About Jean-Louis Gassée

http://

Posts by Jean-Louis Gassée:

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

—————————-

(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

Carriers Still Think We’re Idiots

 

“Carriers are confident we won’t read the small print that contradicts their tricky advertising. Once in a while, a public servant really does his job and forces a retraction. Why so rarely?.”

‘My goal in life has been to have just enough money to ignore 8-point Helvetica!’ Thus spake a close friend one night in a quiet San Francisco bar. His objection was neither stylistic nor ophthalmologic. We were, once again, lamenting the shenanigans and ruses, the hidden fees and “some restrictions apply” (see, if you can, Sprint’s mendacious use of Truly Unlimited here and here), the roach motels of mileage plans, the nickels and dimes extracted by subterfuge, legally or not. In a word, or six, the tyranny of the fine print.

By accumulating “just enough money”, my friend has the luxury of not having to fight the schemers to the last dollar, of not spending hours on the phone arguing with a robohuman who has been cruelly programmed to confuse and outlast the overly-curious customer. His benign neglect allows him to keep a sunny view of life and a calm mind.

Lucky man.

Most of us don’t lead such a charmed life. We can’t, or shouldn’t, ignore the amendments, refinements, and exceptions that belie the marketing come-ons. But the fine printers — the airlines, credit card companies, internet providers and, most of all, the cell phone carriers — rely on our neglect, benign or not. They think they can prey on us, that we’re too stupid or lazy to fight back, to protest their obfuscating plans and bizarre bills.

Because of their ubiquity, the cell phone carriers get the most heat. They’ll sell you a $650 iPhone for a mere $200…and then recoup the $450 shortfall by adding a bit of the difference to each installment of your (mandatory) 24 month “service” contract. If you try to break the manacles, you’ll pay for the fractured iron. It’s right there in the fine print.

Last year, a group of concerned professionals called for an end to the confusing and wasteful smartphone subsidies. The group? The carriers themselves (see Carriers Whine: We Wuz Robbed!).

Verizon and AT&T make a spectacle of groaning under the weight of these awful subsidies. They get the Wall Street Journal and others to repeat their stories wholesale in articles such as this one: How the iPhone Zapped Carriers.
Horace Dediu, for one, doesn’t buy the sob story:

“I repeat what I’ve mentioned before: The iPhone is primarily hired as a premium network service salesman. It receives a ‘commission’ for selling a premium service in the form of a premium price. Because it’s so good at it, the premium is quite high.”

Dediu’s observation applies equally well to all the top smartphone brands. They’re all bait, a great way to hook the customer into a revolving 24 month agreement, with high ARPUs (Average Revenue Per User) stemming from the nature, the breadth and attractiveness of services provided by these high-end devices.

T-Mobile, the perennial dark horse, has been one of the more vocal plaintiffs. Besides clearly stating that the company didn’t need the iPhone, T-Mobile has hinted that it would get rid of the blood-sucking payments to handset makers altogether.
Last month, the hints became reality. T-Mobile “re-imagined” itself as the Un-Carrier:

T-Mobile’s pitch:

With no more annual service contract required, we don’t lock you into a big commitment with our Simple Choice Plan.

It’s a clever idea: T-Mobile has seemingly decoupled hardware and service. If you bring your own phone, you just pay for service. If you need a phone, T-Mobile will be happy to sell you one, let’s say a 16Gb iPhone 5 for $99…and as an added convenience (watch the left hand), they’ll offer you a 24-month contract at just $20/month! You want out before serving your 2-year sentence? No problem! Just pony up the full price of the phone; other terms and conditions may apply.

Inexplicably, some pundits (who should know better) have fallen for the pitch. Here’s David Pogue in the New York Times:

“Last week, the landscape changed. T-Mobile violated the unwritten conspiracy code of cellphone carriers. It admitted that the emperors have no clothes.”

The forums buzzed with the party line: It’s the end of contracts and subsidies.
But the company’s too-clever way with words didn’t sit well with other observers. The no-contract claim is obviously disingenuous; it only applies to people bringing their own phone, a tiny minority. For typical customers — those who get their phones from their carriers — the manacles are too familiar.
The claim also didn’t sit well with Bob Ferguson, Washington State’s Attorney General. Ferguson didn’t dither, saying “No Dice” to T-Mobile’s deceptive “No-Contract” advertising:

“As Attorney General, my job is to defend consumers, ensure truth in advertising, and make sure all businesses are playing by the rules.” 

T-Mobile backed down. The company admitted that there actually is a contract, a subsidy, and they offered to make things right with customers who accepted the agreement under murky pretenses.
Happy ending, congratulations to the vigorous AG.

