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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

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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

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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.

—-

Please, Please Uncle Tim, Tell Us A Story…

 

I’m back from D11, the 11th yearly edition of the Wall Street Journal’s tech conference. The conference site gives you the complete speaker roster, commentary, and full videos of the on-stage interviews as well as demos and hallway conversations.

With such a complete and well-organized reproduction of the event, why even go?

For the schmoozing, the in-the-moment impressions of speakers, the audience reactions… This is the only conference I attend (I’ve only missed it once). I enjoy rubbing scales with aging crocodiles and watching new and old saurians warily eying one another.
Speaking of attendees, I’m struck again by the low, almost non-existent European participation. Most pointedly, Fleur Pellerin, France’s Minister in charge of the Digital Economy, wasn’t there… even though she will be in the Valley this week. Had Minister Pellerin spent a day or two with us in Rancho Palos Verdes, she would have seen, heard, felt, and learned more than in the half dozen limousine hops she’ll make from one Valley HQ to another where she’ll be subjected to frictionless corporate presentations that have been personalized with a quick Search and Replace insertion of her name and title.
At D11, the rules of Aristotelian Unities apply: unity of action, place, and time. The entire ecosystem is represented: entrepreneurs, investors, CEOs of large companies, consultants, investment bankers, journalists, headhunters. What better place to contemplate the Knowledge Economy’s real workings, its actors and its potential to lift France out of its unemployment malaise?

(Of course, Pellerin might also be looking to mend fences after Yahoo’s attempt to acquire DailyMotion was blocked by another French minister. My own view is that the French government did Yahoo a favor. From what I think I know about the company and the political climate surrounding it, Marissa Mayer and Henrique De Castro, her COO, probably had no idea what awaited them.)

The conference formula is refreshingly simple:  Walt Mossberg, the Journal’s tech guru, and Kara Swisher, his co-executive, sit down and interview an industry notable (or sometimes two). No speeches allowed, no PowerPoints…
In the early days, I felt the questions were a little too soft — with the regrettable exception of Kara’s condescending grilling of Mark Zuckerberg four years ago. She clearly didn’t take him seriously. But Uncle Walt once told me he trusts his audience to do our job, to correctly decode the answers, the body language — and to look at one another and roll our eyes on occasion.
Once again, we were treated to phenomenal speakers. I liked Dick Costolo, Twitter’s witty, deeply smart (and best-dressed) CEO; and was impressed by Facebook COO Sheryl Sandberg’s deft handling of questions about business, gender, and politics. Sandberg is a  veteran of Washington, where she worked for Treasury Secretary Larry Summers, her thesis adviser at Harvard, and Google  — where she worked for another Larry. Reading her best-selling and inevitably controversial Lean In doesn’t replace seeing her on stage.


Another highlight was the one exception to the No PowerPoint rule: Mary Meeker’s high-speed walk through the freshest version of her rightly celebrated Internet Trends deck. And, while we’re at it, take a look at this astounding (no exaggeration, I promise) zettabyte (1 billion terabytes, 10^21 bytes) Internet traffic projection by Cisco.
Then we have the perplexing interview with Dennis Woodside and Regina Dugan, CEO and Sr. VP, respectively, of Motorola Mobility, now a Google subsidiary. (Regular attendees will recall that Dugan was on stage at D9 as Director of DARPA , the Defense Advanced Research Projects Agency that gave birth to the Internet).

Woodside stated that Motorola would deliver a range of new phones later this year, including a “hero device” with better integration of sensors into the User Interface as well as class-leading autonomy. He also added that Motorola would sell it for much less than the various $650 smartphones available today, probably meaning no-contract Samsung, HTC and Apple top-of-line phones at Verizon and other carriers.
A smarter-but-much-cheaper phone… it’s a bold but credible claim. Keep in mind that Motorola doesn’t exist to make money for itself. It’s part of what I call Google’s 115% Business Model: Advertising makes 115% of Google’s profits and everything else brings the number back down to 100. The smartphone market could become even more interesting if, after making a free smartphone OS, Google subsidizes the hardware as well.

