hardware

What future for the Macintosh?

With Apple’s smartphones and tablets making so much money and taking up so much media bandwidth, one has to wonder: Is there a future for the Macintosh?

We’ll first take a look at broad trend numbers and try not to molest them too much. As we saw last week, they’ll confess to anything when under torture. After that, we’ll explore the significance of recent changes in the Mac ecosystem: the new MacBook Air and the Mac App Store. Finally, we’ll extrapolate a bit and attempt to answer the question in this note’s title.

Mary Meeker, the Wall Street analyst who recently left her Morgan Stanley pulpit for a Kleiner Perkins perch, just updated her highly-regarded Mobile Internet Trends presentation. From her 56 slides I extract this one:

2011 is the year when PCs will cede the market momentum lead to smartphones and tablets. The disparity between the old guard and the new Really Personal Computers become huge in 2012 and 2013.

This comes sooner than expected: Only four months ago, while she was still at Morgan Stanley, Meeker had this forecast:

The takeover wasn’t supposed to happen until 2012, but, as this review of Gartner and IDC numbers shows, the growth of mobile devices far outpaced the PC in 2010.

For Apple, the smartphone/tablet takeover happened even earlier. I just looked at the Q1 2010 numbers (for the September to December 2009 period):

And this was before the iPad.

For the same quarter this fiscal 2011 year, the iPhone and iPad brought in $15B vs. a “mere” $5.4B for the Macintosh line:

Let’s not forget the iPod Touch. It represents about 50% of the iPod’s $3.4B, with the total for all iOS devices representing 65% of Apple’s revenue. (I have no Apple TV numbers.)

This past year, the Mac business went down percentage-wise, from 28.4% of Apple’s total to 20.3% this past quarter, and operating margins are certain to be smaller than the almost obscene 60%+ Apple gets for its iPhone ($620 ASP against an estimated $180 BOM).

With these numbers, why bother with the Mac? Last October, Apple held a Back to the Mac event whose purpose was to answer that one question: Why bother?

In the first place, the Mac is a $22B business, #110 on the Fortune 500 list. Second, it’s growing nicely. See the numbers above: +23% in dollars (and 22% in units), with a stable ASP of $1313. That last number is the envy of the PC industry. Because of netbook sales, the industry-wide ASP hovers slightly above $530. (This is the net revenue to the manufacturer, not the retail price.) That’s why the largest PC maker, HP, makes only 5% in operating profit on their $10B quarterly sales. For HP, the Why Bother question applies. I’m curious to see what the new CEO, Leo Apotheker, will do about the low-margin commodity parts of HP’s lines of business.

Macintosh products, on the other hand, have avoided the ‘‘race to the bottomthat plagues  PC clones. The business is big, it’s growing faster than the rest of the industry, and it makes more money.

Then, last quarter, something changed:

Desktop unit sales were flat (-1%) while laptops took off (+37%). Compare this to the 2009 vs. 2010 units numbers in Apple’s 10-K (the yearly filing):

Back then, desktops were growing faster than laptops. So what happened last quarter? The answer appears to be the new MacBook Air.

To confirm this, let’s transport ourselves to a typical Apple Store. We’ll start in September 2010. The older MacBook Air is relegated to a low-traffic area of the store. It’s not “moving.”

Now look at the same store today. The Science of Shopping says the ‘‘high-value” area must be the first table on the left, because, statistically, that’s how we navigate stores. There we see six MacBook Airs: four 11” models and two 13” configurations.

Why the change?

The attractive price is part of the answer: The base 11” model sells for $999, low by Apple standards. But performance is the more important factor. The older generation Air was considered neat but sluggish. For the new machines, the slow hard drive was replaced with an SSD (Solid State Drive), and the word of mouth quickly spread: The new MacBook Air is fast! It boots up (and wakes up) quickly, plus it has a longer battery life, improved display… The former also-ran was transformed into a best-seller, especially the smaller 11” model (I’ll call it a neatbook in reference but not deference to Apple’s edict against using the n-word: netbook.)

Thinking of the Mac’s future, we don’t risk much when we assume SSDs will replace hard drives on laptops. Apple is on a drive to drive the drives out — at least in the mobile segment of the Mac line. (We’ll see how this manifests itself when the “Pro” configurations get refreshed later this year.) SSDs are still expensive but for how long? And how will Apple’s billions ($3.9B at last count) in advance purchase agreements with its suppliers impact prices?

We now move to the Mac App Store.

The Mac App Store was launched on January 6th and, but for a few bugs, appears to be a success. My first impression: Nice…it helps the small-scale developer who otherwise can’t get shelf space.

True, the App Store is a boon to developers — the creators of Pixelmator, a well-crafted, easy-to-use Photoshop subset, made one million dollars in revenue in three weeks. But that’s not the Store’s only — or even most important — benefit.

Let’s start with the convenience for the user. As with iTunes tracks and iOS apps, the Mac App Store circumvents the usual e-commerce obstacles. The site, the download, the payment system, the installation and updates…the workflow is smooth. No serial numbers, no DVDs, no waiting. And you can install the same applications on more than one machine by simply confirming your Apple ID, no further payment required.

And let’s talk price… Mac software prices are coming down. A sharp-tongued friend of mine “hopes” Adobe opens a 24/7 War Room. Why? “Because the market price for Mac software just got divided by three.” Nuance and exaggeration aside, he’s right. When Pixelmator was launched in the second half of 2007, it was priced at $59. Now, much improved, it sells for $29 on the App Store (albeit “for a limited time”) with a free upgrade to an upcoming 2.0 version.

Apple sells its own productivity apps (word processor, presentation, and spreadsheet) for $19.99 each. It’ll be interesting to see if, how, and when Microsoft or even Adobe use the App Store and how they’ll price their products.

Now, an IQ test. This…

…or this…

Both are available today. Which do your prefer? The $199 DVD (protected by a serial number) that you buy at the physical store and install on a single machine, or the $79 product you download and install as you see fit on any of your machines?

The difference in price is, of course, the main attraction, but freedom from serial numbers is also important. When I switched machines using the Migration Assistant, everything moved over without a hitch, files, applications, settings, even the desktop background…or so I thought. A few weeks later, I fired up Aperture and, unlike the rest of my applications — even Microsoft Office — it demanded a serial number. A foraging expedition produced the Aperture 3 DVD, but that didn’t placate the cerberus because that was an upgrade DVD. I needed to come up with the SN for Aperture 2. I erased the program and bought Serial Number Freedom — and legal multi-machine installs — for $79.

All of this leads one to wonder if Apple will rid its stores of “boxed” software, thus fulfilling another of their goals: fewer SKUs, a simpler store.

So, what’s the future for the Mac?

