mobile internet

Apps Features: Social vs. “Related”

Mobile application design is hard. For websites, we have well-established graphic rules. For PC screens, the tolerance for interface mishaps is fairly broad. Mobile apps are the  opposite: space is much scarcer, every pixel counts. Try shrinking a tablet app screen down an to a smartphone size: homothecy (linear reduction) rarely works. This is the reason why we often see fine iPad applications turn into flunked smartphone ones. It sometimes takes a while for a successful iPad app turn in to a well-adapted iPhone one: Flipboard, Zite and Bloomberg BusinessWeek were wise enough to take as much time as needed to roll-out great apps for the small screen.

When designers (and marketeers) perform user tests for a small screen app, they realize their design will have to adjust to many new circumstances and constraints. Reading time and general use conditions change substantially from a tablet to a smartphone: while the former is definitely a lean-back device, the latter will be used in many different ways, often including uncomfortable settings — I glance at my phone in a lobby, a waiting line, in the subway, etc. All this deserves thoughtful consideration when designing an application. The same applies to advertisers: they can’t expect to capture the same level of attention when moving from tablets to the smartphones.

With this in mind, I made a quick list of mandatory features for mobile applications.

Social vs. “Related”. Today’s hype leaves no other option but making an application as “social” as possible. This being the certitude du jour, allow me to think differently.

True, some apps are inherently social: when it comes to rating a product or a service, the “crowd factor” is critical. Beyond that, it should be a matter of personal choice — an antinomic notion to today’s the “Social” diktat. When you enroll into Spotify, the default setting is to share your musical taste with your Facebook friends and to suffer theirs in return. I personally can’t stand such obligation: I quickly dumped the application and cancelled my account.

The social idea’s biggest mistake is the belief in a universal and monolithic concept everyone is supposed to be willing to embrace with a similar degree of scope and enthusiasm. That’s a geeky, super-cartesian, Zuckerberg-esque view of society. Among my friends, some like opera (the singing, not the browser), others prefer heavy metal and I’m more into jazz tunes; some are tech-minded like me, others are more inclined towards literature. When it comes to sharing news, I tend to be naturally selective about the people I send a link to: I don’t want to swamp everyone with stuff they don’t care about. I might be wrong, but this is the way I see the social cyberspace: segmented and respectful of each other.

Where am I getting with this: When I read news online, I care about what is related (i.e. recommended by editors) as much as what is social (recommended by the crowd). Of course, Trending, is a good indicator of what’s hot. Here is a good example on TechCrunch iPad app, by any measure a thoughtfully designed one. Its Trending sidebar cleverly displays what’s hot and how it evolves:

Even better: when you dive into a story, the app will give you a better-focused “Trending” indicator on a particular company, in this example Buddy Media….

… will send you to the Crunch Base repository of people and companies:

TechCrunch’s social treatment is mostly Twitter-based. Subjects are connected to relevant tweets with the underlying story shown in a web view:

Related contents come in different flavors. Take the Bloomberg way shown in its remarkable BusinessWeek application. Companies mentioned in a stories can pop-up in a black sidebar drawn from the Bloomberg financial app.

Similarly, ProPublica’s application uses a lateral “drawer” to display related contents in an efficient way:

These features are by no means secondary. Providing related contents or a supplement of data, such as financial of biographical information, is the best proven way to retain users.

Finally, a word about graphics. Apple and the iPad have set the bar pretty high and very few apps takes fully advantage of their graphics power. One company rises way above the crowd: Roambi, in a class in itself when it comes to visualizing information. My take is, someday, most business sites will borrow from Roambi’s spectacular way of displaying graphics (part explanation of its design sophistication: the core of Roambi’s designers comes from the video game industry).

One last world about the ongoing debate between open web-apps and proprietary ones such as iOS or Android: The gap is narrowing. The FT.com, which pioneered the genre two years ago, made tremendous progress in its app. Periodically, a new release comes up with slight improvements in fluidity and ease of use. The iOS system and its software development kit remain a must for games and 3D intensive applications, but for news and data apps, HTML5 is getting closer.