Less credibly, however, Woodside insisted that Google has not and will not give its captive Motorola special access to Android code, because this is something Google simply doesn’t do. Perhaps he doesn’t recall that Google gave advanced access to upcoming Android builds to chosen partners such as Samsung, HTC, and, if memory serves, LG.
Just as interesting, if a bit troubling, Regina Dugan gave us insights into individual identification research work at Motorola. She proudly displayed a tattoo on her forearm that incorporates an RFID (Radio Frequency Identification) antenna that lets you log onto services without the usual annoyances. Or you can swallow an “authentication” pill that’s powered by digestive acids. As Dugan puts it, “your entire body becomes your authentication token.”  Hmmm… A tattoo on one’s forearm, a pill that emits an ID signal that you can’t turn off (for a while)…

Last but not least, Tim Cook’s interview. The low point in the Apple CEO’s appearance came during the Q&A section at the end (it’s around the 1:10:35 mark if you want to fast forward). A fund manager (!!) plaintively begged Cook to make him dream, to tell him stories about the future, like Google does. “Otherwise, we’ll think Mike Spindler and Gil Amelio…” (I’m paraphrasing a bit).


Cook refused to bite. As he’d done many times in the interview, he declined to make announcements, he only allowed TV and wearable devices were areas of “intense interest”. And, when asked if Apple worked on more “game changers” like the iPhone or the iPad, he had no choice but promise more breakthroughs. Nothing new here, this has been Apple’s practice for years.
Which raises a question: What was Apple’s CEO doing at D11 less than two weeks before the company’s Worldwide Developer Conference where, certainly, announcements will be made? What did the organizers and audience expect, that Tim Cook would lift his skirt prematurely?
Actually, there was a small morsel: Cook, discussing Apple TV, claimed 13 million current generation devices had been sold to date, half of them in the past year… but that’s food for another Monday Note.
Audience and media reactions to the lack of entertainment were mixed.

For my part, perhaps because of my own thin skin, I find Tim Cook’s preternatural calm admirable. Taunted with comparisons to Spindler and Amelio, dragged onto the Senate floor, being called a liar by a NYT columnist, constant questioned about his ability to lead Apple to new heights of innovation… nothing seems to faze him. More important, nothing extracts a word of complaint from him.
This is much unlike another CEO, Larry Page, who constantly whines about “negativity” directed at Google, a conduct unbecoming the leader of a successful company that steamrolls everything in its path.
I have my own ideas about Cook’s well-controlled behavior, they have to do with growing up different in Mobile, Alabama. But since he’s obviously not keen to discuss his personal life, I’ll leave it at that and envy his composure.
New Apple products are supposed to come out later this year. You can already draft the two types of stories: If they’re strong, this will be Tim Cook’s Apple; if not, it’ll be We Told You So.

JLG@mondaynote.com

Post-PC: Wall Street Likes the View

 

The conventional PC business is now on the decline and yet share prices for of key players Microsoft and HP are moving up. Why?

In an April press release, IDC painted a bleak picture for the PC. Compared to last year’s first quarter, worldwide shipments of PCs are down 13.9%, the “steepest decline ever in a single quarter”. US numbers are about the same: -12.7%. On a graph, the trend is unmistakable:

Is this a trend Wall Street likes?

When you consider Microsoft, it seems so. In a corporate blog post titled Windows 8 at 6 months, the company proudly claims to have “recently surpassed the 100 million licenses sold mark for Windows 8.” This is an interesting number. A quarter ago, MS announced it had sold 60 million licenses, meaning that only 40 million were sold in the last three months. That’s a 33% drop…hardly a rousing success. (The “licenses sold” phrase requires caution, it doesn’t only mean “sold with new PCs”, there are also updates to existing machines, with or without enthusiasm for the new Windows OS.)