Still, what were T-Mobile execs thinking? Did they really think that we’re such idiots that we can’t see a 24 month obligation as a contract? What sort of corporate culture produces this type of delusion?
In theory, T-Mobile was onto a good idea. You bring your own phone, you truly pay less and you’re not tied to a contract. Come in, stay as long or as little as you’d like, pay by the month.
But this isn’t how the market works in practice. The rapid succession of new phones makes the latest model more desirable. As a result, carriers have an opportunity to tie their customers down by offering the newest device at an artificially low price — and get a comfortable two-year income stream to recoup the subsidy.
Meanwhile, there’s other news in the carrier world:

  • Verizon is locked in difficult negotiations for the purchase of Vodafone’s 45% share of the company. This is in a context where, two years ago, Vodafone made the decision to shed its participation in other carriers such as Orange, SFR or China Mobile. In their bid/ask conversations, Vodafone and Verizon are $30B apart, Verizon offering a mere $100B while Vodafone won’t take a penny less than $130B.
  • Softbank and Dish Network are in a bidding war for Sprint, probably out of gluttony for more punishment. Masayoshi Son, Softbank’s leader, graciously spared us the carrier-as-victim lament. But if Dish Chairman Charlie Ergen prevails, we can be sure this seasoned sob story practitioner will fit right in once he becomes a cellular operator.

These are the people who tell us subsidies are killing them. They really do think we’re idiots.

JLG@mondaynote.com

Apple Buys Intel

 

Getting rid of Samsung as a processor supplier and, at the same time, capturing the crown jewel of the American semiconductor industry. How could Apple resist the temptation to solve its cash problem and make history again?

Halfway through the second quarter of the 2013 fiscal year, most of Apple’s top execs meet at an undisclosed location (Eddy Cue’s chair is empty – he’s been called away to a Ferrari board meeting). They’re joined by a few trusted industry insiders: Bill “the Coach” Campbell, Apple and Intuit Director and adviser to Google’s founders, Mssrs. Page and Brin; Larry Sonsini, the Silicon Valley consigliere of more than three decades; and Frank Quattrone, the star investment banker with nine lives.

The meeting isn’t about the company’s dwindling profit margins. The smaller margins were expected and invited: The reduced-price iPad and heavy promotion of the “old” iPhone 4 as an entry-level product are part of the long term strategy of guarding Apple’s lower end (so to speak). And no whining about AAPL’s grim slide over the last six months, a problem that has only one solution: Apple needs to record a series of better quarters.

The problem of the day is, once again, what to do with Apple’s obscene pile of cash.

By the end of December 2012, the company held about $137B in cash (or equivalents such as marketable securities), including $23B from operations for the quarter.

CFO Peter Oppenheimer delivers the bad news: It looks like operations will disgorge another $35B this quarter. The stock buy-back and dividend program that was designed to bleed off $45B over the next few years (see this March 2012 Monday Note) won’t be enough if the company continues at this rate.

Apple needs something bigger.

Quattrone has been sitting quietly at the end of the table. He clears his throat and speaks:

Buy Intel.

Well, yes, Frank (says Tim Cook), we’ve been buying Intel processors for the Mac since 2005.

Not the chips. The company. The planets are aligned for Apple to strike a blow that will leave the industry forever changed. Make history, acquire Intel.

Quattrone has their attention. He unfolds the celestial calibration:

  • Apple needs to extract itself from the toxic relationship with Samsung, its ARM supplier.
  • Intel is the best large-scale silicon manufacturer in the world. They have the people, the technology, and the plant capacity to match Apple’s needs for years to come.
  • “But Intel doesn’t do ARM!” you say. Indeed, Intel has no interest in the fierce competition and small margins in the ARM-based SoC market. Joining the ARM fray would severely disrupt Intel’s numbers and infuriate Wall Street. But if Intel were to essentially “go private” as Apple’s semiconductor manufacturing arm (pun intended), catering to all of Apple’s x86 and ARM needs (and whatever else Bob Mansfield is secretly plotting), Wall Street would have no such objection.
  • Intel is flailing. The traditional PC market – Intel’s lifeblood – continues to shrink, yet the company does nothing to break into the ARM-dominated mobile sector. In the meantime, the company makes perplexing investments such as buying McAfee for $7.68B.
  • There’s a leadership vacuum at Intel. Six months after announcing CEO Paul Otellini‘s “retirement”, Intel’s Board has yet to find a replacement who can sail the ship in more competitive waters. Apple could commission Pat Gelsinger, a 30-year Intel veteran and former CTO (Intel’s first) who fled to VMware after his career stalled at Intel. Despite being a bit of a Bill Gates look-alike (once upon a time), Gelsinger is a real technologist who would fit well within Apple, especially if he were given the opportunity to really “go for” the ARM architecture instead of iteratively tweaking x86 devices.
  • Last but not least, Intel’s market cap is about $115B, eminently affordable. The company is profitable and generates a good deal of cash, even after the heavy capital expenditures required by its constant need to build new and expensive manufacturing plants.
  • …oh, and one more thing: Wouldn’t it be fun to “partner” more closely with Microsoft, HP and Dell, working on x86 developments, schedules and… pricing?

A lively discussion ensues. Imagine solving many of Apple’s problems with a single sweeping motion. This would really make Cupertino the center of the high-tech world.

