mobile internet

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Samsung’s Mobile OS Dilemma

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by Jean-Louis Gassée

Scroogled if you do, HPed if you don’t. To differentiate itself from aggressive Android competitors, Samsung would need to build its own mobile OS…but can it overcome the odds?

“Samsung execs don’t brush their teeth in the morning, they file them”. So goes the Valley lore, an expression of fearful admiration for the Korean giant’s success. The massive chaebol (the largest conglomerate in South Korea) is terrifyingly effective at dominating  every industry it touches, from shipyards and power plants, to surveillance equipment, amusement parks, cars, and, of course, electronics.

When Samsung enters a market, the competition trembles. The TV set industry is one such example: Sharp remains on life-support after taking a $112M investment from Samsung two years ago (for a 3% stake). Sony has fared a bit better: When Samsung displaced Sony as the world’s number one TV manufacturer, the Japanese company was kept afloat by its life insurance business while CEO Kazuo Hirai worked on a much needed turnaround.

Smartphones offer the most vivid example of Samsung’s determination. As Android rapidly rose to prominence, Samsung saw an opportunity. Combining Android with its manufacturing might and gigantic war chest (Samsung’s 2013 marketing budget was $14B, the biggest in history, about the same as Iceland’s GDP), the company quickly became the world’s leading smartphone manufacturer, selling 300M units in 2013 alone — double Apple’s volume.

But Samsung’s handset business soon contracted. By the third quarter of 2014, Samsung profits had fallen by 60% and unit volume was down by 9% while all other major vendors went up. In the last quarter of the year, Samsung unit volume fell behind Apple (73M vs. 75M) and the Cupertino company reaped a huge share of all smartphone profits.

How did this happen?

Samsung is being squeezed.

At the top-end of the smartphone market, Apple more than holds it own. iOS reaps 89% of smartphone profits worldwide and is gaining unit share as well.

From below, Samsung is being attacked by big-name Android players such as Huawei, Lenovo (which now owns Motorola Mobility), and fast-rising Xiaomi. From lower still, there are no-name Chinese handset makers using chipsets provided by Mediatek running on roll-your-own Android Open Source Platform (AOSP) forks.

One way out of the squeeze is differentiation, something Google isn’t keen on. If you want the full Google Mobile Services (GMS) suite, you need the official Android version: “GMS is not part of the Android Open Source Project and is available only through a license with Google”. Even straying too far from the Android look-and-feel can be a problem: A year ago, Google was accused of “strangling innovation” when it forced Samsung to “tone down” TouchWiz, a proprietary user interface layer. (The beauty and function of TouchWiz was debatable; it reminded some of the PC crapware of yore and it appears to have stopped working on recent Android versions.)

Ironically, one avenue of differentiation is The Apple Way: Samsung could take its future into its own hands and write its own mobile OS.

Regardless of its recent profit slide, Samsung is a rich, powerful, and determined company, one that knows the importance of smartphones. The company toyed with the idea of a mobile OS when it contributed to the Tizen software platform, but that project suffers from two unsurvivable birth defects: it’s a consortium, software by committee; and it runs on everything, from smartphones and tablets to refrigerators, Blue-ray players, AC units, wearable devices, smart TVs…

When we look at what it would take for Samsung to come up with its own mobile OS, the first thing to note is that “operating system” is a misnomer. Surely, iOS and Android are operating systems in the old-school “kernel” sense: They manage drivers, memory, input and output streams, user tasks, and the like. But today, an “operating system” is much more than just a kernel, it includes rich frameworks that support a wide range of applications, games, maps, social networking, productivity, drawing… Building these frameworks is a much harder task than adapting a Linux kernel.

And the OS is just the beginning. What Samsung really wants is its own ecosystem, a set of services that will ensure its autonomy, growth, and lasting importance. It wants its own app store, maps, music/video, cloud storage…

How long would it take for Samsung to build all of this? Three years, four years? Add to this the difficulty of “skating to where the puck will be”, to divine where the industry will land four years from now.

If that’s not enough, consider Samsung’s culture and management structure. So far, the company hasn’t shown a deep understanding of software: The Tizen affair shows that they look at software as some kind of commodity. Also, the Samsung culture isn’t geared for a four-year plan — an eternity in the rapid cycle world of TV sets and other appliances. Top Samsung execs would have to give the OS project leaders (project despots, more likely)  the freedom and space to stay out of the usual political battles and top-level interference inside the huge conglomerate.

And then there’s Google. The cheap, no-name AOSP forks have been enough of an annoyance with their home-grown services that don’t feed into Google’s all-important data collection process. A Samsung OS would be intolerable. If the OS starts to take shape, Larry Page would pick up the phone, call Samsung Electronics Chairman Lee Kun-hee (or his son Lee Jae-yong), and offer a deal: If Samsung keeps using Android, Google will pass back a couple billion dollars a year in rebates, all in recognition of the value of the data that’s scooped up by Google Mobile Services on Samsung’s smartphones. After all, Google is rumored to pay Apple substantial sums for traffic brought by iOS devices, why not relieve Samsung of the burden of developing its own ecosystem – and give it a few billion to assuage its collective ego?