“Ignore the Windows 8 numbers and IDC analysis”, says Wall Street. While the tech-heavy Nasdaq climbed only 6.6% in the last 60 days, Microsoft shares went up by 21%.

The same apparent illogic holds for Hewlett-Packard. Last week, the largest PC maker disclosed its second quarter numbers. Compared to the same quarter last year, they’re not exactly pretty:

Revenue down by 10% to $27.6B
Operating Margin at 5.8%, down by about 20% (HP prefers “down 1.4 points”)
EPS (Earnings Per Share) at 55 cents, down 31%

Zeroing on HP’s PC business, things look worse:

Revenue down by 20% to $7.6B
Operating Margin at 3.2%, down 44% (“down 2.2 points” sounds better)

As one would expect, Wall Street reacted, and HP shares went…up. By 17.8% the day after the announcement:

What was the good news for investors? Resorting to one of the usual bromides, HP “handily beat Street expectations” by posting Earnings Per Share (EPS) of $0.55 vs. a projected $0.30 to $0.40.

As discussed in the December 16th Monday Note, Chapter 2 of the Turnaround Artist Manual prescribes exactly what we’re seeing: Drastically lower expectations within days of taking on the job. “Things are worse than I was told. We’ll have to touch bottom before we bounce back…’”

Following the script, HP CEO Meg Whitman called 2013 a “fix and rebuild year”. Everyone should expect a “broad-based profit decline”. But a 17% rebound in the stock price can’t be explained solely by a collective sigh of relief when the actual numbers aren’t as bad as the CEO had led everyone to expect.

(In its earnings release, HP still calls itself “The world’s largest technology company”. I guess they think smartphones and tablets aren’t “technology”, but PCs and printers are…)

As quoted in a VentureBeat post, Whitman thinks that the other US PC maker, Dell, is in no better shape:

“You saw a competitor, Dell, completely crater earnings,” Whitman said in response to a question. “Maybe that is what you do when you are going private. We are setting up the company for the long term.”

Ironically, and without a hint of self-awareness, she accuses Dell of playing the Setting Artificially Low Expectations game:

She implied that Dell did that on purpose, since Michael Dell is motivated to repurchase shares in the company as cheaply as possible, and deliberately lowering earnings is a good way to get the share prices to fall.

 Actually, Whitman must envy what Dell is attempting to do: Get out of the PC clone Race To The Bottom. Because PCs make half of Dell’s revenue, getting out of that hopelessly commoditized business would cause trouble if done in public. Going private allows Dell to close the curtain, perform the unappetizing surgery out of view and, later, return to Wall Street with a smaller company endowed with a more robust earnings engine, focused on higher-enterprise gear and services.

This helps explain the apparent paradox: Wall Street doesn’t like HP and Microsoft shares despite their lower PC numbers but because of them. Investors want to believe that future earnings (the ones they count on when buying shares today) will come from “Post-PC” products and services instead of being weighed down by shrinking PC volumes and margins. In particular, those who buy HP shares must believe that the company will sooner or later exit the PC clone business. For Microsoft, the bet is that the company will artfully manage a smooth transition to higher Enterprise and Entertainment revenues and their fatter margins.

I’m not in fond of the “Post-PC” label, it lacks nuance and it’s premature. The desktop and laptop machines we’ve known for more than three decades may no longer be the sole incarnations of our personal computing – our affection, time, and money have shifted smartphones and tablets – but the PC will continue to live in our offices and homes.

Regard Lenovo, the Chinese company that seized on IBM’s PC business when Big Blue decided to exit the race. They’re doing quite well, posting a record $34B in revenue for this year.

There is life left in the PC business, just not for US incumbents.

JLG@mondaynote.com

 

Otellini’s Striking Confession

 

We know Intel shunned ARM processors and played virtually no role in the smartphone revolution. But we now learn Steve Jobs asked Intel to build the iPhone microprocessor. Paul Otellini, Intel’s departing CEO, admits he should have followed his gut – and made the smartphone world a very different place.