One feature, though, is missing in most of these apps: the ability to use them offline. 3G coverage and cellular data transfers are more unstable than developers tend to believe; users should have more leeway in configuring their apps to download content in the background, ready for later offline use.

frederic.filloux@mondaynote.com

Facebook: The Collective Hallucination

Facebook’s bumpy IPO debut could signal the end of a collective hallucination. Most of it pertains to the company’s ability to deliver an effective advertising machine.

Pre-IPO numbers looked nice, especially when compared to Google at this critical stage of their respective business lives:

Based on such numbers, and on the prospect for a billion users by the end of 2012, everyone began to extrapolate and predict Facebook’s dominance of the global advertising market.

Until some cracks began to appear.

The first one was General Motors’ decision to pull its ads off Facebook. This was due to poor click-through performance compared to other ads vectors such as Google. No big deal in terms of revenue: according to Advertising Age, GM had spent a mere $10 million in FB ads and a total $30 million maintaining its presence on the social network. But Facebook watchers saw it a major red flag.

The next bad signal came during the roadshow, when Facebook issued a rather stern warning about its advertising performance among mobile users.

“We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered.”

If Facebook can’t effectively monetize its mobile users, it is in serious trouble. Numbers compiled by ComScore are staggering: last March, the average American user spent 7hrs 21 minutes on mobile versions of Facebook (80% on applications, 20% on the mobile site). This represents a reach of more than 80% of mobile users and three times that of the next social media competitor (Twitter), see below:

(source : ComScore)

More broadly, Facebook experiences the unlimited supply of the internet in which users create inventory much faster than advertising can fill it. This trend is known to push ads prices further down as scarcity no longer contains them. The reason why the TV ad market is holding pretty well is its lasting ability to create a tension on prices thanks to the fixed numbers of ad slots available over a given period of time.

Unfortunately for its investors, in many ways, Facebook is not Google. First of all, it has no advertising “killer format ” comparable to Google’s AdWords. The search engine text ads check all the boxes that make a success: they are ultra-simple, efficient, supported by a scalable technology that makes them well-suited for the smallest advertisers as well as for the biggest ones; the system is almost friction-free thanks to an automated market place; and its efficiency doesn’t depend on the quality of creation (there is no room for that). One cent a time, Google churns its enormous revenue stream, without any competition in its field.

By contrast, Facebook’s ad system looks more traditional. For instance, it relies more on creativity than Google does. Although the term sounds a bit overstated considering the level of tactics Facebook uses to collect fans and raise “engagement” of any kind. For example, Tums, the anti-acid drug, developed a game encouraging users to throw virtual tomatoes at pictures of their friends. On a similar level of sophistication, while doing research for this column, I landed on the Facebook Studio Awards site showcasing the best ads and promotional campaigns. My vote goes to the French chicken producer Saint Sever, whose agency devised this elegantly uncomplicated concept: “1 ami = 1poulet” (one friend, one chicken):

If this is the kind of concept Facebook is proud to promote, it becomes a matter of concern for the company’s ARPU.

Speaking of Average Revenue Per User, last year, Facebook made $4.34 per user in overall advertising revenue. A closer look shows differences from one market to another: North America, the most valuable market, yielded $9.51 per user vs. $4.86 for the European market, $1.79 in Asia and only $1.42 for the rest of the world. Facebook’s problem lies exactly there: the most profitable markets are the most saturated ones while the potential for growth resides mostly in the low-yield tier. In the meantime, infrastructure costs are roughly identical: it costs the same to serve a page, or to synchronize a photo album located in Pennsylvania or in Kazakhstan (it could even cost more per user in remote countries, and some say that FB’s infrastructure running costs are likely to grow exponentially as more users generate more interactions between themselves).

Facebook might be tempted to mimic a rather questionable Google trait, that is “The Theory Of Everything”. Over the last years, we’ve seen Google jumping on almost everything (including Motorola’s mobile business), trying a large, confusing array of products and services in order to see what sticks on the wall. The end result is an impressive list of services that became very valuable to users (mail, maps, docs). But more than 90% of Google revenue still come from a single stream of business, search ads.

As for Facebook, we had a glimpse already with the Instagram acquisition (see a recent Monday Note), which looked more like a decision triggered by short-term agitation than by long-term strategic thought. We might see other moves like this as Mark Zuckerberg retains 57% of the voting shares and as the company sits on a big (more than $6 billion) pile of cash. Each month brings up a new business Facebook might be tempted to enter, from mobile phones, to search.

