hardware

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

Transitions: The Nokia Way vs. The Microsoft Way

One false step and you’re dead. Or worse: You’re the walking dead. This is what awaits CEOs who mismanage a product transition and allow the existing revenue stream to run dry before the promising new product shows up.

This is known as the Osborne Effect, named after Adam Osborne, the prolific inventor, entrepreneur and writer, and founder of the eponymous Osborne Computer Corporation. In 1981, Osborne introduced a machine that was, in effect, the first commercially available portable computer, the Osborne 1:

Sales took off, reaching 10,000 units per month. This might not sound like much by our smartphone standards, but thirty years ago it was a truly phenomenal success.

This wasn’t enough for our fearless entrepreneur. In 1983, he told anyone who’d listen: Just you wait! I have two superior models in the works, the Executive and the Vixen.

Customers took his advice. They stopped buying the current model and waited…and waited… In 1985, the company ran out of cash and went bankrupt.

Hence the verb: To osborne one’s product is to kill the current model, and its revenue, by prematurely announcing a more attractive replacement.

(Some, such as the redoubtable Robert X. Cringely, contend Osborne wasn’t osborned, but merely outcompeted. I was at Apple in Cupertino at the time, and have a clear recollection of our collective gasp of surprise when Adam Osborne started touting the unavailable products that killed the Osborne 1 revenue.)

With this in mind, let’s turn to Nokia’s latest wave of troubles: the transition from its old Symbian smartphone OS to Windows Phone 7. (We’ll also look at Microsoft’s very cautious approach to its own perilous transition to the next generation of Windows and to another attempt at securing a position in the tablet market.)

Last Monday, Nokia issued yet another profit warning. Blaming “competitive dynamics” and “pricing tactics,” the company declared its previous revenue forecast invalid and shed doubt on its ability to generate a profit in its Devices business. It also flatly told Wall Street it would no longer “provide annual targets for 2011.”

Translated into plainer English: We expected Android and Apple to take the high-end business while we’re working with Microsoft on our Windows Phone 7 devices, but we were surprised by a the swarm of low-cost Android phones. We don’t know how bad it will get, but…Just you wait!…we have “increased confidence” in our ability to deliver Microsoft-powered Nokia smartphones sometime “beyond October.” And we might be working on a MeeGo device as a “research project”.

Investors were not convinced and the stock plummeted, -20% in a week:

But that’s only half the story or, if you prefer, half of the drop in share price.

Consider the 40.7% drop since February:

The stock peaked on February 8th, just days before the Feb 11th announcement of the MicroNokia “strategic partnership”. Summarizing the corpospeak:

- Nokia adopts Windows Phone 7 as its smartphone OS
- Nokia gets unspecified customization and financial advantages
- Microsoft gets the world’s largest cell phone maker as an OEM

And with the announcement, CEO Stephen Elop osborned Nokia. Customers and, more important, carriers were told the legacy OS was dead and a Nokia Windows Phone 7 device was ten months (or more) away.

No one on the Street believed Nokia’s assurances that the company’s “traditionally strong carrier relationships” would guarantee continued sales of Symbian devices. The May 31st profit warning confirmed investors’ fears. Nokia had run straight into an army of handset makers who offer a wide range of devices powered by Android, a platform with a virile present and an exciting future.

In the now famous February 8th Burning Platforms memo, Elop tipped his hand. Yes, he makes a valid point: This isn’t a platform war, it’s an ecosystem war. But he also makes two crucial mistakes: He blames Nokia employees (“we have lacked accountability and leadership”), and then he implies that Nokia is open to all possibilities as they enter a domain that is forced upon them by the competition (“Our competitors…are taking our market share with an entire ecosystem. This means we’re going to have to decide how we either build, catalyze or join an ecosystem”).

A mere three days later, Elop stands on stage with his former MS boss and tells the world that Nokia has joined the Microsoft ecosystem. Elop’s puzzling and undiplomatic behavior doesn’t sit well with observers and drives some to conspiracy theories.

How about another approach? Make the Microsoft deal, work on a couple of devices, and keep it a secret. Even, perish the thought, subcontract development to an enterprising Asian OEM in order to ship the next generation devices ASAP. From the memo:

“Chinese OEMs are cranking out a device much faster than, as one Nokia employee said only partially in jest, “the time that it takes us to polish a PowerPoint presentation.” They are fast, they are cheap, and they are challenging us.”

When everything is ready, announce it and ship it with appropriate bombast.

In the meantime, rumors would have swirled: What are they up to? A new version of Symbian? A MeeGo tablet? We all expect a new CEO to kickstart new and exciting projects.

So what really happened?

