hardware

Will Microsoft buy RIM or Nokia?

We continue along the lines of last week’s Monday Note kriegsspiel with the latest speculation Will Microsoft, at long last, buy RIM? The idea has been kicked around for at least five years: Days after the iPhone’s introduction in January 2007, Seeking Alpha suggested that the Xbox maker ought to buy RIM in order to build an XPhone. In retrospect, this would have saved both companies a lot of grief.

It’s early 2007 and the BlackBerry maker is riding high. With its Microsoft Exchange integration; a solid PIM (Personal Information Manager) that neatly combines mail, calendar, and contacts; and the secure BlackBerry Messenger network, the “CrackBerry” is rightly perceived as the best smartphone on the market. I love my Blackberry and once I manage to get a hosted Exchange account for the family, I show my un-geeky spouse the ease of over-the-air (OTA) synching between a PC and the BlackBerry. ‘No cable?’ No cable. She promptly ditches her Palm device. One by one, our adult children follow suit. For a brief time, we are a BlackBerry family.

But the Blackberry’s success blinds RIM executives. They don’t see – or refuse to believe – that the iPhone poses a threat to their dominance. A little later, Android comes on the scene. Apple and Google deploy technically superior software platforms that, by comparison, expose the Blackberry’s weaker underpinnings. In 2010, RIM acquires the QNX operating system in an effort to rebuild its software foundations, but it’s too late. The company has lost market share and shareholders see RIM squander 75% of its market cap.

Now, imagine: On the heels of the iPhone introduction in 2007, Microsoft acquires RIM and quickly proceeds to do what they’ve only now accomplished with Windows Phone 7: They ditch the past and build a modern system. This would have saved Microsoft a lot of time and RIM shareholders lots of money. Instead, Microsoft mocks the iPhone and brags that the venerable (to be polite) Windows Mobile will own 40% of the market by 2012.

Things don’t quite work as planned. Early 2010, Microsoft wisely abandons Windows Mobile for the more modern Windows Phone 7 (a moniker that combines the Windows Everywhere obsession with a shameless attempt to make us believe the new smartphone OS is a “version” of the desktop Windows 7).

And things still keep not working as planned. WP 7 doesn’t get traction because handset makers are much more interested in Android’s flexibility and, particularly, their price. Android’s Free and Open pitch works wonders; the technology is sound and improves rapidly; OEMs see Microsoft as the old guard, stagnant, while Google is on the rise, a winner.

All the while, Nokia experiences their own kind of “domination blindness”. In 2007 Nokia is the world’s largest mobile phone maker, but they can’t see the technical shortcomings of their aging Symbian platform, or the futility of their attempts to “mobilize” Linux. iOS and Android devices quickly eat into Nokia’s market share and market cap (down 80% from its 2007 high).

In 2010, Stephen Elop, formerly a Microsoft exec, takes the helm and promptly states two brutal truths: This isn’t about platforms, we are in an ecosystem war; technically, we’ve been kidding ourselves. Nokia’s new CEO sees that the company’s system software efforts – new and improved versions of Symbian or Maemo/Moblin/Meego – won’t save the company.

Having removed the blinders, Elop looks for a competitive mobile OS. Android is quickly discarded with the usual explanations: We’d lose control of our destiny… Not enough opportunities for differentiation… The threat of a race to the bottom might have entered the picture as well.

This leads Elop back into his former boss’ arms. Microsoft and Nokia embark on a “special relationship” that involves technical collaboration and lots of money. It’ll be needed: By the end of 2011, WP 7 has less than 2% market share. Nokia’s just-announced Lumia smartphone is well received by critics but will it demonstrate enough superior points to gain significant share against the Android-iOS duopoly? I’ll buy one as soon as possible in order to form an opinion.

The “MicroNokia” relationship isn’t without problems. Many Nokia fans are outraged: Elop sold out, Nokia’s MeeGo was unfairly maligned, the company has lost its independence… See Tomi Ahonen’s blog for more. (And “more” is the right word. Ahonen’s learned, analytical, and often rabid posts range between 4,000 and 10,000 words.)

The Nokia faithful have a point. In my venture investing profession, we call an arrangement such as the MicroNokia partnership “buying the company without paying the price.” Right now, Microsoft appears to control Nokia’s future since, at this stage, Nokia is as good as dead without WP 7.

But doesn’t that mean that Nokia also controls Microsoft’s smartphone future? “Statements of direction” aside, there are no notable WP 7 OEMs. (Samsung and HTC ship a few WP 7 phones, but their share is infinitesimal compared to their Android handsets.) With Android growing so fast, why would a smartphone maker commit to WP 7 while Nokia holds a privileged status on the platform?

Microsoft is making smart moves against Android by using their patent portfolio to force Android handset makers to pay (undisclosed) royalties. With LG as the latest licensee, Microsoft appears to have snared 70% of Android OEMs. The (serious) joke in the industry is that Microsoft makes more money from Android than from WP 7.

But success with patents doesn’t translate into more WP 7 OEMs, which leaves us to wonder: Will Microsoft consummate the relationship and acquire Nokia, whether the entire corpus or, at least, the fecund (smartphone) bits? For years, Microsoft has claimed they’re all about choice, and when it comes to the PC, that’s true: Businesses and consumers have a wide choice of PCs running Windows. But their customers have no real choice when it comes to WP 7: It’s Nokia or…Nokia. They might as well tie the knot and call it what it is: Microsoft or Microsoft. It works wonders for Xbox and Kinect.

Going back to RIM, we hear it’s ‘’in play’’, that they’ve hired investment bankers to “look at their strategic alternatives”. In English: They’re looking for a buyer.

But who? Microsoft is otherwise engaged. So is Motorola. And forget Samsung.

With RIM’s market share dropping precipitously, and no sign of a rebound with spanking new models until the second half of 2012, who would want to risk billions in a market that’s controlled by competitors who manage to be both huge and fast-growing? Sure, RIM is still in the black, but its cash reserves are dwindling: the Cash and cash equivalents line went from $2.7B last February to $1.1B in November 2011. What’s left will evaporate quickly if revenue and profits keep dropping, as they’re likely to do for the foreseeable future.

JLG@mondaynote.com

The Apple Wireless Carrier (Part 2)

Spurred by years of frustration with AT&T, Verizon, Orange and the like, I wrote a half-serious Monday Note a few months ago (Steve, Please Buy Us A Carrier!) that imagined an Apple wireless universe. Simple pricing, no-surprise phone bills, no-tricks agreements. There would be dancing in the streets…

Unfortunately (I concluded), if Apple were to acquire a carrier — T-Mobile, say, to keep it out of AT&T’s clutches — they’d be saddled with a legacy business, its infrastructure, its people, its culture. That’s not the Apple way. They didn’t get into retail by buying up and remodeling Circuit City stores; the company builds from the ground up.

There are other problems. A single carrier – any carrier — would have limited geographic impact; the potential billions in service revenue is attractive, but it doesn’t serve Apple’s #1 business: selling hardware; wrestling with the FCC over regulatory issues would be intolerable.

Give us a carrier…It’s a nice fantasy but Apple isn’t going to spend tens of billions to buy a headache.

A few weeks later, I was politely but firmly admonished by my daughter’s significant other: Yes, buying a carrier – or a string of carriers – probably isn’t in Apple’s playbook, but let’s not be so quick to kick them out of the game. There is, he said, a better, simpler way for Apple to indulge their iPhone customers.

Today, Apple uses its cash to buy capacity from parts suppliers and manufacturing contractors. Why not do something similar with wireless carriers? The Cupertino company could buy “capacity” (minutes and gigabytes) from Verizon, AT&T, Sprint, or even China Mobile, Vodafone, and the intriguingly-named Tata Teleservices. Apple would become a Mobile Virtual Network Operator, a company that provides cell phone services that ride on someone else’s infrastructure.

