hardware

Losing The Plot

 

It’s a beautiful sight when, year after year, a company stays true to its original idea. But when a business loses the plot, we witness a sorry spectacle, an expensive slide into mediocrity. Every wayward company is wayward in its own way: Accountants masquerading as product planners; wannabe visionary execs jealousy trying to prove that they, too, can put a dent in the universe; board members panicking over bad press. But the result never varies: Customers leave.

A few weeks ago I was in France, enjoying the benefits of the French Paradox and happily testing its limits: Lots of duck fat washed down with an ethanol tincture of polyphenols. It was in this fulfilled state that I watched the launch of the latest iteration of an iconic product. There was a little stretch in one dimension, a little squeeze in another, measurable weight loss, more power better utilized, bigger screen for navigation…

The kommentariat were unanimous, the sum of the improvements equals a blockbuster.

I’m not talking about the boring iPhone 5. The occasion was the seventh iteration of the Volkswagen Golf, introduced at the 2012 Paris Motor Show (or, in the modest French appellation, the Mondial de l’Automobile).

The praise is deserved. Golf 7.0 comes with plenty of new features, yet stays backwards-compatible with previous releases…it’s still recognizable as a Golf.

Born in 1974, the Golf (then dubbed the Rabbit in the US) managed to stay true to Volkswagen’s overall corporate brief — its “People’s Car” mandate — while giving the idea new life by walking away from the Beetle’s design. The engine and drive wheels moved upfront; Giorgetto Giugiaro, the legendary and extraordinarily prolific designer, outlined the hatchback’s iconic silhouette, still recognized and loved 38 years later.

Admittedly, the Golf strayed a bit over the years, it gained weight, developed haunches. At one point, it grew to nearly twice its original mass. Worse, reliability was up and down, as were the experts’ opinions of its drivability.

But despite the swerves and cul-de-sac design details, Volkswagen managed to return to the original concept of a sexy, functional hatchback. And the customers didn’t leave — more than 30 million Golfs have been sold.

The Honda Civic story isn’t nearly pleasant. The Civic was introduced in 1967 as a tiny kei car hatchback called the N360 — for the 360 cubic centimeters of its motorcycle engine. In 1972, the little hatchback grew a pair of additional cylinders and became an auto industry icon, the first for Honda.

Year after year, Honda lovingly improved the Civic: Larger, smoother body; more comfortable interior; cleaner, more powerful engine; smoother suspension. For about twenty years, the Civic was a model of neat progression, of staying true to the original hatchback idea.

But in the mid-nineties, the Civic lost its unmistakable identity. No longer satisfied with being a versatile, dependable transportation machine, the Civic wanted to be treated with respect, it wanted…valet parking. A few years later, the Civic suffered a midlife crisis and tried to become a sports car.

What happened? Was it because of a change of the guard inside the company? Honda was often taken to task for being too much of a maverick; did the Japanese company try too hard to placate critics and become more “normal”?

The parallel Golf and Civic stories show a sharp contrast between the two companies. In many respects, the Civic started as a technically superior product. It had a better engine, better manufacturing, and legendary reliability. But Volkswagen stuck to the original concept and is well rewarded as a result.

There are even sorrier examples of lost plots in the auto industry — think Citroën — but it’s time to turn to our industry.

Regard Hewlett-Packard, serial plot loser.

In the early 70’s, HP owned the PC market (and forgive the anachronism…back then they were called “desktop computers”). Using the technical and financial might it had earned with its late-sixties “programmable calculator” line, HP developed a range of “discrete logic implementations” (integrated circuits) of their 2100 series minicomputer instruction set. It was a clean, visionary strategy. Very quickly, HP’s 9800 series of desktop computers flattened every competitor in its path: Wang, Olivetti, Tektronix, Seiko…

Then, in 1972, Intel introduced the 8008 microprocessor. HP looked down its nose at these  cheap, woefully underpowered 8-bit gizmos…there was no way these toys could compete with HP’s fast, powerful, 16-bit desktop devices — why, even HP’s old 9810A calculator used a 16-bit brain.

We know the rest of the story: The inexpensive devices Pac-Manned their way into HP’s PC business. The 9800 series was displaced by a crowd of entrants, many powered by Microsoft software, including the Apple ][, whose Basic Applesoft interpreter came from Redmond.

It wasn’t until 2002 that HP regained the PC industry’s top spot — and it only did so by acquiring Compaq, the deposed king of PCs. (Ironically, Compaq’s history is similarly predatory: It vaulted to the top when it acquired DEC, another erstwhile king, albeit of the  minicomputer industry. DEC missed the PC revolution entirely.)

Ten years later, after a sorry successions of CEOs, HP’s PC business has become a lackluster, low-margin (5%) endeavor, and Lenovo (or will it be Acer?) is about to assume the number one position in sales.

There is more.

HP was once the king of “mobile computing”. Starting with the HP 35 pocket device (1972), the company grew a phenomenally successful range of iconic devices such as the HP-80 and the HP-12C, the darlings of financial users.

In 1974, the HP-65 topped the range with its magnetic stripe reader for external program storage. The HP-80 had such high margins it provided most of the company’s meager profits during a mid-70‘s financial downturn. (Or so I, lowly HP trenchworker at the time, was told by “upper management”. I’ve researched the record but haven’t been able to confirm the factoid.)

HP owned the pocket-sized form factor, but they’ve since lost the mobile computing plot. There have been a few spasms — the iPaq devices, an iPod dalliance, the amazingly botched $1.2B Palm acquisition– but now HP plays no part in the mobile revolution.

HP CEO Meg Whitman knows this is a problem, that it must be fixed. She tells us that the company must “offer a smartphone because in many countries of the world that is your first computing device.” Her solution? HP won’t have a smartphone in 2013. (Whitman has also announced losses for this year, more losses for next year, and plans to lay off 29,000 people.)

Indeed, for more and more people, in both developing and developed countries, the smartphone has become the first computing device, the really personal computer. So what does “No Smartphone In 2013″ say?

There’s no dearth of Taiwan companies ready with customizable designs. That’s how Nokia got its first Lumia phones from Compal. So why isn’t HP coming up with a Windows Phone 8 device in the next few months? There’s only one possible answer: margins. The smartphone business, dominated as it is by Samsung and Apple, is now in a clones race to the bottom. For HP, this is an all-too-familiar plot line.

How can HP, with its new Make it Matter slogan, continue to lose its key plots? Waiting until 2014 to re-enter the smartphone race won’t help. And competing against Lenovo, Acer and others in the Windows 8 PC-cum-tablet space won’t make HP’s clone business more profitable.

JLG@mondaynote.com

 

Apple Never Invented Anything

Monsieur Voiture, you hopeless [redacted French slur], you still can’t prepare a proper mayonnaise! I’ll show you one last time while standing on one foot…”

[Bear with me, the connection with today's title will become apparent in a moment.]

The year is 1965, I’m midway through a series of strange jobs that I take between dropping out of college and joining HP in 1968 — my “psychosocial moratorium”, in California-speak. This one approaches normal: I’m a waiter in a Paris restaurant on rue Galande, not far from Notre-Dame.

Every day, before service starts, it’s my job to make vinaigrette, remoulade, and mayonnaise, condiments for the hors d’oeuvres (French for appetizers) I’ll wheel around on a little cart — hence the Monsieur Voiture snicker from the chef.

The vinaigrette and remoulade are no problem, but the mayonnaise is not my friend: Day after day, my concoction “splits” and the chef berates me.

So now, pushed beyond limit, he grabs a cul-de-poule (a steel bowl with a round bottom), throws in the mustard, vinegar, and a bit of oil, cracks an egg on the bowl’s edge, separates and drops the yolk into the mixture — all with one hand. I see an opportunity to ingratiate myself: Obligingly, I reach for a whisk.

“No, all I need is a fork.”