CEO valedictions follow a well-known script: My work is done here, great team, all mistakes are mine, all good deeds are theirs, I leave the company in strong hands, the future has never been brighter… It’s an opportunity for a leader to offer a conventional and contrived reminiscence, what the French call la toilette des souvenirs (which Google crudely translates as toilet memories instead of the affectionate and accurate dressing up memories).

For his farewell, Paul Otellini, Intel’s departing CEO, chose the interview format with The Atlantic Monthly’s senior editor Alexis Madrigal. They give us a long (5,700+ words) but highly readable piece titled Paul Otellini’s Intel: Can the Company That Built the Future Survive It?

Photo: Guardian.co.uk

The punctuation mark at the title’s end refers to the elephantine question in the middle of Otellini’s record: Why did Intel miss out on the smartphone? Why did the company that so grandly dominates the PC market sit by while ARM architecture totally, and perhaps irretrievably, took over the new generation of phones — and most other embedded applications?

According to Otellini, it was the result of Intel’s inertia: It took a while to move the machine.

Madrigal backfills this uneasy explanation with equal unease:

“The problem, really, was that Intel’s x86 chip architecture could not rival the performance per watt of power that designs licensed from ARM based on RISC architecture could provide. Intel was always the undisputed champion of performance, but its chips sucked up too much power. In fact, it was only this month that Intel revealed chips that seem like they’ll be able to beat the ARM licensees on the key metrics.”

Note the tiptoeing: Intel’s new chips “seem like” they’ll be fast enough and cheap enough. Madrigal charitably fails to note how Intel, year after year, kept promising to beat ARM at the mobile game, and failed to do so. (See these 2010, 2011 and 2012 Monday Notes.) Last year, Intel was still at it, dismissively predicting “no future for ARM or any of its competitors“. Tell that to ARM Holdings, whose licensees shipped 2.6 billions chips in the first quarter of this year.

Elsewhere in the article, Otellini offers a striking revelation: Fresh from anointing Intel as the microprocessor supplier for the Mac, Steve Jobs came back and asked Intel to design and build the CPU for Apple’s upcoming iPhone. (To clarify the chronology, the iPhone was announced early January, 2007; the CPU conversation must have taken place two years prior, likely before the June, 2005 WWDC where Apple announced the switch to x86. See Chapter 36 of Walter Isaacson’s Jobs bio for more.)

Intel passed on the opportunity [emphasis mine]:

“We ended up not winning it or passing on it, depending on how you want to view it. And the world would have been a lot different if we’d done it, […]

Indeed, the world would have been different. Apple wouldn’t be struggling through a risky transition away from Samsung, its frenemy CPU supplier; the heart of the iPhone would be Made In America; Intel would have supplied processors for more than 500 million iOS devices, sold even more such chips to other handset makers to become as major a player in the smartphone (and tablet) space as it is in the PC world.

Supply your own adjectives…

Indulging briefly in more What If reverie, compare the impact of Intel’s wrong turn to a better one: How would the world look like if, at the end of 1996, Gil Amelio hadn’t returned Apple back to Steve Jobs? (My recollection of the transaction’s official wording could be faulty.)

So, again, what happened?

At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn’t see it. It wasn’t one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.

A little later, Otellini completes the train of thought with a wistful reverie, a model of la toilette des souvenirs:

“The lesson I took away from that was, while we like to speak with data around here, so many times in my career I’ve ended up making decisions with my gut, and I should have followed my gut,” he said. “My gut told me to say yes.”

The frank admission is meant to elicit respect and empathy. Imagine being responsible for missing the opportunity to play a commanding role in the smartphone revolution.

But perhaps things aren’t as simple as being a “gut move” short of an epochal $100B opportunity.