There are dozens of MVNOs operating in the US: Virgin Mobile, Firefly, Straight Talk… Even 7-Eleven, the convenience store giant, offers its “own” cellular network: 7-Eleven Speak Out Wireless. I found one MVNO, H2O Wireless, that claims to “work” with iPhones and Android devices, although keep in mind the (in)famous “Some Restrictions Apply”.

This is a much livelier scene than I imagined. In 2006, according to the felicitously named mobileisgood.com, there were only 330 MVNOs. Wiki the term today and you’ll read that “there are 645 active MVNO operations in the world.” (For the modest sum of $1,125, you can buy a PDF copy of the MVNO Directory 2011 which lists all 645 companies. One free detail: 205 new companies in one year!)

Add Apple’s new “worldphone”, the iPhone 4S straddling GSM and CDMA networks, and you have the ingredients for a virtuous virtual Apple carrier

Insiders tell me this is easier said than done. They’re right. Wireless networks are complicated. Picture the attempt to superimpose Apple-style simplicity on top of layers upon layers of old hardware and patchwork software that span several “somewhat compatible” networks. Once again, an idea that sounds good is, in practice, unfeasible. Worse, the beautiful theory might lead to the sorriest kind of mediocrity: The product that’s impossible to fix and can’t be killed.

Still, I’m optimistic. I find the froth, the growth of MNVO companies exciting, encouraging. Whether they admit it or not, the incumbents know their culture isn’t going to foster innovation, only incrementation. For them, MVNOs might be a way to wage a proxy war against the competition by attracting innovators to their side — until the unruly mercenaries kill the overlord that engaged them.

Back to Apple, they could buy, rather cheaply, a number of MVNOs or even build their own. If 7-Eleven can do it…

Now we find out that as far back as 2005, “Jobs initially hoped to create his own network with the unlicensed spectrum that Wi-Fi uses rather than work with the mobile operators…” This came out in a talk given last week by John Stanton, a cellular industry pioneer, at a Law Seminars conference in Seattle. No real surprise: Jobs wasn’t fond of carriers. He considered them to be obstacles rather than instruments of progress and was naturally inclined to look for ways around them. We know what happened. Jobs ended up working with carriers — but only if they accepted Apple’s control over the handset features and iTunes and App Store content sales.

End of story? Not quite.

Take a look at the recently-announced Republic Wireless, a hybrid carrier that rides on a combination of WiFi networks and cellular infrastructure. The phone, a LG Optimus Android device, costs $199 upfront and the service goes for $19/month, with unlimited minutes, data, and text. No hidden fees, just sales tax. Free roaming in the US over Sprint’s network. Free WiFi calls to the US from anywhere in the world. No contract, no termination fee, cancel when you want. This is far from the $100+/month, two-year indentureship that AT&T offers its iPhone users.

Reactions to the new service, one of a broad array offered by Bandwidth.com (a Carolina company that presents itself as a “Complete BUSINESS Communications Provider”) range from guarded to enthusiastic. As Ina Fried of All Things D points out, Some Restrictions (Still) Apply:

“…the company wants to deliver most of its service over Wi-Fi, using cellular more as a backup for when Wi-Fi isn’t available. Customers who…gobble up too much cellular data or wireless minutes will be asked to find another carrier.”

The company buys 3G network capacity from Sprint. Return too often to the “all you can eat” network buffet and management will escort you out.

We’ll have to wait a few months to see what happens next. Will Republic Wireless grow into a viable, disruptive business, proving Jobs was right to look for a way to build a hybrid carrier? Will its business model fail because $19/month won’t be enough to pay the Sprint bill? Or will Republic Wireless end up as a beta for Apple’s own hybrid network?

———–
An afterthought before we close.

Last week, we heard a titillating rumor: an Amazon smartphone would come out late next year. At first, I dismissed it as unrealistic. Then, I looked at my brand new Kindle Fire and marveled again at the way Amazon “picked Android’s lock”. The company took the Android Open Source code, added its own UI, applications, services and app store. The result is an ‘‘unofficial” Android device without any Google control on it, without the Trojan Horse apps. Further, by slotting its own browser between the Amazon customer and the Google search engine, Bezos & Co. keep accumulating user data without sharing any of it with their Mountain View frenemies. Why not apply this newly developed arrangement to an Amazon smartphone?
I also realized that, in order to feed data to its Kindles, Amazon developed Whispernet, a 3G network riding other carriers‘ infrastructure — which sounds like an MVNO of sorts.
We know the Kindle Fire model of being sold at cost or at a small loss because it boosts the company’s real business: selling things and content. The hypothetical Amazon smartphone (hardware + MVNO contract) would be priced in the same spirit.

More disruption on the way?

JLG@mondaynote.com

iTV: Where’s The Money?

In reaction to last week’s technical speculation on the putative iTV, several commenters raised questions about content providers, distributors, and “pipes”. Does iTV help or harm NBC, Netflix, and Comcast? How does the [one last time: “putative”] iTV make money, and for whom?

Indeed, the column ignored an important – perhaps the most important — part of the product: the Money Pump, a.k.a. the Business Model. While Apple displays a sharp, fulfilling sense of aesthetics and simplicity in the design and implementation of new products, the company didn’t reach the pinnacle of high-tech profitability by merely practicing l’art pour l’art. Apple isn’t deaf to a more practical art form: cash register music.

Starting with pipes, let’s look at smartphone carriers as an analogy. When AT&T “won” exclusive iPhone distribution rights in the US, it appeared that they had traded their birthright. The iPhone bore no AT&T customizations, no stickers, no craplets. Worse, the carrier had to let Apple run the content distribution table with iTunes.

As we’ve since seen, the trade turned out well for AT&T. With more subscribers because it’s an iPhone!, and with more revenue per customer, the device yields AT&T a $100 monthly ARPU, much higher than the $50+ industry average.

With this in mind, should we think of an exclusivity deal between Apple and a “TV carrier”? Perhaps another AT&T deal, this time for their TV + Internet U-Verse line.

AT&T’s network topology — a dedicated set of wires running into each subscriber’s home — is ideal for voice and Internet traffic. But the company is at a disadvantage when it comes to distributing several hundred TV channels, something a cable provider has no problem with. Comcast simply taps into the coax cable that passes by each house and feeds the same anonymous, multiplexed signal into the set-top box for authorization and decoding. (This is an oversimplification and ignores the evolving topologies made possible by optical fiber…but we’re still far from the dream of Fiber To The Home)
iTV could give AT&T an opportunity to take the lead in 21st Century TV, to stop fighting Comcast on its own ground. The resources AT&T deploys today to bring old-style TV channels into markets dominated by cable carriers could be re-allocated to the fast Internet access that lets several iTV devices run in the same home. (Try asking today’s friendly AT&T U-Verse salesperson how many DVRs you can have. “One” is the general answer, as this U-Verse user document cautiously explains. Comcast will let you have — and pay for — as many as you like.) A simpler, more focused life, stealing subscribers from the incumbent, a higher Phone + Internet Access ARPU… For AT&T, this could be a repeat of the original iPhone deal.Realistic? I don’t know if AT&T is bold enough to make such a move.

For cable TV incumbents, the money pump equation is different. By “virtue” of their dominant position, they have more to lose, they have these expensive, inflexible, and tricky channel bundles to protect. What looks like a potential ARPU uptick for AT&T could turn into a subscriber revenue decrease for a cable operator supplying Internet access to iTV viewers using apps instead of channels.

This gets us to iTV content. It will either be “free”, meaning subsidized by advertising; by subscription, like Bloomberg BusinessWeek on a tablet; or pay-as-you-go, one show or game at a time. One reader suggested we’d end up paying more than we do with today’s bundles. It’s a possibility, but we might be happy to pay more in exchange for the freedom to pick and choose, as opposed to today’s situation where adding an “extraneous” channel to an existing bundle is a chore that makes you feel like you work for the cable company and not the other way around. Who knows, we might even spend less overall — while giving more money to the better creators.