In summary, developing its own OS platform and ecosystem is a huge technical task, subject to the giant conglomerate’s cultural and political challenges and, in the end, very likely to be torpedoed by an attractive counter-offer from Google.

So, no, Samsung shouldn’t develop its own OS ecosystem.

Let’s consider a more realistic solution to Samsung’s shrinking marketshare problem, one that’s less glorious, but much safer: The Korean giant could use its hardware might to regain its domination of the mobile market. Samsung makes processors (including Apple’s), displays, batteries…most if not all of the hardware components of a smartphone and tablet. It could slowly develop cloud services that add value to its hardware, buy Here as its maps solution, make a deal with DuckDuckGo or Microsoft’s Bing for Search, and so on. As it becomes less dependent on Google, Samsung puts itself in a better position during negotiations…and all without the pain of having to develop an OS.

Finally, one other alternative: Microsoft’s mobile platform could certainly use some help…but I’ll leave that for a future Monday Note.

JLG@mondaynote.com

The redistribution game for news

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by Frédéric Filloux
Forget the 70-30 split for subscription between publishers and distributors. Today, for publishers, the new norm is a 100%-70% split of ad revenues, depending on who sells the ad. For news distribution, re-intermediation will be intensely competitive.

The chart above illustrates the upcoming shift in news distribution. No doubt: We’re heading towards a new phase of massive re-intermediation, of reshuffling the layers between the news producers (traditional media houses or pure players) and readers. This raises important questions: What will publishers gain or lose in the process? Will they end up handcuffed to a cluster of gatekeepers or will they reap decisive gains for their business model.

Who becomes the dominant player in this new structure? More

More facts on mobile 

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by Frederic Filloux

New mobile internet trends have caught my attention this week. Today, we look at their impact on the news business. (1)

In developing countries, mobile growth keeps accelerating.

  • In Nigeria (pop: 173 million, median age: 18), based on page views count, 76% of internet traffic now comes from mobile.
  • In India (pop: 1.25 billion), the rate is 65%. As a comparison, the proportion is 23% in the UK, 22% in the United States and 14% in France.

At least, four elements drive mobile growth in emerging countries: More

Circa: What went wrong

by Frederic Filloux

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Circa, the clever smartphone news app, failed to live up to its promises. The fiasco stems from the smartphone advertising market’s inherent weakness, from Circa’s inability to catch up with evolving reading habits, and from an insufficient editorial proposition.  More

Featured On Tim Cook’s Keynote – What It Takes

by Frederic Filloux

At last October’s introduction of the new iPad Air, the creators of a clever iOS app named Replay were invited on stage. To get there, they went through a selection process that illustrates Apple’s perfectionism — and hidden application sophistication.

In September 2014, while at the Stupeflix Paris office, Nicolas Steegmann got a call from Apple in Cupertino. Once the caller identified herself, Nicolas knew something up. The contact came after Stupeflix presentations to Apple’s team in Paris. In rather elliptic terms, Steegman’s interlocutor said it would be great if two members of the company, a developer and a designer, could be in Cupertino the next day. ‘They will have to stay at least two weeks’, she said. 48 hours later, the team was on Apple’s campus. They quickly found themselves in a windowless room and given a straightforward brief: Devise the coolest possible demo for your app. No more details, no promises whatsoever.

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[Stupeflix founder Nicolas Steegmans (right) and motion engineer Jean Patry (left)] 

Replay is a clever iOS application that focuses on a “simple” issue: Automating the process of making of videos, without going through the convoluted steps of a dedicated movie editing app. With Replay, you shoot with your iPhone (or your iPad), select the clips you want, pick one of the proposed theme and you’re done. The app will assemble the clips in the smartest possible way, making visual corrections, adjusting the soundtrack selected from your iTunes library (or drawn from a proposed catalogue) to the pace of the movie. If you have the time and inclination, additional settings let you fine-tune your production. But even if you just stay with basic preset themes, the result is stunning. In literally a few seconds, you end up with a clip perfectly suited to quick sharing on YouTube, Instagram or Facebook.

Behind Replay’s simplicity are years of work and a great deal of sophisticated programming. The company’s roots are in an automated video generation system originally designed for completely different goals.

As often, a company’s final product has little to do with the original intent.

Stupeflix is a pure engineers’ startup. It was created in 2008 by Nicolas Steegmann, an engineering and mathematics graduate from Ecole Centrale de Paris, and Francois Lagunas who holds a PhD in computer sciences and linguistics from Polytechnique and Ecole des Mines. Their first product was an automated video generator that scrapped images and text from Wikipedia and other sources, inserted text-to-speech voice-over, to create 45 sec. glances at various cities and places around the world. The result was more a demonstrator than a commercial product (you can still access hundreds of automatically generated videos here on YouTube.)

The concept paved the way for a much more bankable product: a system to create videos entirely online, with presets themes — the ancestor to the Replay app. Its business model was (and still is) based on the proven freemium mechanism: Casual use is free, scaling to a professional/intensive use requires a subscription.