I think the explanation is simple: Microsoft demanded an immediate announcement. They needed a PR coup. With no Phone 7 OS sales to speak of, Microsoft had no revenue to lose and the perception of adoption by the biggest cell phone maker to gain. (After the NokiaSoft announcement, Microsoft got an instant boost of phone credibility.)

How did Ballmer convince Elop to expose Nokia to the Osborne Effect? Was it the “worth billions” concessions? Given the depth of the hole Nokia now finds itself in, the number must have been a large one.

Contrast this with Microsoft’s careful previews of Windows 8. You can see a “canned” demo here, and, from last week’s D9 Conference, a “live” version here. Very nice UI, clearly drawing inspiration from the innovative Windows Phone 7 work.
I also encourage you to watch Steven Sinofsky interviewed on stage by Walt Mossberg and Kara Swisher (video here).

Beyond the slick demo, what do we hear? Continuity.

Sinofsky, the Windows Division President, repeatedly reassures us: Underneath Microsoft’s new touch-enabled tablets, we give you the tried and trusted Windows that hundreds of millions of customers rely upon: Office apps, networking, an approachable file system (a subtle dig at the iPad), a mouse and keyboard if desired. Everything.

This gets roundly criticized by MacWorld’s Jason Snell and Daring FIreball’s John Gruber. They see Windows 8 as fundamentally flawed because it hasn’t learned the from-scratch lesson of the iPad. Windows 8 brings old baggage into a new world. It’ll be complicated, slow, and eat batteries while the “fresh” iPad is simple, pristine, fast, fluid and offers great battery life.

As expected, our two critics are taken to task by Jared Newman:

“Microsoft doesn’t have to copy Apple’s strategy for Windows 8 to succeed. In fact, copying Apple would be a fatal mistake. Instead, Microsoft should be charting new territory with Windows 8, and that’s exactly what’s happening.

What Microsoft demonstrated on Wednesday is exactly what I want in a computer — a lightweight tablet UI that’s meant for casual computing and a powerful, classic Windows that allows me to work. I’m tired of carrying around my iPad and laptop together. I want one device that does everything.”

This is exactly the Microsoft party line: The best of the PC and the tablet in one device.

I have sympathy for both sides. Yes, Microsoft could do well by following the iPad lead…but there’s no way Microsoft can take the plunge into a really different platform. (They did it for Windows Phone where there’s no legacy business to protect, but they can’t with the “real” Windows.)

Microsoft knows better than to osborne itself. The company has consistently stuck to its “Windows Everywhere” mantra and, no less consistently, has made sure that every new version of Windows offers strong backwards compatibility. It hasn’t always work perfectly — see Windows Me or Vista — but the Windows + Office business has been Microsoft’s Golden Goose for decades.

For Microsoft, there is no Post-PC market. As Ballmer insisted when asked about the iPad: It’s a PC — minus the mouse and keyboard!

Grand strategic considerations aside, there is, of course, the small matter of implementation — and what Android and iOS will do next. Sinofsky has promised more details at Microsoft’s Developer Conference this coming September, we’ll have to wait until then.

And while we wait, we’ll watch how Elop gets Nokia out of its self-inflicted osborning.

Asymco’s Horace Dediu isn’t optimistic about Nokia’s prospects. In a recent post titled “Does the phone market forgive failure?”, he lists the handset makers who “hit the rocks”, in terms of profitability. None seem to have recovered. Let’s hope Nokia is the exception.

JLG@mondaynote.com

Google Wallet: Big Deal or another Buzz?

After weeks of rumors, Google finally announced its near field communication payment system, christened Google Wallet. It must be big because PayPal sued, but how big?

Let’s start with the basics.

First, the ostensible goal is to get rid of the antiquated multiplicity of insecure credit cards and replace them with your smartphone…your smartphone is your wallet.

Second, “near field” really is just that: Short-range (4cm, 1.5”) wireless communication between the Point Of Sale (POS) terminal (calling it a “cash register” no longer seems fitting) — and the smartphone.

The use scenario is obvious: In line at Safeway, after all the articles for the Memorial Day BBQ have been scanned, I wave my smartphone and off we go. Quick and simple.

The prospect of contactless debit/credit transactions has been around for a long time. Decades ago, GSM phones, which contained a reasonably secure SIM module using SmartCard technology, were seen as a replacement for plastic payment cards.  A bit later, I remember a Northern Europe vending machine demo: Each item was associated with a phone number; dial the number and the beer can falls. Next month, the transaction appears on your phone bill, as the carrier agreement dictates…just like with Minitel transactions. (Note the carrier role, to be revisited.)

