France. Big Blue had made startling changes to its old ways, boldly calling its new machine The Personal Computer (we thought the “The” was ours). In an even bolder move, IBM loosened its tie and its dress code, and tried (successfully) to speak to the “common man” by using a Charlie Chaplin imitator as a mascot:

An interesting choice, particularly when juxtaposed with the real Chaplin’s cine-commentary on “labor-saving devices”:

The original PC from IBM’s Boca Raton group was a faithful homage to the Apple ][, right down to the cassette interface. But it wasn't a cheap imitation. There was one important difference:  Where the Apple ][ used a 8-bit 6502 processor, IBM splurged on the much-more-powerful 16-bit Intel chip.

Almost overnight, the pages of InfoWorld, previously replete with salivating reviews of Apple products, were filled with IBM PC articles. The new machine got a major boost with the launch of Lotus 1-2-3, a multi-function spreadsheet that became the gold standard for office applications, especially on desktops that sported hard disks and large color screens. Against the Apple ][, the IBM PC was a superior product -- and deftly marketed.

For the next few years, the Apple ][ family stumbled. The Apple ///, beset by early hardware failures, didn't answer the 16-bit question. It wasn't the modernization of the Apple ][ that the company had promised. The Apple II GS was even worse, not compatible enough with the Apple ][ and not powerful enough to attract developers, particularly Bill Gates who saw no potential for Microsoft applications.

That brings us to 1984. The Macintosh changed the game, right?

Hardly. At its coming out party, the Mac was two years behind schedule. I recall the "Mac's Last Slip" jibes at company meetings. No one would deny the obvious potential, the elegance, the innovative user interface, the clean square pixels on the bit-mapped screen, the fonts, the LaserWriter connection... But the Mac didn't support external hard drives until 1986, and it would be another year before internal disks, additional modularity, and a great Trinitron color monitor were added.

By that time, IBM had had the market to itself for half a decade, and its PC creation had morphed into the Wintel clone industry.

Contrary to the revisionist WSJ story, the "generation ago" Mac never had a market share to undercut. Apple's flagship product -- innovative, elegant, a generation ahead – was a dreamer's machine. Down-to-earth market wisdom said the Mac was perfect for Stanford undergrads, but not serious enough for real business use. The common view was application developers wouldn't be able to afford the investment in time and hardware. Starved of competitive software, the Macintosh was doomed to irrelevance and, ultimately, failure.

It almost happened, especially after Apple's desperate attempt to prop up platform share numbers by licensing Mac clones, a move that resulted in a brutal drop in Apple's margins. Market share vs. Profit Share...

The Mac was saved by Gil Amelio's unintentionally self-sacrificing decision to hand the Apple reins back to Steve Jobs. What followed was the most amazing turnaround our industry has ever seen, and it started with two controversial moves: Jobs rescinded the Mac OS license, and he made a deal with the Microsoft Devil. He convinced Gates' company to "invest" $150M in non-voting Apple shares and develop new Mac versions of the Explorer browser and Office apps (although, in reality, the agreement was part of a settlement of an older IP dispute).

We know the rest of the story, including a meme-adverse fact: For close to seven years, the Mac has consistently gained market share at the expense of PC clones.

Since the advent of another flagship product, the iPhone this time, the riches-to-rags Mac meme has led to predictions of a similar fate: Death by drowning in a sea of "cheap" Android clones. Apple's high price ($650 per iPhone on average) gives too much low-end room for competitors. The price will be undercut, there will be a decline in unit share that, in turn, will lead to lower profits, lower developer interest, lower ability to invest in future products. The road to irrelevance is paved with high margins and low market share.

Never mind two differences. First, the iPhone never lacked apps, 750,000 of them at last count. And never mind that it is immensely profitable, that Apple is embarrassingly flush with more cash than all its high-tech colleagues combined. The pundits won't accept evidence as an answer. Market Share will trump Profit Share. Why let facts cloud a good argument?

