About Jean-Louis Gassée

http://

Posts by Jean-Louis Gassée:

iPad and File Systems: Failure of Empathy

 

The iPad placed a clear bet on simplicity — and was criticized for it. The bet won. But now, can the iPad evolve toward more business applications without sacrificing its simplicity, without becoming a “fridge-toaster”?

Three years ago, the iPad came out. The device was an immediate hit with customers and (most) critics. Steve Jobs’ latest — and, unfortunately, last — creation truly deserved the oft-abused game changer moniker.

But, as always, there were grumblings up in the cheap seats. As Mike Monteiro, co-founder of Mule Design observed:

“Following along on Twitter I was seeing things like ‘underwhelming’, ‘meh’ , ‘it’s not open’, ‘it’s just a big iPhone’, etc. And most of this stuff was coming from people who design and build interactive experiences.”

Monteiro penned a sharp, relevant response to the naysayers. Titled “The Failure of Empathy“, his post is summarized by this picture:

A generation ago, geeks were the arbiters of taste in the world of personal computing. Programmers, designers, hobbyists and tinkerers…these were the inhabitants of “user space”, and we built computers with them in mind. By designing the Apple ][ for himself (and his fellow travelers) Steve Wozniak hit the bull’s eye of a large, untapped target.

Today, geeks are but a smallish subset of computer users. Their (typically exaggerated) negative comments may have some sting if you’re responsible for engineering the “brain dead” backing store for a windowing system, but in the real world, no one cares about “byte sex” or “loop unrolling”. What counts is how non-technical users think, feel, and respond. Again, from Monteiro’s post:

“As an industry, we need to understand that not wanting root access doesn’t make you stupid. It simply means you do not want root access. Failing to comprehend this is not only a failure of empathy, but a failure of service.”

This was written in February 2010; I doubt that anyone at the time thought the iPad would ascend to such heights so quickly: 65.7M sold in 2012, 121M since the 2010 debut, rising even faster than the iPhone.

This is all well and good, but with success comes side effects. As the iPad gets used in ways its progenitors didn’t anticipate, another failure of empathy looms: Ignoring the needs of people who want to perform “complicated” tasks on their iPads.

When the iPad was introduced, even the most obliging reviewers saw the device as a vehicle for consumption, not creation. David Pogue in the New York Times:

“…the iPad is not a laptop. It’s not nearly as good for creating stuff. On the other hand, it’s infinitely more convenient for consuming it — books, music, video, photos, Web, e-mail and so on.”

This is still true…but that hasn’t stopped users from trying — struggling — to use their iPads for more ambitious tasks: Building rich media presentations and product brochures, preparing course material, even running a business. Conventional wisdom tells us that these are tasks that fall into the province of “true” personal computers, but these driven users can’t help themselves, they want to do it all on their iPads. They want the best of both worlds: The power of a PC but without its size, weight, (relative) unresponsiveness, and, certainly, price.

The evidence is all around us. Look at how many people in cafés, offices and airport lounges use a keyboard with their iPad, such as this Origami combo:

Or the Logitech Keyboard Cover:

Both keyboards are prominently displayed in the Apple Store. We’ll assume that shelf space isn’t doled out by lottery (or philanthropically), so these devices must be selling briskly.

Of course, this could just be anecdotal evidence. What isn’t anecdotal is that Apple itself claims that the iPad has penetrated a large proportion of Fortune 500 companies. In some of its stores, the company conducts sessions to promote the use of iPads in business applications.

I attended one such gathering last year. There was a very basic demonstration of Keynote, iPad’s presentation app, plus the testimony of a happy customer who described the usefulness of the iPad in sales situations. All quite pleasant, but the Q&A session that followed was brutal and embarrassing: How do you compose real-world, mixed-document presentation? No real answer. Why can’t the iPad access all the documents — not just iWork files — that I dropped into iCloud from my Mac? No answer there, either.

This brings us to a major iPad obstacle: On a “real” PC the file system is visible, accessible; on the iPad, it’s hidden. The act of creating, arranging, accessing files on a PC is trivial and natural. We know how to use Finder on the Mac and Explorer on Windows. We’re not perplexed by folder hierarchies: The MyGreatNovel folder might contain a lengthy set of “MGN-1″, “MGN-2″, “MGN-3″ drafts, as well as subfolders such as ArtWork, Reference, and RejectionLetters, each of which contain further subfolder refinements (RejectedByGrove, RejectedByPenguin, RejectedByRandomHouse…).

On an iPad you don’t navigate a file system but, instead, you launch an app that has it’s own trove of documents that it understands — but it can’t “see” anything else.

For example: Keynote doesn’t let you see the graphics, videos, and PDFs that you want to assemble into your presentation. Unlike on the Mac, there’s no Finder, no place where you can see “everything” at one glance. Even more important, there’s no natural way to combine heterogeneous documents into one.

On the other hand, we all know users who love the iPad for its simplicity. They can download and play music, read books, respond to email and tweets, view photos, and stream movies without having to navigate a file hierarchy. For them, the notion of a “file system” is neither natural nor trivial — it’s foreign and geeky. Why throw them into a maze of folders and files?

Apple’s decision to hide the iOS file system from iPad (and iPhone) users comforts the non-geek and is consistent with Steve Jobs’ idea that applications such as Mail, iTunes, iPhoto, iCal, and Contacts shouldn’t reveal their files and folders. Under the hood, the application stores its data in the Mac’s file system but, on the surface, the user sees appointments, photo albums and events, mailboxes and messages.

Still, some of us see this as the storage equivalent of Seinfeld’s Soup Nazi: No File System For You!

App developers and customers keep trying. iOS apps such as GoodReader and File Manager Pro valiantly attempt to work around the iPad strictures. PhoneView will expose and manipulate your iPad’s file system (not recommended). But success with any of these apps is limited and comes at a price: The iPad’s simplicity and fluidity is long gone by the time you achieve the desired result, the multimedia brochure or HR tutorial.

This places Apple at a fork on the road. On the left is the current path: more/better/lighter/faster of the same. Only evolutionary changes to the simple and successful worldview. This is today’s trajectory, validated by history (think of the evolution of the MacBook) and strong revenue numbers.

On the right, Apple could transform the iPad so that power users can see and combine data in ways that are impossible today. This could attract business customers who are hesitant about making the plunge into the world of tablets, or who may be considering alternatives such as Microsoft’s PC/tablet combo or Android devices with Google services.

The easiest decision is no decision. Let’s have two user interfaces, two modes: The Easy mode for my Mother-In-Law, and the Pro Mode for engineers, McKinsey consultants, and investment bankers. Such dual-mode systems haven’t been very popular so far, it’s been tried without success on PCs and Macs. (Re-reading this, I realize the Mac itself could be considered such a dual-mode machine: Fire up the Terminal app and you have access to a certified Unix engine living inside…)

The drive to “pervert” the iPad is unmistakable. I think it will prove irresistible in the end. But I have trouble forming a coherent picture of an evolution that would let Apple open the iPad to more demanding users — without sacrificing its great simplicity and falling into the fridge + toaster trap.
It’s a delicate balancing act.

JLG@mondaynote.com

 

The Next Apple TV: iWatch

 

Rumors don’t actual Apple products make, see the perennial Apple TV — and the latest iWatch rumors. This is an opportunity to step back, look at Apple’s one and only love –personal computers — and use this thought to sift through rumors. 

Every week brings new rumors of soon-to-be-released Apple products. The mythical Apple TV set is always a favorite: Gossip of an Apple buyout of troubled TV maker Löwe has sent the German company’s stock soaring. We also hear of a radio streaming service that will challenge Pandora and Spotify, and there’s the usual gaggle of iPhone, iPad, and Mac variations. More interesting is the racket surrounding Apple’s “stealth” projects:  an iWatch and other wearable devices (and “racket” is the right word — see these intimations of stock manipulation).

There is a way to see through the dust, to bring some clarity, to organize our thoughts when considering what Apple might actually do, why the company would (or wouldn’t) do it, and how a rumored product would fit into the game plan.

The formula is simple: Apple engineers may wax poetic about the crystalline purity of the software architecture, execs take pride in the manufacturing chain and distribution channels (and rightly so), marketing can point to the Apple Customer Experience (when they’re not pitching regrettable Genius ads or an ill-timed campaign featuring Venus and Serena Williams). But what really floats their bots, what hardens Apple’s resolve is designing, making, and selling large numbers of personal computers, from the traditional desktop/laptop Mac, to the genre-validating iPad, and on to the iPhone — the Very Personal Computer. Everything else is an ingredient, a booster, a means to the noblest end.