We now move to content providers. As they ‘‘appify’‘ their channels, will they be willing to give Apple 30% of the app revenue? If the app is “free”, no problem: 30% of zero isn’t terribly onerous. But even for a free channel, there’s the question of sharing ad revenue: How much for CBS, how much for Apple? This isn’t a random example, we just heard Lee Moonves, the CEO of CBS, say that his company turned down a streaming TV deal with Apple because of a disagreement over ad revenue. CBS and others have to see how iTV will make them more money. (The same is true for game developers who could use iTV as a vehicle for living room or networked games.)

Finally, Apple itself. Their emotive talk about the purity of the software architecture, the praise for the elegant kerning of the Garamond Light Condensed ITC font on Keynote slides…such talk is important and relevant, it addresses the very reasons for Apple’s success, but we shouldn’t forget what rings the Big Cash Register: hardware. The iTV product itself has to generate billions in hardware revenue or stay what it is today, what Jobs felicitously called a hobby, a mere hundreds of millions of dollars of hardware revenue. That’s nothing when compared to the tens of billions — soon $100B — in iOS mobile devices revenue.

How to get there? Recall last week’s No Set-Top Box configuration:

I’ve added a twist, one simplification. Why have two devices, one iTV and one Wifi Base Station or Time Capsule? A unified device saves room, power, the need to have disk storage in two places – and it will help justify a unit price that’s greater than the current $99 for Apple TV.

Let’s put the price tag of this unified device at $299, the price of today’s 2TB Time Capsule. If Apple can sell 10 million units, that’s $2.9B in revenue… Not bad, but put that number into the context of Apple’s overall revenue estimates: $120B in 2011 (calendar year, not fiscal), $160B in 2012, and $200B in 2013. $2.9B in iTV revenue doesn’t get it out of the hobby category. Apple would need to sell 100 million units, $29B in revenue, to really “make a dent in the universe”.

What about the revenue iTV will generate through the App Store as users buy apps-as channels? Consider iTunes: It made about $2B in revenue in the 2011 Fiscal Year ended last September (probably much less in profits as this is a complicated organization with many revenue streams and an expensive infrastructure). iTunes is hardly a loss leader, but its purpose is to fuel iOS device sales, not the other way around. By analogy, the App Store and advertising revenue share isn’t going to make or break iTV.

In last week’s Monday Note, I argued against an Apple-made big-screen TV: Too big, can’t be brought back to the store for repair, the computer inside would become obsolete much more quickly than the screen itself.

Friends tell me I’m wrong. A Big Screen might be the answer to the revenue question. At $1,500 or more, an Apple HDTV set might achieve revenue levels in the tens of billions, and, unlike today’s TV set industry, it might even be profitable.

(As an aside: Last week, Sir Howard Springer, the courageous Welshman running Sony, let it be known that while his company is — “like Apple” — in the process of re-inventing the TV, “Every TV set we make loses money”. We also heard about Logitech giving up on Google TV after losing tens of millions in the misadventure. And Adobe decided to stop Flash development for TV. The news from the TV front could be better.)

As a big beautiful flat-screen set, or even as a separate module, an iTV sounds like a great idea. But translating the dream into a viable 21st Century TV product looks considerably more difficult. To be successful, the iTV needs to make money for carriers, for content developers, for distributors, and for Apple itself. None of which is self-evident.

Still, the ossified TV ecosystem is ripe for disruption, ready for an annoying innovator.

JLG@mondaynote.com

How Bad Boards Kill Companies: HP

‘A good Board can’t make a company, but a bad one will inevitably kill it.‘ Thus spake Barry Weinman, the Gentleman Capitalist, when I joined the VC brotherhood. He meant to tell me to watch out for co-investors on the Board of companies in our portfolio of investments. And he was right. We, Vulture Capitalists, are supposed to be ruthless, but, in fact, we’re toothless. We see trouble ahead, but we dither, we squabble and only make the hard decisions when the damage is done.

While early-stage companies are especially fragile, one would hope mature ones, having survived childhood diseases, are less vulnerable to the Bad Board malady. But no, for a large company, a dysfunctional Board of Directors can be just as toxic as a divided investor syndicate is for a startup. We have two Valley icons to prove it: Yahoo! and HP.

Last week, Yahoo! unceremoniously ejected its 3-year CEO, Carol Bartz, who promptly and publicly questioned its Chairman manhood and called the Board a bunch of doofuses. Wisely, Roy Bostock, the Chairman in question refused to take the bait. Bartz calmed down. And “not-for-sale” Yahoo! directors and temp CEO wrote the troops, urging them to keep up the good work — while they’re caucusing with investment bankers for a sale. Whole, or one limb at a time.
Here’s a short sample of the message Yahoo! co-founders and Chairman hope will motivate the troops:

“What Yahoo! needs to do better — and we’ve talked about this — is accelerate innovation, reignite inspiration, and give our users what they want now…”

Gee, thanks. Let’s accelerate innovation, the troops repeat in unison. How come we didn’t think of it before. All Things D’s Kara Swisher gives the full and rightful savage treatment to the lame messages from the top. More

Crazy Patent Wars

Every week we see more companies filing more lawsuits over patents. Microsoft and Oracle sue Google, Apple sues a long list of companies…and they all countersue in a new kind of circular firing squad, a real MAD (Mutually Assured Destruction) conflagration. Soon, high-tech companies will have more lawyers than engineers.

First, a word on the general topic of patents. Feast your eyes on this Wikipedia article and you’ll see that patents, those erstwhile royal decrees, have been around for a long time. In theory, they’re supposed to foster innovation by granting the inventor a monopoly on an original process. In reality, things get complicated. Byzantine patent law has created lifetime employment opportunities for those who are expert in the Talmudic parsing of what is actually, legally patentable.

Back in the tangible, “real-world” days, you could invent a new process to temper steel that would result in taller, safer buildings. In patenting your idea, you’d earn a bit for yourself and encourage others to raise the bar.

Since then, we’ve invented software and, according to some critics, including at least one Nobel Laureate, we made the terrible mistake of allowing patents on these “inventions”. Can you really patent any algorithm, even a simple one, or only those that are complicated and “non-obvious”? What about the program code that realizes the abstract algorithm? And what do you call the formal language used to create an unequivocal description of the algorithm? Just text or a program?

It’s messy. But the mess isn’t new, it’s been with us for decades.

What’s new is the smartphone. A closer look at its complexity and profitability will provide a simple(r) explanation for the new madness.

First, the complexity. I’m one of those who like to call smartphones the Really Personal Computers. This could be misleading as it implies that these ubiquitous devices are like PCs, only smaller. In reality, a smartphone is much more complicated than a PC: accelerometer, gyroscope, compass, two cameras, multiple radios (Wi-Fi flavors, Bluetooth, multi-band cellular radio/modem), light sensor, humidity sensor, capacitive touch screen… All this in one very small and resilient package.

Most of today’s PCs aren’t nearly that complicated, they have fewer “sensory organs”, form factor size is barely an issue. The smartphone, with its richness, complexity, and miniaturization, has required more, newer, smarter inventions…and has spawned many more patents than a PC.

Second, the money. Take a look at the iPhone’s slice of Apple’s income pie. This year, iPhones (and its iOS siblings, the iPod Touch and the iPad) will yield about 65% of Apple’s approximately $100B revenue. See this Asymco chart for Apple’s most recent quarter:

Furthermore, while Apple’s overall Operating Margin hovers around 40%, the number is significantly higher — upwards of 60% — for iPhones. A mere four years ago, as the chart shows, there were no iPhone billions — zero — Apple was just Macs and iPods.

The Android ecosystem has similarly high stakes. Android devices can’t boast Apple’s Operating Margin, but they make it up in volume – unit sales are much larger than Apple. Add Nokia and RIM and you get an industry that will ship an estimated 475M smartphones this year (see Brian Hall’s post), and growing fast.