Intel is a prisoner of its x86 profit model and Wall Street’s expectations. It’s dominant position in the x86 space give Intel the pricing power to command high margins. There’s no such thing in the competitive ARM space, prices are lower. Even factoring in the lower inherent cost of the somewhat simpler devices (simpler for the time being; they’ll inevitably grow more complex), the profit-per-ARM chip is too thin to sustain Intel’s business model.

(Of course, this assumes a substitution, an ARM chip that displaces an x86 device. As it turns out, the smartphone business could have been largely additive, just as we now see with tablets that cannibalize classical PCs.)

Another factor is the cultural change that would have been required were Intel to have gotten involved in making ARM devices. As both the designer and manufacturer of generation after generation of x86 microprocessors, Intel can wait until they’re good and ready before they allow PC makers to build the chips into their next products. The ARM world doesn’t work that way. Customers design their own chips (often called a System on a Chip, or SoC), and then turn to a semiconductor manufacturer (a foundry) to stamp out the hardware. Taking orders from others isn’t in Intel’s DNA.

And now?

The answer might lie in another French expression: L’histoire ne repasse pas les plats. Google Translate is a bit more felicitous this time: History does not repeat itself. I prefer the more literal image — History doesn’t come around offering seconds — but the point remains: Will there be seconds at the smartphone repast?

Officially, Intel says its next generation of x86 processors will (finally!) topple the ARM regime, that their chips will offer more computing might with no cost or power dissipation penalty. In their parlance “the better transistor” (the basic unit of logic processing) will win.

I doubt it. The newer x86 devices will certainly help Microsoft and its OEMs make Windows 8 devices more competitive, but that won’t prevent the spread of ARM in the legion of devices on which Windows is irrelevant. For these, Intel would have to adopt ARM, a decision Otellini has left to the new tandem leadership of Brian Krzanich (CEO) and Renée James (President). Will they stick to the old creed, to the belief Intel’s superior silicon design and manufacturing technology will eventually overcome the disadvantages of the more complex x86 architecture? Or will they take the plunge?

They might be helped by a change in the financial picture.

In 2006, that is after throwing Jobs in Samsung’s arms (pun unintended), Intel sold its ARM business, the XScale line, to Marvell. The reason was purely financial: for similar capital expenditures (costly fabs), ARM processors achieved much lower per-unit profit, this because of the much more competitive scene than in the x86 space.

Now, if Intel really wants to get a place at the smartphone table with new and improved x86 devices, the company will have to price those to compete with established ARM players. In other words, Intel will have to accept the lower margins they shunned in 2006. Then, why not do it with the ARM-based custom processors Apple and others require?

JLG@mondaynote.com

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(I’ll confess a weakness for The Atlantic and, in particular, for its national correspondent James Fallows, a literate geek and instrument-rated pilot who took upon himself to live in Beijing for a while and, as a result, can speak more helpfully about China than most members of the Fourth Estate. Going back to last week’s reference to the Gauche Caviar, when my Café de Flore acquaintances fall into their usual rut of criticizing my adopted country for its lack of “culture”, I hold out that The Atlantic — which sells briskly at the kiosk next door — is one of many examples of American journalistic excellence.

And, if you’re interested in more strange turns, see this other string Alexis Madrigal piece in the same Atlantic: The Time Exxon Went Into the Semiconductor Business (and Failed). I was there, briefly running an Exxon Information Systems subsidiary in France and learning the importance of corporate culture.)–JLG

Elon Musk’s Sweet Revenge

 

Elon Musk, Tesla’s CEO, saw its latest creation, the Model S – and himself – criticized by traditional media. Now, Tesla just scored its first profitable quarter and Consumer Reports put the Model S at the top of its rankings, making it possible for Musk’s company to become more than a niche player.

Palo Alto is known, primarily, as the cradle of high-tech. Its birth registry stretches from pre-World War II Hewlett-Packard, to Cisco, Sun Microsystems (after Stanford University Network), Logitech, and on to Google and Facebook.