It’s an interesting idea, but there will be obstacles, both cultural and legal.

The Coach goes first: “Knowing both of these companies more than a little bit, I can attest to the pride they have in their respective cultures. They’re both disinclined to reconsider their beliefs in any meaningful way. Merging these two dissimilar groups, shedding unnecessary activities such as McAfee and the like would be dangerously disruptive to Apple’s well-honed, cohesive culture. As a general rule, merging two large organization rarely succeeds… unless you consider merging airlines a success…”

Finally, the Consigliere speaks: “It’s a tempting fantasy, it will mean years of work for my firm and many, many others, but as a friend of the company, as a past confidant of your departed Founder, don’t do it. There will be too much legal trouble with the Feds, with competitors, with Intel partners. Most fantasies aren’t meant to be enacted.”

I won’t dwell on the reality of the meeting: I made it up as a way to explain why Apple really has no choice other than submit to another cash phlebotomy, this time for an additional $60B. And, as with real-world phlebotomies, the procedure will treat the problem, but it won’t cure it. With $30B from operations per quarter, the $60B lancing will have to be repeated.

Some read the decision to return gobs of cash to shareholders as an admission of defeat. Apple has given up making big moves, as in one or more big acquisitions.

I don’t agree: We ought to be glad that the Apple execs (and their wise advisers) didn’t allow themselves to succumb to transaction fever, to a mirage of ego aggrandizement held out by a potential “game changing” acquisition.

A final word on taxes. To return the additional $60B (for a total of $100B when including the ongoing program announced last year) through increased dividends and repurchased shares, Apple will have to borrow money.

Borrow? When they have so much cash?

Yes, thanks to our mangled tax code. As explained here, about $100B of Apple’s cash is stored overseas. If repatriated, it would be “heavily” (read “normally”) taxed. Like most US companies that have international operations, Apple plays complicated, entirely legal tax games that allow their international profits to be taxed at very low rates as long as the profits — and the resulting cash — stay outside Uncle Sam’s reach. And thus we have the apparent paradox of borrowing money when cash-rich.

The benefit of these tax code contortions is difficult to explain to normal humans — as opposed to legislators who allowed the loopholes.

All this now makes Apple a different company. Once a fledgling challenger of established powerhouses such as IBM, Microsoft or HP, it now makes “too much cash” and is condemned to a life of paying dividends and buying back shares — like the old fogies it once derided.

JLG@mondaynote.com

 

 

The App Store: Good Deeds, Poor Communication

 

Apple does the right thing when striving to keep its App Store free from promotional trickery – but fails to shed light on the process and, as a result, damages its reputation.

Earlier this month, the Apple App Store removed the popular AppGratis application from its shelves. Then, last week, the App Store censors delivered a decisive blow by suppressing AppGratis’ push notifications to installed apps.
Apple’s reason for the ban: “… the app circumvented App Store rules preventing applications promoting other apps and direct marketing.”

AppGratis CEO Simon Dawlat took to the airwaves, loudly protesting his innocence. The aggrieved entrepreneur criticized Apple’s arbitrary and inconsistent approval process and “out of the blue” removal of AppGratis. He launched an online petition that gathered 571K signatures in just a few hours. He convinced Fleur Pellerin, France’s Minister of Digital Technologies, to run to the wounded company’s bedside and join the protest. Minister Pellerin added a bit of saber-rattling, calling Apple’s actions “brutal” and hinting at plans to ask the EU to examine the takedown.

But then the PR tide turned. An AppGratis document leaked to Business Insider by a “source in the developer community” hints at the company’s unspoken business model: AppGratis will raise your app’s rating in the App Store – for a fee.

Specifically, AppGratis gives developers an estimate of where in Apple’s App Store rankings an App can land based on how much the developer is willing to pay… [The] document shows AppGratis estimates a ~$300,000 buy will land an app in the top five slot in the US version of the App Store.

$300k is a lot of money for a small app developer, but the promise is that the higher ranking will result in increased revenue that will more than cover AppGratis’ “service fee”.

Before the e-dust could settle, Dawlat posted a long-winded blog entry that I assume was meant as a rebuttal. Here’s an excerpt:

People have “accused us” of gaming the top. But the reality is that with or without the “rankings,” our community will still drive millions of installs for the apps we feature. Independently from the App Store. We have never based our business on ranking exposure, because we’ve always expected Apple to chime in at some point, and change that. 

He then went on to announce AppGratis’ “crazy cool” old-yet-new direction [emphasis mine]:

And even more exciting, we’re back to our roots. A crazy cool daily newsletter with millions of subscribers, that will very soon be complemented by the newest and nicest HTML5 WebApp you’ll ever see. Two things we fully own, and that no one can take away from us. So when I stated a week ago that the reports of our death were greatly exaggerated, I wasn’t kidding. Not kidding at all. AppGratis is just getting started.
Because from the bottom of our hearts, we know we add value to this whole ecosystem.
And we intend to keep doing just that.