That’s a lot of phones, a lot of innovation, and a lot of money. And a lot of money has already changed hands in the smartphone patent wars. In 2006, after years of sometimes dirty pool, RIM agreed to pay NTP, an intellectual property company (a.k.a patent troll), the nice sum of $612M for “full and final settlement of all claims”. More recently, in a little-heralded settlement, Stephen Elop, Nokia’s CEO-for-now, pronounced himself “very pleased to have Apple join the growing number of Nokia licensees.” The unsubstantiated whisper was $600M.
Speaking of those $600M, we didn’t hear David Drummond criticize Nokia for “extorting” Apple. You know, the David Drummond, Google’s Chief Legal Officer, who penned a whiny blog post titled “When patents attack Android”. This was right on the heels of Google’s loss in the auction for Nortel’s patents. It’s rather ironic when considering Google’s fortunes depend on key patents from Stanford, and Applied Semantics for AdSense.
And now, Google buys a patent, turns around and sells it to HTC who promptly uses it to sue Apple, the precise kind of dirty maneuver Drummond shed crocodile tears over. See Philip Elmer-Dewitt choice words: Google gets its hands dirty

Today, there are about 5 billion cell phone subscriptions in the world, about 30% of which are smartphones (also from Asymco):

The smartphone industry has billions of devices and hundreds of billions of dollars in its future.

Imagine the throng of patent holders trying to extract royalties from each of these smartphones. For reference, Microsoft is rumored to get about $5 in royalties on each Android phone made by HTC and others (which leads to the ironic situation in which the Redmond company makes more money from Android than from its own Windows 7 Phone platform. Hopefully, when the MicroNokia agreement kicks in, this will change).

More patentable content per device, more devices, huge revenue and profit numbers at stake… No wonder the knives — and the attorneys — come out. See this detailed, well-written NPR story on patent trolls. After mentioning the $4.5B Nortel patent portfolio purchase by a consortium of companies including RIM, Microsoft, and Apple, the article concludes:

“The big companies — Google, Apple, Microsoft — will probably survive. The likely casualties are the companies out there now that no one’s ever heard of that could one day take their place.”

Can we reform this? Should we? No. Band-aids such as the recently-passed First To File reformette won’t quench appetites, nor will it put leg irons on the trolls. Instead, we should rejoice and look at the current agitation as an unavoidable side-effect of the smartphone ecosystem’s prosperity. A robust organism will always attract a number of parasites – pardon – symbionts.

Consider this false legend: In 1899, Charles Duell, Director of the US Patent and Trademark Office, is supposed to have said ‘Everything that can be invented has been invented’. We know this was wrong then, and it’s wrong now. If you think that large companies have a monopoly on invention, you forget how today’s giants — Google, Apple, Microsoft — toppled their elders: By imagining the unimaginable, patenting the unpatented.

JLG@mondaynote.com

An Apple TV Set In Our Future?

Not another Apple TV black box but a real 50” flat-screen TV, “Designed by Apple in California” — and Made in China, like most Apple products. Or Made In Korea, if the company concludes a new pact with its best frenemy, Samsung, the new king of TV sets, the new Sony.

Rumors of an Apple TV set have been circulating for at least two years. In a May 2010 blog post, Peter Yared wrote:

“Stylish, high-end TVs is the last consumer electronics frontier for Apple to dominate, and it will make apps as much of a differentiator on TVs as they were on smartphones.”

and:

“The TV is the last frontier in Silicon Valley’s relentless drive to computerize every screen. With the price of fully Internet-enabling a screen at below $300, everything that people see and touch is being turned into a computer: mobile phones, billboards, price displays, and with the iPad even magazines, books, and newspapers.”

More recently, Gene Munster, an oft-quoted analyst at the PiperJaffray investment bank, repeated his prediction of an Apple TV set launch in 2012, with Stewart Alsop adding:

“Apple will do to television manufacturers what it did to phone makers with the iPhone…”

The idea is exciting and so obvious it’s got to happen. Imagine a true plug-and-play experience. One set with only two wires: power and the cable TV coax. Turn it on, assert your Apple ID credentials and you’re in business. The program guide looks good and is easy to navigate; pay channels are just a click and a password away. The TV runs apps, from games to FaceTime and Skype, it “just works’’ with your other iDevices and also acts as a Wi-Fi base station using the cable provider’s Internet service.

But when we turn to the Small Matter Of Implementation, we see a few obstacles.

First, the TV incorporates a set-top box, with storage for the DVR function. It’s feasible: the CableCARD was invented for that very use. The electronics of a set-top box:

Now squeezed onto a card that’s inserted in the back of the TV set:

It’s an attractive idea, but the implementation failed to meet expectations. Although critics accuse cable carriers of being technically incompetent and lazy, I think there’s a more acceptable explanation: Carriers looked at the CableCARD and saw complicated field service calls in their future.  A separate, outboard set-top box is easy to diagnose and fix; a card inside the TV set, not so much. It generates a host of hard-to-understand bugs: Is the card working? Is it kind of working but causing the TV to malfunction? Is the TV working but killing the card?… and so on. More calls, more finger pointing, more expensive field techs…

Apple’s product culture, its talent for giving birth to nicely integrated devices could overcome some of these problems, but not the field tech issue. Would this new product force Apple to deploy its own Geek Squad, or do we see ourselves carrying a 50” Apple TV set back to the store when something goes wrong?

Then there’s the complexity of supporting multiple cable systems. Large carriers, such as Comcast, are known as Multiple System Operators, MSOs, with an emphasis on the “M”. They’re a patchwork of acquired systems that have never needed to be compatible. This would either restrict the TV set to a small number of carriers, or make the product more complicated and prone to more bugs — and more field tech visits.

And there’s Moore’s Law. In addition to the CableCard, the wonder set contains a little computer running iOS, and enough storage for apps and content that’s not hosted by iCloud. Great…but how long will it last? Not in terms of reliability, that’s not a problem — especially with an SSD replacing the DVR’s conventional hard disk — but in terms of being competitive with newer hardware.

Conventional TVs aren’t really affected by Moore’s Law. As long as the electronics work and the display doesn’t fail — and today’s sets are exceptionally reliable — there’s little pressure to upgrade. Once a family shells out for a nice 1080p set, it’s difficult to sell them the new improved model next year.

We’re willing to upgrade our laptops, smartphones, and tablets every year or two because Moore’s Law keeps improving the CPU and other electronics at the rapid rate that made the computer industry’s fortunes. An integrated Apple TV set wouldn’t benefit from better electronics as naturally as an iPhone does…unless, of course, the tiny iOS computer is implemented as an easily accessible plug-in module. This could also solve — or at least mitigate — the field service problem: Bring the module to the store, we’ll diagnose and replace it if needed…or sell you this year’s model.

In one device we might have something like: a CableCard inside an Apple TV 3.0, itself inside a TV set.

With regard to carriers, there’s no need to disintermediate them, no need for Apple to seduce them into giving up content sales the way Jobs did with AT&T. Carriers ought to welcome an Apple TV set as a way to increase their ARPU, but for this to happen much work remains. Try getting a human on the phone when you want to add a channel to your current Comcast bundle. At home, you’re connected through a secure device with a known MAC address, so why can’t you simply point to a channel and click-to-add? This and other bone-headed commercial practices — such as refusing to suspend your billing when you’re between houses — reveals a depth of customer-hostile culture that an Apple or a Google would find intolerable, but might have trouble changing.

I mention Google because they’re in the TV/Internet/Apps integration game as well. The first Google TV wasn’t a success, to say the least. My friends at Logitech lost tens of millions of dollars — and a CEO — with the first iteration. And Sony’s Google TV implementation didn’t fly either.

But the concept remains valid. And now that Google owns Motorola, a company with known expertise in set-top boxes and CableCards, we can expect a next-generation Google TV and, quite likely, a Samsung TV set with an integrated Google TV running Android apps and competing with the putative Apple TV.