But there’s an aspect of the town that’s rarely remarked upon. As a happy Palo Alto resident for 25 years as well as a half-century regular at the Café de Flore and Au Sauvignon, I can attest that Palo Alto vies with Paris’ Left Bank as the cynosure of the Gauche Caviar — the Caviar Left, the Volvo Liberals as they were known eons ago. Palo Altans, like the residents of the sixth arrondissement, have money and they’re willing to spend it (this isn’t constipated New England, after all) — but they only spend it in the proper way. And there’s no better way to demonstrate that you’re spending your money in a seemly fashion than to be seen driving the proper car.

The combination of tech culture, money, and sincere (if easily lampooned) social/ecological awareness make Palo Alto an interesting place to watch automotive fashion wax and wane.

Walking Palo Alto’s leafy streets in the early 2000′s, I witnessed the rise of the Prius. Rather than grafting “green” organs onto a Camry or a disinterred Tercel, Toyota’s engineers had designed a hybrid from the tires up…and they gave the car a distinctive, sui generis look. It was a stroke of genius, and it tickled us green. What better way to flaunt our concern for the environment while showing off our discerning tech taste than to be spotted behind the wheel of a Prius? (I write “us” without irony: I owned a Gen I and a Gen II Prius, and drive a Prius V in France.) Palo Alto was Prius City years before the rest of the world caught on. (Prius is now the third best-selling car worldwide; more than a million were sold in 2012.)

The cute but artificial Volkswagen Beetle came and went. The Mini, on the other hand, has been a success. A coupling of British modesty and German engineer (the car is built by BMW), the Mini proved that Americans could fall in love with a small car.

The Smart, an even smaller car, hasn’t fared well at all. There are now more older Citroëns than Smarts on our streets. I also see some tiny Fiat 500s, but too few so far to call it a durable trend.

Then there’s Tesla. In 2008, when the Tesla Roadster came out, I watched it with mixed feelings: some in my neighborhood ended up on flatbeds, but I smiled as I saw Roadsters smoothly (and silently) outrun a Porsche when the traffic light turned green.

As much as I admired Elon Musk, Tesla’s founder and a serial entrepreneur of PayPal fame, I was skeptical. A thousand-pound battery and electric drive train in a Lotus frame…it felt like a hack. This was a beta release car, a $100k nano-niche vehicle. It wasn’t seemly.

Musk muscled his way through, pushed his company onto firmer financial ground, and, in June 2012, Tesla began delivery of the Model S. This is a “real” car with four doors, a big trunk (two, actually, front and back), and a 250 mile (400 km) range. Right away, the sales lot at Tesla’s corporate store in nearby Menlo Park was packed. I started to see the elegant sedan on our streets, and within a few months there were three Model Ss in the parking garage at work. With their superior range, they rarely feed from the EV charging stations. (The Nissan Leaf, on the other hand, is a constant suckler.)

This was a big deal. The company had jumped straight from beta to Tesla 2.0. The bigwigs in the automotive press agreed: Motor Trend and Automobile Magazine named the Model S their 2012 Car of the Year.

Actually, not all the bigwigs agreed. The New York Times’ John Broder gushed over the Model S’s futuristic engineering (“The car is a technological wonder”), but published an ultimately negative story titled Stalled Out on Tesla’s Electric Highway. The battery wouldn’t hold a charge, the car misreported its range, Tesla support gave him bad information… The car ended up being hauled off on a flatbed.

Broder’s review didn’t evince much empathy from Elon Musk, a man who clearly doesn’t believe the meek will inherit the Earth. In a detailed blog post backed up by the data the data that was logged by the car, Tesla’s CEO took Broder to task for shoddy and fallacious reporting:

As the State of Charge log shows, the Model S battery never ran out of energy at any time, including when Broder called the flatbed truck…
During the second Supercharge… he deliberately stopped charging at 72%. On the third leg, where he claimed the car ran out of energy, he stopped charging at 28%.