Look at Apple’s report to its owners: there’s only one Profit and Loss (P&L) statement for the entire $200B business. Unlike Microsoft or HP, for example, there is no P&L by division. As Tim Cook put it:

We manage the company at the top and just have one P&L and don’t worry about the iCloud team making money and the Siri team making money…we don’t do that–we don’t believe in that…

Apple’s appreciation for the importance and great economic potential of personal computers — which were invented to act as dumb servants to help us with data storage, text manipulation, math operations — may have been, at first, more instinctual than reasoned. But it doesn’t matter; the company’s monomania, it’s collective passion is undeniable. More than any other company, Apple has made computers personal, machines we can lift with our hands and our credit cards.

With these personal computer glasses on, we see a bit more clearly.

For example: Is Apple a media distribution company? Take a look at Apple’s latest 10-Q SEC filing, especially the Management Discussion and Analysis (MD&A) section starting page 21. iTunes, now reported separately, clocked $3.7B for the last quarter of 2012.  Elsewhere, Horace Dediu sees $13.5B for the entire year. A big number indeed, and, certainly, iTunes is a key to Apple’s success: Without iTunes there would have been no iPod, Apple’s “halo product“, proof that the company could come up with a winner.  Later, iTunes begat the App Store, a service that solidified the App Phone genre.

Some misguided analysts look at the numbers and argue that Apple ought to spin off iTunes. They use the old “shareholder value” gambit, but the “value” simply isn’t there: Horace Dediu puts iTunes margins in the 15% region, well below Apple’s overall 38%. iTunes is a hugely important means to the personal computer end, but it’s not a separate business.

How about Apple as a retail company? The success of the Apple Store is stellar, a word that’s almost too weak: The Apple Stores welcomed three times more visitors than all of the Disney parks, and generated more than $20B in revenue last year — that works out to an astonishing $6000 per square foot, twice as much as the #2 shop (Tiffany and Co.). But Apple’s 400 stores aren’t a business, they only exist to create an experience that will lead to more sales, enhanced customer satisfaction, and, as a consequence, increased margins.

Apple as a software company? No. The raison d’être for OS X, iOS, iWork, and even Garage Band is to breathe life into Apple hardware. By now, the calls for Apple to see the error of its ways, to not repeat the original sin of not licensing Mac OS, to sell iOS licenses to all comers have (almost) died.
During my first visit to Apple’s hypergalactic headquarters and warehouse in February 1981, I was astonished at the sight of forklifts moving pallets of Apple ][ software. The term “ecosystem” wasn’t part of the industry lingo yet, but I had witnessed the birth of the notion.
Apple had a much harder time building a similarly rich set of applications for the Macintosh, but the lesson was eventually learned, partly due to the NeXT acquisition and the adoption of object oriented programming. We now have a multi-dimensional macrocosm — a true ecosystem — in which our various forms of personal computing work together, share data, media, services.

Where does the current Apple TV device (the black puck, not the mythical TV set) fit into this scheme? Apple TV runs on a version of iOS, and it knows how to communicate with a Bluetooth keyboard — but that doesn’t mean the device is a personal computer. Perhaps Apple will (someday) provide a TV Software Development Kit (SDK) so developers can adapt existing iOS apps or write new ones. But I still see it as a lean-back device, as opposed to a lean-forward PC.

In any case, sales of the $100 black puck don’t move the needle. Four million Apple TVs were sold in 2012; even if ten million are sold this year — and that’s a very optimistic estimate — it won’t make a noticeable difference, at least not directly. Apple TV is a neat part of the ecosystem, it makes iPhones, iPads, Macs and our iTunes libraries more valuable, but it’s still just a member of the supporting cast.

This brings us back to the putative iWatch. Computer history buffs will recall the HP 01 watch. Buoyed by the success of its handheld calculators, including the programable HP 65 with its magnetic card reader, HP convinced itself it could make a calculator watch, introduced in 1977:

A technology tour de force, fondly remembered by aging geeks, but a market failure: too expensive, too hard to use, ill-fitting distribution channels.

Apple is in a different spot. Today, you can find a number of iPod watchbands such as this one:

It’s hard to imagine that Apple would merely integrate an existing accessory into a new iPod. Sales of the iPod proper are decelerating, so the iPod-as-iWatch could give the line a much needed boost, but it’s difficult to reconcile the rumors of “100 people” working on the project if it’s just a retrofit job. Is Apple working on an iWatch that can be experienced as an Even More Personal personal computer — an “intimate computer”? If so, many questions arise: user interface, sensors, iOS version, new types of apps, connection with other iDevices… And, of course price.

This would be much more interesting than the perennially in-the-future Apple TV set. Of course, iWatch and Apple TV aren’t necessarily mutually exclusive. If the Löwe buyout rumors are true, Apple could do both — the company could develop its own watch device and repurpose Löwe’s TV. (I still doubt the TV set part, as opposed to enhancing the black puck.)

But once we understand what Apple’s only business is, and that the related software, retail, and services are simply part of the supporting cast, Apple’s attitude towards big acquisitions becomes clearer. Apple isn’t looking at buying a big new business, it already owns The Big One. So, no movie studio, no retail chain or cable company, no HP or Dell, or Yahoo!. (But… a big law firm, perhaps?) Integrating a large group of people into Apple’s strong, unbending culture would, alone, prove to be impossible.

A small acquisition to absorb technology (and talented people) makes sense. The cultural integration risks remain, but at a manageable scale, unlike what happened to Exxon in the early eighties when it burned $4B (that was real money, then) in a failed attempt to become an information systems company — you know, the Oil of the Twenty-First Century.

Let’s just hope Apple doesn’t talk itself into a “because we can” move.

JLG@mondaynote.com

 

The Next Big Thing: Big Missing Pieces

 

Looking for next big wave of products or services, for something as big as smartphones or, more recently, tablets, we see technology kept in check by culture.

To qualify as a Big Thing these days, a product — or a service, or maybe something hardly more effable than a meme (think “social networks”) — has to assume a value on the order of $100B worldwide. The value needn’t be concentrated in a single company; indeed, the more boats that are lifted by the rising tide, the better. The revenue from the Next Big Thing might be divvied up among today’s hardware and software giants or shared with companies that are currently lurking under the radar of industry statistics.

The $100B number is derived from a look at Apple. For Fiscal Year 2013 (started October 1st, 2012), the company will weigh about $200B in revenue. To “move the needle” for just this one company, a Big Thing will need to contribute about $20B to this total. For Apple execs and shareholders, anything less counts as a mere hobby (which leads to questions about the future of the Mac, but I digress).

Using this gauge, smartphones easily qualify as a Big Thing. As Charles Arthur reports in The Guardian: Mobile internet devices ‘will outnumber humans this year‘. Initially offered by Palm, Microsoft, RIM, and Nokia, and then given successive boosts by the iPhone (first with the device itself and then the App Store), it’s no exaggeration to say that the size of the smartphone tsunami surprised everyone. Even the Big Four incumbents were crushed by the wave: Palm is gone, RIM is in trouble, and Nokia has enslaved itself to Microsoft — which has yet to come up with a viable smartphone OS.

The latest Big Thing is, of course, the “media tablet” (as IDC and Gartner obsessively call the iPad and its competitors). Whatever you call it, regardless of who makes it or which OS it runs, the tablet is a Big Thing that just keeps getting bigger. In less than five years, tablets have attained 10% US market penetration, a milestone that smartphones took eight years to reach. (See also slide 9 in Mary Meeker’s now iconic Internets Trends presentation.)

In his February 7th Apple 2.0 post, Philip Elmer-DeWitt offers this Canalys chart, which shows that one in six “PCs” shipped in Q4 2012 was an iPad:

So what’s next? Is there a breakthrough technology quietly germinating somewhere? What are the obstacles to a self-amplifying chain of events?

I don’t think the barriers to the Next Big Thing are technical. The ingredients are there, we simply need a master chef to combine them.

This brings us to the broad — and fuzzy — class of what is sometimes called “smart appliances.”

The underlying idea is that the devices that surround us — alarm systems, heaters and air conditions, televisions, stereos, baby monitors, cars, home health-care devices — should be automated and connected. And we should be able to control them through a common, intuitive UI — in other words, they should speak our language, not the other way around.