To shed light on this complicated situation, let’s use an analogy. And since this about a French company, Apple will be represented by Carrefour, the hypermarché giant — something like Walmart, but less polite. If you ask to have your groceries packed up, the cashier throws a plastic bag at you and tells you to do it yourself. You’ll be playing Simon Dawlat.

You approach Carrefour with your unique line of heirloom yogurts made from free range goat milk. It’s an interesting product, but is Carrefour obligated to give you shelf space? Of course not. The store may be inelegant and the staff is rude, but the company has its standards. Carrefour offers to take you on if you agree to its rules concerning shelf displays and promotional activities.

One day, a store manager notices the coupons you’ve enclosed in your yogurt packs. These coupons promote other products that Carrefour stocks, offered at lower prices when purchased on-line. When asked about it, you finally admit that, yes, some of the other manufacturers pay you to include their coupons with your yogurt. Carrefour management throws a plastic bag at you and tells you to pack up and go home. Their store, their rules.

(The analogy is both transparent and flawed. There’s no perfect physical retail analogue for AppGratis’ virtual schtick — getting paid to bubble an app up the App Store rankings. And the App Store doesn’t have a great real-world analogue, either. The App Store’s raison d’être is to make iPhone and iPads more valuable; it’s not a business in itself. But you get the idea.)

To touch on the obvious, Apple isn’t obligated to publish AppGratis or any other app, regardless of a developer’s adherence to the rules.

As for the rules themselves, I read through the App Store Review Guidelines, bracing myself for Apple’s usual hauteur. What I found was a personable, (mostly) well-written document that addresses a number of complicated issues while (mostly) avoiding the opaque legalese found in the licensing agreements we all stopped reading long ago.

The rule that’s most pertinent to the AppGratis case is this [emphasis mine]:

If you attempt to cheat the system (for example, by trying to trick the review process, steal data from users, copy another developer’s work, or manipulate the ratings) your Apps will be removed from the store and you will be expelled from the developer program.

There seems little doubt that AppGratis crossed this line: Its business model is precisely one of artificially enhancing an app’s ratings.

This isn’t a new issue. In September 2012, Apple added a clause (section 2.25) to the Guidelines:

Apps that display Apps other than your own for purchase or promotion in a manner similar to or confusing with the App Store will be rejected.

A good deal of discussion ensued, most of which made clear what awaited AppGratis and others such as FreeAppADay, AppoDay, Daily App Dream, and App Shopper. As explained in a PocketGamer post [emphasis mine]:

The wording is typically vague, but clause 2.25 appears to give Apple carte blanche to put any app that promotes titles from a different developer out of action.
At the moment, we understand Apple’s likely prime targets are pure app promotion services, such as (but not necessarily including) FreeAppADay, AppoDay, AppGratis, Daily App Dream and AppShopper, amongst others.

That clause 2.25 was introduced more than six months ago puts Dawlat’s claim that Apple acted “out of the blue” and Minister Pellerin’s accusation of “brutality” in a different light: Dawlat had ample notice of Apple’s intent.

(Minister Pellerin might now be wondering if her staff performed sufficient research before letting her run to Dawlat’s rescue…or maybe not. Half-baked technopolicy is becoming politics-as-usual in France. Last year, the newly-elected government ran afoul of high-tech entrepreneurs when it announced legislation that would greatly increase taxes on their equity gains, only to beat a hasty half-retreat, leaving the tax question muddier than ever. Perhaps the AppGratis snafu was perceived as an opportunity to earn back some of the lost credit, especially when portraying the situation as a French David vs. an American Goliath.)

Ultimately, Dawlat’s cry of foul will probably be seen as disingenuous and tiresome, not to mention a wasteful distraction… Do the critics of the App Store approval process consider the noise level that approvers must endure? To get to the current 700,000 apps, the company has to scrutinize more than 3,000 new entries a week plus revisions of existing apps. Mistakes will be made. Some apps will be approved only to be yanked when their scheme becomes obvious. Developers will be incensed, and Apple, sensibly, has anticipated the backlash:

If your app is rejected, we have a Review Board that you can appeal to. If you run to the press and trash us, it never helps.

So it’s case closed, right?

Not quite. There remains the problem of perception.

I can’t provide a link to the Guidelines in this Note because the document is only accessible to dues-paying developers (of which I am one). There’s nothing mysterious, secret, or dangerous about these words, they provide no competitive insight that could work to Apple’s disadvantage. Charging a developer just to read the rules gains nothing, and contributes to Apple’s negative image. Attempting to keep them out of the public eye is insulting and futile – developers freely leak and comment on the content.

Far worse is that Apple appears to have a policy (with very few allowances) of refusing to publicly explain its App Store decisions. I realize that some judgments are ineffable, matters of taste, as explained in the Guidelines:

We will reject Apps for any content or behavior that we believe is over the line. What line, you ask? Well, as a Supreme Court Justice once said, “I’ll know it when I see it”. And we think that you will also know it when you cross it.