I used to think product size, carriers and the rapid obsolescence of the integrated computer made an Apple TV set an impossible dream. I’m not so sure anymore.

JLG@mondaynote.com

PS: To help think about this some more, a great counter example: the Bose Videowave TV set. I use and like other Bose products but, with this one, what are thinking? $5,000, no cable box integration, a separate console box for the “integrated” set. See the Setup and Owner’s guides for more details.

HP: What Léo Apotheker’s Decisions Mean

Last Monday evening, hours after Google’s $12.5B gamble on Motorola Mobile (MMI), I had an intriguing idea and began drafting a Monday Note to explore its ramifications. It started like this:

Larry, Please Give Us a Free gPhone
In three easy steps, you can finish the job you started with Android:
First, tell Motorola to make a single, really nice gPhone. One model, running a fine-tuned version of Android, with all Google apps and services nicely integrated.
Next, tell carriers that the gPhone is free. No upfront cost, just a modest percentage of the monthly bill, of the carrier’s Holy ARPU.
Finally, tell the world: Google customers, get your free gPhone from the carrier of your choice!

Building and dismantling the business case for such a bold move will have to wait for another week’s fiction.

Today, we look at HP’s new reality: The world’s largest PC maker wants out of the personal business. How its PC division will be “exited” is to be determined. As for the TouchPad tablet and the Pre smartphone, both of which are based on the WebOS platform that HP acquired from Palm in April 2010, their fate is more certain They’re dead.

As business decisions, both moves make sense.
First, the PC. For years now, HP’s Personal System Group (PSG) has been a drag on the company’s earnings. Take a look at the numbers for the most recent quarter (FY Q3) ending July 31st 2011. At about $40B/year and 31% of HP’s total revenue, PSG is a huge business…but it’s shrinking: -3% for the first 9 months with an even greater hit (-17%) in the Consumer PC segment.
Furthermore, PSG doesn’t make real money: 6% operating profit in Q3, a meager improvement over last year’s same quarter when that number was 5%.
And let’s add the working capital required to support the PC channel inventory. Every week of product in the pipeline means at least $500M. If the company manages its channel very efficiently, it’ll have 6 to 8 weeks of products in the channel: that’s $3 -4B.

By contrast, HP’s Imaging and Printing Group seems to be making (I’ll avoid the tempting pun) good money: 16% operating profit with modest but reliable growth (+3%). It’s smaller than PSG, but, at about $26B/year, it’s still quite large.

Despite its size, PSG must be sacrificed so Léo Apotheker’s HP can “go IBM”, focus on selling big iron, software (note the $10.3B acquisition of Autonomy), and professional services to Enterprise customers. Plus some ink on the side.

(Years ago, Lou Gerstner saved Big Blue by getting rid of the commoditized PC business and concentrating on IT services. The right chef to implement that recipe, he kept IBM in business, and, as the Wikipedia article rightly says: “[performed] one of the most remarkable turnarounds in business history”.)

Second, the TouchPad. The “perfect” launch promised by HP’s CEO failed to materialize. Although critics saw great promise in WebOS, most panned the TouchPad. HP promised quick fixes (and even delivered some), execs tried to re-position the product and cut the price.

Nothing worked. The market had spoken.

As All Things D’s Arik Hesseldahl reported, Best Buy is now (supposedly) sitting on most of the 270,000 TouchPads it had stocked, having sold no more than 25,000 of the devices.

Léo’s reaction was swift: no more TouchPads, no more Pre smartphones. WebOS devices are gone. The company is eating $100M to clean things up. (We hear rumors of a fire sale, with some retailers offering basic TouchPads for $100. If true, I’ll get one.)

HP’s explanation: The WebOS ecosystem isn’t strong enough to make the TouchPad a contender in the tablet race…and the company simply wants out of Consumer markets.

A difficult decision, certainly, but clear and logical. Investors might not like that HP has folded their hand in the fast-growing smartphone/tablet game, but the “Going IBM” story, and the associated profit picture, makes sense. Shareholders should be pleased…

…but no: HP’s stock went down 20% on Friday, losing 27% for the week:

Why?

Let’s start with the exit from the PC business. HP’s announcement was vague and unactionable. In reply to a question about the precise fate of HP’s PC business, this is what Léo said during the Q&A part of Thursday’s conference call:

“Let me try to answer this and we’ll try to answer this as a team. So what the board and the management team have been working very diligently over the last period is to really look at all of our options and what the board has decided to do, together with the management team, is to look at all of the strategic options around PSG. And we’re really examining all of them. The announcement of today will allow us to look at this much more closely, including all of the synergies and other aspects of this operation. And over time, a decision will or will not crystallize on what the most appropriate way is to deal with PSG going forward. That’s all I can say about this right now, and we will refrain from commenting on what the strategic options are until the board will make such a decision.”

This is terrible. Worse than a terse ‘No Comment’. Either HP comes out and says ‘We’re spinning off PSG, Toff Bradley, its current head will run it, it’ll be called APC’, or it says nothing until it has a real announcement.

(See more abstracts in this PC Magazine post, and in Seeking Alpha’s full transcript. As the quote above demonstrates, the Q&A part of an earnings call is always more revealing than the “prepared statement” vetted by a brigade of lawyers, accountants and PR flacks.)

In my line of business, “the exploration of strategic alternatives’’ means you’re trying to pawn something off. It’s usually done discreetly for fear of making the merchandise look tired.

Here, HP trumpets that it wants to rid itself of the PC business. People or companies shopping for a new PC will look elsewhere, forcing HP to drastically cut prices to keep their current product moving. In turn, this will undercut the price HP can expect to get for its PC business. No wonder Michael Dell is snickering on Twitter:

(Of course, this is the same Michael Dell who, in 1997, told everyone Steve Jobs ought to shut Apple down and distribute the cash to shareholders…)

Shareholders don’t like this uncertainty, they don’t like what could happen to PSG revenue while the “alternatives” are “explored”. They’re becoming uncomfortable with HP’s erratic and bombastic public statements, and the premature release of financial information. The latter happened last quarter, following the leak of an internal memo discussing a “tough quarter”, and it happened again this past Thursday, when more leaks forced HP to release earnings while the market was still open. This might seem like a technicality, but the stock market is supposed to provide equal access to information. Insiders have an unfair advantage and, thus, are prohibited from trading. A selective leak gives an unfair advantage to a few outsiders.
To level the playing field, the SEC issued a Selective Disclosure rule, known as Reg FD, obligating companies to immediately disclose all information to all shareholders. This is serious because some investors stand to gain or lose millions of dollars when a company makes such mistakes. Two in a row reflects poorly on management — or on the organization’s loyalty to the boss.

Examples of HP statements that should have been avoided are, unfortunately, easy to come by. The latest is the “tablet effect” mentioned by Léo in the Q3 earnings conference call. Yes, there is the Unmentionable Tablet, but while affirming its impact on your business might sound courageous, it also downgrades PSG’s perceived value as the “strategic alternatives” are being explored.

(Contrast this with Microsoft’s PR: their chief propagandist, the witty, diplomatic and literate Frank X. Shaw doesn’t stray from Microsoft’s PC-centric party line. In his latest post, Where the PC is headed: Plus is the New “Post”, Shaw explains how irreplaceable the PC is and how these other devices are just PC companions. You agree or disagree, partially or totally, but Microsoft doesn’t waver. For a witty deconstruction of Frank’s post, see Brian S. Hall’s translation here.)

Then we have various “the WebOS isn’t dead” statements, HP’s messages to its staff and to the outside world saying there’s still a future for the platform. Does the company think it’ll find an Asian manufacturer – Samsung, perhaps – who’s eager to “go Apple”, to make integrated hardware/software tablets and phones in an effort to fight the Cupertino company?