This isn’t a new idea. For decades now, we’ve been told the Smart Home is upon us, a fully automated, connected, secured, and energy-saving dwelling. More than 20 years ago, Vint Cerf, an Internet progenitor and now Google’s Chief Internet Evangelist, posed with a t-shirt featuring the famous IP On Everything pun:

The Internet visionary was and is right: Every object of importance is destined to have an “IP stack“, the hardware, software, and communication link required to plug the device into the Internet. With every turn of Moore Law’s crank, the hardware becomes smaller, less expensive and power-hungry, and thus makes more room for better software, allowing Internet (and local) connectivity to potentially “infect” a growing number of devices. And as devices become smart, they will “teach” each other how to communicate.

Imagine: You take a new remote control out of the box, walk up to a TV and press the “?”  key on the remote. A standardized “teach me” message is broadcast, and the TV responds, wirelessly, by sending back a longish XML file that identifies itself and tells the remote the commands it understands:

In a language that computers — and even humans — can process without too much effort, the TV has taught the remote: Here is where you’ll find me, and this is how you can talk to me. The little computer inside the remote munges the file and now the device knows how to control the TV…or the five components of the home theater, the heater/air conditioner, the alarm system, the car…

Now replace the remote in this scenario with your tablet, with its better UI, processing, and connectivity. Rather than controlling your devices by pushing plastic buttons, you use an app on your tablet — an app that the device delivered just before it sent the XML file. (You can use the default app sent by the device, or wander over to the App Store and pay $5 for a deluxe version with different skins. This is how cottage industries are born.)

So goes the lovely theory… but in reality we see so-called Smart TVs with Internet connections but mediocre UI; or less-smart TVs that are still bound to barely intelligent set-top boxes, with their Trabant-grade user experience. And we control them through multi-function “universal” remotes that cost as much as a smartphone, but that do less and do it less well.

What’s missing?

The technological building blocks exist in abundance. There is plenty of Open Source software available to help the remote (or your tablet) digest the This Is How To Talk To Me file from the TV.

Even in our deliberately simplified example, there seems to be no interest in coming up with a simple, open (yes, that word, again) standard to help appliances tell the rest of the world how to control them. It wouldn’t add much to the cost of the device and certainly wouldn’t require hiring rocket scientists. In other words, the obstacles are neither economical nor technical; they’re cultural, they’re keeping the Machine To Machine (M2M) revolution in check.

We’ve seen a similar sort of cultural resistance when we consider à la carte, app-based channels on the mythical “iTV”, whether from Apple, Google, or anyone else. Users would love to pick and chose individual shows and have them delivered through applications rather than through deaf-and-dumb multicast streams. App-ification of TV content would provide other “organic” features: the ability to rewind a live broadcast (without a DVR), easy search through program archives, access to user forums and behind-the-scenes commentary…

The technology and design already exist, as the wonderful 60 Minutes iPad app demonstrates:

 

Similar examples can be found on every internet-enabled TV platform from Google TV to Roku, the Xbox, and others.

Nice, easy, technically feasible yesterday…but it’s impossible today and will almost certainly continue to be impossible for the near future (I first typed nerd future, a neat typo).

Why?

Because carriers won’t allow it. They’re terrified of becoming dumb pipes (the link refers to mobile carriers but the idea also applies to cable and satellite providers). Carriers force us to buy bundles of channels that they package and sell in a tiered, take-it-or-leave it pricing scheme. True, there is VOD (Video On Demand) where we can buy and view individual movies or premium sporting events, but a pervasive newsstand model where we only pay for what we consume is still far away.

The content owners — movie studios and TV networks — don’t like the newsstand model either. They go by the old Hollywood saying: Content is King, but Distribution is King Kong. iTunes made an impression: Movie and TV studios don’t want to let Google, Apple, Netflix, or Amazon run the table the way Apple did with iTunes and AT&T. (That AT&T derived lasting benefits in higher ARPU and market share doesn’t seem to alleviate the content providers’ fears.)

How can this change and, as a result, unlock one or two Big Things? To retread a famous two-part Buddhist joke, change is a mysterious thing. Telling people what they ought to do doesn’t always work. Still, two thoughts come to mind.

First, the tablet. We, Tech People have always known the tablet was the right thing to do, and we tried for thirty years without much success. Three years ago, Chef Jobs grabbed the ingredients that had been available to all and, this time, the tablet genre “took”. Now, perhaps, the tablet will take its place as an ingredient in a yet grander scheme.

Second, go to an aquarium and watch a school of fish. They move in concert and suddenly turn for no apparent reason. Somewhere inside the school there must have been a “lead fish” that caused the change of direction. Perhaps the fish didn’t even realize he was The One destined to trigger the turn.

Who’s going to be our industry’s fish, big or small, that precipitates a cultural change unlocking the potential of existing technologies and gives rise to the next $100B opportunity?

JLG@mondaynote.com

iPad Pro: The Missing Workflow

 

The iPad started simple, one window at a time, putting it in the “media consumption” category as a result. Over time, such category proved too narrow, the iPad did well in some content creation activities. Can the new 128 GB iPad continue the trend and acquire better workflow capabilities?

Last week, without great fanfare, Apple announced a new 128 GB version of its fourth generation iPad, a configuration popularly known as the “iPad Pro“. The “Pro” monicker isn’t official, but you wouldn’t know that from Apple’s press release:

Companies regularly utilizing large amounts of data such as 3D CAD files, X-rays, film edits, music tracks, project blueprints, training videos and service manuals all benefit from having a greater choice of storage options for iPad. 

Cue the quotes from execs at seriously data storage-intense companies such as AutoCAD; WaveMachine Labs (audio software); and, quirkily, Global Aptitude, a company that makes film analysis software for football teams:

“The bottom line for our customers is winning football games, and iPad running our GamePlan solution unquestionably helps players be as prepared as possible,” said Randall Fusee, Global Apptitude Co-Founder. 

The naysayers grumble: Who needs this much memory on a “media tablet”? As Gizmodo put it:

The new iPad has the same retina display as its brothers, and the same design, and the same guts, with one notable exception: a metric crap-ton of storage. More storage than any decent or sane human being could ever want from a pure tablet…

(Increased storage is…indecent? This reminds me of the lambasting Apple received for putting 1 — one! — megabyte of memory in the 1986 Mac Plus. And we all recall Bill Gates’ assertion that 640 Kbytes ought to be enough for anyone. He now claims that the quote is apocryphal, but I have a different recollection.)

Or maybe this is simply Apple’s attempt to shore up the iPad’s average selling price ($467, down 18% from the year ago quarter), which took a hit following the introduction of the lower-priced iPad mini. (What? Apple is trying to make more money?)

The critics are right to be skeptical, but they’re questioning the wrong part of the equation.

When we compare iPad prices, the Pro is a bargain, at least by Apple standards:

The jump from 16GB to 32GB costs $100. Another doubling to 64GB costs the same $100. And, on February 5th, you’ll get an additional 64GB for yet another mere $100. (By comparison, extra solid state storage on a MacBook costs between $125 and $150 per 64GB.)

We get a bit more clarity when we consider the iPad’s place in Apple’s product line: As sales of the Mac slow down, the iPad Pro represents the future. Look at Dan Frommer’s analysis of 10 years of Mac sales. First, the Mac alone:

This leads Dan to ask if the Mac has peaked. Mac numbers for the most recent quarter  were disappointing. The newer iMacs were announced in October, with delivery dates in November and December for the 21.5″ and 27″ models respectively. But Apple missed the Xmas quarter window by about a million units, which cut revenue by as much as $1.5B and margin by half a billion or so (these are all very rough numbers). We’ll probably never find out how Apple’s well-oiled Supply Chain Management machine managed to strip a gear, but one can’t help wonder who will be exiled to Outer Mongolia Enterprise Sales.

Now consider another of Dan Frommer’s graphs:

This is units, not revenue. Mac and iPad ASPs are a 3 to 1 ratio but, still, this paints a picture of a slow-growth Mac vs. the galloping iPad.

The iPad — and tablets in general — are usurping the Mac/PC space. In the media consumption domain, the war is all but won. But when we take a closer look at the iPad “Pro”, we see that Apple’s tablet is far from realizing its “professional” potential.

This is where the critics have it wrong: Increased storage isn’t “insane”, it’s a necessary element…but it isn’t sufficient.

For example, can I compose this Monday Note on an iPad? Answering in the affirmative would be to commit the Third Lie of Computing: You Can Do It. (The first two are Of Course It’s Compatible and Chief, We’ll be in Golden Master by Monday.)

I do research on the Web and accumulate documents, such as Dan Frommer’s blog post mentioned above. On a PC or Mac, saving a Web page to Evernote for future reference takes a right click (or a two finger tap).

On an iPad, things get complicated. The Share button in Safari gives me two clumsy choices: I can mail the page to my Evernote account, or I can Copy the URL, launch Evernote, paste the URL, compose a title for the note I just created, and perhaps add a few tags.