There’s the promise of “regularity,” apps that only use published APIs. This is both a controversial topic and a way for Apple to redeem past sins. Restricting hacks could mean less room for developer creativity, but it will also mean a more reliable system and, for Apple, more freedom to make changes “under” the applications once enough of them are “regularized.”

This takes us to a more speculative train of thought: Moving to the ARM architecture.

When you experience the 11” MacBook Air on a relatively slow 1.4 GHz Intel processor, you can’t help but wonder how it would feel on multi-core ARM hardware. Porting an OS to a new processor is no longer rocket science, but moving third-party applications is much harder — unless they’ve been distributed and regularized in such a way that makes the transition smooth and transparent.

Then we have the next OS X version, dubbed Lion. Last October, Steve Jobs emphasized the point that Lion’s simplified UI borrows the “magic” of the iPad. We’ll have to wait for the product, slated for a Summer ’11 launch, but that didn’t stop my friend Peter Yared, a serial entrepreneur and sharp blogger, to offer a suggestion: “Take that iPad-ified MacBook Air one step further. Look at the Toshiba Tablet PC; there’s a pivot inside the display’s hinge:

Twist the display and it becomes a tablet:

Imagine what Apple could do with this!”

As I was writing this note, I found Andy Ihnatko, a respected technology journalist, appears to be thinking closely related thoughts in this MacWorld piece.

I worry about the complications: OS + UI + mechanical challenges but…Apple might have the people and guts to pull it off. We’ll see.

End notes:

No MicroNokia kremlinology today. I’ll write about it in a few weeks, after the dust settles. In the meantime, you can look back at past Monday Notes such as last September’s Nokia’s New CEO: Challenges or last February’s Mobile World Clusterf#^k. And, of course, Elop’s Burning Platform memo, highly unusual in its brutal frankness.

As always, look for penetrating analysis on Horace Dediu’s Asymco. And for another type of “penetrating” commentary and BS detection, see Brian Hall’s The Smartphone Wars — they both rose to this week’s challenge.

JLG@mondaynote.com

Inside Apple’s numbers

On Monday last week we hear Steve Jobs is taking another medical leave of absence and, on Tuesday, we get a look at Apple’s numbers for Q1 2011 (which is actually the last quarter of 2010).

Brian Hall provides this crisp summary:

• Sales: $26.74 billion, up 70.5% year over year
• Profits: $6 billion, up 77.7%
• EPS: $6.43, up 75.2%
• iPhone: 16.24 million units, up 85.8%
• iPad: 7.33 million units, compared with Wall St. consensus of 6.15 million
• Mac: 4.13 million units, up 23%
• iPod: 19.45 million units, down 7.3%
• iPod touch: More than 50% of total iPod sales
• Gross margin: 38.5%, compared with guidance of 36%
• Revenue guidance for Q2: $22 billion
• EPS guidance for Q2: $4.90
• Gross margin guidance: 38.5%
• Apple stores: $12 million average revenue per store, up 69% from Q4
• Cash and marketable securities: $59.7 billion, up from $51 billion in Q4.

MacWorld put together a more detailed but still digestible review that includes a history of quarterly profits since 2007, as well as units and revenue numbers by product line. Very well done.

For the official word from the mother ship, we have Seeking Alpha’s transcript of the earnings call where Tim Cook, Apple’s COO, and Peter Oppenheimer, CFO, read prepared remarks and answer carefully choreographed questions from analysts.

And if you’re ready for some long form reading, we have SEC filings. For the quarter just ended, there’s the Form 10-Q (55 pages). For the entire fiscal year 2010 ending last September, Form 10-K (116 pages…).

You don’t have to read them all–or at all, it’s an acquired taste–but if you decide to indulge, take a moment to feast your legal eyes on the faux handwringing in the Risk Factors section (a.k.a CYA Central). Then head for the good stuff, the Management’s Discussion and Analysis section starting on page 28 in the 10-K, and page 20 in the 10-Q. Company execs use the MD&A to walk us through the key elements of the business.

From that sea of words and numbers, I’ll extract three trains of thoughts.

First, the significance of the iPad business.

14.8M iPads were shipped in just nine months. This in a previously marginalized or verticalized category: Tablets. By comparison, the first iPhone didn’t reach 10M until it was a year old.

Looking at quarterly iPad unit sales:

• 3.3M units for the launch quarter ending in June
• 4.3M for the following three months
• 7.3M units for the period just reported.

At last year’s D9 conference Steve Ballmer dismissed the iPad as “just another PC”. (This is standard Microsoft decorum. In 2007, he scoffed at the iPhone.) Well, then, if the iPad must be counted as a PC, it just captured 7% of the global PC market last quarter.

This explains why Acer and Asus, leading netbook makers, are rushing tablets to the market and why Lenovo, another PC titan, is starting a mobile division. All in all, 80 tablets were announced at CES a few weeks ago. The iPad is about to get some serious competition but, based on the 7.3 million units shipped last quarter, most forecasters feel confident in predicting 30 million iPads or more for the year.

Deloitte, the large accounting and consulting firm, now calls 2011 The Year Of The Tablet. They, and other market research firms, don’t agree with Ballmer. They put the iPad in a new category: Media tablets, and they see Apple’s share as somewhere between 87.5% (where do they find that .5%?) and 90% of the market. (I’m not sure the media tablet moniker will stick. These devices already let you do much more than “consume” media.)

Last quarter’s iPad revenue, $4.6B, is almost as large as the Mac’s $5.4B… and this is after only nine months while the Mac will soon be 27 years old. (For another Monday Note: the Mac business, growing by 22% last year, versus 14% for the entire PC industry, with a closer look at the MacBook Air’s impact, present and future.)

The 10-Q also gives us revenue-per-unit:

• $629 for each iPad
• $649 per iPhone

(Company execs quote ASPs of $600 and $625 in the call transcript but they’re probably excluding ancillary services and accessories.)

The iPad’s lower ASP may seem counterintuitive, but recall the iPad’s introduction last January when the $499 base price took everyone by surprise. Pre-launch speculation pegged it somewhere between $800 and $1,000. It felt like a turning point, it looked like Apple wanted to remove price as an excuse for not buying, that they wanted to occupy as much terrain as quickly as possible. And they did, with a barrage of ads that started soon after the launch and are still going on.

This was followed by two more aggressive price moves, the $99 Apple TV and, more important, the $999 MacBook Air.

Apple’s overall Gross Margin has declined from 39.4% last year to 38.5% last quarter, but that’s better than the 36% level the company had predicted in October. In other words, the more assertive prices seem to have worked: Revenue grew 70% year-to-year without harming profits, which grew by 77%.

(Again, we’ll leave the iPhone’s $649 ASP for another Monday Note, probably around the time of the Mobile World Congress, next month in Barcelona. If we are to believe Apple Insider, Apple has become the world’s largest mobile phone manufacturer — by revenue. As Apple execs “neglected” to brag about beating the incumbent, we’ll wait for Nokia’s quarterly numbers coming out in a few days, January 27th.)