Apple isn’t wrong to reserve the right to make such decisions. Although insiders may depict the company as obsessive control freaks, “normal” customers seem to appreciate Apple’s efforts to keep the App Store a Clean, Well-Lighted Place.

But maintaining a stony silence when imposing a judgment call is a bad choice, it distances developers, and it inevitably triggers controversy. A few words of explanation would invite respect for having courageously taken a difficult stance.

As already discussed in a recent Monday Note (Apple is Losing The War – Of Words), I find the company’s refusal to engage in more public debate harmful and disrespectful. While the AppGratis incident in itself isn’t overly important, it could be an opportunity for Apple to reconsider its ways.

JLG@mondaynote.com

 

Privacy: You Have Nothing To Fear

 

Pervasive sensors and IP connections, coupled with the “infinite” storage and computing power in the Cloud, threaten our privacy. We need to defend ourselves and get control of our personal data amassed by private companies and government agencies.

Optimists and pessimists may inhabit opposing camps, but they do have one thing in common: Their inclinations lead to behaviors that verify their prophecies. I’ve chosen my side: I’m an optimist and have been rewarded accordingly. As a reminder of my attitude, to make sure that the occasional frustrations don’t derail my determination, I keep a little figurine from the Provençal Crèche (Nativity Scene) on my desk. He’s called Lou Ravi, the Enraptured One:

The traditional characterization is that of a gent who wanders the world, innocently marveling at the simplest of miracles. (At times, I wonder if he isn’t just a polite version of the village idiot.)

Recently, a seemingly trivial incident cast a shadow over my life-long optimism, an event that awakened dark thoughts about technology’s impact on our privacy.

As I’m driving on the A10 not-so-freeway towards the Loire châteaux, I see my license plate displayed on a sign that tells me that I’m exceeding the speed limit (130kph, about 80mph). This is novel… where we used to have an anonymous flashing nag, now we’re individually fingered. On the one hand, it’s certainly more helpful than a broad, impersonal warning; on the other, it’s now personal.

Stirred from my enraptured stupor, I start counting other ways in which we’re targeted.

Staying within the realm of license plates, we have an official, Wikipedia-sanctioned acronym: ALPR, the Automatic License Plate Reader, a device that’s used (or mis-used) by municipalities to scan every vehicle that enters the city’s limits. An ALPR system is already operational in ritzy Tiburon just north of the Golden Gate Bridge, and it’s being considered in ritzier Piedmont, an island of wealth surrounded by Oakland. The NYPD has used mobile license plate readers to build a “database of 16 million license plates, along with locations where the car was spotted”. (A Google search for Automatic License Plate Reader yields more than 1M hits.)

We also have various flavors of “event data recorders” in our cars. Similar to a plane’s black box, an EDR can regurgitate the sequence of events that preceded a crash. According to the NHTSA (National Highway Traffic Safety Administration), 96% of all 2013 vehicles carry such a device and there is a proposal to make them mandatory in 2015 models.

Insurance companies see the EDR as an opportunity to better evaluate risk so they can offer lower premiums to good drivers. Privacy advocates are concerned that the data could be used for less benevolent purposes:

Though the information is being collected with the best of intentions – safer cars or to provide drivers with more services and conveniences – there is always the danger it can end up in lawsuits, or in the hands of the government or with marketers looking to drum up business from passing motorists.

Again, if you Google “car black box recorder”, you get about 6M hits and a wide range of third-party devices. Some come with a dashboard camera such as we see in American patrol cars (and that have been adopted by a huge number of Russian drivers); others plug into the OBD-II (On-Board Diagnostic) connector that’s present on all modern cars. Combined with accelerometers and precision GPS recording, these draw a very accurate picture of everything we do at the wheel, where, when and how.

It’s not all sinister: With appropriate software, weekend track drivers can visualize and analyze their braking, acceleration, and effective use of apexes. Still, the overall picture is one of omnipresent surveillance. And I’m certainly not encouraged when I read that “anyone with a handheld scanner and access to the port under your steering column can download a wealth of information about your vehicle.”

The regard for privacy that’s demonstrated by the public sector — the government agencies that can have an enormous impact on our lives — is also less than encouraging. We now realize that the IRS reads our email without requiring any authorization or judicial supervision; the DEA complains about iMessage encryption; we have National Security Letters that confer broad and little-supervised snooping powers to US government agencies.

On the private side, Google, Facebook, and cellular carriers amass and trade on our personal data, again, with little or no practical oversight. Try asking any of these companies what sort of information they have on you, to whom they sell it, and if you can have a peek at it.

The litany goes on: Escalating healthcare expenditures give insurers equally escalating incentives to acquire personal behavior data in order to improve their risk calculation (and reject claims). We’re photographed, videoed, and, now, face-recognized everywhere. Try counting the cameras that see you on the street, in stores, elevators, offices.