Once I start writing, I want to look through the research material I’ve compiled. On a Mac, I simply open an Evernote window, side-by-side with my Pages document: select, drag, drop. I take some partial screenshots, annotate graphs (such as the iPad Pro prices above), convert images to the .png format used to put the Monday Note on the Web…

On the iPad, these tasks are complicated and cumbersome.

For starters — and to belabor the obvious — I can’t open multiple windows. iOS uses the “one thing at a time” model. I can’t select/drag/drop, I have to switch from Pages to Evernote or Safari, select and copy a quote, and then switch back to the document and paste.

Adding a hyperlink is even more tortuous and, at times, confusing. I can copy a link from Safari, switch back to Pages, paste…but I want to “slide” the link under a phrase. I consult Help, which suggests that I tap on the link, to no avail. If I want to attach a link to a phrase in my document, I have to hit the Space key after pasting, go to Settings and then enter the text that will “cover” the link — perfectly obvious.

This order of operations is intuitively backwards. On a Mac (or PC), I select the target text and then decide which link to paste under it.

Things get worse for graphics. On the iPad, I can’t take a partial screenshot. I can take a full screenshot by simultaneously pressing the Home and Sleep buttons, or I can tap on a picture in Safari and select Save. In both cases, the screenshot ends up in the Photos app where I can perform some amount of cropping and enhancing, followed by a Copy, then switch back to Pages and Paste into my opus.

Annotations? No known way. Control over the image file format? Same answer. There’s no iPad equivalent to the wonderful Preview app on the Mac. And while I’m at it, if I store a Preview document in iCloud, how do I see it from my iPad?

This gets us into the more general — and “professional” — topic of assembling a trove of parts that can be assembled into a “rich” document, such as a Keynote presentation. On a personal computer, there are plenty of choices. With the iPad, Apple doesn’t provide a solution, there’s no general document repository, no iCloud analog to Dropbox or Microsoft’s Skydrive, both of which are simple to use, quasi-free and, in my experience, quite reliable. (One wonders: Is the absence of a Dropbox-like general documents folder in iCloud a matter of technology or theology?)

Simply throwing storage at the problem is, clearly, not enough to make the iPad a “Pro” device.  But there is good news. Some of it is anecdotal, such as the more sophisticated editing provided by the iPad version of iPhoto. The better news is that iOS is a mature, stable operating system that takes advantage of fast and spacious hardware.

But the best news is that Apple has, finally, some competition when it comes to User Experience. For example, tablets that run Microsoft or Google software let users slide the current window to show portions of another one below, making it easier to select parts of a document and drop them into another. (Come to think of it, the sliding Notifications “drawer” on the iPad and iPhone isn’t too far off.)

This competition might spur Apple to move the already very successful iPad into authentically “Pro” territory.

The more complex the task, the more our beloved 30-year-old personal computer is up to it. But there is now room above the enforced simplicity that made the iPad’s success for UI changes allowing a modicum of real-world “Pro” workflow on iPads.

JLG@mondaynote.com

Dell Buyout: Microsoft’s Generosity

 

To perform painful surgery on its business model, Dell needs to take the company private. Seeing challenges in raising the needed $22B, Microsoft “generously” proposes to contribute a few billions. Is this helping or killing the deal?

The news broke two weeks ago: Dell wants to go private. The company would like to buy back all of its publicly traded shares.

The Apple forums are abuzz with memories of Michael Dell’s dismissal of Steve Jobs’ efforts to breathe new life into Apple in 1997:

What would I do? I’d shut it down and give the money back to the shareholders.

Is it now Michael’s turn to offer a refund?

Now we hear that Microsoft wants to lend a hand, as in “several billion dollars”. The forums buzz again: It’s just like when Bill Gates came to Jobs’ rescue and invested $150M in the Cupertino company, thus avoiding a liquidity crisis.

The analogy is amusing but facile. Dell 2013 isn’t Apple 1997. A look at Dell’s latest financials shows that the company still enjoys a solid cash position ($14B) and a profitable business (3.5% net profit margin). It’s profits may not be growing (-11% year to year), but the company is cash-flow positive nonetheless ($1.3B from the latest quarter). There’s no reason to fold up the tents.

As for Microsoft’s involvement: The Redmond company’s “investment” in Apple was part of a settlement of an on-going IP dispute. Microsoft avoided accusations of monopoly by keeping alive a highly visible but not overly dangerous adversary.

So what is Dell trying to accomplish by going private? To answer the question, let’s step back a bit and explore the whys and hows of such a move.

First, we have the Management Buyout. Frustrated with Wall Street’s low valuation, executives buy back their company “on the cheap” and run it in private for their own benefit. This rarely ends well.  Second-guessing the market is never a good idea, and the enormous amount of money that’s needed to pay off shareholders puts the execs at the mercy of bigger, smarter predators who turn out to be the ones who end up running the company for their benefit.

A good reason for going private is to allow a company to shift to a radically different business model without being distracted by Wall Street’s annoying glare and hysterics. This is what Dell is trying to do. They’re not shutting down shop, they’re merely closing the curtain.

Is it necessary to privatize for such a move? For an example that never came to pass, recall Bill Gates’ suggestion, in 1985, that Apple should get out of the hardware business and, instead, license the Mac operating system. At the time, the average revenue per Mac exceeded $2,500; a putative Mac OS license would have sold for $100. The theory was that Apple would eventually sell many, many more OS licenses than it did Macs.

The pundits agreed: “Just look at Microsoft!”.  Apple would jump from one slowly ascending earnings curve to a much steeper one.

Now picture yourself as John Sculley, Apple CEO, going to Wall Street with the following message: “We heard you, we’ve seen the light. Today, we’re announcing a new era for our company, we’ll be licensing Mac OS licenses to all comers for $100 apiece. Of course, there’ll be a trough; licensing revenue won’t immediately compensate the loss of Mac hardware sales. We need am ‘earnings holiday’ of about 36 months before the huge software profits flow in.”

You just became the ex-CEO. Wall Street dumps your shares, effectively telling you to take them back and only return after your “holiday” is over.

As another example that didn’t happen but probably should have, imagine if Nokia CEO Stephen Elop had taken his company private in 2011. Instead of osborning its Symbian business, Nokia would have had the latitude to perform the OS gender change behind closed doors and reemerge with a shiny new range of Microsoft-powered smartphones.

I’ll hasten to add that these made-up examples are somewhat unrealistic: To engineer a buyout, one must raise amounts of money commensurate with the company’s current valuation. Around 1987, Apple was worth about $2B, a great deal of money a quarter of century ago. In early 2011, Nokia’s market capitalization was about $40B, an impossibly large sum.

Still, thanks to these buyout fantasies, we get the two key ideas: First, Dell wants to go private because it plans to alter its business model in ways that would scare nervous, short-term Wall Street shareholders; second, the required amount of money (Dell’s market cap is about $22B) is a potential deal-killer.

We don’t have to look very far for the changes Dell wants to make. Dell no longer likes its legacy PC business and has made efforts to reposition itself as an enterprise player (expensive iron, software and services). Going private will allow it to perform the needed surgery, stanch the bleeding, and reemerge with a much stronger income statement, rid of low-margin commodity PCs.

When we look at the money that needs to be raised, things become really interesting. Michael Dell’s 15.7% ownership of the company undoubtedly helps, but the $22B market cap is still a big hill to climb. Several buyout firms and banks got involved in preliminary discussions; one group, TPG Capital, dropped out, but another, Silver Lake, has persisted in its attempt to round up big banks and other investors with enough funds to vacuum up Dell’s publicly traded shares.

That’s when Microsoft walks in on the discussions and offers to save Private Dell.

Clearly, Microsoft’s money will help in the buyout…but will its involvement torpedo Dell’s intentions? The NY Times DealBook article makes the case for Microsoft propping up the leading PC maker:

A vibrant Dell is an important part of Microsoft’s plans to make Windows more relevant for the tablet era, when more and more devices come with touch screens.

This would give Microsoft some amount of control over the restructured Dell, a seat on the Board of Directors, perhaps, with ways to better align the PC maker’s hardware with Redmond’s software. Microsoft wants Dell’s reinvigorated participation in the “Windows Reimagined” business.

But note the phrasing above: “Dell is an important part of Microsoft’s plans…” Better vertical integration without having to pay the full price for ownership, the putative “several billion dollars” would give Microsoft a significant ownership, 10% or 15%. This is completely at odds with the buyout’s supposed intent: Getting out of the PC clone race to the bottom.