Up on one foot, as promised, he gives the mixture a single, masterful stroke — and the mayonnaise begins to emulsify, I see the first filaments. The chef sniffs and walks away. I had been trying too hard…the rest was obvious: a thin trickle of oil, whisk calmly.

Clearly, the episode left its mark, and it came back to mind when I first saw the iPad.

For thirty years, the industry had tried to create a tablet, and it had tried too hard. The devices kept clotting, one after the other. Alan Kay’s Dynabook, Go, Eo, GridPad, various Microsoft-powered Tablet PCs, even Apple’s Newton in the early nineties….they didn’t congeal, nothing took.

Then, in January 2010, Chef Jobs walks on stage with the iPad and it all becomes obvious, easy. Three decades of failures are forgotten.

This brings us to last week’s animated debate about Apple’s talent for invention in the Comments section of the “Apple Tax” Monday Note:

“…moving from stylus to touch (finger) was a change in enabling technology, not some invention by Apple – even gesture existed way back before the iPhone. Have an IPAQ on my desk as a reminder – a product ahead of the implementing technology!
Unfortunately Apple have run out of real innovation…”

In other words: “Nothing new, no innovation, the ingredients were already lying around somewhere…”. The comment drew this retort from another reader:

“iPaq as a precursor to iPad?
Are you on drugs? Right now?”

Drugged or sober, the proud iPaq owner falls into the following point: The basic ingredients are the same. Software is all zeroes and ones, after all. The quantity and order may vary, but that’s about it. Hardware is just protons, neutrons, electrons and photons buzzing around, nothing original. Apple didn’t “invent” anything, the iPad is simply their variation, their interpretation of the well-known tablet recipe.

By this myopic logic, Einstein didn’t invent the theory of relativity, Henri Poincaré had similar ideas before him, as did Hendrik Lorentz earlier still. And, come to think of it, Maxwell’s equations contain all of the basic ingredients of relativity; Einstein “merely” found a way to combine them with another set of parts, Newtonian mechanics.

Back to the kitchen: Where does talent reside? Having access to commonly available ingredients or in the subtlety, the creativity — if not the magic — of their artful combination? Why are the great chefs so richly compensated and, yes, imitated? Alain Ducasse, Alain Senderens, and Joel Robuchon might be out of our price range, but Pierre Herme’s macarons are both affordable and out of this world — try the Ispahan, or the salted caramel, or… (We’ll note that he opened his first boutique in Tokyo, where customers pay attention to details.)

In cars, Brand X (I don’t want to offend) and BMW (I don’t drive one) get their steel, aluminum, plastics, rubber, and electronics from similar — and often the same — suppliers. But their respective chefs coax the ingredients differently, with markedly different aesthetic and financial outcomes.

Did IBM invent the PC? Did HP invent the pocket calculators or desktop computers that once put them at the top of the high tech world? Did Henry Ford invent the automobile.

So, yes, if we stick to the basic ingredients list, Apple didn’t invent anything…not the Apple ][, nor the Macintosh, not the iPod, the iPhone, or the iPad…to say nothing of Apple Stores and App Stores. We’d seen them all before, in one fashion or another.

And yet, we can’t escape a key fact: The same chef was involved in all these creations. He didn’t write the code or design the hardware, but he was there in the kitchen — the “executive chef” in trade parlance — with a unique gift for picking ingredients and whipping up unique products.

JLG@mondaynote.com

As a postscript, two links:

– Steve Wildstrom valiantly attempts to clear up the tech media’s distortions of the patents that were — and weren’t — part of the Apple-Samsung trial:

Whatever happens on appeal, I think the jury did an admirable job making sense of the case they were given. They certainly did better than much of the tech media, which have made a complete mess of the verdict.

– This August 2009 Counternotions post provides a well-reasoned perspective on the iPhone’s risks and contributions, as opposed to being a mere packaging job. (The entire Counternotions site is worth reading for its spirited dissection of fashionable “truths”.)

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Summer Fun: The HR-Less Performance Review

The idea for today’s off-topic note came to me when I read “Microsoft’s Lost Decade“, an aptly titled Vanity Fair story. In the piece, Kurt Eichenwald tracks Microsoft’s decline as he revisits a decade of technical missteps and bad business decisions. Predictably, the piece has generated strong retorts from Microsoft’s Ministry of Truth and from Ballmer himself (“It’s not been a lost decade for me!” he barked from the tumbrel).

But I don’t come to bury Caesar — not, yet, I’ll wait until actual numbers for Windows 8 and the Surface tablets emerge. Instead, let’s consider the centerpiece of Eichenwald’s article, his depiction of the cultural degeneracy and intramural paranoia that comes of a badly implemented performance review system.

Performance assessments are, of course, an important aspect of a healthy company. In order to maintain fighting weight, an organization must honestly assay its employees’ contributions and cull the dead wood. This is tournament play, after all, and the coach must “release” players who can’t help get the team to the finals.

But Microsoft’s implementation — “stack ranking”, a bell curve that pits employees and groups against one another like rats in a cage — plunged the company into internecine fights, horse trading, and backstabbing.

…every unit was forced to declare a certain percentage of employees as top performers, then good performers, then average, then below average, then poor…For that reason, executives said, a lot of Microsoft superstars did everything they could to avoid working alongside other top-notch developers, out of fear that they would be hurt in the rankings.

Employees quickly realized that it was more important to focus on organization politics than actual performance:

Every current and former Microsoft employee I interviewed—every one—cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees.

This brought back bad memories of my corpocrat days working for a noted Valley company. When I landed here in 1985, I was dismayed by the pervasive presence of Human Resources, an éminence grise that cast a shadow across the entire organization. Humor being the courtesy of despair, engineers referred to HR as the KGB or, for a more literary reference, the Bene Gesserit, monikers that knowingly imputed an efficiency to a department that offered anything but. Granted, there was no bell curve grading, no obligation to sacrifice the bottom 5%, but the politics were stifling nonetheless, the review process a painful charade.

In memory of those shenanigans, I’ve come up with a possible antidote to manipulative reviews, an attempt to deal honestly and pleasantly with the imperfections of life at work. (Someday I’ll write a Note about an equally important task: How to let go of people with decency — and without lawyers.)

A review must start with three key ingredients, in this order:

  • First: Because your performance meets/exceeds requirements, we’ll renew our vows, our work relationship will continue.
  • Second: Here are your new numbers: salary, bonus, stock.
  • Third: We’re sufficiently happy with your performance as it stands today, so feel free to disregard the observations and suggestions for improvement I’m about to make. Now let’s talk…

This might sound a little too “different” (that’s Californian for “batty”), but there’s a serious purpose, here. We’ve all been reviewed, we all know the anxiety — and sometimes the resentment — that precedes the event. Mealy-mouthed comments about team-spirit, loyalty, how the company cares for its people and other insufferable HR pablum only makes things worse. You tune out, you can only hear the noises in your own head: Am I being led to the exit? Am I being shafted out of a raise/bonus/stock? Am I supposed to think that loyalty is its own — and only — reward?

To be heard, the reviewer must silence these questions. Hence the preamble: Your job is safe; here are the $$; we like what you do enough that you can safely continue to behave in the manner we have come to expect, no need to course-correct.

There follows a pause to let the news sink in. Anxiety quelled, the reviewee is now prepared — and willing — to listen.

On to the observations and suggestions. It’s probably a good idea to start with the minus side of the ledger — this isn’t much different from a sales pitch: Get the product’s negatives out of the way first. Stick to specific comments about goals missed, undesirable habits, and the like. “When you arrive 20 minutes late at our staff meetings, you’re being disrespectful to your colleagues, including me.” Defensive reactions to the negative part of a review are unavoidable, so you sing the refrain: The objectionable behavior, while imperfect, doesn’t jeopardize your job.

(As an aside, and seriously: Objecting to a behavior that you insist will be tolerated because of the overall goodness of the relationship…this approach works wonders outside of work. It’s a lot more constructive than the comminatory “You must stop doing this”, which invites the sarcastic and unhelpful response: “And if I don’t? What? You’ll divorce me?”)