The same went for the next iteration: a home-brewed API allowing third parties to use all the tools Stupeflix developed to create videos. As a result, digital advertising agencies such as Publicis, Saatchi and TBWA jumped on it. Hundreds of thousands of videos were created for Coca-Cola, Red Bull or Sprint, to be used in countless promotional operations. Stupeflix still derives significant revenue from its API business.

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Technically speaking, editing and rendering a video is CPU intensive — GPU intensive to be more precise; Stupeflix’s APIs suck a lot of graphic processing power. At the time, explains Nicolas Steegmann, graphics rendering was outsourced to a specialized server farm in Texas (where the oil industry consumes loads of computational power for geophysics modeling). Now, Stupeflix relies on Amazon Web Services, which has since cornered the CPU/GPU for-hire market.

It took 18 months to port the video rendering engine to iOS. Many invisible features had to be pared down to fit the power of the iPad/iPhone processor. Unbeknownst to the user, Replay performs many complex graphics tasks. For instance, it analyses each piece of raw media material picked by the user. Color palette and saturation, exposure, motion, pace are decomposed and translated into mathematically useable components. These chunks of data are then fed into a “cinematographic grammar” hard-coded by Replay’s programmers (all movie enthusiasts). Each theme or skin selected by the user reflects a Quentin Tarantino or Alfred Hitchcock inspiration that will direct transitions, colorimetry, beat, as well as soundtrack sync. And an embedded machine learning engine also devises new rules by itself.

The fluidity of Replay’s performance caught Apple’ attention during the summer of 2014, a couple of months before Tim Cook’s unveiling of the new iPad Air.

Now secluded in their room of the Apple campus, always escorted when they had to walk in and out, Stupeflix’s team is hard at work devising the most mind-blowing demonstration of their app. Early on, they had a hunch that the whole process was in fact a competition among applications (12 contenders, as they would later discover.) For two weeks, a quiet selection process took place, with a stream of people visiting the team, now allowed to test its work on the last version of a new iPad camouflaged in a thick neoprene enclosure to conceal its size and shape. Each successive visit was made by someone ranking higher and higher in the chain of command — as the team realized after Googling the reviewers. They knew they were on the short list when their demo was shown to Phil Schiller, Apple SVP for Worldwide Marketing. The next day, the pair was taken to a conference room where their work was reviewed by Tim Cook in person. They knew it was a go. It was time for a series of full rehearsals.

On D-day, the two-minute presentation was to be made by Jeff Boudier, the Stupeflix man in San Fransisco (and co-founder of the company), assisted by François Lagunas controlling the iPad. It went well, except when a slip of a finger (due to an excess of makeup applied to the demonstrator’s hand) caused the auto-correct to transform the title “Utah Road Trip” into a weirder “It’s a road trip”… After the show, Apple staff asked to re-record the demo for a spotless posterity (the re-edited version visible here on Apple’s site, while the original is here; time code about 00:55:10 on the two keynotes). This says much about Apple’s attention to details.

An epilogue: Replay became a hit, generating substantial revenue thanks to the in-app purchase system. Stupeflix now employs 23 people, all of the same caliber as the founders. To stimulate the team’s creativity, management keeps holding internal hackathons, and they continue to build on the uniqueness of their video algorithms and rendering engines. The company recently came up with Steady, a spectacular app that gives the impression your iPhone is mounted on a Steadicam (a complex system crops each frame in real-time to compensate for unwanted motion) and Legend, that animates texts on the fly. They are now working on another movie capture app that will further transfer the burden of filmmaking from the user to the software. Call it talent by proxy.

frederic.filloux@mondaynote.com

Beware of Airbnb entering the hyperlocal travel guide business

 

by Frédéric Filloux 

Airbnb has every reason to enter the news services sector – and to threaten a broad range of media/services such as Trip Advisor or Yelp. 

Seen through the eyes of travel information publishers, Airbnb holds a dream position: a huge base of 25 million potential readers/users, spread over 34,000 cities in 190 countries, well in tune with the brand’s core product and attributes.

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For a start, should Airbnb develop a publishing arm, this unparalleled notoriety would spare it tens of millions dollars otherwise required to promote its content services: In the travel industry, advertising and marketing demand high spending. To put things in perspective, this year, according to the trade site Skift.com, HomeAway, one of Airbnb’s key competitors, plans to spend $100m (after shelling out $60m in 2014) “To show it’s not Airbnb“. HomeAway was created in 2005 and received $504m in funding before going public in 2011 — the stock lost 18% since. Airbnb has yet to go public after raising more than $800m. Its latest confirmed round closed in October was for $50M with a $13bn valuation. Airbnb is now rumored to be raising a $1bn “war chest” at an even higher price: $20bn.

Today, Airbnb’s expansion is a matter of concern not only for its direct competitors but also for large players in the travel information segment.

Last November, Airbnb fired the first shot: Pineapple, a 128 page, ad-free, glossy quarterly magazine, mostly written by hosts and guests gently discussing their experiences. With a tiny print run of 20,000 copies, it was distributed for free in some Airbnb hotspots and sold at selected bookstores such as WH Smith in Paris, where I got my copy for €12. According to Pineapple publisher Christopher Lunekzic (interview on the FIPP site), “The idea came from a desire to capture the unique nature of traveling through Airbnb. We wanted to bring that sense of creativity, culture and connection to life”. All the talking points of an elegant PR campaign are checked, part of Airbnb recent rebranding. Nothing to freak out travel press behemoths.