Or maybe there’s another story behind Microsoft’s beneficence: The investor syndicate struggles and can’t quite reach the $22B finish line. Microsoft generously — and very publicly — offers to contribute the few missing billions. Investors see Microsoft trying to reattach the PC millstone to their necks — and run away.

Hats off to Steve Ballmer: Microsoft looks generous – without having to spend a dime – and forces Dell keep making PCs.

JLG@mondaynote.com

iPhone Low-cost Numbers

 

For years, Apple’s been told its products were too expensive – and prospered mightily. Today, many suggest Apple should launch a low-cost iPhone. Will history repeat itself, or have the rules of the Smartphone Wars changed in ways that will force Apple to alter its strategy? 

Dismissing the prospect of a Low Cost iPhone isn’t all that difficult. Just look at Apple’s history. For years, the high tech pundits have hectored Apple for it’s inability to see the wisdom of the cheap. In the late eighties and into the nineties, they insisted that a low cost Mac was the only way the company could survive against the swarm of PC clones. Steve Jobs returned and righted the Apple ship, no LC Mac required.

A decade later, the netbook was cast as the killer torpedo that would sink the resurgent Mac business. Jobs famously dismissed the netbook as a cheap plastic device Apple would never stoop to make: “We don’t know how to build a sub-$500 computer that is not a piece of junk.”

At the September 2012 iPhone 5 launch, Tim Cook announced that the MacBook is the #1 selling notebook in the US (5:30 into this video). Couple that with the success of the iPad, and the netbook is dead. And thus, by analogy, there will be no iPhone LC. Apple doesn’t do cheap. The company will focus on a premium customer experience and enjoy a high profit margin. The race to the bottom will be left to Android clones. Move along, nothing to see.

Not so fast.

Using Apple’s history — and particularly the sorry netbook story — to dismiss the iPhone LC makes questionable assumptions. As Marx (Karl, not Groucho) liked to say: ‘History doesn’t repeat itself, it stutters’. Smartphones aren’t PCs, only smaller; the rules of the Macintosh game don’t apply to the iPhone. The Smartphone Wars are waged by markedly different laws, and are waged well by Google and Samsung, unencumbered by a PC past.

But let’s back up: What would a Low Cost iPhone look like, whom would it serve, and just how “low” is Low? The easiest way to picture the thing is to drag out your old iPhone 3G or 3GS. A plastic body, an “original-resolution” screen (no Retina here), a slow processor and even slower wireless connection. It’s not today’s iPhone 5, with its metal body, lovingly machined chamfers, Gorilla Glass, high-speed A6 processor, and 5 megapixel camera.

The phone would serve the prepaid market, it addresses customers with little or no credit. Everything is paid for with cash up front: You pay the full, unsubsidized price for the phone and you buy “minutes” (let’s call them units of wireless network utilization) in advance. Buying units for these devices is a simpler experience than I imagined: Go to the neighborhood drugstore, pick out a phone card by a (virtual) carrier such as TracFone, and the cash register prints an activation code you then enter into the phone. Simple, pervasive, and very successful — even in a “rich” country such as the US.

So far, Apple has avoided the prepaid approach. When we give $199 to Verizon for a $650 iPhone, the $450 subsidy is an act of faith by the wireless carrier. The philanthropic organization assumes we’ll pay our bill every month for two years, by which time the carrier has recouped the subsidy. This is the postpaid world that Apple understands.

As for the pricetag, let’s assume that an iPhone LC would cost about $100 to manufacture — that’s half the cost of the basic iPhone 5. If we apply a 60% margin percentage — the same as today’s iPhone 5 — the unsubsidized iPhone LC would sell for $299.

That’s too high. Let’s try lower numbers: 50% margin gets us down to $199; 30% to $149. To get to the magic $99 unsubsidized retail, with an un-Apple 30% margin, the iPhone LC would need to be manufactured for less than $75, about one third of today’s iPhone 5.

And even $99 may not be low enough. Go to Amazon and look for prepaid cell phones. The first models start at $6.99 (not recommended, I tried one at $8.99 for my visiting Mother-in-Law, that was a mistake). Real smartphones running Android 2.2 start at $49.99 – today! For another $10 you get 2.3. The $80.73 Kyocera Rise runs the much more modern 4.0 (Ice Cream Sandwich) version. (I checked prepaid prices in other countries and the situation is similar.)

In his earnings release conference calls, Tim Cook constantly refers to Apple’s interest in the vast prepaid market segment but so far it’s been all talk. The reason for the gap between words and deeds sits in plain view on Amazon’s prepaid cell phone page. As more devices enter the market, we can only imagine what the page will look like a year from now.

The prepaid market, without carrier subsidies, is already in a PC-like race to the bottom. For Apple to enter and prosper in this segment, it has to determine two things: What sort of premium can it get for a low cost iPhone, and what would the device mean for the rest of the product line?

Apple execs are fond of saying they’d cannibalize their products themselves rather than let competitors do it. Even if exquisitely executed and priced just so, it’s hard not to see the (putative) iPhone LC as the augur of a new era of lower Apple margins. In other words, the iPhone LC wouldn’t be born of a tactical decision to add a new set of customers, it would be a strategic move that signals a new phase in the Smartphone Wars.

Apple loves to control the game. So do Google, Microsoft, Samsung, and everyone else, of course, but Apple’s love is an unusually intense, deeply seated drive that stems from Steve Jobs’ own (carnal as opposed to deliberate) need to master and direct every aspect of the game.

In the PC business, Jobs pushed vertical integration down beyond hardware and software, and into its retail chain of Apple Stores, thus ensuring a tightly controlled delivery of the product experience. The same applied to the iPod and its integration with iTunes. The well-controlled media delivery and novel micro-payment system was a huge win: In 2006 iPod revenue outpaced the Macintosh line.

The iPhone started with Apple fully in control. AT&T stood aside and let Apple run the table, handle all aspects of the customer experience (except for call quality). Later, the App Store extended Apple’s control of the game. The iPhone became an app phone and a phenomenal success.

(We also have the counterexample of Apple TV, an exception that proves the rule. TV content owners, distributors, and carriers haven’t let the Cupertino company seize control of the customer experience, and thus Apple TV remains a “hobby”.)

Apple is still in control of its iPhone ecosystem… but things have changed. Now the company faces Google and Samsung. Google isn’t just Android, it’s also a provider of a wide set of services such a Google Maps, Gmail, Google Docs and Drive, Google Voice, and on and on. Samsung is more vertically integrated, makes its own smartphones components, and spends more marketing money ($13B last year) than anyone else.

In today’s smartphone scene, can Apple still enjoy the control — and the ensuing profit potential — it craves? And if not, how will it react? Tactics or strategy?

JLG@mondaynote.com

2013: The Year Of…

 

As Samsung dominates the Android market, one has to wonder, who controls whom? Is Google really in charge, or is Samsung so strong it can now rule the Android game?

This morning’s thoughts are harder to focus than usual: I’m sitting across the street from Sciences Po — the Paris Institute of Political Studies — one of France’s elite graduate schools. As hundreds of students gather at the door, smoking (and littering the pavement with very Parisian hauteur), I’m dismayed by the thought that many of these smart, eagerly alive young people will die from lung cancer. Somber thoughts made more acute by the loss of a dear friend two days ago to that very illness — the third smoking-induced death of a close relation in a matter of months. This from a legal drug that’s much more dangerous than some that can land you in jail….

Back to less morbid topics: Like so many other high tech observers, the impending CES (Consumer Electronics Show) in Las Vegas has prompted me to take a guess at what — or who — will turn out to be 2103′s most important development. One name that isn’t on the list: Microsoft.

CES isn’t just an endless series of booths manned by barkers and BS artists where companies peddle their latest vacuum tube audio gear and touch-screen laptops, it’s also the venue for a conference with a series of keynote speeches. During the Golden Age of the PC, Bill Gates was the obligatory headliner on the eve of the trade show. Gates’ keynote was an opportunity for the head of the world’s most important software company to describe (and prescribe) the future according to Microsoft.

When he ceded the CEO title, Gates also passed the keynote baton to Steve Ballmer who continued the propaganda, although with progressively diminishing success. Last year’s keynote was widely trashed by the press (see here, here or here)

Microsoft CEO crashes and burns in final CES keynote.
At CES, Microsoft’s Steve Ballmer Strains For Relevance

There will be no keynote address from Ballmer or any other Microsoft representative at this year’s CES.
The baton has indeed been passed, but to whom?
The ascendancy will be decided in a fight between Google and Samsung — and that could turn out to be the most important 2013 development.