These old examples don’t involve near-field communication, but they point to an old desire: We can do better than cash and cards. Other companies — Vivotech, Verifone — have tried to either replace or supplement the debit/credit card.

The basic idea is unchanged: The card is a token, a unique number encoded in a magnetic stripe. The latest notion is to store the number on another medium, one that can be read without contact, through a short-range wireless connection

It sounds simple, logical, fast, and safe.

But, so far, contactless replacements for debit/credit cards have failed to take the market by storm.

One reason for the modest success of NFC payment systems is the consumer’s entrenched habits and cognitive obstacles. “Plastic” is well understood, it works, it’s accepted everywhere around the world — and each card is a totem of a distinct account. Well-meaning experts saw that the “magstripe” had more than enough room to store the information for a dozen credit cards and tried to promote multi-account cards. It didn’t work. Merchants and customers found the invisible abstraction of a “multi-card” difficult to manage. By the same token, pardon the pun, consumers today see little benefit in making their familiar, physical cards disappear into a contactless device, whether it’s a dongle or a cell phone.

Nonetheless, the desire to do better than the old, dumb, insecure plastic refuses to die.

Enter the smartphone. As Brian Hall, the Smartphone Bard, likes to say: The smartphone destroys everything. Particularly business models.

Smartphones have taught us the benefits of a multi-use device: Multiple accounts for email, Facebook, iTunes, Amazon, in addition to the phone, camera, and mp3 player. Further training is provided by uses such as smartphone boarding passes that are displayed and scanned at the gate: A nice example of a reasonably secure method of authenticating a transaction.

(Speaking of transactions, smartphones play an ever larger role in commerce. AdMob, Google’s mobile advertising arm, receives 3.5 times more requests than a year ago.)

In November 2010, AT&T, T-Mobile, and Verizon — the usual suspects — formed a smartphone contactless payment alliance called Isis. American Express jumped in the fray, and Visa followed with its own contactless payment proposal. Other smaller but more agile players such as Mopay and Boku, to name but a few, will make the fight between incumbents and newcomers interesting to watch — and perplexing for merchants and consumers.

Perhaps the big carriers were reacting to rumors that Google and Apple were getting into the NFC payments game, or maybe they authentically sensed the possibilities, the torrents of money, a chance to increase the sacred ARPU by getting a cut of contactless payments. In any case, they had a concept. As for the implementation… Visit the news section of the Isis website and you’ll see how far these carriers are from an actual solution.

Google Wallet takes the concept much further. They’ve looked at the problem through the lens of their one and only business: advertising. With Google Wallet (I don’t know if they’ll claim ownership of the latter word) on your smartphone, you’ll get much more than a contactless credit card replacement. You’ll see ads and receive promotional emails, store coupons for this weekend’s deals — from pizza to electronics — and be able to use payment alternatives such as Google Checkout. Compare this with the “old” process: see an ad in the Sunday supplement, clip the coupon, make sure you stuff it in your wallet, go shopping, whip out the coupon at the cash register, pay with your card. For merchants, Google’s NFC is the link to a seamless marketing campaign: Lure customers with special offers and then offer a smooth transition from promotion to “e-coupon” to purchase and payment.

This could be big…if Google can get it to work. They have the means to do it, to make it a standard, and they could reap massive amounts of payment processing revenue and additional advertising as a result.

But…matters of implementation are likely to interfere.

Even if consumers continue to accept the concept of a unified account device, there’s still the problem of the “physical plant”, the infrastructure of tens of millions of credit card terminals around the world. Going NFC means replacing these well-debugged and cheap magstripe readers with hybrid contactless + magstripe machines — a hugely expensive proposition. Who’s going to pay for the hardware upgrade: the merchant, the payment processor, or the customer?

And the (big) carriers might get in the way if they perceive (as they should) that Google is trying to disintermediate them. Currently, Google Wallet is only available through the Sprint Nexus S phone. Visa/AT&T/Verizon are conspicuously absent in the announcement. For Google Wallet to succeed, carriers will have to distribute Wallet-enabled Android phones, or perhaps Google will “openly” force every Android licensee to carry the Wallet (hardware + software).

Google is right: Replacing credit cards with smartphones is a great idea. Further, Android being Google’s way to break into the new business models created by the smartphone revolution, Google Wallet is a logical outgrowth, an unavoidable tentacle.

(On Google’s overall disintermediation strategy, read Bill Gurley’s terrific and, for some, terrorizing piece: The Freight Train That Is Android.)

But, as we’ve seen with social networking — ad with Google’s older payment system, Checkout — simply being a logical component of Google’s arsenal doesn’t always mean success.