The second point: The Apple Stores.

In FY 2010, revenue across all Apple Stores was $9.8B. This is 15% of Apple’s total sales, with 317 stores open at the end of the reporting period, 44 more than the year before.

But I want to know the revenue per employee. Obligingly, the 10-K mentions 26,500 “full-time equivalent” employees by the end of FY 2010. A simple division yields $370K per employee. There were significantly fewer employees at the beginning of the year so we can safely assume a full-time employee brings in about $400K/year, a ratio that must be the envy of the entire retail industry.

While I’m at it, I also want to get an idea of the Gross Margin for Apple’s retail business. I have a French peasant view of the world: Forget the revenue numbers, its the Gross Margin that really matters, those are the dollars that feed you. We know the operating profit–the 10-K says it was $2.4B, 24%–but what about the Gross Margin?

It’s moderately complicated. If this isn’t your cup of numbers, please skip to the result.

We know Apple’s overall Gross Margin, 39.4% last year; we have numbers for indirect sales and retail, $55.4B and $9.8B respectively. How do we extract retail’s GM? We’re facing one linear equation with two unknowns: the GM for indirect (non-retail) sales and the GM for retail sales. Weighted by their respective sales volumes, they compound to the known 39.4% total Gross Margin number.

I use a simple trick: I assume two components for the retail GM. First I apply a “standard” retail discount. For this exercise, I use 30%. Once I’ve done that, the discounted number becomes of the same nature as indirect sales. The second margin component of the retail GM is therefore equal to the (unknown) indirect GM.
Having “fixed” one variable, the retail discount, we now have one linear equation with one unknown, the indirect Gross Margin, x:

Retail Sales * (30% + 70% * x) + Indirect Sales * x = Total Sales * 39.4%

or, with actual sales numbers, in billions:

9.8 * (30% + 70% * x) + 55.4 * x = 65.2 * 39.4%

Now, copy the line above and paste it into WolframAlpha:

and you’re done:


Isn’t this fun?

The result: 36.5% GM for Apple’s indirect $55.4B sales and, after compounding the assumed 30% retail discount, we arrive at an approximate 56% GM for Apple’s retail stores.
(No warranties expressed or implied.)

Thus, each Apple Store employee can dine on 56% of $400K. That’s $224K. Probably enough to pay salaries, rent and HVAC…and leave change for the shareholders.

That was last year. In the quarter just reported, Apple’s retail business grew 95% year-to-year to $3.9B. Using Apple’s historic seasonality (4xQ1 for the full year; 5xQ4 for the following year) we can project at least $16B for Apple retail in FY 2011.

That’s 16% of the $100B revenue number Apple could approach this year…

Much has been said about the Apple Store as a sterling example of everything that can go right in retail: record sales volume per square foot, traffic numbers, profitability, aesthetics (more at Apple’s architecture firm: Bohlin Cywinski Jackson), and customer service.

Most important, the Apple Store proves Apple’s ability to execute on a global scale.

Which leads me to my last point: The Silence of the Lambs. Wall Street Analysts.

If you go back to the earnings call transcript, there’s a conspicuous absence. There’s no mention of Steve Jobs.

The supposedly aggressive Wall Street analysts didn’t ask a single question about Steve’s medical leave of absence, its nature, duration, Apple’s contingency plans. How come?

The answer in a single word: Access.

A few years ago I asked a journalist friend about a sycophantically fellatious piece that a colleague of his had written for a respected business daily. The writer had followed a key software executive as he toured the company’s R&D offices around the world. In dulcet, reverent tones, the journalist reported how the missus dominicus spread the gospel, blessed projects, and occasionally, but rightfully, disciplined errant local chieftains.

‘How come?’, I asked. ‘This isn’t reporting, this is simply disgorging the party line!’

His response: ‘It’s all about access. This is a huge company that’s an important source of news, great fodder for the paper and its journos. It’s a quid pro quo. In order to get access to the top execs, to get the juicy tidbits, sometimes you have to strap the kneepads on…’

Before its earnings call, a company decides which analysts will be allowed to ask questions. The opportunity comes with an understanding. If you don’t do your part, your conference call line will never open again, you’ll have lost access.

And we can’t blame Apple: All companies do it. At least the ones that bestow enough prestige.

Nonetheless, I don’t buy the criticism of Apple’s decision to keep a tight lid on Jobs’ medical condition. In the first place, no less than ex-SEC commissioner Arthur Levitt believes Apple has met its legal disclosure obligations.

Further, Apple’s behavior is consistent. Critics might find it unpleasant, but they shouldn’t be surprised. Fault-finders would lead a happier and more productive life if they recognized that this is the way it was, is, and always will be.

Speaking of which, of modus operandi, one of Steve’s signal achievements is the management team and culture he’s installed since he took the reins in 1997 and engineered Apple 2.0. The vision, the panache, the demanding aesthetics, the (more than) occasional swish of his rhetoric rapier could obscure the fact that he’s built one of the best–perhaps the best–business machines this industry has ever seen, run by a uniquely competent and cohesive management team.

But yes, there is only one Steve. We all hope to see him soon on stage or driving around Palo Alto. (Don’t ask about the license plate.)

JLG@mondaynote.com

PS: Thanks to John Gruber, I found this advertising executive’s insightful homage to Jobs and Apple, saying things like:

‘Yeah, it’s just some metal, plastic and silicon. And, yes, Apple makes a lot of money. But those two observations miss completely the point of Apple. It’s about inspiration, hope and an embrace of the future and humanity’s place within it.’

The full text is here.

—-

Wintel: Le Divorce

The eponymous flick is mildly interesting, but we’re gathered here today to examine the Wintel breakup. After years of monogamy with the x86 architecture, Windows will soon run on ARM processors.

As in any divorce, Microsoft and Intel point fingers at one another.

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

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

Intel: We constantly improve our geometry. Year after year we shrink the size of the basic semiconductor building block. Our newest fabs run 22nm processes!

MS: Yes, but why does ARM continue to win the battery game? Not to mention ARM’s flexible licensing which has created a thriving ecosystem of third-party processor extensions. Graphics, radios, networking functions…they all end up on the same low-power hardware, an entire system-on-a-chip (SOC) customized for each application, from navigation systems to tablets.

Intel: We’ve had this talk before. You’re a software company, why can’t you create a “mobilized” OS? At least we tried with Moblin.

MS: …and then you mated it with Nokia’s Maemo and spawned Meego. Ask any credentialed engineer what they think of corpocrats who condone such unnatural acts.

Let’s mediate.