The review can now proceed to the positive, to praising the individual’s performance and giving thanks. Saccharine is to be avoided, examples are a must, and exaggeration is only welcome in moderate doses.

Finally, ask for feedback… but don’t kid yourself: Hierarchy trumps honesty, so you may have to ask twice. Explain that you understand the challenge in giving feedback to the reviewer. You might get some useful tidbits, especially if they sting a bit.

Back in the real world, this simple, direct approach might not fit a large organization where you need to protect the rest of the team from the demoralization of a metastasized employee. The habitual backstabber, the knee-jerk naysayer, the self-appointed “Fellow” must be excised before too much harm is done. It’s a difficult task that requires a degree of human judgment and courage that’s not afforded by a mechanical ranking system.

Next week, we might return to topics such as Apple’s uneasy relationship with file systems, Android tablets and phablets, or some such tech disquisition.

Saving Private RIM

Over the past couple weeks, we’ve read a number of bedtimes stories about RIM’s next move. They all start with the same trope: Once upon a time, late last century, Apple was on the edge of the precipice and still managed to come back — and how! Today, RIM’s situation isn’t nearly as dire as Apple’s was then. Unlike Apple, it doesn’t need a cash transfusion and, in the words of Thorsten Heins, RIM’s new CEO: “If you look at the platform it’s still growing, if you look at the devices we’ve got a single phone that’s sold 45 million units.” RIM will pull off an Apple-like rebound and live happily ever after.

Equating RIM 2012 with Apple 1997 is, in so many respects, delusional. Let me count the ways.

First, the context, the marketplace. In its dark days, Apple faced PC clones running Windows. With Microsoft’s 95% market share, it wasn’t even a two-platform race. Microsoft came to Apple’s rescue with a $150M investment and a commitment to continue writing apps for the Macintosh. This was enlightened self-interest on Microsoft’s part: Discreetly tucked into the agreement was the settlement of a brewing IP suit. And by keeping their highly visible (if economically unthreatening) competitor alive, Microsoft hoped to score a few goodwill points in the face of the DOJ’s antitrust investigations.

Fifteen years later, there’s no looming smartphone monopoly. We have a genuine two-horse race between Android and iOS, and a third horse, Microsoft, circling in the paddock. This is a very different world, a much rougher one with bruisers such as Apple, Samsung, Huawei, and ZTE…with this many players, there’s no rationale for investing in a fallen player.

Second, ecosystems. In Stephen Elop’s ringing (if infelicitously timed) words, yesterday’s platform struggles have become all-out ecosystem wars. To claw back into the race, let alone to return to its former CrackBerry glory, RIM must build an array of content and services that can equal or better those that will be offered by the dominant players in 2013.

This isn’t just about app stores — a challenge unto itself when developers ask why they should commit to a troubled player. Smartphone and tablet users expect entertainment, navigation, synchronization between their devices and other Cloud services.

In the Daily Telegraph interview quoted earlier, Thorsten Heins boasts that BB10, the upcoming BlackBerry 10 OS, will have “true multitasking, … potentially running a car’s navigation, entertainment and gaming systems for the whole family“. Elsewhere, he refers to a new world of applications in which your Blackberry will connect to “the embedded systems that run constantly in the background of everyday life – from parking meters and car computers to credit card machines and ticket counters“. (Home automation can’t be very far off.) Even more majestically, Heins tells us that RIM’s mission is “to build a new mobile computing platform to empower a people in a way they didn’t think possible“.

This all sounds like a noble and worthy goal…but it’s a bit vague. How will RIM’s approach be different from — or better than — the competing ecosystems?

This leads us to our third point: The engineering team (or, “it’s simply a matter of implementation”). When Steve Jobs reverse-acquired Apple in 1997, he brought with him the creators of NextStep, the likes of Avie Tevanian, Bertrand Serlet, and Scott Forstall. They led a team of talented, like-minded computer scientists whose goal was clear: Replace the decrepit Mac OS with a truly modern foundation. It took them the better part of five years to produce what we know as OS X.

RIM acquired QNX, the foundation for BB10, a mere two years ago. After a quick bow to the work ethic and technical manhood of RIM’s engineers, one must ask if they’re in the same league as the team Jobs brought to Apple 2.0, if they can accomplish everything they need to do by early 2013. Weren’t most of these engineers already onboard when RIM fell asleep at the switch?

Fourth and last, leadership. Using Apple 1997 as the model for turning around a once-great company invites challenging comparisons. Or, more accurately, a single comparison: Is Thorsten Heins made of the same unobtainium as Steve Jobs? This isn’t a question of IQ, of neo-cortex, but of Mind, of being sufficiently agitated, of having the right animal inside.

The prodigal Jobs returned to Apple having known stellar business success with Pixar, and just-as-stellar lack thereof at NeXT (despite the company’s technical prowess). Heins, by contrast, is an insider. He’s been part of RIM’s problem since 2007.

But enough of this fantasy. Let’s turn to the latest story: RIM’s CEO has conceded that the company might have to license its platform:

To deliver BB10 we may need to look at licensing it to someone who can do this at a way better cost proposition than I can do it.

Dumbfoundingly, the licensing idea (which, presumably, will include BlackBerry Messenger), has been met with approval: ”RIM is in trouble and is seemingly finally listening to reason“.

This gambit doesn’t work. It didn’t work for Palm (twice!), nor for Nokia with Symbian. And it really didn’t work for Apple when it licensed the Mac OS to PowerComputing and Motorola in 1995. The Mac clones quickly underpriced the original products and siphoned profits out of Apple’s income statement. Jobs reversed that decision in 1997, and, after much initial criticism, was ultimately vindicated.

With these examples, what drives Heins to think that the BlackBerry 10 clones won’t underprice RIM’s own devices and empty the cash register? BlackBerry Messenger may be well-liked, but it’s also under attack by free, multi-device services such as iMessage.

So, where does this leave RIM? The use of “Private” in this note’s title isn’t a facile pun. It points to a possible avenue for the BlackBerry maker. If it decides to license the software layer of its (formerly) proprietary platform, RIM will indisputably see hardware dollars disappear much faster than software licenses can be signed. RIM will forego a known source of revenue in order to grow a new income stream that, given enough time, might be strong enough to keep the company solvent.

For a publicly-traded company, switching business models in this way is a factual impossibility, it defies business gravity. Shareholders might applaud the long-term strategy but when the cheering stops, they’ll dump the stock.

If RIM wants to do something bold, such as focusing on software and services, they might consider taking the company private. As I write this, RIM has a market cap that’s less than $4B and more than $2B in apparently unencumbered cash. Management and the Board could work with a Private Equity fund, a KKR-type organization, and buy the company from the shareholders.

The ink dries, the curtains close. Backstage, in private, the company performs painful surgery, sheds the groups and businesses that are no longer required by the new, tighter focus. This may be hard on employees, but it’s unavoidable either way: Lose some of the company now, or the entire thing soon enough.

In theory, the company re-emerges smaller but stronger, with a highly profitable software and services business model.

Will this work for RIM? I don’t think so. Given the company’s low market cap and the availability of private capital, if this were an attractive move, it would have been attempted already. Cold-hearted investors looking at the risk involved must have already asked themselves the burning question: How do you compete with free? How do you sell licenses when Android hands them out, gratis (even if licensees have to pay for a few Microsoft patents)?

Sadly for former BlackBerry fans like yours truly — or for current ones who appreciate its core functionality — there aren’t many moves left for RIM on the smartphone chessboard.

JLG@mondaynote.com

Business Model Dances

Apple will licence the iOS. An unexpected disturbance is apparent in Apple’s vaunted Supply Chain. It’s not what’s there, but what isn’t: In the past, each new iPhone was preceded by an increase in orders for displays, batteries, memory, cases, etc. But now, as we approach the September/October launch of the new iPhone 5, the manufacturing pipeline is only modestly full.