JLG@mondaynote.com

Intel 3-D Transistors: Why and When?

A few days ago, Intel teased: On May 4th, the company would make “its most significant technology announcement of the year.”

Tongues wagged. Will Intel make ARM chips for Apple? The speculation has roots in reality.

We’ll start with the public breakup of the Wintel marriage. At this year’s CES in January, Steve Ballmer made it clear that x86 exclusivity was done for. With an eye on reentering the tablet market, the next release of Microsoft’s legacy OS, Windows 8, would also run on ARM SOCs. This will “fork” Windows: There’ll be two versions, one on x86 processors, another on ARM chips. Tablets, which introduce UI differences, add a couple more tines to the fork. The impact on application development isn’t clear yet (food for a future Monday Note). Surprisingly, there’s been little talk of Intel “going ARM” to repair the Wintel relationship.

Now let’s consider Intel’s complete absence from the mobile scene. Not a single smartphone contains an x86 processor. Not a single tablet, no GPS device, nothing.

For the past four years Intel has told us we’d see x86 mobile devices Real Soon Now. The company developed its own mobile version of Linux, MobLin, and they made a big deal of joining forces with Nokia’s Maemo to create MeeGo. But Nokia’s new CEO, Stephen Elop, kicked Meego to the kerb, wisely deciding to focus on one software platform, his ex-employer’s Windows Phone 7.

(We’ll see how wise this decision turns out to be. Perhaps Elop should have put his money on the front-running Android horse. Perhaps Microsoft should have “gone Apple” — pardon, “vertical.” They could have acquired Nokia, controlled the hardware and the software. They did so, successfully, with the Xbox and Kinect. Again, more food for future Monday Notes.)

The x86 mobile devices never materialized. Each new low-power processor promise from Intel was matched by ever more attractive ARM development. Now that the PC market is in its twilight, with mobile devices proliferating and stealing growth from the PC, surely Intel has to get into the race.

Then there’s the long-standing relationship between Steve Jobs and Intel — or, more specifically, with Intel co-founder Andy Grove. The relationship flourished at NeXT when Jobs moved the platform to Intel processors. After Jobs returned to Apple, efforts got under way to move the Macintosh away from the PowerPC, which was deemed poorly supported by IBM and Motorola, to the more robust x86 line.

It isn’t hard to imagine Intel offering Apple its advanced 22nanometer fabs, along with some kind of exclusivity and price advantage. And there’s a bonus: They’d be kicking Samsung, an annoying combination of supplier, competitor, and adversary in IP lawsuits. In return, Apple would give Intel the kind of volume the company likes, 100 million ARM chips in 2012.

From there, the train of thought continues to the terminus: the Macintosh line switches wholly to ARM, and Intel supplies the processors. It’s not impossible. Intel hedges its bets, secures an inexpensive ARM license and uses its technology and marketing prowess to grab their share of the explosive growth.

As the rumor site says: “This is going to cause meetings.”

Now, the reality.

What Intel announced last week is a new “3-D” transistor technology. 3-D here doesn’t refer to images but to a design and manufacturing technique: Making transistors in three dimensions, as opposed to today’s “planar” technology where the microscopic silicon circuitry is laid out on a flat surface. Just as you can store more cars in a multi-storey garage than in a flat parking lot, more circuitry can be packed in three dimensions.

The new 22nm semiconductor manufacturing process also helps. The circuitry building blocks are smaller, they waste less electrical power through heat dissipation. All of this — cue the cymbals — is ideal for mobile applications. In plain English: This is Intel’s ARM killer. (Cruelly, Google tells us we heard the same story three years ago. And two years ago. And last year.)

Intel’s press release is firmly planted in hyperbole:

Intel’s scientists and engineers have once again reinvented the transistor, this time utilizing the third dimension,” said Intel President and CEO Paul Otellini. “Amazing, world-shaping devices will be created from this capability as we advance Moore’s Law into new realms.”

The part about “once again” reinventing the transistor is a bit far-fetched. On Intel’s website, you’ll find the company’s own timeline, replete with innovations, and bowdlerization…but nothing about reinventing the transistor. There’s some dispute as to the transistor’s actual invention: when, where, by whom. Most history books credit William Shockley at Bell Labs Research with the first silicon transistor, which was produced in 1954 by Texas Instruments. (At my Breton Roman Catholic boarding school, the Prefect of Discipline was a certified geek. In 1955, instead of looking at religious pictures, we were in his office drooling at this incredible Philips OC 71 germanium transistor…)

We’re meant to be impressed by the promised performance and power dissipation improvements:

The 22nm 3-D Tri-Gate transistors provide up to 37 percent performance increase at low voltage versus Intel’s 32nm planar transistors. This incredible gain means that they are ideal for use in small handheld devices, which operate using less energy to “switch” back and forth. Alternatively, the new transistors consume less than half the power when at the same performance as 2-D planar transistors on 32nm chips.