Throughout the PC era, the Redmond company has cleaved to Intel. Intel insiders may dislike their second billing in the Wintel monicker and insist that the company is more than a junior partner, but the numbers tell a different story: Microsoft makes $62.5B in yearly revenue with a market cap of $242B; Intel? $44B/ $118B.

A thought experiment to illustrate Intel’s dependence on Windows: Take two PC processors, same size, computing output, power dissipation, and manufacturing cost. They differ in only one regard: Processor A doesn’t run Windows, processor I does.

Which chip will fetch the better market price?

The I chip, of course, the x86 processor.

Intel executives have chafed under the Microsoft yoke, they want to monetize their semiconductor design and manufacturing might in ways that don’t rely on Gates & Co. They even started their own venture portfolio, Intel Capital, to find and fund young companies that have the potential to open new sea lanes for the mother ship. They’ve gotten into all sorts of businesses, from toys to server farms, from modems to memory, and, lately, Wind River, Infineon and McAfee, none of which has done much to change Intel’s subordinate role in the PC market.

(This isn’t the case in the server sector where the dominant life form is x86 running Linux variants. Indeed, Intel’s strong Q4 2010 results show a 15% growth in the “data center group” while PC-related sales were flat.)

While the PC reigned, Wintel put on a happy face. But really personal computers–smartphones and tablets–broke up the marriage.

All smartphones run on ARM processors. (A handful of tablets use x86 hardware, but without much success.) The modern generation of mobile computing employs an array of operating systems, from Android to Bada, QNX, Meego, WebOS, iOS, but when you scratch down to the metal, you’ll find an ARM-based SOC. All of the subsystems that were cradled on a PC motherboard are now integrated on a single piece of silicon, ARM processor included.

Microsoft got tired of waiting for Intel to step up to the plate and, at the January 2011 CES in Las Vegas, Steve Ballmer announced that the next version of Windows would also run on ARM (transcript here).

But what is Microsoft’s CEO really saying?

I think Ballmer intends to bring the full market power of the franchise to tablets. Microsoft will step back and take the time–target 2012?–to make a “WinTablet” OS (WinTab? Wablet? Winblet? Register the domain names now) that includes a tablet version of Office. Third-party developers will follow.

The Wintel breakup causes profound and welcome changes in the industry, best summarized by Horace Dediu, in a recent Asymco blog post:

“At this year’s CES two unthinkable things happened:
• The abandonment of Windows exclusivity by practically all of Microsoft’s OEM customers.
• The abandonment of Intel exclusivity by Microsoft for the next generation of Windows.”

Intel professes to be unconcerned by the ARM flirtation, but below the calm surface the company’s executive must have their doubts. The low-end Atom business for netbooks hasn’t been doing well lately and will do even worse if tablets continue to eat into that category. Yes, there isn’t an enormous amount of money at stake in the low-end, but tablets and, more generally, ARM-based devices could seriously upset the x86 PC cart.

For Intel, getting back into the ARM business (they sold the previous one to Marvell in 2006) seems like a straight shot: A bit of paperwork, some money, a team of engineers and they’re in business. Intel could very well decide to follow Microsoft’s lead–once again– and make ARM processors for the new Windows + Office combo.

In reality, however, it won’t be that easy.

PC OEMs have little choice: x86 processors are available from Intel and AMD, and, in a limited form, from TSMC. They can’t design an application-specific x86 device and send it to be manufactured in Taiwan or Korea.

Tablets and smartphone manufacturers, on the other hand, have the benefit of design flexibility, the choice of sources that come with the ARM ecosystem. Intel can’t take advantage of the quasi-monopoly it enjoys today in the PC world. Plus, the new ARM world means lower profits, so the company may decide against getting into the fray and, instead, focus on the servers. And even there ARM could become a threat: x86-based server farms run huge electricity bills and cause operators to look anew at ARM’s power-saving advantages for data centers.

None of these changes will happen overnight, but they won’t take long. A year ago, tablets were nonexistent. The PC market has been irreversibly changed. The George and Martha Wintel bickering makes for an interesting story, but…there are businesses to be run.

JLG@mondaynote.com

Navigation’s Destination

by Jean-Louis Gassée

The frustrations began with the (many) limitations of the Pioneer after-market navigation system in the Toyota I use while in France. I can deal with the inscrutable UI and the belligerent touch screen—“resistive technology”, indeed–but I need up-to-date maps (which are clearly antiquated on this device) and a precise reading of my speed. European roads combine baffling speed limit changes and an aggressive deployment of automated radar cameras. You don’t want to rely on your car’s imprecise speedometer if you want to drive just at—or maybe just over—the speed limit.

I need a second opinion.

A quick walk to the Louvre Apple Store and I have my prize, the TomTom GPS adapter for my iPhone, 99€. I download maps of Western Europe—including speed limits—from the App Store for $74.99 and, while I’m at it, I spend another $5.99 for one month of real-time, over-the-air traffic updates. The download is horribly slow and fails at first, even with a reliable WiFi connection, but I finally get it running. Onto the windshield. The suction cup performs its appointed function; the tilt and swivel is commendably ergonomic; there’s even a Bluetooth pairing feature for handsfree calls, indispensible in France where the gendarmes are touchy about touching a cell phone while driving. Sound quality is below par, but it’ll do. I’m in business.

(As an aside, I would have liked to have used Google’s free turn-by-turn app on my Droid X, but the Verizon network is incompatible with the European “GSM” standard.)

We head to the Basque country. The TomTom displays clean speed readings and warns me about impending speed traps. Yes, it occasionally gets confused and suggests a slower pace even as the road signs disagree, but…close enough. The Pioneer…forget it.

Things take a turn for the worse when we drive from France into Spain towards Bilbao—we want to take a look at the Guggenheim museum.

(Photo courtesy of Gaspar Serrano;

It’s a 100 km (60 mi.) drive from the no-stopping border (a pleasant affect of the EU) on the smooth E70. But just past San Sebastiàn both GPS units go crazy. They don’t know this freeway. I expect as much from the aging Pioneer unit, but what about the TomTom map I just downloaded? Not knowing about some rarely used back-country lane is one thing, getting lost around a major new European freeway? It’s not as if this is a state secret.

Approaching Bilbao, I try to get detailed directions to the Guggenheim. The TomTom app’s POIs (Points of Interest) finds it immediately. The Pioneer unit has never heard of the museum. Maybe it’s too new: After all, it did just open…13 years ago.

So the standalone TomTom wins? Unfortunately, there are problems.

On our way back to Paris, the iPhone GPS adapter starts acting up. It won’t charge the phone and the “This accessory is not made to work with iPhone” message blinks on and off at random times. I re-mate the Bluetooth and it disappears for an hour or so, but then it comes back on for good. I apply the official suggestions, no joy. It’s not the iPhone—I have a spare car charger lying around and verify that the iPhone isn’t on the fritz.