When we worry about such practices, we get the sort of rote retort infelicitously typified by Eric Schmidt: “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”

Sure, if you have nothing to hide, you have nothing to fear. All you need to do is lead a pristine life. Drive carefully; wait for the green light before you cross the street; eat a balanced diet; don’t take, view, or exchange the wrong pictures; don’t consort with undesirable people; don’t say or write bad words; don’t inhale the wrong smoke…

This is unrealistic.

If there is nowhere to hide, how can disagreements safely ferment in political life, at work, in relationships? By definition, change disturbs something or annoys someone. And, moving to paranoia, or full awareness, the age-old question arises: Who will guard us from the guardians?

Returning to my now slightly-strained optimism, I hope we’ll support the people and organizations, such as the ACLU and many others, who work for our privacy, and that we’ll use our votes to unseat those who sell us out to private and state encroachers. We can start with demanding a handle on who has what data on us. Playing on Habeas Corpus, it’s already called Habeas Data.

I’m curious to see what Google, Verizon, Orange, Facebook, Amazon and many others know about me. Insights await…

JLG@mondaynote.com

Facebook Home: Another Android Lock Pick

 

Facebook’s new Home on Android smartphone is an audacious attempt to demote the OS to a utility role, to keep to itself user data Android was supposed to feed into Google’s advertising business. Google’s reaction will be worth watching.

Amazon’s Kindle Fire, announced late September 2011, is viewed as a clever “Android lock pick“. Notwithstanding the term’s illicit flavor, Amazon’s burglary is entirely legal, an intended consequence of Google’s decision to Open Source their Android mobile operating system. Download the Android source code here, modify it to your heart’s — or business needs’ — content, load it onto a device and sell as many as you’d like.

Because it doesn’t fully meet the terms of the Android Compatibility Program, Amazon’s proprietary version isn’t allowed to use the Android trademark and the company had to open its own App Store. In industry argot, Amazon “forked” Android; they spawned an incompatible branch in the Android Source Tree.

The result of this heretic version of Android is a platform that’s tuned to Amazon’s own needs: Promoting its e-commerce without feeding Google’s advertising money pump.

And that brings us to Facebook’s new Home.

(The company’s slick presentation is here. Business Insider’s also provides a helpful gallery.)

Zuckerberg’s new creation is the latest instance of the noble pursuit of making the user’s life easier by wrapping a shell around existing software. Creating a shell isn’t a shallow endeavor; Windows started its life as a GUI shell wrapped around MS-DOS.  Even venerable Unix command line interfaces such as C shell, Bourne, and Bash (which can be found inside OS X) are user-friendly — or “somewhat friendlier” — wrappers around the Unix kernel. (Sometimes this noble pursuit is taken too far — remember Microsoft’s Bob? It was the source of many jokes.)

Facebook Home is a shell wrapped around Android; it’s a software layer that sits on top of everything else on your smartphone. Your Facebook friends, your timeline, conversations, everything is in one place. It also gives you a simple, clean way to get to other applications should you feel the need to leave the Facebook corral… but the intent is clear: Why would you ever want to leave Home?

This is audacious and clever, everything we’ve come to expect from the company’s founder.

To start with, and contrary to the speculation leading up to the announcement, Facebook didn’t unveil a piece of hardware. Why bother with design, manufacture, distribution and support, only to sell a few million devices — a tiny fraction of your one billion users — when you can sneak in and take over a much larger number of Android smartphones at a much smaller cost?

Second, Home is not only well-aligned with Facebook’s real business, advertising revenue, it’s even more aligned with an important part of the company’s business strategy: keeping that revenue out of Google’s hands. Android’s only raison d’être is to attract a captive audience, to offer free services (search, email, maps…) in order to gain access to the users’ actions and data, which Google then cashes in by selling eyeballs to advertisers. By “floating” above Android, Home can keep these actions and data to itself, out of Google’s reach.

Facebook, like Amazon, wants to keep control of its core business. But unlike Amazon, Facebook didn’t “fork” Android, it merely demoted it to an OS layer that sits underneath the Home shell.

On paper and in the demos, it sounds like Zuckerberg has run the table… but moving from concept to reality complicates matters.

First, Facebook Home isn’t the only Android shell. An important example is Samsung, the leading Android player: it provides its own TouchWiz UI. Given that the Korean giant is obviously determined to stay in control of its own core business, one wonders how the company will welcome Facebook Home into the family of Galaxy phones and phablets. Will it be a warm embrace, or will Samsung continually modify its software in order to keep Home one step behind?

More generally, Facebook has admitted that differences in Android implementations prevent the first release of Home from working on all Android phones. In order to achieve the coverage they’ll need to keep Google (and its Google+ social networking effort) at bay, Facebook could be sucked into a quagmire of development and support.

Last but not least, there’s Google’s reaction.

So far, we’ve heard little but mellifluous pablum from Google in response to Home. (Microsoft, on the other hand, quickly attempted to point out that they were first with an all-your-activities-friends-communications shell in Windows Phone but, in this game, Android is the new Windows and Microsoft is the Apple of the early 90’s.)