Except… Now, a sizable part of Airbnb community is aware of the company’s recent push into the magazine business. Which could make a serious difference.

That said, print is certainly not a key part of Airbnb’s media future. Mobile apps are. Last year, only 20% of Airbnb traffic came from mobile. That was before last December’s app redesign. Today, the Airbnb ranks in the top 5 apps in 7 countries, and in the top 100 in… 152 countries. That’s where the real potential is. And the San Francisco-based icon of the sharing economy is betting heavily on mobile: it recently announced a partnership with Deutsche Telekom’s T-Mobile to pre-install its app on Android smartphone across 13 markets in Europe (TechCrunch story here). A decisive move for Airbnb’s mobile expansion.

Now let’s indulge in a little bit of fiction — from the perspective of an Airbnb guest.

I’m booking a flat in, say in London’s Marylebone district. I’m not familiar with the best places to go out. In the dedicated section of the new Airbnb app, I enter the host’s postal code, which is precise down to the building (likewise, the American “Zip+4″ code provides a city block location; in other cities, the Lat-Long associated to a street address does the job). My host has listed her preferred spots: organic groceries, wine bars, galleries, shopping places, movie theaters… Every place shows up on a Google map. The practical details I might need appear over my host’s comments: business hours, booking information, etc. I can also check the reviews on third party sites, but given my host’s profile, I assume our tastes will match; plus, I don’t want to get drowned into a tedious (and too often dubious) series of five-stars searches.

On my phone, I now enjoy a mini-guide of the neighborhood where I’m going to spend the next few days, filled with trusted, non-commercially-induced recommendations. Right from the app, I can make reservation via Open Table, and even call a Uber car. That’s what API’s are for: connecting applications together, in a mutually beneficial way. The third-party service provider expands its reach and the app publisher offers a wider range of services while keeping the customer “inside”. Similarly, a gallery or museum can make its program available within the app.
APIs will be a major development engine for the apps ecosystem as the number of features and services that can be added is boundless. For example, Uber has recently made its API system much more accessible and now partners with 11 companies, including Hyatt, OpenTable, Starbucks, Time Out, TripAdvisor, TripCase — curiously, not Airbnb nor Yelp.

Why would such integration threaten large travel business publishers?

Beyond developing its gigantic global footprint, Airbnb wants to build a community of users, itself structured in homogenous layers (e.g. young families looking for budget rentals, yuppies aiming at trendy places…) There’s even the growing crowd of professionals who prefer an Airbnb apartment free of the check-in/out hassles of hotels, and who will gladly trade unexciting room service for a super-fast DSL connection. (I’m told a growing number of Googlers do so for their business trips, with their employer’s blessing.) Each of these sub-communities will be far more likely to trust their peers than the usual travel guides where it’s always difficult to sort actual user opinions from bogus reviews and paid-for insertions, disguised advertorials, etc.

The beauty of this powerful combination lies in its scalability. Airbnb listings contain a broad range of properties, including high-end, luxury items. Those who might be willing to cough up €2,000 a night for a two-bedroom unit with a stunning view of the Hong Kong harbor might also want a special cicerone, a much more sophisticated one than the peer-to-peer guide described above.

Sometime ago, Louis Vuitton — the main brand of LVMH luxury conglomerate — had the idea of creating a dedicated app aimed at its rich Chinese clientèle, at those able to spend €20,000 or more in a single afternoon shopping stroll through Avenue Montaigne in Paris. This special application was to offer the services of a personal shopper, but also a personal city guide (Louis Vuitton already publishes its own collection of high-end guides) to be used from planning the trip to the actual journey. Even better, the app was to rely on the Chinese-made WeChat application (500 millions users, roughly 85% from mainland China) connected to an actual human able to guide the wealthy tourist on a real-time basis, either with messages or voice contact. In such case, relying on peer recommendations made no sense, but a highly personalized service did. A couple of selected partners were in the loop.

Regardless of the market segment, a notorious brand coupled to a set of mobile services is a potent combination. In the case of Airbnb, the “full stack” company — a concept coined by Andreesen Horowitz’ Chris Dixon —  is likely to be a master tool for securing the position of a brand in its market.

frederic.filloux@mondaynote.com

News Media Should Drop Native Apps

 

by Frédéric Filloux

When it comes to the most basic form of news delivery, facts keep piling up in a way that makes native apps more and more questionable. Here is why it’s worth considering a move back to mobile sites or web apps…  

One of the most shared statistic on mobile use is this one: Applications account for 86% of the time spend b’y users. This leaves a mere 14% for browser-based activities, i.e. sites designed for mobile, either especially coded for nomad consumption, built using responsive design techniques that adapt look and feel to screen size, or special WebApp designs such as FT.com.

This 86/14 split is completely misleading for two reasons: the weight of mobile gaming, and the importance of Facebook.