I call the TomTom Support number. They’re closed from Christmas until the New Year. “Try us again later.”

Still, it was a good trip, the Basque know how to live, the roads were clear, and I didn’t get flashed. But…

This got me thinking about the state and future of Navigation. Integrated navigation systems amount to a nice racket, an expensive option on most cars. We don’t have to have one, but we willingly pay $1,000 or more for the integration— no dangling wires, no unseemly windshield or dashboard protuberances to sully our pristine conveyances—and that’s probably enough to push a car sale into the black all by itself. A year or so later, we get a letter in the mail offering software/map updates ranging from $185 (Japanese) to $295 (Wehrmacht staff cars). They must have been watching Microsoft peddling Office updates.

During the Basque trip, I compared the TomTom (and, with flagging enthusiasm, the Pioneer), to Google Maps on my iPhone. You can guess what I saw: The E70 extension that mystified TomTom and Pioneer wasn’t a problem for Google. If you want turn-by-turn navigation with up-to-date maps—and you don’t want to get fleeced—get an Android phone with Google’s application.

Maintaining maps is a Sisyphean task. You need a lot of money, a lot of data, and a lot of people. How many companies can compete with Google on these three fronts?

Once upon a time, Nokia bought a mapping company called Navteq and TomTom bought TeleAtlas. Neither company has Google’s money or data or culture, and, above all, its goals. Google hires a battalion of contractors to minutely edit map legends and their translations. We’ve seen their odd-looking mapping vehicles that carry high-precision cameras, GPS, and the controversial but ultimately helpful WiFi SSID mapping units. (WiFi triangulation helps when a GPS signal isn’t available.)

We know Google’s strategy: They want to be everything to everyone, everywhere, all the time. This is the means to their advertising money pump (a.k.a. their business model). Google’s definition of “openness” is they want us to be always open to their stream of ads. Google Maps, a splendid product, full of clever nuances and constantly improved, is a strong component of that overall strategy.

What does this mean for the future of navigation devices?

Carmakers will continue to get an integration premium. Some, like BMW, already “sell” Google Maps. If you’re connected to the Google Cloud, the update problem disappears…the only button you have to press is “Refresh”. It’ll be interesting to see what Apple, Nokia, RIM, and Microsoft will do to up this ante.

One last anecdote.

On the way back to the airport, we’re in luck. We’re in the audience of a geeky cab driver. In addition to the cab company terminal, he has an iPhone, a TomTom, and a Coyote device. We exchange stories. He complains about the TomTom update process. Once a month, he has to connect it to his computer, a chancy, clunky experience. The Coyote unit is more sophisticated, it combines a GPS locator and a 3G link to the Cloud. (Apparently, there is some new combination between TomTom and Coyote. And I realize, too late, there is a Coyote iPhone app…) Pay a monthly fee and you get speed trap updates in real time. But the kicker is this: These updates are crowdsourced. Drivers notify the Coyote Systems of new traps and the updates spread instantly.

Cloud + Crowd = might.

We happen upon an accident. The driver punches a button on his cab’s terminal, sending time and location to the company’s servers and, as a side-effect, to other drivers.

Soon to be a Google Maps service?

JLG@mondaynote.com

iPhone = Mac 2.0

by Jean-Louis Gassée

There are two ways to interpret the equation above.

Doomsayers will sing the licensing blues. By refusing to license the operating system—iOS, in this case—the iPhone will drown in a sea of Android smartphones. We’ve seen it before: Apple is repeating the mistake that allowed Windows clones to scuttle the Mac.

Others, such as yours truly, see the iPhone—or, more properly, its pole position in the smartphone race—as a perfect illustration of lessons learned from the Mac’s struggle to find breathing room in the PC industry.

We know how the first reading of the equation continues. The Mac had immense promise, a much better personal computer than the 16-bit clone of the Apple ][ called the IBM PC. But Apple’s arrogance beleaguered the platform. Instead of following the Microsoft model—focusing on software and letting licensees create a prosperous ecosystem—Apple repeatedly nixed Mac clones and was marginalized, with the Mac market share sinking as low as 2%.

The iPhone is equally promising and, the argument goes, just as equally destined to a marginal role. Like the original Mac, the iPhone has inaugurated a new era, and will ultimately see others dominate the market.

This is a resilient meme, one that gives rise to regular kommentariat pieces predicting trouble for Jobs and his company. Last October, a New York Times piece asked: Will Apple’s Culture Hurt the iPhone? Just last week, a Fortune columnist joined the herd and declared ‘2011 will be the year Android explodes’.

Unsurprisingly, others tore the “closed = marginalization” formula apart. The new smartphone world isn’t a replica of the PC industry, the analogy doesn’t apply. John Gruber argues here that the real race is in reducing the cost of monthly agreements: A “free” Android smartphone versus a $99 or $199 iPhone won’t make much of a difference if the monthly plan costs $80 to $100. Another observer, whose nom de plume is Kontra, thinks we’ll reach a different kind of duopoly where Android will get the volume and Apple will make all the money. See “The Unbearable Inevitability of Being Android, 1995”. And take a look at this great piece felicitously titled “Fragmandroid: Google’s mad dash to Microsoftdom”.

I have my own set of questions about the Mac’s “failure”.

First, shall we agree that Microsoft “open” model is the exception rather than the rule? How many other examples of the Microsoft platform licensing model, with its caveats, prohibitions, and insistence on fealty, do we see? Have we forgotten that Microsoft’s methods led to a conviction of being a monopolist?

Second, there is the Mac’s rebirth. Last year, its US market share approached 10%, with a 90% unit share in the $1k-and-greater segment. For the past five years, Mac unit sales have grown faster than the PC industry.

Even more important: profits. HP is the leading PC manufacturer, with quarterly revenues in the $10B range and 5% operating income. Apple makes only a third of HP’s PC dollar volume per quarter—but with an operating income in the 30% to 35% range. (More details in this May 2nd, 2010 Monday Note.) We’ll have numbers for the October-December quarter in a few days. We’re likely to see a continuation of the dual rise of Mac market share and profits. In the meantime, Apple, for its sins, has been punished with the highest market cap of all high-tech companies, close to $300B.

This could be a blueprint for the iPhone’s future: smaller market share, bigger profits.

Back to the equation and my own interpretation: Applying the lessons from the Mac’s troubled beginnings.

When the Mac came out, it showed immense promise. The execution wasn’t flawless and it suffered from several important shortcomings—the lack of a hard disk, next to nothing in the way of application software compared to the PC. Steve Jobs tried—and tried hard—to get Lotus, Microsoft, and Software Publishing (of PFS: fame) to write apps for the Mac. In a pre-introduction Sales Conference in Honolulu in 1983, we were treated to a mock Dating Game where Mitch Kapor, Bill Gates and Fred Gibbons pledged to date the Mac, to write applications for the new wonder-PC. Ironically, the only “date” that produced anything helpful was Gates with Excel and Word. This was in exchange for a UI licensing agreement that produced no end of trouble.