Concerned by the underflow, I put in a call to a friend at DigiTimes. Is this just a test run that portends a delayed release? According to my friend’s usual sources: No, the launch hasn’t been pushed back. The parts aren’t on order because Apple intends to produce the new iPhone in much smaller numbers offered through online sales only, plus a small subset of the Apple Stores worldwide (no more than 44 stores, says the rumor). But there will, nonetheless, be much rejoicing at the launch, because…

…Apple will announce a broad iOS licensing program.

This is great news for “rational” business people: Apple has finally come to its senses. I imagine the explosion in the media:

Apple sees the light at the end of the tunnel, and it’s the Android locomotive with Samsung at the controls.

or…

Years ago, I told Apple’s CEO: ‘Mr. Jobs, break down that wall’. Thank Heaven, Tim Cook is a reasonable man: the Walled Garden is now open to all.

But I couldn’t help but ask: Why launch a new iPhone at all, why not leave the field fully open to Apple’s new partners? My friend was ahead of me; he had already asked the same question. The answer: Apple must set the proper hardware standards for the iOS platform while leaving room for its OEMs. The iPhone 5 isn’t an ordinary iPhone, its a design point.

As I put down the phone, I spin out the rest of this story:

In order to compete with Android, which is free but for the occasional payoff to the Redmond Patent Troll, the iOS license is forced to essentially zero, as well. Before its epiphany, Apple made about $400 per iPhone. Now enlightened, Apple’s margin for each design point iPhone is around $50 per unit, and the company makes nothing on the huge number of iOS clones sold by Samsung, HTC, Huawei and ZTE, RIM and Nokia (just kidding about these last two).

Within weeks (days?), the big Wall Street funds that own most of AAPL dump their shares and the most valuable high-tech company in history loses 90% of its market cap.

Let’s stop the fiction here and consider the very real peril in switching business models. Once you choose a path, you stick to it for the rest of your life, whether brutish and short, or long and prosperous.

In the mid-nineties, Apple tried to correct the errors of its un-licensing ways and almost paid with its life as Power Computing and Motorola siphoned gross margin money out of Apple’s P&L. When Jobs reverse-acquired Apple, one of the first things he did was stanch the bleeding by canceling the Mac OS licenses. It was met with noisy disapproval –  for a while.

With this in mind, let’s look at two other companies that are trying to finesse difficult business model moves: Microsoft and Google.

Microsoft announces its Surface tablets…pardon…Tablet PCs, and quickly finds itself between two business models: Are they offering a vertically integrated device, a la Xbox; or are they licensing a software platform, as in Windows/Office? As remarked upon by Horace Dediu and others, one day Ballmer says:

“We are working real hard on the Surface. That’s the focus. That’s our core.”

and the next, with equal strength of conviction:

“Surface is just a design point.”

Ballmer isn’t delusional, he knows he can’t dump his OEM vassals and become a vertically integrated tablet maker overnight, setting up manufacturing, distribution, and support for 100 million or more units a year. Also, PC+ wars of words aside, he sees that these annoying “media tablets” are gaining on Windows PCs.

The solution: Announce Tablet PCs that he hopes will spur HP, Dell, and Lenovo to imitate and even outdo Microsoft own Surface devices. In a perfectly Nixonian explanation, Ballmer promises that after years of forcing PC clone makers into a race to the bottom by constantly eating into their margins — and then condemning them for their shoddy products — the new, open Microsoft won’t cheat its business partners, they won’t withhold some of that “openness” for exclusive use by Microsoft’s own devices.

As with the presidential precursor, this could be a very shrewd move…and ultimately doomed.

If it works, Microsoft will have succeeded in “reimagining” Windows.

If it doesn’t work, Ballmer will have a “neither-nor” business model on his hands: He’ll have chased away partners without gaining the time and talent to create a Microsoft tablet business the size of Google’s and Apple’s. Perhaps, in Brian Hall’s words: “Someone should tell Microsoft that PC+ is about as likely as Minicomputer+“.

So far, traditional Windows OEMs have been quiet, with the (perhaps transitory) exception of HP which announced that it won’t make a Windows RT tablet. (That’s the ARM-based variant, as opposed to the more conventional Intel-based one.)

All subject to change, as we know from Ballmer’s constant zigs and zags.

With Google we see what could be the beginning of several contortions. Just like Microsoft, Google seems to have become impatient with their own subjects: “No one seems to be able to do a proper tablet…we’ll have to do it ourselves.” (We know what “proper” means, here: It’s a grudging recognition of the great degree of complexity that belies the iPad’s benign surface.)

So now we have Google’s 7″ Nexus tablet, the first such device to receive the highest of honors — A Tablet To Rival the iPad — bestowed by reviewers from the NYT, the WSJ, Ars Technica, and others.

(I’m getting mine. Here’s my order number: 15731260465432498277.1587861291707893. Thirty-six digits. They must be kidding, right? Or they’re making room for a lot of orders from exoplanets. Not enough for a Googol, though.)

Is Google’s “vertical” move into designing, manufacturing, selling, and supporting its own tablets the same as Microsoft’s? Probably not. In the past, they tried with phones made by HTC, but the experiment didn’t last. Because Amazon was able to pick Android’s lock and create the Android-based yet non-Android Kindle Fire, Google’s current move could be much more serious.

And it could carry serious risks, as well: The gentle folks at Samsung are not going to take this with a smile and a quick genuflection. If they’re not cowed by Apple, they certainly aren’t going to let Google eat into their tablet business. As for phones, there’s Google’s $12.5B subsidiary, Motorola Mobility, another irritant for Samsung and other Android smartphone makers.

Like Microsoft, Google now faces the toxic waste of its own licensing formula: A good, enthusiastically-adopted platform that launches a race to the bottom. With few exceptions, the low margins and the haste to produce model after model have starved engineering teams of the budgets and time they need to to come up with “proper” products. Google becomes unhappy, decides to “do something about it” — and thus pushes itself closer to a business model change in which it competes with its own partners.

For the first Nexus tablet, Google can sell it at cost (or close to it), just like Amazon. But Google doesn’t have Amazon’s ecosystem, its vast store of physical products and digital content that the Kindle Fire helps sell. Sooner or later, this could force Google to make tablets “for their own sake”, as a money-making business unit.

Or they could stick with the current Android strategy: An OEM platform that runs zillions of devices, all with the same goal: Expose the consumer to Google services, to the radiation of its advertising business, all the time, everywhere, on any device.

Or , like Microsoft, end up in a neither here nor there crack of the business model space.

This is going to be interesting.

JLG@mondaynote.com

iPad Mini: Wishful Thinking?

Or another killer product? Or, on the pessimistic side, a loser defensive move showing Apple’s fear of competitors such as Amazon, with its Kindle Fire, and Google’s 7″ Nexus tablet?

Recent leaks from purported sources inside Apple’s traditional suppliers have ignited a new frenzy of speculation. And not just from the usual blogging suspects — often better informed and more insightful than the official kommentariat. BusinessWeek and the Wall Street Journal both stuck their august necks out: The so-called iPad Mini will be launched this coming September.

On this matter, my own biases are on the record.

In an August 2009 Note titled “Apple’s Jesus Tablet: What For?“, I went as far as measuring the pocket on men’s pockets. As a result, I posited a 10″ (diagonal) tablet might not provide the same desirable ubiquity as a 7″ one that men could carry in a coat or jacket pocket, and women in a purse.
(Apple once came to a similar conclusion: the original Newton project started by Steve Sakoman in 1987 was a letter-size tablet. After he and I left, the screen size was cut in half and the actual Newton came out as a pocketable product.)
Five months later, on January 27th, 2010, Steve Jobs stood up and changed the personal computing world for the third time with the 9.7″ (diagonal screen size) iPad. The take-no-prisoners price ($499 for the entry model) was a big surprise. Another one, much less obvious, was Dear Leader’s unusually tentative positioning statement: ‘We’ll see how the iPad finds its place between the iPhone and a MacBook’. (I’m paraphrasing a bit but the tone was there.)
The iPad surprised many, Apple included and, at the beginning, was often misunderstood. I recall my initial disappointment at not being able to perform the same tasks as on my laptop. A huge number of normal humans of all ages thought differently. As we know now, the iPad grew even faster than the iPhone. Notwithstanding Microsoft’s clinging to its ossified PC-centric rhetoric, this turned out to be the true beginning of the Post-PC era.