Samsung is, by far, the biggest promoter and the best advertisement for the Android platform. Not only does the Korean giant dominate the Android market in unit volume — about half if we believe the company’s necessarily imprecise numbers — it also sets the standard for quality with handsets such as the Galaxy S III. And when you consider the huge amount of money Samsung has spent promoting their devices (about $13B — see Horace Dediu’s chart, below, from yet another of illuminating posts, The Cost of Selling Galaxies), you would think that the two companies would be close allies.

But as Samsung dominates ever more of the Android market, one has to wonder: Who controls whom? Is Google really in charge, or is Samsung so strong it can now set the rules in the Android game?

I don’t think Samsung’s competitors fully appreciate the implications of the company’s spare-no-expense investment in securing a dominant market share. In particular, I wonder what Apple execs think of the disproportion between their own relatively tiny marketing expenses and Samsung’s gargantuan budget. Apple has shown, time and again, that they can do more with less, but have they let Samsung secure an inexpugnable market position? Perhaps the Cupertino team was simply unwilling to waste money stimulating a demand they knew they couldn’t satisfy due to iPhone supply chain bottlenecks.

Is Google truly happy with all this free advertisement? Samsung is firing on all cylinders: great Android handsets, apparently limitless manufacturing capacity, imaginative and prolific marketing campaigns. There may be a feeling in Mountain View that the tail is starting to wag the dog, the handset vassal could end up dictating terms to the platform creator. Samsung could parlay its dominant share of Android handsets in a number of ways.

For example: The Android economy doesn’t rely on licensing revenues but on user data that flows back to the Google mothership through the use of Google applications running on platform-compliant handsets. (Such data then flows through Google’s advertising money pump, but we’ll leave that aside for now.) What if Samsung could renegotiate its Android license and demand “role-appropriate” levies for running Google apps on its market-leading handsets? We’ve heard rumors of just such a levy before: Apple is said to receive significant payments for favoring Google’s search engine in iOS devices.

Another possibility is that Samsung could emulate Amazon’s practice of picking the Android lock. By modifying the Open Source Android source code — a completely legal maneuver — Samsung could create its own set of revenue-generating apps and services and thus cut Google out of the income stream. A number of other handset makers, particularly in China, are headed down this path, proposing devices based on Android-derived platforms such as Tapas and OPhone.

Lastly, although less seriously, Samsung has announced handsets based on Tizen, an OS that has joined the chorus line of Open Source platforms: Gram (née WebOS), Jolla (Nokia émigrés), Ubuntu (née Debian), Firefox OS. My apologies for possible oversights…

Samsung can’t possibly believe it can build a viable business on Tizen. It must know that the platform itself no longer matters, that this has become an ecosystem war. Even with Samsung’s resources and determination, betting on Tizen as an alternative to the Android ecosystem isn’t realistic — and can’t possibly impress Google execs. Complicating matters, Samsung also builds handsets on Windows Phone and Bada (developed in house). Such complexity isn’t sustainable.

Over in its corner, Google has Motorola. Ostensibly acquired for its patents, Motorola could    be the piece of the puzzle that Google needs to create a fully-integrated device, a “proper” Android handset that Google execs feel their ecosystem deserves and that independent handset makers have failed to deliver. Rumors of an xPhone are in the air, but they don’t say much about what the product will do, exactly, or when it will come out.(Google protests that it won’t give its Motorola team any unfair advantage…a promise that comes from a company that gives special access to partners-of-the-moment such as HTC, Samsung, and LG.)

Of course, creating a device in the numbers that can effectively compete with leading Samsung (and Apple) devices is easier said than done. Google/Motorola will need to convince component suppliers and device manufacturers — who are “controlled” by Samsung and Apple — to free up some space on their assembly lines.

So on one side, we have Samsung, an extremely capable and determined Korean giant with huge technical and financial resources — and little regard for niceties.

On the other, we have Google with its unparalleled infrastructure, full control of the Android ecosystem through its Google apps (think Maps) and services, very strong finances, and real long-term vision. As for niceties, Google’s style may be more “polished” than Samsung’s, but it isn’t a pushover. Google can stand toe-to-toe with anyone.

In the end, ownership of the ecosystem should tip the scales: Google will win the undeclared war with Samsung. The Mountain View company will help itself to the higher value of vertically integrated products and, at best, degrade the Korean giant’s margins or, worse, drive them into a PC-like race-to-the-bottom with other handset makers.

This isn’t an outcome Samsung will take lightly.

JLG@mondaynote.com

PS: Bill Clinton will attend Samsung’s CES keynote

Whitman: One Write-Off Too Far

 

Meg Whitman’s efforts to turn HP around follow a proven script. But, in her efforts to frame future results against a background of past misdeeds, she might have gone one excuse too far and engaged in a potentially embarrassing fight against Mike Lynch, Autonomy’s founder.

Turnaround Artist Manual – Chapter 1: Walk in with a frown; blame your predecessor; slash projects, budgets, people; lower expectations, loudly; and write off assets.

When you’re finished, any progress going forward will be attributed to your decisive surgery and skill at the helm. You reap the benefits of a statistical illusion: Cut something by 50%, use time, work, and a little bit of luck to bring it back to its pre-surgery size, and you’re a miracle worker! 100% growth!

When Meg Whitman became HP’s CEO in September 2011, she followed the manual to the letter, and how!

Whitman had more than one predecessor to blame: Leo Apotheker was culpable for sins that we’ll review in a moment; Mark Hurd for acquiring EDS for $13.9B, for starving R&D down to less than 2.5% of revenue, and for the ill-fated $1.2B Palm acquisition. For good measure, Whitman included Carly Fiorina in her “rotating cast of CEOs” who were at fault for their “multiple inconsistent strategic plans and executional miscues“.

Then we have the HP layoffs. Early in 2012, Meg projected 27,000 layoffs through 2014, a number that has since increased to 29,000. (HP employs about 300,000 people worldwide.)

Next in the manual: lower expectations. As reported by Business Insider, HP’s CEO calls 2013 a “fix and rebuild” year, warning that the company will experience a “broad-based profit decline”. But there’s a silver lining: Whitman promises that HP will not only hit its savings targets and complete its restructuring by the end of fiscal 2014, but that the company’s revenues will be “growing in line with gross domestic product”…by 2016. (A high-tech Valley company that won’t reach GDP growth rates for three years… really?)

Further, after stating how important smartphones are to HP…

“My view is we have to ultimately offer a smartphone because in many countries of the world, that is your first computing device.”

…Whitman makes it clear that we shouldn’t expect an HP device in 2013. Does this mean that HP will introduce a smartphone in 2014 when Samsung and Apple will have taken complete control of the market? With all due respect, Whitman shouldn’t take IDC’s bizarre and fluctuating predictions seriously (11% market share for Windows Phone by 2016). Few people do outside of Redmond.

Next up: Write-offs. Here, Meg doesn’t go for small numbers, starting with a $3.3B Palm/WebOS asset zap. As the übergizmo article points out, the Palm misadventure cost shareholders close to $5B. Imagine what a startup could do with that kind of money.

And then there’s EDS, an IT services company founded by the industry legend Ross Perot and acquired by HP in 2008. Whitman decided to write off $8B of the $13.8B purchase price (58%) and, in a masterful stroke of corpospeak, managed to convince an IDC analyst that this was “Really Good News In Disguise“. Yes, that’s exactly the point of the Turnaround Artist Manual.

The grand finale is the Autonomy write-off. Acquired in August 2011 for $11.1B, HP’s official documents at the time called the acquisition “accretive“, that it would add to shareholder wealth. It sounded like a great idea: HP would have vaulted itself into the front of the pack in the exploding unstructured data applications sector.

A year later, HP’s CEO writes down Autonomy to the tune of $8.8B — 80% of the acquisition price tag. In an alternate reality, Whitman places hand on heart and takes the blame:

“I was on HP’s Board of Directors when we made the decision to acquire Autonomy. I have been part of the problem and I will now lead the solution. I’m committed to give Autonomy the place it deserves in HP’s products portfolio.”

Wall Street grumbles a bit, but the industry — and the company — applauds Whitman’s frankness, her leadership by example.

But that’s not what happened. In the aftermath of the Autonomy fiasco, Whitman blames everyone but herself and the current HP directors. First she points a finger at her predecessor, Leo Apotheker. Leo smiles and benignly lets it be known he is ready to help: “I will make myself available, however I can, to assist HP…”

(Apotheker has since assumed a more assertive stance in reminding everyone of the role that Ray Lane, HP’s chairman, played in the Autonomy transaction: “No single CEO is ever able to make a decision on a major acquisition in isolation… and certainly not without the full support of the chairman of the board.”)