“Never again.” This must have been Steve Jobs’ motto when, in 1997, he finally assumed undisputed leadership of the company he had co-founded. From then on, Apple was going to control its own future.

Fast-forward to the iPhone: It has the polish the early Mac lacked, it has the support of Apple’s own retail network, it has rid itself of the carriers’ mucking around with handsets and content distribution and, thanks to the iTunes infrastructure, it has its App Store, giving it a huge lead in the breadth and depth of available applications. Not everything works flawlessly but it has been an amazingly well organized campaign that has taken the establishment by surprise.

The result? A fundamentally different situation: While the Mac struggled from day one, the iPhone immediately took the prize.

So, will Android ultimately win, just as Windows prevailed?

My own guess is we’ll get to today’s version of the Mac vs. Windows wars, only faster and better. Faster meaning the iPhone skipped over the Mac’s early struggles. Better means profits. While Android clones proliferate and race to the bottom, iOS devices are likely to retain a substantial share of consumer dollars. Today, Apple reaps close to half of all smartphone profits, (see this Asymco post). That dominance probably won’t last, but in a sea of Android clones, Apple is likely to remain the most profitable smartphone maker. And this is without considering the other devices the iOS platform will power: tablets, iPods, Apple TV…

JLG@mondaynote.com

CES: The Missing Protocol

We’re done with 2010 and off to 2011 with CES, the Consumer Electronics Show. Still hungover from New Year festivities, hordes of exhibitors, store owners, and civilians brave one another and the refined Las Vegas culture in order to show off and ogle the latest gotta-have-it gadgetry.

Once upon a time, the computer industry’s signal event was the NCC, which then morphed into the now-deceased Comdex. Las Vegas cab drivers made no secret of their low regard for us dull computer types: We didn’t know how to have fun. Ah, car dealer conventions… Those guys knew how to enjoy Vegas.

Sympathetic barkers tried to lift our mood. As we streamed out of the exhibition halls at the end of a Comdex day, they plied us with cards advertising choice local businesses and practitioners: ‘Boom boom in the ROM!’ Others were magicians who offered to ‘Change your software into hardware’.

Today, computers, the old kind, are out. Consumer Electronics are in. Actually, computers still reign. They’ve taken over, infiltrated, become the soul of Consumer Electronics. Why do you think Apple dropped the ‘Computer‘ from its name? And why do Microsoft bosses, first Gates and now Ballmer, give the opening Sunday night keynote address? Obligingly, the other Wintel half follows. Intels’ CEO (Paul Otellini after years of co-founder Andy Grove in the role) treats us to nice slides chockfull of nanometers, gigahertz, and everything converged, obediently toeing the MS line.

Computers still rule, but things have changed. We now have these mobile and really personal computers, smartphones and tablets. In that arena, Microsoft and Intel no longer have the power to tell us what to think and what to do, although it won’t stop them from trying. Ballmer will show more tablets…just like last year, only better! And, just like last year, Intel will insist that they now have the right x86 processors for mobile applications.

But minds and wallets have moved on. ARM and Android are everywhere, from GPS devices to home theaters, smartphones, tablets, Internet TVs, and set-top boxes. Even Microsoft-powered Windows Phone devices aren’t using Intel processors: HTC, Samsung and others aren’t suicidal.

So it’s BS as usual, but with a twist: This is The Year of The Tablet. No self-respecting manufacturer will dare show up without a tablet. Pardon, a tableau of tablets, a full Kama Sutra of hardware and software configurations: keyboard or not, touch, pen, Android, mobile Linux derivatives, WebOS, Windows 7 adapted for tablets, ARM or Intel processors.

And, of course, Apple will be absent, preferring to run its own course unencumbered by a trade show organizer and a mess of noisy exhibitors. Results support their consistent “Think Different” mantra. [Update: the cheeky Apple event schedulers have chosen January 6th, the opening day of CES, to launch their Mac App Store.]

All well and good…but one protocol will be missing.

This being the Consumer Electronics Show, we’ll see a flood of new and improved entertainment devices, TVs, home theaters systems, security cameras and other home control products. All of which have a terrible time talking to one another and being centrally controlled, or even simply controlled. Why do you think they make baskets for remotes?

Controlling these devices from one remote is too complicated and expensive. I know a learned high-tech exec with unimpeachable command-line credentials who gave up trying to program a single remote for his home theater. He says he’d rather learn how to use each remote to turn the proper device on and off, set the channel, select the right source or program the PVR.

If you’re geeky—and lucky and take rejection well—you might be able to program a “unified” gadget, a “meta-remote”, one that will learn the right code sequences for all your devices. My suggestion is to get a Logitech Harmony device. (Disclosure: Although I used to be a Logitech director, I left the board about ten years ago and don’t own stock in the company, or in any other while we’re on the topic of possible financial interests.)

The Harmony product line comes in (too) many flavors—ironic, given the stated purpose of simplification. Stick with the Harmony One, it abandons the old ways in which the boss remote “learns” from each individual remote or, worse, where you have to pore through cryptic manuals and manually enter codes for each command. With the Harmony One, you use a Windows/Mac application connected to a Logitech server to describe your devices (make and model) and then you set up activities: Watch TV, Watch a DVD, Listen to Music, use your Apple TV (which Logitech quaintly categorizes as a Media Center PC). The server knows (almost) every device code and talks to the local application which programs the remote for you.

I’m not crazy about Harmony’s desktop app UI nor about the fact that the remote apparently needs to reboot its own little embedded computer after each programming session. Why not just update a configuration file and go? So it’s not perfect, but it works better than anything else…unless you’re prepared to move into a different league and get a professional installation—and a service contract.

Skipping through this klutz’s errors and tribulations, and assuming we now have correct setup, everything works smoothly, right?

Not quite.

You tap the Watch TV activity on the remote’s little touch screen. No TV. Tap the Help button and it takes you through a sequence of questions: Is the PVR on? No. The remote attempts to turn it on. Did this solve the problem? No. Is the TV input switched to HDMI 1? No, it was left on HDMI 2 by the previous activity. The remote attempts to cycle through the sequence of HDMI inputs because this particular TV doesn’t have a command to go directly to HDMI 1.

In other words, the remote flies blind. It has no way to determine the state of the devices it’s attempting to control. Commands are one-way messages, no dialog, no feedback. Some commands, such as On/Off, are toggles: There aren’t separate On and Off commands, just one to switch states. That’s what the TV or receiver knows and that’s what the remote has to work with. If someone had the primitive impulse to turn the TV on manually, the remote turns it off when you ask it to turn it on. Hence the clever but pained process in the Harmony’s error recovery checklist.