Take a look at this chart form Flurry Analytics:

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If you combine gaming, Facebook and Social Messaging, roughly 60% of time spent on mobile is swallowed by this trio. As for Facebook, it reaped the top four slots in downloads for non-gaming apps worldwide:

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Mobile consumption will concentrate even more as messaging and free direct communication (red dot in the chart) combine into the fastest growing segment by far. Mobile carriers have reason to be scared. Consequently, Facebook will tighten its grip on the mobile ecosystem as it commands the two dominant direct communication apps. If this wasn’t enough, there are two other fast-growing usages: Video streaming (+44% downloads last year) and Travel & Transportation — Uber, AirBnB, CityMapper — (+31%.)

The main characteristic of these services is they couldn’t be designed outside of a full-fledged application: They require key phone features not easily accessible through a browser such as radio modules, GPS,  image rendering (for maps, graphics), camera, etc.

By comparison, news-related applications do not requires a lot of phone resources. They collect XML feeds, some low resolution images and render those in pre-defined, non-dynamic templates. They use a tiny fraction of a modern smartphone’s processing power.

In fact, for news media, as the following matrix shows, native apps (iOS, Android and soon Windows) become a questionable proposition:

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Summing up, apps for news distribution are technically justified for speed, ability to send notifications, inApp purchases, and the hypothetical use of phone sensors. That’s much money and a lot of complications for a small number of features. (On this subject, see the previous The Future of Mobile Apps for News column.)

Unless you are fighting for the prime phone screens, say the first three swipes, or if you are determined to provide key visual or functional differentiators, going for a set of native apps must be carefully weighed. Depending on the level of sophistication and required features, developing a native application costs between $50,000 and $100,000, for each environment, plus dedicated SDKs for marketing, analytics, etc., plus a 30% fee paid to the app store if you go for a paid or subscription model, plus hassles for approval of the smallest update in the messy iOS App Store…

But if you are already big on social and SEO, a mobile site, lightweight, clearly focused on a small feature set can be quite effective. Disappointing as it may be, HTML5-based web apps are all but dead (the difficulty lies in finding good developers and in managing them.)

Among all players, Google has the ability to overhaul the mobile ecosystem. If it comes up with an SDK or a framework aimed at creating simple and effective apps, indeed with limited performance but with enough features to accommodate news delivery, this could become an industry game-changer.

frederic.filloux@mondaynote.com

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Microsoft Makes Clever Moves

 

by Jean-Louis Gassée

While Microsoft Office for mobile is a satisfying success, the company can’t seem to create — or even buy — a mobile operating system that can compete with iOS and Android. Perhaps they’ve been looking in the wrong direction and can return to their “trusted” Embrace and Extend tactics.

Microsoft published its numbers for its Fiscal Year 2015 2nd quarter ending in December 2014. While the company isn’t the money machine it once was, it is healthy: Revenue grew 8% to $26.5B, Operating Income declined only a bit (- 2%) at $7.8B, there will be another $.31 dividend for the quarter, and cash reserves stand at $90B.

Such numbers give Satya Nadella the space he needs to implement the Mobile First – Cloud First vision he outlined last year. A key component of this plan is to spread Office applications across all platforms and devices: PCs, tablets, and smartphones – native apps as well as Web versions. Last week, Microsoft took another step in this direction with the release of its historic Outlook PIM (Personal Information Manager) app for Android and iOS.

While the Outlook release was warmly received, I’ve learned to take enthusiastic press reviews with caution. I prefer to “play customer”: I buy and use the product in klutzy ways engineers can’t foresee and, as a result, I get a better idea of how the product will fare in the real world. So, I installed Outlook on my iPad mini and, not to pour salt on some wounds… It Just Works. It runs my Exchange account at work, and it speaks Gmail and iCloud as well. No ifs, no buts.

Perhaps the most interesting aspect of the release is that it completes the core components of the native MS Office bundle: Word, PowerPoint, Excel, and now Outlook. It doesn’t matter which platform you use — Windows, Mac, Android, or iOS — you now have the full complement of Microsoft’s productivity apps built specifically for your device.

I used to think that if Apple could get its software house in order and work out the  (numerous) bugs, iWork could easily displace Microsoft Office on Mac, iCloud, and iOS. After all, iWork is free… Now, I’m not so sure. With this release, MS Office provides a fit and finish, a safe and effective cross-platform solution that’s worth the price of admission, particularly in the Enterprise world.

But Apple isn’t the competitor Microsoft worries about. Cross-platform Office is a powerful countermove against Google Apps. Microsoft doesn’t have a dog in the old Web vs. Native Apps fight, it offers both everywhere.

In other matters, however, things aren’t entirely rosy for Microsoft. Its smartphone hardware business isn’t doing well. A look at the recent 10-Q and at the slide presentation for the Earnings Release shows hardware revenue of $2.3B, for 10.5M Lumia phones and 39.7M on-Lumia devices:

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Microsoft’s smartphone business is still dealing with the Nokia acquisition trauma, so these numbers are less reliable than in a stable business. But even if we proceed with caution, when we divide the $2.3B revenue number by 50.2M (the total number of devices), we get a meager ASP (Average System Price) of $46.