Whitman then focuses on the company’s then-CTO, Shane Robison, who led the team that performed the due diligence. Blaming the well-liked Robison, who recently — and conveniently — retired, hasn’t won Whitman any friends inside the company.

Finally, she accuses Mike Lynch, Autonomy’s founder and CEO, of “accounting improprieties”. HP considers a referral to the SEC’s Enforcement Division and the UK’s Serious Fraud Office, and threatens to force Lynch to testify “under the penalty of perjury“.

The amount of the alleged fraud, around $100M, can also be explained by revenue recognition difficulties. These are not infrequent, especially when different accounting standards are involved, IFRS for most European companies (such as Autonomy), vs. GAAP in the US.

And, yes, the $100M “problem” would impact the transaction price by perhaps $1.5B, but that leaves another $5B to account for. (About $2B of the Autonomy write-off come from convolute but legit accounting mechanics tied to HP’s own stock price decline.)

Despite this discrepancy, Whitman attributes the bulk of the write-off to irregularities under Lynch’s regime. Catherine Lesjak, HP’s CFO, explains it thus [emphasis mine]:

The majority of this impairment charge [i.e. write-off] is linked to serious accounting improprieties, disclosure failures and misrepresentations that occurred prior to HP’s acquisition of Autonomy and the associated impact on the financial performance of the business over the long term.”

Vague words such as “associated impact” and “long term” purposefully confound a modest revenue recognition question with a much bigger problem. Many think the accounting snafu is a smoke screen: The Autonomy acquisition was simply a bad decision.

With Autonomy, Meg Whitman may have gone one write-off too far. Mike Lynch is a Larry Ellison-grade adversary: intelligent, articulate, aggressively entrepreneurial, with a willingness to create a reality distortion field around his company and an unwillingness to back down.

Lynch immediately writes to HP’s Board and demands proof of the allegations. Nothing so far. He then launches a website to buttress his defense and counterattack. His thesis is simple:
– First, Autonomy’s books were vetted by world-class accounting and consulting firms (Deloitte and KPMG) during the acquisition’s due diligence process.
– Second, HP’s Board of Directors, which comprises industry experts such as Ray Lane (ex-Oracle) and Marc Andreessen (ex-Netscape, Opsware, and founder of the Andreessen Horowitz venture firm) to say nothing of Meg herself, unanimously supported the acquisition proposed by Léo, himself an Enterprise Software expert (22 years at SAP).
– Third, Lynch contends that HP’s ponderous bureaucracy completely misunderstood and mismanaged the entrepreneurial culture that made Autonomy successful. As a result, key people left and the business is now in shambles.

The too-convenient Autonomy write-off and the attacks on Lynch could badly backfire. Legal action against Autonomy’s founder could open a Pandora’s box of embarrassing information.

For example, at its October 3rd analyst meeting, HP tells Wall Street that 2013 profits will fall below expectations, $3.40 to $3.60 per share vs. earlier estimates of $4.16. The stock hits a 9-year low. That same day, HP puts out a lengthy (2056 words) news release as well as a link to the presentations to be used at the meeting. I downloaded the (excellent) slides, looked for the word “Autonomy”, and found a mere footnote in Meg’s presentation and, elsewhere, an upbeat slogan: “Taking Autonomy from start-up to grown-up”…. Neither the CEO nor Cathie Lesjak, the CFO, said a word to tell shareholders trouble was brewing.

Seven weeks later, HP reveals that the investigation into Autonomy’s alleged accounting improprieties had been going on since last May when an insider blew the whistle. If Whitman and her staff are invited by Lynch’s lawyers to give depositions under the  “penalty of perjury” they earlier waved in his face, they could face some painful What Did You Know and When Did You Know It questions.

HP was once a pillar of Silicon Valley, a shining example of technical and managerial culture at their best. Today, insignificance and mediocrity loom. Does Whitman, who waves a Make It Matter slogan to rally troops, really think an ugly, mud-slinging fight will make things better?

JLG@mondaynote.com

The enduring Apple TV Fantasy

 

We all want TV Done Right, free of the Soviet Era set-top box, UI and opaque contracts. We imagine Apple will put all the pieces together. But what’s desirable and “obvious” might not be so simple or soon…

“When I go into my living room and turn on the TV, I feel like I have gone backwards in time by 20 to 30 years,” Apple CEO Tim Cook told . NBC’s Brian Williams “It’s an area of intense interest. I can’t say more than that.”

These words — and similar ones in a substantial Bloomberg interview — launched yet another round of frenzied speculation about the mythical Apple TV.

Piper Jaffray’s Gene Munster insists that an Apple TV in 2013 is a sure thing. “It will be the biggest thing in consumer electronics since the smartphone“. (Of course, Munster has been saying this every year for the last three years…)

Another analyst, Wells Fargo’s Maynard Um, agrees that the device is inevitable, if only because a full-fledged television is “more in tune” with Apple than a simple set-top box.

Hmmm…

First, let’s take a calmer look at Tim Cook’s words. As many have noted, there’s nothing new here. Cook said essentially the same things at the D10 Conference last May and has repeated the message on earnings conference calls. The only changes to the Apple TV script in the past twelve months are the stated number of black pucks sold in the last fiscal year (more than 5 million), and an upgrade from “hobby” to “intense interest”. The actual meaning of this “interest” is widely open to interpretation.

Speculation aside, Cook has one thing right: The set-top box experience does place one back in time by 20 to 30 years:

– We still can’t order channels à la carte or search the program grid. For the latter you have to go to your tablet. And forget about the former.

– You can’t buy your own set-top box; you have to rent it from your carrier. For STB makers, there’s no incentive to build a better product.

– Add in the contorted rights and packages games played by the content providers and you end up with today’s mess.

The solution? Channels, shows, special events should all be presented as apps. Click, pay, and play, with standard fare for free. Catch the 6 pm news when you get home at 9:30; watch two programs side-by-side with Android 7 or iOS 9, all on your screen of choice: smartphone, tablet, PC, or TV.

The technology isn’t an issue. There’s enough bandwidth on cable (or pretend-fiber) networks, plenty of storage on servers, and all the required computing power in current or future TV boxes, from Apple and its competitors.

But there’s an obstacle in the tangled, encrusted business models that the Comcasts, CBSs, and Disneys cling to out of fear that Apple will wrest control of their content, that they’ll be disintermediated a la iTunes or the iPhone/iPad App Store.

Second, I simply don’t believe Apple will make, or even wants to make, a TV set. To realize the dream, as discussed previously, you need to put a computer — something like an Apple TV module — inside the set. Eighteen months later, as Moore’s Law dictates, the computer is obsolete but the screen is just fine. No problem, you’ll say, just make the computer module removable, easily replaced by a new one; more revenue for Apple…and you’re right back to today’s separate box arrangement. And you can spread said box to all HDTVs, not just the hypothetical Apple-brand set.

If carriers and content owners can be tricked, bribed, sued, or otherwise made to see the light and wisdom of higher revenue per subscriber, the TV Done Right will descend from Heaven in the form of a next generation Apple set-top box, not a TV set.

So why is Tim Cook talking about Apple TV at all?

The simplest explanation is that he’s simply answering an interviewer’s question. Possible… but not likely in such tightly choreographed exercises.

A cheekier possibility is that the answer is a head fake. Cook, a noted College Football fan, is trying to draw Google offsides, to provoke then into yet another embarrassing Google TV moment. And maybe even goad Microsoft into another WebTV dud.

Amusing… but not likely.

In Google’s case, the failed experiment has been digested and the next iteration will be much sharper. (Note well that Google’s subsidiary Motorola is putting its set-top box business up for bids, with “vendor financing possible”…)

For Microsoft, the company is happy with its successful Xbox ecosystem and its ability to provide TV content through its game console, even if that content doesn’t flow onto its phone and tablets as nicely as they would like. In any event, Tim Cook wishes Steve Ballmer no ill — au contraire, Cook wants Ballmer to stay on the job as long as he keeps helping his friends in Cupertino.

A more serious interpretation: Apple’s CEO is indicating that he’ll continue to invest talent and money until the TV obstacles are finally surmounted. In other words: “Join us and ride the wave that will sweep away the competition”.

Speaking of the competition, Sony is trying to break free from its profitless HDTV past by building a new 4K TV business.

If you have the opportunity, treat yourself to a 4K TV demo at a Sony Store. The spectacle is stunning: You see the delicate capillaries on a baby’s eyelids, feathers on birds, minute details on street scenes without any of the blurring you get on today’s HDTV.