This excited competitors around the world: You’ll find here a list of 76 tablets announced at CES. By the end of 2011, few had accomplished anything. One exception was Amazon’s Kindle Fire, its Xmas season numbers were rumored to reach more than 4M units, even 6M by some rumored estimates. This rekindled, sorry, rumors of a smaller iPad.
In October 2010, Jobs famously dismissed the idea: “7-inch tablets should come with sandpaper so users can file down their fingers.” None of the journalists present at the time had the presence of mind to ask him about the iPhone screen…
Tim Cook, Steve’s disciple put it well at the D10 conference last June when he affectionately (and accurately) called Jobs a great flip-flopper, citing examples of products features his then boss ended up endorsing after repeatedly nixing them.
In an April 2012 Monday Note, I discussed the possible end of Apple’s One Size Fits All for  iPhones and, in particular, iPads. There, I linked to an A. T. Faust III post lucidly explaining how the original 1024 x 768 resolution could easily scale down to a 7.85″ tablet and achieve a nice 163 ppi (pixels per inch) resolution, the same as pre-Retina iPhones. This leads one to believe there is abundant (and inexpensive) manufacturing capacity for such pre-Retina displays.

A few questions.

First, developers. As we saw with iOS apps for iPhone and iPad, size matters, apps don’t scale. That hasn’t dampened the enthusiasm of developers for investing in app versions that take advantage of each device unique characteristics, as opposed to committing the cardinal sin of “It’s like the other one, only smaller/bigger”.
So, if developers believe a 7″ iPad would sell in large numbers, they’ll happily fire up Xcode, adapt their existing app, or write a new one. As for the belief in large unit volume for a 7″ device, the initial reception accorded to Google’s Nexus tablet shows there is potentially a lot of life in a smaller iPad.

(I ordered a Nexus tablet and will dutifully report. Last April, I bought a Samsung Note phablet and promised a report. Here it is: I’ll sell you mine for $50. A respectable product, I could definitely live with it. But, IMO, too big for a phone, too small for a tablet.)

Second, Apple was on offense. Now, competition succeeded in putting it on the defensive. While initial Kindle Fire sales were rumored to be huge, the same “sources”, checking on display supplier suppliers, now claim sales of Amazon’s tablet dropped precipitously after the Holidays. Amazon keeps mum, but is also rumored to prepare a slew of not one but several tablets for this year’s Xmas quarter.
As for the Nexus tablet, it isn’t shipping yet.
Instead of a defensive move, I think a 7″ iPad might be another take-no-prisoners move:

From the very beginning of the iPad and its surprising low $499 entry price, it’s been clear that Apple wants to conquer the tablet market and maintain an iPod-like share for the iPad. Now that Apple has become The Man, the company might have to adopt the Not A Single Crack In The Wall strategy used by the previous occupant of the hightech throne.

If this cannibalizes 10″ iPad sales, no problem, better do it yourself than let Google, Amazon or Samsung do it.

Lastly, the price/cost question. As you’ll see on this video, Todd Schoenberger, a Wall Street haruspex visibly off his meds, contends an iPad Mini is a terrible move for Apple, it would be a break with its single product version focus. Like, for the example, the one and only Macintosh, the one and only iPod. Also, he continues, an iPad Mini wouldn’t allow Apple achieve the 37% gross margin it gets from the bigger sibling.
No. If we’re to believe iSuppli, a saner authority on cost matters, the latest 32 GB 4G iPad carries a Bill Of Materials of about $364, for a retail price of $729. Even with a bit of manufacturing overhead, we’re far from 37% today. And, tomorrow, a smaller iPad, with a smaller display, a smaller battery, a correspondingly smaller processor would nicely scale down in cost from the “new” iPad and its expensive display/battery/processor combo.
To where? I won’t speculate, but Apple has shown an ability to be very cost competitive when using previous generation parts and processes. See today’s iPhone 3GS and iPhone 4 prices for an example.

I have no inside knowledge and quite a few inclinations: I’d love a pocketable iPad as much as I like small computers such as the defunct Toshiba Libretto and the lively 11″ MacBook Air.

If Apple comes up with a smaller iPad later this year, I think it’ll be a killer product.

–JLG@mondaynote.com

What’s next for RIM?

A sad coincidence provides a stark contrast between the fortunes of two high tech companies, titans present and past. Last week, on (almost) the same day that the iPhone celebrated its fifth birthday, RIM issued very bad quarterly numbers: Down 43% year-to-year to $2.8B; a $518M net loss compared to a $695M profit in the same quarter last year.

A short five years ago, the BlackBerry was sine qua non in the smartphone world. Today, the future looks gloomy: RIM admits that they expect “the next several quarters to be very challenging”; they announce “a global workforce reduction of approximately 5,000 employees”; and, last but not least, they tell us that the new BB10 OS, initially promised for the end of the year, will be delayed until Q1 2013.

The downward trend has been evident for some time. It led to the replacement of RIM’s historic co-CEOs, Messrs. Lazaridis and Balsillie, with former co-COO Thorsten Heins – and it leads us to ask a series of questions about RIM’s survival.

Will BB10, RIM’s answer to iOS and Android — the company’s “number one priority” — ever ship? And, if it does, will it matter?

Probably not…and probably not.

To start with, BB10 isn’t a next-generation OS, it’s not a version N+1. It’s a whole new infrastructure based on QNX. Certainly, QNX is robust, venerable, and respected — but over its nearly 30 years, it has evolved into the premier OS for real-time applications embedded in consumer electronics, medical devices, and automobiles, not smartphones. From the QNX website:

QNX software is the preferred choice for life-critical systems such as air traffic control systems, surgical equipment, and nuclear power plants. And its cool multimedia features have QNX software turning up in everything from in-dash radios and infotainment systems to the latest casino gaming terminals.

When RIM acquired QNX from Harman International in 2010, the OS came with a handful of sophisticated but narrow, focused tool kits and libraries. Tool kits that let developers build “high-value consumer-grade solutions that range from simple media players to multiple-node systems with intra-vehicle multimedia sharing.” Algorithms that “improve the clarity, quality, and accuracy of voice communications for the most challenging acoustic environments … from conference rooms to automobiles.”

Admirable, certainly, but can they do Angry Birds?

What QNX lacks is a general-purpose application framework for developers. This is the most important (and fattest) part of the smartphone operating system. To app developers, the app framework manifests itself as APIs (Application Programming Interfaces). There are more than 1,000 APIs in Android and iOS. Building such a framework is a complex, time consuming task. A vital one, too: No app framework means no developers, no apps, no sale in the smartphone era.

RIM’s CEO saw that the company’s engineers needed more time, bowed to reality, and announced that BB10 would be delayed until “Q1 2013”.

In normal times, delaying an OS release by a few months is almost routine, part of an always arduous development process. But these times aren’t normal: In the smartphone wars, nine months is a very long time. And we suspect there will be further delays: How many of the company’s software engineers will lash themselves to the mast as RIM continues to lose money, market share, partners, credibility? How many of their best techies have already fled to companies where their work will have a chance to matter, to be enjoyed by fellow app developers and by legions of paying customers?