One is tempted to point to the race to the bottom that PC clone makers have experienced over the past decade. HP enjoys the largest Market Share of all PC makers, but it also "enjoys" less than 4% operating profit for its efforts. Meanwhile, Apple's margin is in the 25% range for its Mac line. That may not be as enjoyable as the 60% margin for the iPhone, but it's a solid business, particularly when you consider that the clone makers, HP and Dell foremost, are angling to get out of the business altogether. (See an earlier MN: Post-PC: Wall Street Likes the View.)

Returning to the iOS vs Android debate, I will state an opinion - not to be confused with a prediction, let alone The Truth: I think the vertical simplicity of Apple's business will tilt the field in its favor as the complicated Android world devolves into anarchy. Apple vs Google isn't Apple vs Microsoft/Intel/IBM.

Let's back up a bit. Google's 2005 acquisition of Android was a visionary move. (Some say Google's vision was sharpened by Eric Schmidt's presence on Apple's Board as the company worked on the future iPhone. Jobs was furious about Google's decision and summarily asked Schmidt to leave.) Android's unprecedented growth -- more than 50% share of the smartphone market in the US, and even more worldwide – is a testament to the "open" approach. Google gives away the Open Source Android OS; processors are another kind of "open", custom-designed under ARM licenses open to all payers.

But Android is a "cushion shot", it's an indirect way for Google to make money. Android is a Trojan horse that infects smartphones so it can install services that collect the user data that feeds Google's true business: advertising.

Now, Google faces several problems. Android's openness leads to incompatibilities between devices, a problem for developers that didn't happen under Microsoft's rule in the PC era. Worse (for Google), the many diverging versions of Android (a.k.a. forks) -- especially those created in China -- carry no Google services. They harvest no data and so they bring no advertising revenue potential back to Google.

This is clearly a concern for Google, so much so that the company now offers "pure" Android smartphones by Samsung (for $650) and HTC (for $599) on its Google Play site.

On the other hand, Android 2013 is a mature, stable OS. It isn't Windows '95, which was nothing more than a shell bolted on top of DOS. While the Mac's system software wasn't fully developed when it first came out, many saw it as superior -- or potentially superior -- to Microsoft's OS. Android is a tougher competitor than Windows was at the same age.

Then there is Google's subsidiary Motorola Mobility and the relationship with Samsung, the most powerful Android handset maker. As discussed last week, Motorola's stated intention is to push Android phone prices well below the $650 (unsubsidized) level. Is Samsung in a position to wag the Android dog? And if so, how will they react to Motorola's moves?

Let's not forget "the small matter of execution", one that might prove more important than lofty "strategic" considerations. And, to further complicate predictions, we have the herd's tendency to assume Company X will make all the mistakes while its competitors will play a perfect game.

Confused? Then I have accomplished one of my goals, to show how unhelpful the old bromides are when trying to guess what will happen next.

-- JLG@mondaynote.com

PS: I'd be remiss if I didn't direct you recently discovered articles by John Kirk, who calls himself a recovering attorney and indeed writes tightly reasoned posts on Techpinions. I'll whet your appetite with two quotes. One from Does The Rise Of Android's Market Share Mean The End of Apple's Profits? [emphasis mine]:

Steve Jobs wanted, and Apple wants, market share. But they want the RIGHT market share. Apple wants customers who are willing to pay for their products. And Apple wants customers who are good for their platform. In other words, Apple wants market share in their target demographic. Based on the fact that Apple is taking in 72% of the mobile phone profits with only 8% or 9% of the market share, it sure sounds like they’ve aquired the right market share to me.

Does the rise of Android’s market share mean the end of Apple’s profits? Hardly. You can argue as loudly as you like that developers and profit share must necessarily follow market share. But the facts will shout you down.

The other is from 4 Mobile Business Models, 4 Ways To Keep Score where he concludes:

And if you’re going to prophesy that market share alone gives Google data that will someday, somehow, be worth something to someone, then you need to go back and re-read how the “razor-and-blades” business model is scored.

What we desperately need in analyzing mobile computing is far more attention paid to profits and far less attention paid to prophets.

—-