Google has shown that it can play nice with its competitors — as long as they aren’t actually competing on the same turf. The Mountain View company doesn’t mind making substantial ($1B or more) Traffic Acquisition payments to Apple because the two don’t compete in the Search and Advertising business. Facebook taking over an Android smartphone is another matter entirely. Google and Facebook are in the same game; they both crave access to user data.

Google could sit back and observe for a while, quantify Facebook’s actual takeover of Android phones, keep tabs on users’ reactions. Perhaps Home will be perceived as yet another walled garden with a massive handover of private data to Facebook.

But Google already sees trouble for its Android strategy.

Many Asian handset makers now adopt Android without including services such as Google Search, Gmail, and Google Maps, the all-important user data pumps. Samsung still uses many of these services but, having gained a leading role on the Android platform, it might demand more money for the user data it feeds to Google, or even fork the code.

In this context, Facebook Home could be perceived as yet another threat to the Android business model.

A number of possible responses come to mind.

In the computer industry, being annoyed or worse by “compatible” hardware or software isn’t new. As a result, the responses are well honed. You can keep changing the interface, thus making it difficult for the parasitic product to bite into its host and suck its blood (data, in this case), or you change the licensing terms.

Google could change or hide its APIs (Application Programming Interfaces) in order to limit Home’s functionality, or even prevent it from running at all (at least until a particularly nasty “bug” is fixed). Worse, Google could makes changes that cause the Facebook shell to still run, but poorly.

I’ll hasten to say that I doubt Google would do any of this deliberately — it would violate the company’s Don’t Be Evil ethos. But… accidents could happen, such as when a hapless Google engineer mistakenly captured Wifi data.

Seriously, FaceBook Home is yet another pick of the Android lock, a threat against Google’s core strategy that will have to be addressed, either with specific countermeasures or with more global changes in the platform’s monetization.

JLG@mondaynote.com

Yahoo: The Marissa Mayer Turnaround

 

Critics spew well-meaning generalities when criticizing Marissa Mayer’s first moves at Yahoo! They fail to see the urgency of the company’s turnaround situation, the need to refocus the workforce and spruce up the management.

Last July, Yahoo! elected a new CEO, their seventh or eight, I’ve lost count. Marissa Mayer is an ex-Google exec with a BS in symbolics systems and an MS in Computer Science from Stanford, just like Scott Forstall. After a 13-year career at the biggest Cloud company on Earth, Mayer brings relevant experience to the CEO position of the once-great Web company. She also happens to be female but, unlike a predecessor of the same gender, Mayer doesn’t appear to feel the need to assert power by swearing like a sailor.

Power she asserts nonetheless. Barely pausing to deliver her first child, Mayer set to work: Yahoo! apps were too many, she vowed to cut them from 60 to the dozen or so that support our “digital daily habit“. Hiring standards have been seriously upgraded, the CEO wants to review every candidate to weed out “C-list slackers“. People were shown the door, starting in the executive suite. Some were replaced by ex-Google comrades such as her newly-appointed COO, Henrique De Castro.

The changes have been met with intramural criticism, from charges of Google cronyism to moaning over her meddling with the hiring process (“Yahoo’s Mayer gets internal flak for more rigorous hiring“). The complainers might as well get used to it: Mayer knows who she’s competing against, she wants to win, and that means Yahoo! needs to attract Valley-class talent. If she can pull them from Google, even better. The insiders who complain to the media only advertise their fear — a bad idea — and unwittingly make the case for Mayer’s higher standards.

The new sheriff is a high-intensity person. Friends tell me she also reviews new apps in great detail, down to color choices. (Didn’t another successful leader so annoy people?)

The protests over Mayer’s hiring practices and (supposed) micromanagement are nothing compared to the howls of pain over Mayer’s most controversial decision: No more Working From Home.

The prohibition is an affront to accepted beliefs about white-collar productivity, work/life balance, working mothers, sending less CO2 into the atmosphere. Does Mayer oppose a balanced life and a greener planet?

No, presumably — but reality intrudes. Once the king of the Web, Yahoo! stood by and watched as Google and Facebook seduced their users and advertisers. In 2008, in an effort to bolster its flagging on-line fortunes, Microsoft offered more than $44B to acquire Yahoo. The Board nixed the deal and Yahoo! kept sinking. Right before Mayer took the helm in July 2012, Yahoo’s market cap hovered around $16B, a decline of more than 60%.

The niceties of peacetime prosperity had to go. Unlike her “explicit” predecessor, Mayer doesn’t stoop to lash out at the protesters but one can imagine what she thinks: “Shut up, you whiners. This is a turnaround, not a Baja California cruise!”

In the Valley, WFH has long been controversial. In spite of its undeniable benefits, too-frequent abuses led to WFH becoming a euphemism for goofing off, or for starting a software business on one’s employer’s dime, an honored tradition.