One could argue that the computation is misleading because it throws Non-Lumia phones — such as the Nokia X running Android — into the same pot as worthier Lumia devices. So let’s take take another stab at the numbers: Let’s imagine that all non-Lumia phones are simply given away, $0 ASP. That leaves us with 10.5M Lumia phones divided into $2.3B revenue for a yield of $219 ASP. Compare this to the $687 ASP Apple got for its iPhones last quarter. Playing with numbers a bit more, if you assume a $20 ASP for non-Lumia “dumbphones”, the ASP for Lumia smart devices comes to $143.

As discussed here last December, even with “forever” cash reserves, why bother? Big enterprises such as Bank of America and Chase that have discontinued Windows Phone support agree.

After fruitlessly jumping into a Broad Strategic Partnership with Nokia and then promptly Osborning it, Microsoft acquired the company’s smartphone business rather than letting it die. It’s still not working and, as the most recent industry numbers show, there’s little hope that Microsoft’s phone hardware business, while saddled with the hapless Windows Phone OS, will be anything other than a waste of time, money, and reputation. Many have suggested that Microsoft drop its OS efforts and fork Android, returning, in Ben Thompson’s words, to “its roots of embracing and extending”.

That brings us to Cyanogen. In the grand tradition of Homebrew Computing that gave birth to Microsoft, Apple and countless others, developers have taken the Open Android operating system and opened it even more, creating a raft of improved versions.

Initially, many thought these variants were just for the hacker who wanted to play with his Android device, reflash its ROM, and grow hair on his chest. But one Android strain, CyanogenMod, exhibited such vitality hat it spawned an organized, for-profit company. In 2012, Benchmark and Redpoint led a $7M Series A investment in Cyanogen, Inc. (“Series A” is typically the first serious VC money, after a Seed Round.) In December, 2014, there was a more substantial $23M Series B round, led by another member of the Valley’s VC nobility, Andreessen Horowitz. And now, there is talk of a $70M round…  in which Microsoft might be a “minority” player.

Kirk McMaster, Cyanogen’s CEO, has been unusually candid about the company’s goal [emphasis mine]:

“I’m the CEO of Cyanogen. We’re attempting to take Android away from Google.”

and…

We’ve barely scratched the surface in regards to what mobile can be. Today, Cyanogen has some dependence on Google. Tomorrow, it will not. We will not be based on some derivative of Google in three to five years. There will be services that are doing the same old bulls— with Android, and then there will be something different. That is where we’re going here.”

Ambitious words, indeed, but they’re backed by some of the Valley’s smartest money.

Microsoft’s role in Cyanogen is probably just a minor one; perhaps it will help with the patent portfolio it unleashes on Android OEMs. But the company’s involvement at all could be seen as part of its long battle with Google. Recall that “Google acquired Android in 2005 as a defense against Windows Mobile dominating smartphones just as Windows dominated PCs.” Later, in 2008, Microsoft acquired Android founder Andy Rubin’s previous company Danger, whose Sidekick design inspired Google’s pre-iPhone G1 devices.

Cyanogen has long been in Google’s cross-hairs. In its early days, CyanogenMod (since renamed to Cyanogen OS) was perceived as such a nuisance — or a threat — that its users suddenly found that they needed to perform contorted workarounds to load Google’s proprietary apps (Google Map, YouTube, GTalk, and so on). Can Microsoft resist the temptation to aid this Google irritant?

Tantalizing as the Cyanogen investment is, it might not be enough to keep Microsoft in the brutal smartphone hardware business, but it’s consistent with the company’s efforts to undermine Google’s ecosystem by any means necessary. Including gathering allies to do to Android what Bill Gates once did to Lotus 1-2-3.

Let’s keep in mind that the mobile industry is no more mature than the PC industry was in the mid eighties. Things could get interesting as Cyanogen reveals more of the business model its muscular investors have bought into. And they will become particularly interesting if the company can corral support from industry players who are eager to get out from under Google’s thumb.

JLG@mondaynote.com

Europe: The Digital Squeeze Is Coming

 

By Frédéric Filloux

A recent Bain & Co survey paints Europe’s digital future as squeezed between the explosive demand of emerging countries and the dominance of US-based internet giants.

The “Next Billion”, a phrase coined and propagated by the Quartz team, refers to the explosive internet growth in emerging countries — almost entirely fueled by mobile usage. The new phrase got its own  conference (last week in NYC, next May 19th in London) and a dedicated section on the Quartz site.

For Europe, the Next Billion will be hard: Last week, the global consulting firm Bain & Co published a survey that exposes what’s at stake. The report, titled Generation #hashtag (pdf here), was commissioned by The Forum d’Avignon, a yearly gathering of intellectuals and business people that explores cultural changes; the survey was conducted by Bain’s staff in Paris and Los Angeles over 7,000 respondents in 10 countries with the following internet status:

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Source : Internet World Stats

Bain’s key findings follow:

The next period is going to be dominated by digital natives, i.e. audiences that won’t have even known other forms of media vectors (video, communication, news or entertainment). In emerging countries, powerful forces are now in motion (emphasis mine):

Across the BRICS countries, the percentage of consumers 25 and younger—who are, on average, 40% more prevalent than in developed economies, according to Euromonitor—suggests the rapid rise of Generation #hashtag in emerging markets. (…) Over the past year, smartphone ownership rose significantly in emerging markets: from 45% to 50% in China, 14% to 21% in India, 45% to 54% in Brazil and 45% to 63% in Russia.