But let’s assume BB10 finally ships (and that it doesn’t suffer from too many early release bugs). Will it matter? By Q1 2013, Android and iOS will be even more entrenched; BB10 — and whatever new hardware RIM can manage to produce while it sinks and lays people off — will have to be strikingly superior to reverse the company’s slide into insignificance. RIM will have to build a real ecosystem (app store, media, companion devices, payment system) that can compete with what Apple and Google deploy…to say nothing of what Samsung appears to be building.

We could stop here. If BB10 doesn’t matter, that’s the end of the road for RIM. Investors seemed to agree. The day after the quarterly earnings release, RIM shares lost 19% of their value. Subtracting RIM’s $2.2B in cash from its latest $3.8B market cap, the company is left with a (putative) enterprise value of $1.6B. Since its high in June 2008 — a mere four years — RIM has lost about 95% of its value.

Which raises another question: Under the circumstances, why are investors now buying RIM shares? (78M shares last Friday, more than 4X the average daily volume.) Are they philanthropists and necrophiliacs…or astute traders? What prospective endgame justifies the uptick?

There are two theories.

First, RIM will be cut up and sold in pieces: A BB10 licensing business, a BBM (BlackBerry Messenger) operation, an entry-level hardware unit. On closer examination, however, this doesn’t make much sense.

– CEO Heins says RIM licensing will be “fully open”, by which he probably means even more open than Android. Right. Who needs a fledgling OS — without an ecosystem?

– BlackBerry Messenger is/was well-loved, and for good reason, but it doesn’t make sense on its own. Which smartphone platform would it run on? Android, iOS, Windows Phone? Or Tizen for high-end feature phones?

– As to the hardware unit, Huawei, ZTE, and others already produce low-cost BlackBerry killers sold in developing countries and, soon, everywhere. They don’t need RIM’s imprimatur, particularly if BBM and BB10 are no longer part of the brand.

Which leads us to the second theory: RIM sold as a whole to a muscular player such as one of the Chinese companies already mentioned. This could present a different sort of problem: BlackBerries are still popular with many government agencies around the world and Huawei, for one, isn’t. As for other wholecloth buyers: Samsung is busy with four platforms already (Bada, Tizen, Windows Phone, Android). Microsoft has its own story with Nokia. Who else?

Speaking of Ballmer & Co., yet another line of thought is that RIM will ditch BB10 and jump on the Windows Phone platform. Easier said than done, we saw what happened when Nokia osborned its Symbian and MeeGo devices. The move would need to be done in secret and quickly. (Allegedly, Nokia got its first Windows Phone devices from Compal, an experienced Taiwanese supplier; that might be a place to look for a quick transition.) Running BBM on top of Windows Phone 8 would please customers. Microsoft’s ecosystem would also help.

Would Microsoft want to see RIM join the Windows Phone party? Probably…but RIM’s CEO nixed that move. Moreover, Heins nixed all such moves, including joining the Android camp: He wants RIM to stay on its own platform.

Can Heins stick to his guns? We’ll see what he has to say after his brand new (effective July 1st) General Counsel, Steve Zipperstein, takes him aside and whispers in his ear about shareholder lawsuits. For almost 10 years, RIM’s new legal eagle worked for the US Department of Justice as a federal prosecutor…

RIM’s $2.2B in cash, no debt, gives it a bit of maneuvering room: It’s a lot easier to sell your company, or parts of it, when there is money in the bank. Further, the 55 days (of average sales) in channel inventory isn’t completely bad news, some of it could be flushed — at a loss — to generate additional cash and more “runway”. But for how long?

JLG@mondaynote.com

Microsoft: Apostasy Or Head Fake?

My appetite whetted by three days of rumors, I went online last Monday and watched Microsoft introduce its Surface tablets. After the previous false starts — the moribund Tablet PC and the still-born Courier — Microsoft finally took matters into its own hands. Ballmer & Co. could no longer wait for OEMs to create vehicles worthy of Windows 8’s “reimagined” beauty and function, not while the A-team ran away with the tablet market.

It was a terrific performance that hit all the right notes:

• World-class industrial design by Microsoft’s guru, Panos Panay.
• An ARM-based consumer tablet running Windows RT, and an x86 enterprise version on Windows 8, both with the innovative Metro UI.
A “digital ink” stylus for handwriting and drawing, faithful to Gates’ famous dictum: “I’ve been predicting a tablet with a stylus for many years, I will eventually turn out to be right or be dead.
• Creative, thoughtful touches: the integrated kick-stand, a novel smart cover with an integrated keyboard, the magnetic stylus that sticks to the side of the device.
• MicroSD, USB 2.0, and Micro HD video connectors.
• 10.6” displays: ClearType HD for the ARM-based tablet, ClearType Full HD for the x86 device.
• Both tablets are slim and light: 9.3 mm/676 grams for the consumer model, 13.5 mm/903 grams for enterprise. (That’s .37”/1.5 lbs, .53”/2 lbs, imperial.)

47 minutes later, Microsoft has jumped to the head of the tablet race. Yesterday’s laggard is now the Big Dog. Thrilling. I want one — probably the lighter Windows RT model.

The live demo wasn’t fumble-free, as a number of critics have pointlessly pointed out. Yes, Windows Chef Steven Sinofsky had to swap out a busted tablet, but this (probably) means nothing, it happens all the time, trust me — I gave my first computer demo 44 years ago and have fumbled through a few more since then.

I smile when I imagine Ballmer on the phone to Tim Cook, letting Apple’s CEO know that a complimentary toaster/fridge – the “convergence” of his nightmares – is on its way to Cupertino’s One Infinite Loop. (Perhaps I should explain: In a recent D10 Conference interview, Cook dismissed the notion of a hybrid tablet + laptop with a quip: “You can converge a toaster and a refrigerator, but those aren’t going to be pleasing to the user.”)

Fantasy phone call aside, this is an historic event. Microsoft decides to make its own hardware and, straight out of the gate, unveils two attractive products that combine the best features of tablets and laptops, both supported by the huge Windows ecosystem.

Unsurprisingly, the momentous happening unleashed an orgiastic excess of premature evaluation. Reactions were fast and predictably polarized. It was, in the repurposed words of one witty blogger: Choo, choo, all aboard the Pundit Express to PageHitsVille! (He was referring to a different event, but I can’t resist repeating the epigram.)

After a few hours, a pattern started to emerge:

- Reviewers who weren’t in attendance, unencumbered by direct experience, were more inclined to view the new products through pre-existing biases and to issue clear-cut predictions.

- The privileged few who were invited to the press event in Los Angeles were more nuanced in their analyses, but with a recurring complaint: They didn’t have an opportunity to use the product for themselves, they were hurried along in small groups to look at non-functioning machines. A couple examples:

I was only permitted to touch the device while the machine was powered off. Microsoft representatives were happy to show off the device, but they didn’t let me actually use the new tablet (Slate’s Farhad Manjoo).
As for performance, we’ll be honest: tech press were treated to about two minutes at each of several stations, some of which demoed design, and not so much the power that lies inside that thin frame.

Unfortunately, we didn’t get to see a working demo of the keyboards. As in, we weren’t permitted to type sample sentences and feel what it’s like to hammer out characters on a flat keyboard, or on keys that have just 1.5mm of travel (Endgadget’s Dana Wollman).

With these observations in mind, I took another look at the video and realized how many other important details were omitted from the well-oiled presentation: Price, delivery dates, battery life, wireless connectivity, display resolution (could we have an unequivocal definition of the ClearType HD and ClearType Full HD?).

The missing data, the evasions, the lack of hands-on examination, even the circumstantial evidence of a stage struck device…it all smacks of products that aren’t ready — or even almost ready — for customers’ mitts and credit cards.

This leaves us with a list of questions.

First: Why now? Microsoft’s agitprop specialists aren’t new to the game. They know what happens when you show up with less than fully-baked devices and refuse to answer simple, important questions. Why not announce on, say, October 15th – the beginning of the Holiday shopping season — when they would have a better chance of running a FUD (Fear Uncertainty and Doubt) campaign against the opposition? Why the rush?