More unpleasantness ensued, ending with an uneasy statement from Margaret Sullivan, The NYT’s Public Editor: Problems With Precision and Judgment, but Not Integrity, in Tesla Test, and with Musk claiming that the NYT story had cost Tesla $100M in market cap.

Other writers, such as David Thier in Forbes, rushed to Broder’s defense for no reason other than an “inclination”:

I’m inclined to trust the reporter’s account of what happened, though at this point, it barely matters. The original story is so far removed that mostly what we have now is a billionaire throwing a temper tantrum about someone who said mean things about him.

In “Why the great Elon Musk needs a muzzle” (sorry, no link; the article is iPad only) Aaron Robinson of Car and Driver Magazine condemns Musk for the sin of questioning the infallibility of the New York Times:

(There’s no need to pile onto this argument, but let’s note that the NYT’s foibles are well-documented, such as, I can’t resist, its tortured justification for not using the word “torture” when dealing with “enhanced interrogation”.)

None of this dampened the enthusiasm of customers living in our sunnier physical and psychological clime. I saw more and more Model Ss on the streets and freeways. Most telling, the Model S became a common sight in the parking lot at Alice’s Restaurant up the hill in Woodside, a place where bikers and drivers of fashionable cars, vintage and cutting edge, gather to watch and be watched.

Publishing deadlines can be cruel. A few days after Robinson’s story appeared in Car and Driver, Tesla released its quarterly numbers for Q1 2013 (click to enlarge):

Tesla’s $555M in revenue is an astonishing 20x increase compared to the same quarter a year ago. Tesla is now profitable; shares jumped by more than 37% in two trading sessions. On Wall Street paper, the company’s $8.77B market cap makes it worth about 20% of GM’s $42.93B capitalization… Musk got his “lost $100M” back and more.

Curiously, the numbers also show that while Operations were in the red, the company recorded a Net Income of $11M. How is that possible? The explanation is “simple”: If your car company manufactures vehicles that surpass (in a good way) California’s emissions standards, the state hands you Zero Emissions Vehicle Credits for your good behavior. You can then sell your virtue to the big car companies – Chrysler, Ford, GM, Honda — who must comply with ZEV regulations. For Tesla, this arrangement resulted in “higher sales of regulatory credits including $67.9 million in zero emission credit sales”.

Tesla is careful to note that this type of additional income is likely to disappear towards the end of 2013. (For a more detailed analysis of Tesla’s numbers see this post from The Truth About Cars, a site that recommends itself for not being yet another industry mouthpiece.)

The numbers point to a future where Tesla can leave its niche and become a leading manufacturer in a too-often stodgy automotive industry. And, of course, we Silicon Valley geeks take great pleasure in a car that updates it software over the air, like a smartphone; that has a 17″ touchscreen; and that’s designed and built right here (the Tesla factory is across the Bay in the NUMMI plant that was previously occupied by Toyota and GM).

A last dollop of honey in Elon’s revenge: Coinciding with the Car and Driver screed, Consumer Reports gave the Model S its top test score. After driving a friend’s Model S at adequate freeway speeds, I agree, it’s a wonderful car, a bit of the future available today.

Some say the Model S is still too pricey, that it’s only for the very well-off who can afford a third vehicle, that it will never reach a mass audience. It’s a reasonable objection, but consider Ferrari: It sold 7318 cars in 2012 and says it will restrict output in 2013 to less than 7,000 to “keep its exclusivity” – in other words, it must adapt to the slowing demand in Europe and, perhaps, Asia. Last year, Land Rover sold about 43,000 cars in the US. By comparison, Tesla will sell about 20,000 cars this year and expects to grow further as it opens international distribution.

One more thing: Elon Musk is also the CEO of SpaceX, a successful maker of another type  of vehicles: space-launch rockets.

JLG@mondaynote.com