The chart below shows two important elements. One is the importance of the Generation #hashtag: the digital population comprised with digital “migrants” and “natives”. The second and even more interesting is the demographic distribution which, for emerging countries, clearly states the potential:

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These demographics show two major gaps: disposable income and networking infrastructure. Taking the long view, the first one could be overcome by strong growth in key areas. For the second, in many countries of Asia or Sub-Saharan Africa, land lines equipment is staying flat — and sometimes decreasing — while cellular networks are growing like weeds. A couple of weeks ago, Benedict Evans, from the Andreessen Horowitz venture firm, released his Mobile is Eating the World slide deck – from which I extracted these two charts :

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These figures might prove to be conservative as heated competition for the Next Billion has already started between tech giants. Google’s Project Loon, Facebook’s future drones network, both aimed at delivering broadband internet in developing countries, are soon to be joined by  Elon Musk’s plan to deploy 700 micro-satellites at a cost of $1bn to serve the same purpose. If we factor in Mark Zuckerberg’s idea to get a 100x improvement on internet delivery (10x reduction in cost of serving data multiplied by 10x improvement in compression and caching technologies), we can project the internet’s global availability challenge as solved within the next five years or so.

In this picture, Europe faces a huge industrial problem. The players who will benefit from the exploding demand in emerging markets are everywhere but in Europe, except maybe for Nokia Networks (not the handset division, now owned by Microsoft, but the remaining independent infrastructure business), and Sweden-based telecom maker Ericsson. Other are mostly Chinese, Taiwanese and Korean (Samsung and many others), they cover the entire field from networking infrastructure to mobile terminals. Symmetrically, most of the engineering brainpower and very large investment capabilities are concentrated in the United States with immensely rich companies such as Google or Facebook (or Musk’s Space X) thay are focused on capturing this Next Billion.

Europe’s options are limited. With no common language, no political leadership, encumbered by a gigantic bureaucracy, scattered and uneven access to capital (compared to the Keiretsu-like American venture capital system), Europe could choke, squeezed between Asian hardware markers and US-based software giants. Unfortunately, instead of organizing itself to favor the emergence of tech leaders — through decisive education programs and smarter immigration policies for instance — Europe’s main contribution to technologies has been the creation of tax havens. A textbook example of a missed opportunity.

frederic.filloux@mondaynote.com

BlackBerry: The Endgame

 

The BlackBerry was the first truly modern smartphone, the king of Personal Information Management On The Go. But under its modern presentation lurked its most fatal flaw, a software engine that couldn’t be adapted to the Smartphone 2.0 era.

Jet-lagged in New York City on January 4th 2007, just back from New Years in Paris, I left my West 54th Street hotel around 6am in search of coffee. At the corner of the Avenue of the Americas, I saw glowing Starbucks stores in every direction. I walked to the nearest one and lined up to get my first ration of the sacred fluid. Ahead of me, behind me, and on down the line, everyone held a BlackBerry, checking email and BBM messages, wearing a serious but professional frown. The BlackBerry was the de rigueur smartphone for bankers, lawyers, accountants, and anyone else who, like me, wanted to be seen as a four-star businessperson.

Five days later, on January 9th, Steve Jobs walked on stage holding an iPhone and the era of the BlackBerry, the Starbucks of smartphones, would soon be over. Even if it took three years for BlackBerry sales to start their plunge, the iPhone introduction truly was a turning point In BlackBerry’s life.

RIM (as the company was once called) shipped 2M Blackberries in the first quarter of 2007 and quickly ascended to a peak of 14.6M units by Q4 2010, only to fall back to pre-2007 levels by the end of 2013:

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Last week, BlackBerry Limited (now the name of the company) released its latest quarterly numbers and they are not good: Revenue plunged to $916M vs. $1.57B a year ago (-42%); the company lost $207M and shipped just 2.1M smartphones, more than a half-million shy of the Q1 2007 number. For reference, IDC tells us that the smartphone industry shipped about 300M units in the second quarter of 2014, with Android and iOS devices accounting for 96% of the global market.

Explanations abound for BlackBerry’s precipitous fall.

Many focus on the company’s leaders, with ex-CEO Jim Balsillie and RIM founder Mike Lazaridis taking the brunt of the criticism. In a March 2011 Monday Note uncharitably titled The Inmates Have Taken Over The Asylum, I quoted the colorful but enigmatic Jim Balsillie speaking in tongues:

“There’s tremendous turbulence in the ecosystem, of course, in mobility. And that’s sort of an obvious thing, but also there’s tremendous architectural contention at play. And so I’m going to really frame our mobile architectural distinction. We’ve taken two fundamentally different approaches in their causalness. It’s a causal difference, not just nuance. It’s not just a causal direction that I’m going to really articulate here—and feel free to go as deep as you want—it’s really as fundamental as causalness.”

This and a barely less bizarre Lazaridis discussion of “application tonnage” led one to wonder what had happened to the two people who had so energetically led RIM/BlackBerry to the top of the industry. Where did they take the wrong turn? What was the cause of the panic in their disoriented statements?