Telecommuting requires a secure VPN (Virtual Private Network) connection from your computer at home to the company’s servers. These systems keep a traffic log, a record of who connects, from what IP address, when, for how long, how much data, and so on. Now, picture a CEO from the Google tradition of data analysis. She looks at the VPN logs and sees too much “comfort”, to be polite.

Mayer did what leaders do: She made a decision that made some people unhappy in order to achieve success for the whole enterprise (toned-up employees and shareholders). After seeing Yahoo! lose altitude year after year, the criticism leveled at Mayer makes me optimistic about the company’s future: Mayer’s treatment hurts where it needs to.

Among the many critics of Mayer’s no-WHF decision, the one I find most puzzling — or is it embarrassing? — emanates from the prestigious Wharton School of Business (at the University of Pennsylvania). In a Knowledge@Wharton article, scholars make sage but irrelevant comments such as:

Wharton faculty members who specialize in issues pertaining to employee productivity and work/life balance were similarly surprised by Mayer’s all-encompassing policy change. “Our experience in this field is that one-size-fits-all policies just don’t work,” notes Stewart Friedman, Wharton practice professor of management and director of the school’s Work/Life Integration Project. “You want to have as many tools as possible available to you as an executive to be able to tailor the work to the demands of the task. The fewer tools you have available, the harder it is to solve the problem.”

Nowhere in the article do the Wharton scholars consider the urgency of Yahoo’s situation, nor do they speculate that perhaps Mayer didn’t like what she found in the VPN logs. And, speaking of numbers, the Wharton experts provide no numbers, no sample size, no control group to buttress their statements. Our well-meaning academics might want to take a look at a recent blog post by Scott Adams, the prolific creator of corpocrat-skewering Dilbert cartoons. Titled Management/Success/Leadership: Mostly Bullshit, the post vigorously delivers what the title promises, as in this paragraph:

The fields of management/success/leadership are a lot like the finance industry in the sense that much of it is based on confusing correlation and chance with causation. We humans like to feel as if we understand and control our environments. We don’t like to think of ourselves as helpless leaves blowing in the wind of chance. So we clutch at any ridiculous explanation of how things work. 

Or this one, closer to today’s topic [emphasis mine]:

I first noticed the questionable claims of management experts back in the nineties, when it was fashionable to explain a company’s success by its generous employee benefits. The quaint idea of the time was that treating employees like kings and queens would free their creative energies to create massive profits. The boring reality is that companies that are successful have the resources to be generous to employees and so they do. The best way a CEO can justify an obscene pay package is by treating employees generously. To put this in another way, have you ever seen a corporate turnaround that was caused primarily by improving employee benefits?

Tony Hsieh, the founder and CEO of on-line shoe store Zappos, isn’t a blogger, cartoonist, or academic theoretician; he leads a very successful company that’s admired for its customer-oriented practices (culture, if you will). In this Business Insider piece, titled Here’s Why I Don’t Want My Employees To Work From Home, Hsieh is unequivocal about the value of Working From Work [emphasis mine]:

Research has shown that companies with strong cultures outperform those without in the long-term financially. So we’re big, big believers in building strong company cultures. And I think that’s hard to do remotely.

We don’t really telecommute at Zappos. We want employees to be interacting with each other, building those personal relationships and relationships outside of work as well.

What we found is when they have those personal connections that productivity increases because there’s higher levels of trust. Employees are willing to do favors for each other because they’re not just co-workers, but also friends, and communication is better. So we’re big believers in in-person interactions.

Who in good conscience believes that Mayer’s edict is absolute and permanent? You have a sick child at home, will you be granted the permission to work from home for a few days? Of course. Or, you’re an asocial but genius coder, will you be allowed to code at home from 10 pm to 7 am? Again, yes. Mayer saw it done, with good results, at her previous company.

With Mayer’s guidance, the patient has been stabilized and is on the road to recovery. But where does that road lead to? What does Yahoo! want to be now that it’s starting to act like a grownup? A better portal, a place to which we gravitate because, as an insider says, we’ll find more relevant fodder — without relying on “friends”? This would be a return to Yahoo’s original mission, one of cataloguing the Web, only with better technology and taste than Facebook, Google, AOL or even Microsoft’s Bing (Yahoo’s supplier of search data).

This leads to the $$ question, to Yahoo’s business model: advertising or services? With Google and now Facebook dominating the advertising space, how much room is left?

We hear Mayer is focusing Yahoo! on mobile applications. This sounds reasonable… but isn’t everyone?

In the search for a renewed identity (and profits), the question of alliances comes up. Who’s my enemy, my enemy’s enemy, irreplaceable partner/supplier, natural complement? In this regard, the Microsoft question will undoubtedly pop up again. I doubt Mayer has the utmost regard for Microsoft or for its CEO’s bullying style, but can she live without Bing? Is there an alternative? Also, what, if anything, could a healthier Yahoo! offer to Facebook or Apple?

The fun is just starting.

JLG@mondaynote.com