Maybe it’s the expectation that Google will announce its own Android tablet at Google I/O later this week…but I find the argument unconvincing. Microsoft would have been better off letting Google speak first so they could analyze the product and come up with a sharply targeted counter, especially if Google ships much sooner than Microsoft.

Second, the Apostasy question. For decades, the Redmond company has preached the Righteous Way of its OEM ecosystem, the wide range of hardware configurations and prices for its Windows platform. Now Microsoft pulls a 180º, they design and contract/manufacture Surface tablets by themselves, with distribution through the Microsoft Stores and online. That’s a whole different religion.

Why?

Is it because, as one supporter put it, “greedy” OEMs have become “obstacles of innovation”, that “the software giant has bled too much for OEMs far too long”? That’s one way to look at it. (Another reading of history sees that under the Windows thumb, Microsoft’s vassals have had little choice but to engage in a price war, in a race to the bottom. For PC makers, this undercut the margins they needed to design and manufacture the “innovative” products that their overlord now chides them for not having in their arsenals.)

There must be a more sensible explanation, and our friend Horace Dediu doesn’t disappoint. In his Who will be Microsoft’s Tim Cook? Dediu comes up with an eye-opening analysis that focuses on the “business model inversion” that has taken place in the last two years.

For decades, software generated much higher margins than hardware. Microsoft was admired for its extremely high margins, while Apple was criticized for stubbornly sticking to hardware and its lower profitability — to say nothing of lower volumes as a marginal PC player. But now, as Dediu points out, Apple is the company with both the higher revenue and operating margin [emphasis mine]:

If we simply divide revenues by PCs sold we get about $55 Windows revenues per PC and $68 of Office revenues per PC sold [1]. The total income for Microsoft per PC sold is therefore about $123. If we divide operating income by PCs as well we get $35 per Windows license and $43 per Office license. That’s a total of $78 of operating profit per PC.
Now let’s think about a post-PC future exemplified by the iPad. Apple sells the iPad with a nearly 33% margin but at a higher average price than Microsoft’s software bundle. Apple gives away the software (and apps are very cheap) but it still gains $195 in operating profit per iPad sold.
Fine, you say, but Microsoft make up for it in volume. Well, that’s a problem. The tablet volumes are expanding very quickly and are on track to overtake traditional PCs while traditional PCs are likely to be disrupted and decline.
So Microsoft faces a dilemma. Their business model of expensive software on cheap hardware is not sustainable. The future is nearly free software integrated into moderately priced hardware.

Which leads Horace to his killer conclusion:

For Microsoft to maintain their profitability, they have to find a way of obtaining $80 of profit per device. Under the current structure, device makers will not pay $55 per Windows license per device and users will not spend $68 per Office bundle per tablet. Price competition with Android tablets which have no software licensing costs and with iPad which has very cheap software means that a $300 tablet with a $68 software bill will not be competitive or profitable.
However, if Microsoft can sell a $400 (on average) device bundled with its software, and is able to get 20% margins then Microsoft is back to its $80 profit per device sold. This, I believe, is a large part of the practical motivation behind the Surface product.
The challenge for Microsoft therefore becomes to build hundreds of millions of these devices. Every year. Sounds like they need a Tim Cook to run it.

It’s difficult to argue with Horace’s logic, but there’s another way to look at Microsoft’s new posture: It’s just that, a posture, a way to wake up PC OEMs and force them to react. “If you do the right thing and come up with the world-class product Windows 8 deserves, we’ll back off and let you enjoy the just deserts of your efforts.” It’s a devious thought, but it could be more realistic than the notion that Microsoft will produce something in the order of 100 million Surface tablets in 2013 in order to keep their dog in the fight. (For reference, the lead PC maker, HP, currently ships about 16M devices per quarter.)

I’m also curious about Microsoft’s rigid insistence on calling these devices PCs. See their official site announcing a “New Family of PCs for Windows”:

Try as they might, Microsoft won’t be able to convince folks to refer to the Surface as anything other than a “tablet”. The Redmond team seems fixated on a best-of-both-worlds product: Everything a PC does plus the best features of a tablet. This is what John Gruber calls being caught Between a Rock and a Hardware Place. (Gruber’s post, which quotes Dediu’s, is itself quoted and felicitously expanded upon by Philip Elmer-DeWitt.)

Peter Yared offers his help with a witty clarification:

In the end, I can’t see how Microsoft can suddenly morph into a tablet, er, PC maker capable of pumping hundreds of millions of devices per year. The fuller Surface story is yet to unfold.

JLG@mondaynote.com

The Nokia Torture

How would you like to be a Nokia employee? Last week the bosses came up with more bad news: In order to cut 3B€ (about $3.8B) in expenses by the end of 2013, another 10,000 employees will be shown the door — this after earlier cutting payroll by 4,000 people. The news came couched in corporate doublespeak: Nokia sharpens strategy and provides updates to its targets and outlook, with a shamefully misleading first subtitle:

Company announces targeted investments in key growth areas, operational changes and significantly increased cost reduction target

Followed by a second one, finally hinting at the bad news:

Company lowers Devices & Services outlook for the second quarter 2012

In the opaque 2900-word release, management concedes business is worse than expected, with no immediate hope of improvement:

During the second quarter 2012, competitive industry dynamics are negatively affecting the Smart Devices business unit to a somewhat greater extent than previously expected. Furthermore, while visibility remains limited, Nokia expects competitive industry dynamics to continue to negatively impact Devices & Services in the third quarter 2012. Nokia now expects its non-IFRS Devices & Services operating margin in the second quarter 2012 to be below the first quarter 2012 level of negative 3.0%. This compares to the previous outlook of similar to or below the first quarter level of negative 3.0%.

In English: ‘Our smartphone business sucks, it lost money last quarter, it will lose even more money for the current quarter ending in June, probably in the 5% operating loss range, and we’ll experience similar bleeding for the foreseeable future.’

Bond-rating agencies took note and promptly downgraded Nokia’s debt to junk status, another worrisome development. Reading Nokia’s Q1 2012 numbers, we see Net Cash at 4.8B€ (approx. $6B), 24% less than a year ago, 13% less than the immediately preceding quarter. With accelerating losses, the cash drain is likely to do the same. This puts Nokia in a dangerous squeeze: It could have to borrow money at unfavorable rates, or be prevented from doing so, or be forced into liquidation.

This is how: We know Nokia has already borrowed money, about 4.9B€ (approx. $6.3B), but we don’t know what the small print on those bonds say. Creditors often put conditions (covenants) giving them the option to demand immediate repayment if the debtor’s business deteriorates too much.

Nokia’s management is worried, it shows in little signs such as the length of precautions taken in what is known as Forward-Looking Statements. These consist in lawyerly language telling us everything we have heard or read could be nullified by a number of changes in the weather, the price of pork bellies or crop failures. The practice, as often, stared with the best of intentions: Management should be free to share their views of the future without being held too strictly to their description of inherently fragile circumstances.

In February 2011, Nokia’s cautious language about 255 words. Last week, attorneys in charge of covering the backs of Nokia execs needed more than 1,400 words, listing precautions from A to K, and from 1 to 39.

Put simply, this betrays is a growing fear of lawsuits.

In the meantime, Nokia’s CEO, Stephen Elop, is “opening the second envelope”, that is firing members of his exec team, including one who imprudently followed him from Microsoft. Next time, it’ll be his turn — and too late to save the company.

Many blame Elop, but what about the Board of Directors? In 2010, when the fact Nokia was on the way down became too obscenely obvious for the Board to ignore, they fired the CEO, OPK (Olli-Pekka Kallasvuo), an accountant cum lawyer, and doubled down by hiring Elop, a Microsoft exec with zero smartphone experience and a record of job-hopping. The new CEO soon said one very true thing, ‘This is a battle of ecosystems’ and did a terrible one: He osborned Nokia’s existing Symbian-based products as he committed to a distant collaboration with Microsoft and its unproven Windows Phone system software. What did the Board do? Directors approved the move. Willfully or stupidly, it doesn’t matter, they supported Elop’s imprudent move.