In an alternate universe, you take your remote, approach the device you want to control and press the Talk To Me button. The TV answers with a bitstream describing its make, model, commands, and current status. The remote then talks to your computer, or smartphone, or directly to the Net and gets the right programming code for the device. When you tap Watch TV, each concerned device, the set-top box, the TV, the receiver for better sound, acknowledges receipt and execution of the command, or else provides an error message.

Why can’t TVs, receivers and DVD players answer questions? Some devices have Ethernet or even WiFi connections and they all contain one or more micro-controllers, but they still resist interrogation. How hard would it be to program a device to provide some feedback? I’d be happy with simpler Infrared or RF (radio) exchanges.

That’s the missing protocol. Today’s consumer devices aren’t deaf, but they’re dumb. They need to talk back.

JLG@mondaynote.com

Video will be the online advertising engine

Last week, Akamai quietly rerouted loads of its client’s traffic to deflect Wikileaks related attacks. The company, based in Cambridge (Massachusetts), had a surfeit of busy days fighting massive DDoS (Distributed Denial of Service) attacks. These raids were directed at companies seen as too complacent with the US government (the so-called “Wikichickens”, as coined by the financial site Breaking Views). Akamai’s countermeasures involved quickly moving data from one server to another or, when the origin of a DDoS was detected, rerouting the flood of aggressive requests to decoy URLs.

Akamai Technologies Inc. is specialized in providing distributed computing platforms called CDN (Content Distribution Networks). Its business is mainly to reduce internet latency and to offload its customers’ servers. As its president David Kenny told me last week, Akamai runs on three main business drivers: Cloud Computing, e-commerce, and video delivery (with the associated advertising).
The first driver is very straightforward: as applications move away from the desktop, users need to feel they get about the same response time from the cloud as they do from their hard drive. The same is true for infrastructure-as-a service. All is built around the idea of elasticity: servers, storage capacity and networks dynamically adjusting to demand.
The second component of Akamai’s business stems from the need for e-commerce sites’ availability. On Thanksgiving, Akamai said it saved about $50m in sales for its e-commerce clients who came under a series of cyber attacks. On a routine basis, the technology company stores thousands of videos and other bandwidth intensive items on its servers.
The third pillar is the biggest, and the more challenging, not just for Akamai but for the commercial internet as a whole: the growth of video, and of its monetization, will become more bandwidth hungry as advertising migrates from contextual to behavioral.

A couple of weeks ago, David Kenny was in Paris at a gathering hosted by Weborama, the European specialist of behavioral targeting (described on a previous Monday Note How the Web talks to us). He presented stunning projections for the growth of internet video.
Here are the key numbers :
- Global IP traffic will quadruple between 2009 to 2014 as the number of internet users will grow from 1.7 billion today to 4 billion in 2020.
In 2014, the Internet will be four times larger than it was in 2009. By year-end 2014, the equivalent of 12 billion DVDs will cross the Internet each month.
- It would take over two years to watch the amount of video that will cross global IP networks every second in 2014.

Traffic evolution goes like this :

Let’s pause for a moment and look at the technical side. Akamai relies on a distributed infrastructure as opposed to a centralized one. It operates 77,000 servers, which is comparatively small to Google’s infrastructure (between 1m and 1.5m servers on 30 data centers). The difference is that Akamai’s strategy is to get as close as possible to the user thanks to agreements with local Internet Service Providers. There are 12,000 ISPs in the world, and Akamai says it has deals with the top 1,000. This results in multiple storage and caching capabilities in more the 700 biggest cities in the world.

This works for a page of the New York Times or for a popular iPhone application (Apple, like Facebook are big Akamai clients). In Paris, Cairo or Manilla, the first customer who requests an item gets it from the company — whether it is from NY Times or Apple’s servers — and also causes the page or the app to be “cached” by the ISP. This ISP could rely on storage leased from a university or a third party hosting facility. From there, the next user gets its content in a blink without triggering a much slower transcontinental request. That’s how distributed infrastructure works. Of course, companies such as Akamai have developed powerful algorithms to determine which pages, services, applications or video streams are the most likely to be much in demand at a given moment, and to adjust storage and network capacities accordingly.

Now, let’s look at the money side. What does advertising have to do with bandwidth issues? The answer is: behavioral vs. contextualization. Ads will shift from a delivery based on context (I’m watching a home improvement video, I’m getting Ikea ads), to targeted ads (regardless of what I’m watching, I’ve been spotted as a potential motorcycle buyer and I’m getting Harley Davidson ads). Such ads could be in the usual pre-roll format (15 sec before the start of the video) or inserted into the video or the stream, like in this example provided by Akamai.

As online advertising spending doubles over the next ten years, video is likely to capture a large chunk of it. It will require a increasing amount of technology, both to refine the behavioral / targeting component, and to deliver it in real-time to each individually targeted customer. This is quite a challenge for news media company. On one hand, they are well-placed to produce high value contents, on the other, they will have to learn how to pick up the right partner to address the new monetization complexities.

frederic.filloux@mondaynote.com

Google’s Self-Driving Car

by Jean-Louis Gassée

I want one! You probably do, too. So do millions of readers of John Markoff’s October 21st NY Times piece on Google’s revolutionary cars that drive themselves—in traffic! (More drooling on this ABC News video here.)

Is this really real, or is it a demo, another carefully choreographed PR exercise designed to enhance Google’s image as a nurturing friend of the people and their planet?

Autonomous, self-driving, driverless… The concept and implementations have been around for a while, in Europe, in Japan—the land of robotics—and, of course, in the US. In 2004, DARPA, the forefather of the Internet, launched the DARPA Grand Challenge, a driverless car competition. No entrant finished the first race, but in 2005, Stanley, Stanford’s vehicle, took the prize.

In September of this year, we saw Shelley, a driverless Audi, ascend Pikes Peak (14,115 ft/4,302 m). The car performed well although the event was marked by tragedy when helicopter filming the ascent crashed on the mountainside. The project, a joint venture between Stanford and Volkswagen’s Electronic Research Lab in Palo Alto, has since been suspended. (On a personal note, about 15 years ago I drove to the very top of Pikes Peak—slowly but easily—in a rental car. You can do it and enjoy yet another movingly beautiful part of Big Sky Country.)

How real is Google’s driverless car? Based on the DARPA and Stanford heritage, I’d say pretty real. Google was, of course, founded by two Stanford alumni, now with unlimited money and computer power. Moreover, they’ve advanced the art. Stanley and Shelley were solo drives on closed roads. Google’s car drove itself in traffic. From the Markoff article:
“…seven test cars have driven 1,000 miles without human intervention and more than 140,000 miles with only occasional human control… The only accident, engineers said, was when one Google car was rear-ended while stopped at a traffic light.”