Note the Alternatively: it’s either more performance or less power dissipation.

We’ll have to wait a year to see how this markitecture translates into actual devices.

Will this be enough to unseat ARM? Most observers doubt it. The big news was received with an equally big yawn. Wall Street didn’t pay much attention. We’ve been here before: The “product” of the announcement is the announcement. (And there’s the suspicion that “breakthrough” revelations are an attempt to mask a lack of spanking new products.)

But let’s return to the rumor, from SemiAccurate, that the Mac and Intel will soon be “arm-in-ARM.” (That bad pun isn’t mine.)

First, let’s consider the name of the website.

Second, what will Apple do at the high-end, for media creation and editing? What about Photoshop, FinalCut, and other applications, including CAD where the Mac is getting back in the game? There’s no roadmap for ARM chips to beat Intel in these computationally intensive areas.

Today, going ARM is technically feasible on entry-level Macs. Tomorrow, newer multicore ARM chips might work for middle-of-the-line Macintosh products. But will Apple abandon the faster x86 processors at the high end just to avoid the kind of forking that awaits Windows in its own move to ARM? If not, we’ll again see Universal applications (a.k.a. fat binaries–two versions inside the same container), just as we did with the PowerPC to x86 transition. Microsoft is doing it because it must; Apple did it because the PowerPC didn’t have a future. But now?

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On a related note…and more food for thought: I’d love to know how the iPad line will evolve. For example: will pressure-sensitive stylus input ever happen? Eschewing stylus input in the early days was a thoughtful move. Perhaps it’s time to relax the restriction and thus enable richer media creation applications.

The next iOS and OS X releases will shed more light on the relative roles of Apple’s tablet and PC product lines, how they will coexist, what they’ll have in common and what will keep them apart. We should know in about a month.

JLG@mondaynote.com

Carnival Barker Edition: Show me your iOS licensing certificate!

Apple is doing it wrong, Apple is living on borrowed time! Apple will Fail Again!

This idea, this meme, isn’t new. For more than 30 years we’ve heard a number of versions of the “Apple is doomed” requiem.

December 12th 1980 — the day of Apple’s IPO, coincidentally — I’m in Geneva, signing my employment agreement with Apple. My mission: start Apple France. Back in Paris I meet a chorus of naysayers: You’re deranged. Look at the respectable companies you’ve worked for: HP, Data General, Exxon Office Systems. (They don’t know that I can’t wait to leave the latter.) And now you’re going to work for these California hippies? They don’t have CP/M; the Apple ][ has a 40-column screen and lacks standard 8” floppies…and Fortune Systems is coming up with a Wang emulator that will wipe Apple off the planet’s surface!

The latest Dies Irae comes from a trio of highly skilled artists: Henry Blodget of Wall Street and Business Insider fame; Fred Wilson, co-founder of the VC firm Union Square Ventures and an eloquent and insightful blogger (AVC blog); and Dan Lyons, the sharp and eerily hilarious author of the Fake Steve Jobs parody blog (currently on hiatus), now writing for the Daily Beast and Newsweek. (See here, here and here but a few examples of their refrain. Google will oblige with more.)

I’ll start by intoning their cantus firmus.

In 1984, Apple comes out with a superior personal computer, the Macintosh. And then they lost the market to an inferior genus: the IBM PC clone.

Why?

Ignoring universal advice — including Billl Gates’ — Apple arrogantly refused to license the Mac operating system, leaving the field to Microsoft’s technically inferior product. DOS and Windows clones proliferated and almost exterminated the Mac, relegating it to a minuscule, irrelevant market share.

With the iPhone — and out of the same deeply ingrained arrogance — Apple is making the same mistake. Apple won’t license its iOS software platform. As a result, Android-powered smartphones and tablets will do to the iPhone and the iPad what Windows did to the Mac.

The story ends with Andy Rubin at the wheel of the Android steamroller. Behind him we see Henry, Fred, and Dan throwing rose petals on themselves and singing I Told You So.

(I have personal reasons to like Android. Several of my Be associates moved on to Google where they were instrumental in the creation of the platform. I admire what the engineering team accomplished in a very short time. There’s little wonder that Nokia and RIM have lost their footing. One of my two smartphones is an Android device, from Motorola; I see everyday why the platform is so successful. And as an iPhone user, I’m glad Google is fueling Apple’s competitive fires.) More