Nokia, once the emperor of mobile phones, shipping more than 100 million devices per quarter, is now in a tailspin, probably irrecoverable, taking its employees into the ground.

And there is Nokia’s chosen partner, Microsoft. What will Nokia’s failure do to its future? Ballmer knows Microsoft can’t be relegated to a inconsequential role in the smartphone wars. Will this lead to Microsoft going “vertical”, that is buying Nokia’s smartphone business and become an vertically player, as it already is in its Xbox business?

JLG@mondaynote.com

Monday Note Exclusive: The Walmart Garden Smartphone

Last week was the 10th anniversary of the Wall Street Journal’s All Things Digital Conference, D10 for short. For the past three years it’s been held at the Terranea Resort in Rancho Palos Verdes, South of Los Angeles.
If I leave in the wee hours and take an North and East detour around the Evil 405, it’s a “short” 6-hour drive from Palo Alto. This is a welcome opportunity to avoid airport hassles, to bring all my toys, to listen to Glenn Gould and to catch up on phone calls. For a long I5 Central Valley stretch, I also get to work on my Spanish, the only language spoken on local FM stations. The fare varies widely: plagent Mexican love songs; garrulous commercials spoken at ultra-high speed with the rolling rrrrs that bring up smiles and childhood memories; the obligatory preachers and the occasional public interest program — the latter with a distinctly more educated Castellano enunciation.

I like the conference formula: Interviews of ‘‘heads of state’’, high-tech and media CEOs, by Walt Mossberg and Kara Swisher, two highly regarded tech journalists. No talking heads, no mind-numbing PowerPoint presentations — we gave at the office. I once complained to Uncle Walt his questions looked a little soft, without much of an attempt to follow-up on obvious evasions or outright fabrications. ‘Think again’, Walt said, ‘you used the word obvious; don’t think you’re the only BS expert in the audience, I let everyone draw their own conclusion.’ He’s right, I recall moments when a telco executive made such impudent statements audience members looked at each other wondering wether the guest was lying or incompetent.

The D10 site is supplemented by iPhone and Android apps, all giving access to videos, transcripts and commentary. High-quality, mostly, but the abundance can be overwhelming. If you’re short on time, look for the following:

Ed Catmull, the Pixar co-founder. For me, his interview was the highlight of the conference. Quietly brilliant and wise. A short video here.
Larry Ellison, founded Oracle in 1977 and still running it. He never disappoints, mercilessly ridiculing SAP and HP and the former CEO of both. Larry is a dangerous adversary, wittier and more knowledgeable than most CEOs.
Mary Meeker broke the No PowerPoint rule, she took us through a 125-slide deck.
I’m a fan of hers and often refer to her legendary Sate of The Industry presentations, but she could have done an even more effective job by concentrating on one or two slides, by commenting on their origin and significance. See for example this one:

It summarizes Facebook’s biggest problem, what she diplomatically calls a $20B opportunity: mobile ads fail to produce any kind of significant revenue, and we’re not sure why.
Ari Emmanuel, the assoholic Hollywood super-agent was equal to his reputation, he shouted down The Verge’s Joshua Topolsky for having the nerve to question his view of Google’s role in filtering content. For all the entertainment value, the verbal violence and bad faith were uncalled for and do nothing to improve the agent’s clients image. Topolsky’s measured reply is here.
Tim Cook, long-time Steve Jobs’ second-in-command and now Apple CEO. He gave a quiet, competent performance, masterfully deflecting questions about future products and reminding us imitating Steve Jobs definitely isn’t the way forward.

But we shouldn’t lose sight of the real formula for this gathering: Great interviews and demos on stage + even greater schmoozing in the hallways.

There, I got really lucky.

In the line for the coffee urns, I overheard two Walmart execs animatedly pitching their upcoming smartphone to the CEO of an app development company — in Spanish. They must have felt safe in the belief the catering staff might understand the language, but definitely not the topic. Using a simple, striking one-liner…

“Walmart wants to become the Walmart of smartphones.”

… they told the gent he could help their company achieve this goal and, in the process, profit immensely.

Later that evening, I introduced myself to the developer — in his native language. After a couple of drinks and cross-cultural pleasantries, I asked about his interest in Walmart’s smartphone. He was relaxed and practical: ‘They have a big business (and big problems) in Mexico, I can help them get good apps for their launch there later this year, but you know their reputation, they squeeze their suppliers, I’ll want money upfront…’
I nodded and asked what he liked most about the product: the design, the platform, the business model? Little by little, I learned Walmart’s smartphone program came from Walmart Labs, a Silicon Valley outpost of the Arkansas giant. The project was born out of frustration with Google’s conversion of Google’s free Product Search to Google Shopping’s pay-to-play model where inclusion in search results (as opposed to ads on the side) now requires a payment. There is also a reaction to Amazon’s rumored smartphone, a complement to its Kindle Fire. Actually, my drinking companion said, Walmart’s smartphone takes more than a leaf off Amazon’s playbook: like the Kindle Fire, it relies on an Android fork, that is grabbing the Open Source code and retargeting to its own business purpose — without the onus of included Google apps that come with the sanctioned Android version. The hardware is from HTC, with a NFC chip for fast and easy contact-less checkouts; the software platform is designed to help product discovery and content sales and, like Amazon, Walmart will launch its own App Store in the US, Canada and Mexico.
To sell its “Walmart Garden” smartphone, the company will use its more than 5,000 North-American stores and set itself up as an MVNO, reselling Sprint in the US, Rogers in Canada and Telmex in Mexico. The Walmart smartphones will come with both conventional (also called post-paid) contracts and pre-paid plans for customers will lower credit scores.
I couldn’t get an idea of projected prices or sales volumes, but the developer said evangelizing Walmart execs were dangling a future installed base numbering in the tens of millions, may be 100 million after a few years.

This is fiction.

Mostly but not all: Walmart Labs do exist, but the rest is invented. I’m sure Walmart watches Google’s every move and worries about the Search giant becoming an unavoidable — and therefore increasingly expensive — toll gate. But designing, selling and supporting one’s smartphone is no easy task, even for a competent giant like Walmart.
Put another way, does it make sense for every major corporation to develop its own branded smartphone as a way to keep their customer relationship “pure”, protected from search engine and social network predators?

Smartphones aren’t merely handsets with bigger screens and more functions, they’re app phones, they’re part of an ecosystem. They’re a separate, highly specialized, often risky trade, not just another line of business easily added to a large corporation’s portfolio.

Which bring us to the recurring Facebook phone rumors. Some are so asinine I’ll just quote without a link:

Facebook has quietly assembled all the important bits of a mobile phone [emphasis mine]. It just released its new camera application that uploads directly to Facebook, its own messenger service, and it’s reported that Facebook is courting mobile web browser developer Opera.

Right. Kick any trash can around the Valley and all the unimportant bits, hardware, operating system, retail distribution, service and support crawl out. Unsurprisingly, the general reaction to the latest Facebook phone rumor, summarized here, has been overwhelmingly negative. It’s one thing for Apple to defy conventional wisdom (infelicitously spewed by Palm’s Ed Colligan), they had never made a telephone before, but Jobs & Co. had validated experience in the entire hardware food chain, from design to retail stores. It’s another for Facebook to learn and quickly become competitive in a trade now dominated by giant slayers of Apple and Google stature.

I greatly admire Zuckerberg, I think he’s a cagey strategist playing the long ball, and I don’t believe he’s this naive. He might worry about Google becoming too much of a toll gate for his company’s good, but building a Facebook smartphone in order to contain the Android invasion isn’t the right answer. Google has enough adversaries, some with business models that differ enough from Facebook’s, to offer a choice of viable allies. Stay tuned, as Apple’s CEO said at D10.

JLG@mondaynote.com