Now that we know about the project, sighting stories surface. Robert Scoble, a noted blogger, has one. In retrospect, I now recall two mornings when I found myself driving next to the self-driving Prius on the often-packed Route 101 somewhere between Palo Alto and San Francisco. I mistook the vehicle for one of the Google Street View cars…

Henry Blodget, Business Insider’s boss, wonders if self-driving car research is a good use of Google shareholders’ assets. Perhaps the company should spin the project off to an independent venture and give the engineers a piece of the action. More

HP’s Board Gets No Respect

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And rightly so.

You recall: Last August, HP’s Board of Directors dismissed its wunder-CEO, Mark Hurd. Well-loved by Wall Street, although not so much by employees, Hurd turned HP around after the lackluster Fiorina years. He made acquisitions, cut costs, and put the company at the very top of the IT industry. But HP’s fearless leader was accused of having entangled himself, carnally and emotionally, with a female “marketing contractor”, and of having engaged in a few financial peccadilloes in the process of covering up the relationship.

I’ll hasten to add that Hurd reached an amiable—and solid—settlement with the former soft-porn actress. By “solid settlement” I mean we’ve heard exactly nothing from the aggrieved woman, or from Gloria Allred, her highly expressive Hollywood attorney. (As a self-described “Fearless Advocate for Justice and Equality”, Ms. Allred appears to dig gold on behalf of the rejected/dejected paramours of media and sports celebrities.)

While Hurd tried to do the right thing after his alleged mistakes, HP’s Board and management repeatedly and needlessly pilloried him, barely stopping short of accusing their former CEO of fraud. (See more sorry details in this Monday Note.)

All this led Larry Ellison to publicly lambaste the HP Board for kicking Hurd to the curb—and to promptly hire him as co-president of Oracle.

Ignoring the “when you’re in a hole, stop digging” maxim, HP doubles down and sues Hurd. Their complaint? As Oracle co-president, Hurd will inevitably misuse HP’s confidential information and cause his ex-employer grievous harm.

Larry chuckles and lashes out again. He calls HP’s suit vindictive, which is true, and adds that it will make it impossible to continue as business partners, only somewhat true as each had already recently moved into the other’s business. Oracle bought Sun and HP got into software and services by acquiring EDS.

A few days later, on the eve of Oracle’s OpenWorld, the suit is settled. HP’s pain is salved by a few million dollars, and the threat of the misuse of confidential information is suddenly, mysteriously no longer an issue. One wonders about the damage HP’s Board did to the company’s reputation by treating this alleged sinner in such a bullying and ultimately lame way.

While Hurd stays out of the limelight plotting Oracle’s next moves, HP directors keep stoking the coals for their critics. In their quest for a new CEO, the Board rejects internal candidates for the third time and pick an outsider: Léo Apotheker, ex-CEO of SAP Germany. This leads to another salvo of Ellison jibes. (When Larry calls himself “speechless”, you know he’s having a good time.)

But wait, there’s more.

What does the Board do besides recruiting Apotheker? They hire Ray Lane as Chairman. As the link to his Kleiner Perkins bio proves, Lane is, without a doubt, an “industry figure”, the type Kleiner Perkins, one of the largest VC firms in the world, likes to co-opt. But the slick KPCB bio (there is, significantly, nothing on him on Wikipedia) omits an important episode: Ray’s acrimonious departure from Oracle. The more charitable souls among us hope that everything is forgiven and forgotten. But knowing the protagonists, Larry and Ray, a more realistic view is that HP’s Board brought Ray in with a specific intent: They want to strengthen the team for a fight against Oracle.

There are three problems with such a move.

First, we now have two muscular venture capitalists on HP’s BoD: Lane and Marc Andreesen, from Andreesen Horowitz (as an aside, admire the firm’s spartan site). While some argue that it’s great that HP has such connections in the VC world (as if any executive or Board member couldn’t get us VCs to return their calls), there’s a governance problem. There will be many situations in which Mark’s or Ray’s existing investments and connections will raise conflict of interest questions; they won’t be deemed independent directors. More

The Carriers’ Rebellion

Before the Steve Jobs hypnosis session, AT&T ruled. Handsets, their prices, branding, applications, contractual terms, content sales…AT&T decided everything and made pennies on each bit that flowed through its network. Then the Great Mesmerizer swept the table. Apple provided the hardware, the operating system, and “everything else”: applications, music, ringtones, movies, books… The iTunes cash register rang and AT&T didn’t make a red cent on content.

In the eyes of other carriers, AT&T sold its birthright. But they didn’t sell cheap. The industry-wide ARPU (Average Revenue Per User per month) is a little more than $50. AT&T’s iPhone ARPU hovers above $100. Subtract $25 kicked back to Apple, and AT&T still wins. More important, AT&T’s iPhone exclusivity in the US “stole” millions of subscribers from rivals Verizon, Sprint, and T-Mobile—more than 1 million per quarter since the iPhone came out in June, 2007.

(Legend has it that Jobs approached Verizon before AT&T, but Apple’s demands were deemed “obscene”. If the story is true, Verizon’s disgust lost them 10 million subscribers and billions in revenue—much more than it would have made in content sales putatively under its control. Another theory, unprovable but preferable, is that Apple went for the worldwide “GSM’’ standard, hence AT&T.)

To the industry at large, the damage had been done. Jobs disintermediated carriers. Consumers woke up to a different life, one where the carrier supplied the bit pipe and nothing else. Yesterday’s smartphones became today’s mobile personal computers and carriers devolved into wireless ISPs, their worst fear.

Enter Android.

Android is like Linux, it’s Open Source, it’s free. And it’s very good, and rabidly getting better. But with two important differences. Android is Linux with money, Google’s money. And Android is Linux without a Microsoft adversary. There’s no legally—or illegally—dominant player in the smartphone/really personal computer space. Nokia, Palm, Microsoft, and RIM were and still are much larger than the Disintermediating Devil from Cupertino.

Handset makers and software developers love Android, new handsets and new applications are released daily; see the Android Market here. The current guess is that Android will grab the lion’s share of the handset market by 2012. Nokia, RIM, and Microsoft may disagree with that forecast, and Apple is certain to stick to its small market share/high margin, vertical, bare-metal-to-flesh strategy.

Carriers get excited about Android, too. For two reasons. First, Android (and the very good bundled Google apps) allows handset makers to make inexpensive devices. Carriers and Google both encourage a race to the bottom where handsets are commoditized, but smart.

Second, because Android is an Open Source platform, carriers can work with handset makers, they can dictate the feature set and, as a result, revitalize the revenue stream. They can promote their favorite apps, content, and services sales that have been choked by disintermediation.

But it’s not a straight shot. Android lays out the playing field for a contest between Google and carriers. More