Seeing an opportunity, Microsoft wastes no time:

Cheeky and effective, a well-run operation. (Go to Twitter to see the amazing response and Brandon Watson manning the ramparts.)
We’ve had HP’s CEO touting its company’s goal to snag Apple’s cool factor, an admirable but long term goal, requiring a lot of patience and money — and the right company culture. (How long did it take Jobs to turn the “marginal”, “on the losing side of history” perception around? This wasn’t a goal, but a byproduct. And, the “being on the losing side” meme still lingers.)
I’ll end the litany with the “WebOS running on 100 million devices” fallacy (see the March 13th, 2011 Monday Note). The Write Once, Run Everywhere mantra doesn’t work anymore. Credibility is sapped when “Run Everywhere” includes destinations as heterogeneous as PC pre-boot, printers, smartphones, and tablets.

Investors listen to HP’s pronouncements and wonder: Which of these statements do we believe? Which will stand the test of a few months? In the meantime, they dump the stock.

Let’s end on a humorous note. I found a buyer for HP’s PC business: Microsoft.

“Steve [Ballmer, that is], please give us a free PC!”.

Responding to a promo on Microsoft’s on-line store last Thanksgiving, I bought a version of Office 2010 for $199 and got a free PC to go with it. The PC was a cheap Dell netbook running a castrated version of Windows 7 that caused no end of trouble when attempting to connect to the office Exchange server. In spite of years of experience in such setups, I was stymied. It took our IT person a good 20 minutes to get it done, muttering expletives at the Windows 7 Starter Edition’s artificial limitations.

Ballmer could put an end to that suffering, make sure everything runs smoothly and have nice products to sell — or to give away with a software purchase — in the 75 expensive Microsoft Stores opening across the country. Come to think of it, Ballmer could snatch Borders stores before Google does in order to get choice retail locations for the gPhone blitzkrieg mentioned above. There’s a great one on University Avenue in Palo Alto, right across an Apple Store.

And just like makers of Android smartphones profess happiness at Google’s $12.5B acquisition of Motorola Mobile, we can be sure that Acer, Asus, and others would rejoice when Microsoft starts making its own PCs and Windows 8 tablets.

Isn’t the end-to-end integrated Kinect, Microsoft’s fasted growing business, making a good case for Ballmer’s next move?

Just kidding.

JLG@mondaynote.com

PS: For me, HP’s move is an especially sad one.This is the (formerly) great company that gave me my biggest break in business. In June ’68, they hired me to launch their first desktop computer on the French market. Later, as reminisced in the May 9th, 2010 Monday Note, I saw HP rise to the top of the nascent personal computer market, only to lose it to machines using “cheap” microprocessors, and to rise to the top again after the Compaq acquisition. And now, HP exits the PC business from the top.
Gizmodo has a related recollection of HP’s early personal computing days. —

Catching the Cloud

When it comes to contracting for a computer service, there is little choice but hoping for the best. Small or mid-size companies, especially those located outside the United States, are betting they’ll never have to go to court – usually one located 11,000km and thousands of dollars in legal fees away. Let’s face it: contracting with a large American company is a jump into the unknown. Agreements are written in an obscure form of English, often presented in PDF format, transparently implying modifications are out of question. Should you consider litigating, be prepared to make your case before a judge located on the West Coast of the United States. The not-so-subliminal reading of such contracts: ‘Sue me…’, with a grin.

The Cloud’s rise to prominence makes things worse. A growing number of companies and individuals handle their data to a remote infrastructure offering little hope of any legal leverage. The Cloud is the ultimate form of the outsourcing cascade. A US-based company rents capacity wherever electric power is cheap, connections reliable, and climate friendly to server farms cooling towers. As world connectivity expands, so do eligible regions. (While doing research for this column, I found Greenland was for served by a 960 Gbps (Gigabit per second) undersea cable linked to Iceland. In turn, the volcano island is linked to the rest of the world via a the huge 5 Tbps “Danice” cable). Datacenters are sprinkled over a number of countries and workload moves from one server farm to another as capacity management dictates. At this point, no company knows for sure where its data reside. This raises further legal hurdles as Cloud operators might be tempted to deploy datacenters in less stable but cheaper countries with even looser contractual protections.

European lawyers are beginning to look at better ways to protect their clients’ interests. A couple of weeks ago, I discussed the legal implications of Cloud Computing with Guillaume Seligmann, the lead tech attorney at the law firm Cotty Vivant Marchisio & Lauzeral. (He is also an associate professor at l’Ecole Centrale a prominent French engineering school). ‘When it comes to Cloud Computing, the relationship between the service provider and the customer is by nature asymmetrical’, he says. ‘The former has thousands if not millions of customers and limited liability; in case of litigation, it will have entire control over elements of proof. As for the customer, he bears the risk of having his service interrupted, his data lost or corrupted — when not retained by the supplier, or accessed by third parties and government agencies)’.
In theory, the contract is the first line of defense. ‘It is, except there is usually little room for negotiation on contracts engineered by expert American attorneys, based on US legislation and destined to be handled by US judges. Our conclusion is that solely relying on contracts is largely insufficient because it may not offer efficient means of sanctioning breaches in the agreement’.

The CVML partner then laid out six critical elements to be implemented in European legislation. These would legally supersede US contractual terms and, as a result, better protect European customers.

1 / Transparency. Guillaume Seligmann suggests a set of standard indicators pertaining to service availability, backup arrangements and pricing – like in the banking industry for instance. In Europe, a bank must provide a borrower with the full extent of his commitments when underwriting a loan. (Some economists say this disposition played a significant role at containing the credit bubble that devastated the US economy).

2 / Incident notifications. Today, unless he is directly affected, the customer learns about outages from specialized medias, rarely though a detailed notification from the service provider. Again, says Seligmann, the Cloud operator should have the obligation to report in greater details all incidents as well as steps taken to contain damage. This would allow the customer to take all measures required to protect his business operations.

3 / Data restitution. On this crucial matter, most contracts remain vague. In many instances, the customer wanting to terminate his contract and to get back his precious data, will get a large dump of raw data, sometimes in the provider’s proprietary format. ‘That’s unacceptable’, says the attorney. ‘The customer should have the absolute guarantee that, at any moment of his choosing, he we have the right to get the latest backed-up version of his data, presented in a standard format immediately useable by another provider. By no means can data be held hostage in the event of a lawsuit’.

4 / Control and certification. Foreign-headquartered companies, themselves renting facilities in other countries, create a chain fraught with serious hazards. The only way to mitigate risks is to give customers the ability to monitor at all times the facility hosting their data. Probably not the easiest to implement for confidentiality and security reasons. At least, says Guillaume Seligmann, any Cloud provider should be certified by a third party entity in the same way many industries (energy, transportation, banking) get certifications and ratings from specialized agencies – think about how critical such provisions are for airlines or nuclear power plants.

5 / Governing laws. The idea is to avoid the usual clause: “For any dispute, the parties consent to personal jurisdiction in, and the exclusive venue of, the courts of Santa Clara County, California”. To many European companies, this sounds like preemptive surrender. According to Seligmann’s proposal, the end-user should have the option to take his case before his own national court and the local judge should have the power to order really effective remedies. This is the only way to make the prospect of litigation a realistic one.

6 / Enforceability. The credibility of the points stated above depends on their ability to supersede and to render ineffective conflicting contractual terms imposed by the service provider. In that respect, the European Union is well armed to impose such constraints, as it already did on personal data protection. In the US, imposing the same rules might be a different story.

The overall issue of regulating the cloud is far from anecdotal. Within a few years, we can bet the bulk of our hard drives – individual as well as collective ones – will be in other people’s large hands: Amazon S3 storage service now stores 339 billion objects – twice last year’s volume.
We’ll gain in terms of convenience and efficiency. We should also gain in security.