With 3,840 by 2,160 pixels on an 80-inch TV screen, the 4K boasts 4 times the resolution of 1080p (1920 by 1080)… and an even greater price tag ratio: $25K vs $2K or less. The 4K TV is delivered with a server that contains full-resolution movies because cable and satellite carriers provide no such content — and have no plans to do so.

Sony has a valuable asset in its movie library and a need to push its new 4K TV technology. Could this portend an Apple-Sony alliance? The two companies have worked well together in the past, a CEO-level conversation could easily happen. But even if an Apple TV box provided a strong showcase for a Sony 4K TV set, carriers would still have to be shown how to milk the opportunity.

On still more sober musings, let’s consider Apple TV’s place in the company’s business. In the 2012 fiscal year ending last september, Apple’s total revenue was $156B. 5 million Apple TVs translates into $500M; that’s 0.3% of the company’s total.

Why bother? In 2014, Apple’s revenue could exceed $250B. Even if Apple TV sales were to grow by ten times, they would still represent no more than a 2% fragment of the total.

The answer is that Apple TV isn’t meant to generate revenue but to enhance the value of the more muscular, profit-making members of the ecosystem: iPhones, iPads and, to a lesser extent, Macs. In a similar, grander, and now well-understood way, iTunes isn’t in the business of making money by itself. iTunes made the iPod larger than the Mac in 2006, and it made the App Store possible — and the iPhone and the iPad as profit engines.

For Apple TV, is there a path from today’s supporting role to a $50B size, to 20% of Apple’s revenue in 2014? (Gene Munster thinks there is.)

My belief is that Apple TV sales numbers will continue to increase as the device is slowly, patiently improved and the ecosystem is enhanced. In a not-too-distant future we’ll see explicit Apple TV apps, similar to those on iPhones and iPads.

And someday, Apple will reach a limited agreement with a carrier such as Comcast. The enhanced experience will create a wedge — and will spur competitors. As a result, TV will at last become “modern” — sitting down in front of your TV set will no longer send you time traveling to 1992.

JLG@mondaynote.com

——————
Late update, an amusing coincidence: a just-discovered “Apple TV set” at Lyfe, a modern Palo Alto eatery.
With my apologies for the low quality pictures, this is the menu on five TV sets, side-by-side in portrait mode:

And, if you’re curious, you discover five Mac Minis bolted to the back of the TV sets:

Gene Munster should take a look.

Wintel: Le Divorce Part II

 

At CES 2011, Ballmer told the world Windows would “fork”, that it would also run on lower power ARM chips for mobile devices. This was seen as a momentous breach in the long-standing Wintel duopoly. Two years later, the ARM tooth of the fork looks short and dull.

This is what I wrote almost two years ago:

After years of monogamy with the x86 architecture, Windows will soon run on ARM processors.

As in any divorce, Microsoft and Intel point fingers at one another. Intel complains about Microsoft’s failure to make a real tablet OS. They say MS has tried to shoehorn “Windows Everywhere” onto a device that has an incompatible user interface, power management, and connectivity requirements while the competition has created device-focused software platforms.

Microsoft rebuts: It’s Intel’s fault. Windows CE works perfectly well on ARM-based devices, as do Windows Mobile and now Windows Phone 7. Intel keeps telling us they’re “on track”, that they’ll eventually shrink x86 processors to the point where the power dissipation will be compatible with smartphones and tablets. But…when?

Today, a version of Windows (RT) does indeed run on an ARM processor, on Microsoft’s Surface tablet-PC hybrid. Has Microsoft finally served Intel with divorce papers?

Not so fast. The market’s reaction to Redmond’s ambitious Surface design has fallen far short of the heights envisioned in the company’s enthusiastic launch: Surface machines aren’t flying off Microsoft Store shelves. Ballmer himself admits sales are “modest” (and then quickly backpedals); Digitimes, admittedly not always reliable, quotes suppliers who say that Surface orders have been cut by half; anecdotally, but amusingly, field research by Piper Jaffray’s Gene Munster (who can be a bit excitable) shows zero Surfaces sold during a two hour period at the Mall of America on Black Friday, while iPads were selling at a rate of 11-an-hour.

Traditional PC OEMs aren’t enthusiastic either. Todd Bradley, head of HP’s Personal Systems Group, is unimpressed:

“It tends to be slow and a little kludgey as you use it .…”

Acer exec Linxian Lang warns:

“Redmond will have to eat ‘hard rice’ with Surface…it should stick to its more readily-chewed software diet.”

To be sure, there are happy Surface users, such as Steve Sinofsky, the former Windows Division President, as captured in lukew’s Instagram picture:

(An aside: I went back to Sinofsky’s 8,000 words blog post that lovingly describes the process of developing “WOA” — Windows on ARM. At the time, WOA was presented as part of the Windows 8 universe. Later, Microsoft swapped the “8″ designation and chose to use “RT” instead. These naming decisions aren’t made lightly. Is there any wonder why WOA was moved out of the Windows 8 camp?)

It’s possible that the jury is still out… Surface sales could take off, Windows RT could be embraced by leading PC OEMs… but what are the odds? In addition to the tepid reception from customers and vendors alike, Microsoft must surmount the relentless market conquest of Android and iOS tablets whose numbers (210 million units) are expected to exceed laptop sales next year.

So, no… the Wintel Divorce isn’t happening. Intel’s x86 chips will remain the processors of choice to run Windows. Next month, we’ll have CES and its usual burst of announcements, both believable and dubious (remember when 2010 was declared the Year Of The Tablet PC?). We’ll have to sort the announcements that are merely that from those that will yield an actual device, but in the end I doubt we’ll see many new and really momentous Windows RT products out there.

Microsoft’s lackluster attempt at Post-PC infidelity doesn’t help Intel in its efforts to gain a foothold in the mobile world. Intel’s perennial efforts to break into the mobile market with lower power, lower cost x86 chips have, also perennially, failed. As a result, there is renewed speculation about a rapprochement between Intel and Apple, that the Santa Clara microprocessor giant could become an ardent (and high-volume) ARM SoC foundry.

As discussed here, some of this makes sense: Samsung is Apple’s biggest and most successful competitor in the smartphone/tablet space, spending billions more than anyone else in global marketing programs. At the same time, the South Korean company is Apple’s only supplier of ARM chips. Intel has the technology and manufacturing capacity to become an effective replacement for Samsung.

This wouldn’t be an easy decision for Intel: the volumes are high — as high as 415M ARM chips for 2013 according to one analyst — but the margins are low. And Intel doesn’t do low margins. Because of the Wintel duopoly, Intel’s x86 chips have always commanded a premium markup. Take Windows out of the picture and the margin disappears.

(As another aside, the 415,000 ARM chips number seems excessive. Assuming about 50 million iPhone 5s and 15 million iPads in the current quarter, and using the 4X rule of thumb for the following calendar year, we land somewhere between 250M and 300M ARM chips for Apple in 2013.)

Also, Intel would almost certainly not be Apple’s sole supplier of ARM chips. Yes, Apple needs to get out of its current and dangerous single source situation. But Tim Cook’s Supply Chain Management expertise will come into play to ensure that Apple doesn’t fall into a similar situation with Intel, that the company will secure at least a second source, such as the rumored TSMC.

The speculation by an RBC analyst that Intel will offer its services to build ARM chips for the iPhone on the condition Apple picks an x86 device for the iPad is nonsensical: Apple won’t fork iOS. Life is complicated enough with OS X on Intel and iOS on ARM.

Historically, a sizable fraction of Intel’s profits came from the following comparison. Take two microprocessor chips of equal “merit”: manufacturing cost, computing output, power dissipation… And add one difference: one runs Windows, the other doesn’t. Which one will get the highest profit margin?

In the ARM world and its flurry of customized chips and software platforms, the “runs Windows” advantage is no longer. ARM chips generate significantly lower margins than in the Intel-dominated world (its competitor AMD is ailing).

This leaves the chip giant facing a choice: It can have a meager meal at the tablet/smartphone fest, or not dine at all at the mobile table…while it watches its PC business decline.

In other news… Paul Otellini, Intel’s CEO, unexpectedly announced he’ll leave next May, a couple years ahead of the company’s mandatory 65-year retirement age. No undignified exit here. Intel’s Board pointedly stated they’ll be looking outside as well as inside for a successor, another unusual move in a company that so far stuck to successions orchestrated around carefully groomed execs. This could be seen as a sanction for Otellini missing the mobile wave and, much more important, a desire to bring new blood willing and able to look past the old x86 orthodoxy.

JLG@mondaynote.com