Software. I call it the Apple ][ syndrome.

Once upon a time, the Apple ][ was a friendly, capable, well-loved computer. Its internal software was reliable because of its simplicity: The operating system launched applications and managed the machine’s 8-bit CPU, memory, and peripherals. But the Apple ][ software wasn’t built from the modular architecture that we see in modern operating systems, so it couldn’t adapt as Moore’s Law allowed more powerful processors. A radical change was needed. Hence the internecine war between the Apple ][ and Steve Jobs’ Mac group.

Similarly, the BlackBerry had a simple, robust software engine that helped the company sell millions of devices to the business community, as well as to lay consumers. I recall how my spouse marveled at the disappearance of the sync cable when I moved her from a Palm to a Blackberry and when she saw her data emails, calendar and address book effortless fly from her PC to her new smartphone. (And her PC mechanic was happy to be freed from Hotsync Not Working calls.)

But like the Apple ][, advances in hardware and heightened customer expectations outran the software engine’s ability to evolve.

This isn’t something that escaped RIM’s management. As recounted in a well-documented Globe and Mail story, Mike Lazaridis quickly realized what he was against:

“Mike Lazaridis was at home on his treadmill and watching television when he first saw the Apple iPhone in early 2007. There were a few things he didn’t understand about the product. So, that summer, he pried one open to look inside and was shocked. It was like Apple had stuffed a Mac computer into a cellphone, he thought.

[…] the iPhone was a device that broke all the rules. The operating system alone took up 700 megabytes of memory, and the device used two processors. The entire BlackBerry ran on one processor and used 32 MB. Unlike the BlackBerry, the iPhone had a fully Internet-capable browser.”

So at a very early stage in the shift to the Smartphone 2.0 era, RIM understood the nature and extent of their problem: BlackBerry’s serviceable but outdated software engine was against a much more capable architecture. The BlackBerry was a generation behind.

It wasn’t until 2010 that RIM acquired QNX, a “Unix-ish” operating system that was first shipped in 1982 by Quantum Software Systems, founded by two Waterloo University students. Why did Lazaridis’ company take three years to act on the sharp, accurate recognition of its software problem? Three years were lost in attempts to tweak the old software engine, and in fights between Keyboard Forever! traditionalists and would-be adopters of a touch interface.

Adapting BlackBerry’s applications to QNX was more complicated than just fitting a new software engine into RIM’s product line. To start with, QNX didn’t have the thick layer of frameworks developers depend on to write their applications. These frameworks, which make up most of the 700 megabytes Lazaridis saw in the iPhone’s software engine, had to be rebuilt on top of a system that was well-respected in the real-time automotive, medical, and entertainment segment, but that was ill-suited for “normal” use.

To complicate things, the company had to struggle with its legacy, with existing applications and services. Which ones do we update for the new OS? which ones need to be rewritten from scratch? …and which ones do we drop entirely?

In reality, RIM was much more than three years behind iOS (and, later, Android). Depending on whom we listen to, the 2007 iPhone didn’t just didn’t stand on a modern (if incomplete) OS, it stood on 3 to 5 years of development, of trial and error.

BlackBerry had lost the software battle before it could even be fought.

All other factors that are invoked in explaining BlackBerry’s fall — company culture, hardware misdirections, loss of engineering talent — pale compared to the fundamentally unwinnable software battle.

(A side note: Two other players, Palm and Nokia, lost the battle for the same reason. Encumbered by once successful legacy platforms, they succumbed to the fresh approach taken by Android and iOS.)

Now under turnaround management, BlackBerry is looking for an exit. John Chen, the company’s new CEO, comes with a storied résumé that includes turning around database company Sybase and selling it to SAP in 2012. Surely, such an experienced executive doesn’t believe that the new keyboard-based BlackBerry Passport (or its Porsche Design sibling) can be the solution:

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Beyond serving the needs or wants of die-hard keyboard-only users, it’s hard to see the Passport gaining a foothold in the marketplace. Tepid reviews don’t help (“The Passport just doesn’t offer the tools I need to get my work done”); Android compatibility is a kludge; developers busy writing code for the two leading platforms won’t commit.

Chen, never departing from his optimistic script, touts BlackBerry’s security, Mobile Device Management, and the QNX operating system licenses for embedded industry applications.

None of this will move the needle in an appreciable way. And, because BlackBerry’s future is seen as uncertain, corporate customers who once used BlackBerry’s communication, security, and fleet management services continue to abandon their old supplier and turn to the likes of IBM and Good Technology.

The company isn’t in danger of a sudden financial death: Chen has more than $3B in cash at his disposal and the company burns about $35M of it every quarter. Blackberry’s current stock price says the company is worth about $5B, $2B more than its cash position. Therefore, Chen’s endgame is to sell the company, either whole or, more likely, in parts (IP portfolio, QNX OS…) for more than $2B net of cash.

Wall Street knows this, corporate customers know this, carriers looking at selling Passports and some services know this. And potential body parts buyers know this as well… and wait.

It’s not going to be pretty.

JLG@mondaynote.com