—  frederic.filloux@mondaynote.com

HP’s Tortured WebOS Positioning

As an old HP fan, the rebirth of WebOS is painful to watch. Palm, after missing the ‘‘App Phone’’ transition was effectiv ely taken over by an investor group led by Elevation Partners. They promptly installed Jon Rubinstein as CEO, banking on his successful Apple experience to breathe new life into Palm. He did: In June 2009, Palm 2.0 launched the Palm Pre smartphone based on a new and very promising platform called WebOS. For reasons still in doubt (imperfect hardware, Sprint as the chosen carrier partner, young software, a perceived lack of applications, unusual ads…) customers didn’t vote with their wallets. Palm 2.0 investors got tired and the company was sold to HP in April 2010 for $1.2B. (At the time, I predicted no one would pick it up…)

HP immediately positioned WebOS for a broader role: it would also run on devices such as the company’s printers, improving their UI. On the surface of things, a good idea. And buying Palm was a declaration of independence from Microsoft: HP would control its smartphone (and tablet) future.

Back in September 2010, addressing the “Apple Problem”, Todd Bradley, the senior exec in charge of HP’s Personal Systems Group, took pains to dismiss ideas of direct competition with Apple: “… emulating Apple is not part of our strategy…”
When HP’s WebOS tablet, the TouchPad, was finally announced on February 9th, comparisons with Apple and Android couldn’t be avoided. (YouTube video here.)

In a BBC interview, HP’s new CEO, Leo Apotheker, kept the Apple comparison alive: “I hope one day people will say ‘this is as cool as HP’, not ‘as cool as Apple’.”
This is a worthy goal, one with the potential to motivate the troops. In principle, it can be done: some call Apple the new Sony; others see Samsung as having taken Sony’s place.

But… Isn’t this type of goal better kept quiet, working and working until the market says you have dethroned the incumbent?

We now go back to last month’s D9 conference and its proven formula: captains of industry softly interviewed by Walt Mossberg and Kara Swisher. The “softly” part is a bit misleading: these two journalists don’t do attack interviews, they might ask the occasional follow-up question, or let a pregnant pause signal BS detection and, on occasion, push the careless fabulist to dig deeper. But they mostly let their audience of industry insiders judge for themselves.
We, too, can do this.
For example, we can turn to Leo Apotheker’s on-stage performance at the conference. (See the video here.)

When asked about what took HP so long to come up with a tablet after Palm’s acquisition a year ago, the company’s CEO replied he wanted the TouchPad to be perfect when shipped. A friend sitting next to me in the audience turned and asked, sotto voce: ‘Why his he doing this to himself?’ And to his people, one might add. What is the benefit in setting up such a high bar?

Bill Walsh, the legendary football coach, used a better approach: before a game, he gave detailed praise to the adversary. Great quarterback, sharp throws, hard defense, and so on. If Bill’s team won, they did so against a worthy opponent. If they lost, well, this had been a hard fight against a clearly superior opponent. Safe and gracious.

Last week, after setting lofty expectations, HP launched its WebOS TouchPad.

None of the first reviews contained the word “perfect’’. Most praised WebOS features such as the Card UI, the Synergy integration of information sources and its unrestricted multitasking. But, too often, the praise was followed by criticism of poor execution.

Walt Mossberg, the Walt Street Journal “gadget guru” and arbiter of high-tech taste ended his detailed review saying: ‘I can’t recommend the TouchPad over the iPad 2’.

Gizmodo’s review is best summed up by its opening paragraph:

“I am so goddamned tired of the iPad. Which is why I was so excited for the TouchPad. And that’s why I feel so completely crushed right now.”

Last February, when the TouchPad was first announced, CNET UK gave it a very positive review:

“If you’ve been hankering for a credible alternative to Apple’s iPad, hanker no more. We’ve sat down with the HP TouchPad, a new contender to the tablet throne — and it is, for desperate want of a better word, amazeballs. It promises a host of advantages over the all-conquering iPad, including a dual-core CPU, no-nonsense media handling and, joy of all joys, Adobe Flash playback.”

This was then. Last week’s CNET’s review ends with this bottom line:

“The TouchPad would have made a great competitor for the original iPad, but its design, features, and speed put it behind today’s crop of tablet heavyweights.”

As for Flash performance, while Ars Technica gave the TouchPad a more “fair and balanced” hands-on, it nonetheless joined other review sites in noting flawed rendering:

“One big problem with browsing is Flash. Yes, it’s nice to avoid non-functional gray or black pages every time you visit a restaurant website, but we encountered far too many instances where some site’s Flashy goodness brought the entire TouchPad to its knees.”

(I just found out I’m not alone in pointing to the trouble with making promises of perfection. In a June 1st Market Watch interview (video here), Walt Mossberg opined the claim to a perfect-at-birth TouchPad “might come back to haunt Apotheker as HP tries to penetrate the market dominance of the iPad with the TouchPad.”)

This launched HP into damage control mode. First, a by-the-book response: The less-than-perfect features widely remarked upon by reviewers will be taken care Real Soon Now. According to Walt Mossberg’s TouchPad review, “H-P acknowledges most of these problems and says it is already working on a webOS update, to be delivered wirelessly in three to six weeks that will fix nearly all of them.”

But, wait a minute, if the bugs can be exterminated so quickly, why didn’t HP wait “three to six weeks” and execute the perfect launch promised by their CEO? Did Apotheker get to test the product himself and decide it met his standard for perfection, or did his staff tell him bedtime stories?

Then, Richard Kerris, the exec in charge of Developer Relations re-assures us: “We think the world of Apple and have the utmost respect for their products,” said Kerris. “It would be ignorant for us to say that we are going to take it [the market] away from Apple.”

Next, we’re told the TouchPad isn’t an iPad killer, but an “enterprise play”. By the same Richard Kerris: “We think there’s a better opportunity for us to go after the enterprise space and those consumers that use PCs.”

In the meantime, another HP exec, Eric Cador, claims his company’s TouchPad will become better than number one: “… in the tablet world we’re going to become better than number one. We call it number one plus.”

Jon Rubinstein comes to the rescue and compares the TouchPad’s teething problems to Apple’s early versions of OS X. In his memo to the troops, Ruby, as he is affectionately known, shows leadership and reminds everyone of Apple tribulations when rebuilding the Macintosh software foundation after Jobs came back to power. True.

But… Apple had a following HP lacks today. The adversary was Windows, great market power and not especially respected for its technical prowess. And today’s competitors are of two kinds, the huge iOS monolith and the even larger and proliferating Android.

In his D9 interview, Apotheker argues WebOS gives HP the ability to control better control its destiny by making both hardware and software like, you know, Apple. A few weeks later, we’re told HP is looking for WebOS licensing partners — thus opening itself to competing on price and features with its licensees, something Google, Apple and Microsoft have studiously avoided. (In the mid-nineties, Apple briefly tried to have it both ways. Profits plunged, Jobs came back and put an end to the bleeding.)

Unfortunately, I’m not done with the complicated positioning message.

Earlier this year, HP’s CEO made the claim WebOS would run on “100 million” devices. To quote the ZDNet article: “Although that 100 million figure sounds crazy it should be noted that HP shipped more than 52 million printers in 2010 and 64 million PCs. Tablets and smartphones are gravy.”

On PCs, as discussed in the March 13th Monday Note, the idea, an old one, is to have a “mini-OS” that’ll boot much faster than Windows so you can quickly check your webmail or your Facebook page. Printers would get better a nicer touch-UI. All this leading to grand statements of a boon for application developers: 100 million devices! Write Once, Run Everywhere! Neat theory, unclean reality. Just take a look at applications written for smartphones when playing on a tablet. iPhone apps do run, technically, on an iPad. And developers prefer rewriting those to better use the full screen. And what about code written for a Pre smartphone running in a printer, or a PC laptop using WebOS in a “quick-boot” arrangement?

We even hear rumors HP might do a Windows 8 tablet after all. No warranties expressed or implied.

In any event, this is a sad display of a once and still mighty company badly messing up its WebOS and TouchPad messages.

The reality is simpler — and harder: HP decided to enter the smartphone/tablet fray. It thus competes with Android and iOS. The consumerization of IT renders the “enterprise-only” pivot null and void. In this new world, Google and Apple wage an ecosystem war: devices + apps + distribution. Add marketing, if you want, but Word Of Mouth is still more potent than ad dollars. Or merely reinforces it.

This is the war HP is in. Bragging, pivoting or denying will only hurt.

JLG@mondaynote.com

RIM: What Did You Know and When Did You Know It?

You’re under oath. The opposing attorney asks you: What did you know and when did you know it? Big Trouble. The legal eagle already knows the answer, that’s the basic rule: Only ask questions you know the answers to. You’re about to incriminate yourself.

This is what Mike Lazaridis and Jim Balsillie, RIM co-CEOs, are likely to face. They’ve been in legal jeopardy before: In 2009, they paid hefty penalties for backdating stock-options. But that’s nothing compared to what awaits them after RIM’s 21% share price drop on Friday, June 17th.

Far from new, shareholder lawsuits are becoming routine. Announce bad results and a specialized law firm files a class action suit on behalf of aggrieved shareholders. The savviest of these firms keep small-scale shareholders on retainer, ready to be proffered as representatives of the injured class.

Excessive — and sometimes downright unethical — class action suits are part of the cost of doing business as a publicly-traded company. Even the most frivolous claim eats up time and money. Better to settle, to make a deal between greedy but knowledgeable attorneys rather than expose yourself to the unpredictable reaction of a jury of your ‘‘peers’’, retirees barely making do on Social Security who see your millions as ill-gotten.

But for Lazaridis and Balsillie, the What and When Question is an exceptionally dangerous one.

On April 29th they issued a profit warning. They told shareholders that shipments for the current quarter would be “slightly below” the expected $5.2B to $5.6B, and that profit per share would take a 12% nosedive compared to the numbers they had forecast a mere four weeks before.

The RIMM ticker symbol lost 14% on the spot. All the while, RIM execs stuck to their yearly Earnings Per Share pronouncement (and I’m paraphrasing): “It’s a tough transition right now, but we’ll get through it. We have great products on the horizon and we stand by our $7.50 EPS number for the year!”

Six weeks later, that sunny analysis has became inoperative (“Not incorrect, not misinformed, not untrue—simply inoperative.”) Revenue has fallen to $4.9B and the outlook for the following quarter is even bleaker. Revenue will continue to fall for the year, no unit shipment forecast has been given, and the EPS estimate for the year was finally cut by 25%, to between $5.25 and $6.

This is nonsense, and it’s what makes the What and When question particularly dangerous for Mssrs. Lazaridis and Balsillie.

For the first half of the FY 2012 year, EPS will end up at about $2 ($1.33 for Q1 and somewhere between $.75 and $1.05 for Q2). How can anyone believe the sinking ship will suddenly right itself and produce an EPS between $3 and $4 for the second half as BlackBerry shipments continue to sink?

But, they’ll say, we have PlayBook shipments: 500,000 so far, with a 67% growth in International Revenues.

Do you smell “channel stuffing”?

To make your numbers at the end of the quarter, one is tempted to force-ship product into channels ahead of their actual needs, before the actual ‘‘sell-out’’ to real customers. Eventually, the channels barf and embarrassing numbers emerge.

For the PlayBook, RIM is spectacularly silent about units sold vs. units shipped. Given that the co-CEOs have never been shy about actual or fantasized feats, their caution on the number of PlayBooks actually sold is notable.

The same applies for the claimed 67% growth in international sales. Who knows how many of these have been shipped as a way to meet quarterly goals, but yet sit in carriers’ or distributors’ inventories?

Further, as we speak, low-end Android smartphones are coming to developing markets in very large numbers and are likely to further devastate RIM’s international business. See Amol Sarva’s piece on “Shanzai Blackberries’’. (Amol is the CEO of Peek, a mobile e-mail device company; his views on BlackBerry could be seen as biased, but the facts he cites are facts nonetheless.)

All this boils down to yet another possible profit warning as BlackBerry smartphones and PlayBook tablet sales fail to rise and restore earnings.

Back to the legal challenges: I think they’re serious. From March to late April to June, the numbers continued to fall. Shareholders–and their attornies–will demand emails and other documents, they’ll want to show that RIM execs “knew or should have known’’ that their public statements were incorrect. If the misstatements were deliberate, that’s fraud; even “good-faith” mistakes constitute reckless misconduct. Both are actionable, meaning expensive settlements and/or ejection.

How did we get there? Is this yet another example of the Incumbent’s Curse?:

“The Incumbent’s Curse works like a neurotransmitter disease: it starts slowly, there is no brutal onset of symptoms. The patient’s good health of the moment encourages denial; but when the malady becomes obvious it’s hard to combat, it’s often too late.”

RIM has much to proud of. They invented the smartphone. Not Palm with the Treo, a result of the Handspring acquisition; not Microsoft with Windows Mobile; not even Nokia with EPOC, the OS purchased from Psion via the Symbian clusterf#^k, the Nokia+Motorola+Sony Ericsson joint venture.

RIM started as a pager company and evolved into the best everyday device, offering unparalleled Exchange connectivity, seamlessly and wirelessly running the Holy Triad of email, contacts. and calendar services. For years, I’ve been a happy BlackBerry user and have wholeheartedly encouraged family members and friends to join the “CrackBerry” fold.

But then two modern platforms, Android and iOS, upended the status quo and caused deep trouble for RIM, Palm, Nokia, and Microsoft. Initial denials and sneers notwithstanding, the elders had to do something.

Palm was swept up by HP.

Microsoft and Nokia finally decided to get married.

RIM kept insisting its platform was best-of-breed and would continue to do great things. Last year, the company finally decided to switch horses. They acquired QNX and started the difficult, dangerous process of moving its smartphones to a new OS. Just as Nokia osborned its Symbian devices while waiting for the Windows Phone rescue, RIM kept bragging about future QNX-based “superphones” and a tablet, also running on QNX, that would be “three to four times faster than the iPad”.

But, as RIM execs just told us — again — the transition to the new superphones will take longer than expected. As for the killer tablet, it still misses a native email client and, because of a paucity of native apps, it will have to resort to an emulator running Android tablet apps on the QNX-based Playbook. (A clear message to would-be PlayBook developers: Go Android.)

In the optimistic scenario, QNX BlackBerries and PlayBooks will be ship-ready — really! — by September 2011. Carriers, distributors, developers, enterprise customers, and consumers who had deserted the platform will return in droves, and the RIM execs who have insisted that their achievements are underappreciated will finally be vindicated. See what Lazaridis said to the NY Times last April:

“Why is it that people don’t appreciate our profits? Why is it that people don’t appreciate our growth? Why is it that people don’t appreciate the fact that we spent the last four years going global? Why is it that people don’t appreciate that we have 500 carriers in 170 countries with products in almost 30 languages?”
He wrapped up with “
I don’t fully understand why there’s this negative sentiment, and I just don’t have the time to battle it.

The execs are partly right: RIM is an amazing success story. And the company is still profitable with about $3B in cash.

But, unfortunately, they’re also dangerously wrong. RIM has been an amazing story, but its leaders have been in denial for too long, they have failed to recognized how two from-stratch platforms were able to move much faster than the incumbent, with its need to preserve the past while trying to build an incompatible future at the same time.

Furthermore, there’s the company’s culture. Every software developer I know who’s either worked with RIM or has considered doing so, dismisses the company as not just arrogant but tone-deaf. RIM thinks they “get” software and applications developers, but their top management doesn’t. Ex-employees, with the usual caution for the opinions of departed workers, say similar things: ‘’Research In Motion’s collapse can be traced straight to the top of the company.’’

We’ll soon find out what shareholders decide to do — besides running away.

JLG@mondaynote.com