All ideas that fit Facebook’s vital need for growth.

frederic.filloux@mondaynote.com

Nokia: Three Big Problems

Nokia’s results for Q1 2012 are in: They’re not good. (See the earnings release here, Management’s Conference Call presentation here.)

Compared to the same quarter last year, Nokia overall revenue is down 29%, to $9.7B. And the company is now losing money, $1.8B, 18.5% of revenue. [Nokia’s official numbers are stated in euros, I convert them at today’s rate of $1.32 for 1€.]

One year after Nokia’s decision to jump of its “burning platform”, this yet another bad quarter and leaves one to wonder about the company’s future. Many, like Forbes’ Erik Savitz, think The Worst Is Still To Come.

I see three life-threatening problems for the deposed king of mobile phones.

First and potentially most lethal: Nokia is burning cash. As the chart above documents, Nokia’s Net Cash went down 24% in one year. From page 5 of the Earnings Release: “Year-on-year, net cash and other liquid assets decreased by $2B…. Sequentially [emphasis added], net cash and other liquid assets decreased by $.9B”. Here, the word sequentially means compared to the immediately preceding quarter, as opposed to the same quarter last year.
Elsewhere in the document, on page 6, we learn Microsoft provided $250M in “platform support payments”. If you back this amount out, you see Nokia’s operations have in fact consumed $1.15B, a significant fraction of the company’s $6.4B Net Cash. This cannot continue for very long and leads Henry Blodget to worry Nokia could go bankrupt in two years or less.
Henry’s view might be a bit extreme; Nokia has assets they could convert to cash, thus giving itself more runway for its recovery efforts. But, as we’ll see below, the company’s prospects in both phone categories don’t look stellar. And bad things happen to cash when the market loses confidence in a company’s future: vendors want to be paid more quickly, customers become more hesitant, all precipitating a crisis.

Second, the dumbphone (a.k.a. “Mobile Phones”) business, still Nokia’s largest, is now in a race to the bottom:

Volume is huge, 70.8M units; it dipped 16%, not a good sign. Worse, the ASP (Average Selling Price) went down 18% to $44 (33€). Mostly in developing countries, Nokia is now losing ground to the likes of Huawei and ZTE selling feature phones and smartphones, both very inexpensive. Unsurprisingly, Nokia claims they’ll counterattack with their Asha family of mobile phones. Few, outside of Nokia, or even inside, believe they can win a brutal price cutting fight against those adversaries.

Last, Nokia’s last hope: Their new Windows Phone “Smart Devices”.

As the chart above shows, Nokia’s smartphone business keeps sinking: -51% in volume compared to the same quarter last year. And, with a $189 (143€) ASP, it can’t make any significant money as $189 is about what it costs to build one.

As for the latest Lumia smartphones, the reviews have been mixed. So are sales, according to Stephen Elop, Nokia’s CEO. Going to the earnings release, I searched for the word “Lumia” in the document. It appears 29 times. — without any number attached to it, just words like “encouraging awards and popular acclaim”. Which can only mean one thing: Actual numbers better left unsaid.

Things don’t get better when, according to Reuters, mobile carriers in Europe pronounced themselves ‘‘unconvinced”, finding the new Lumia smartphones “not good enough”. It is worth noting things could be better in the US where AT&T appears to make a real effort selling Lumias, and where Verizon recently stated its interest in fostering a third ecosystem with Windows Phone devices.

Unfortunately, we also hear a puzzling rumor: Existing Lumia phones wouldn’t be upgradable to the next OS version, Windows Phone 8, code-named Apollo. Both Mary Jo Foley, a recognized authority on things Microsoft, and The Verge, an aggressive and often well-sourced blog, support that theory.

So far, in spite of the potential damage to their business, neither Microsoft nor Nokia have seen fit to comment. Should it be true, should current Lumia buyers find themselves unable to upgrade their software, Microsoft would be about to commit a massive blunder.

But why would they do this? Apparently, the current Windows Phone OS is built on the venerable Windows CE kernel. Setting veneration aside, Microsoft would have decided to use a more modern foundation for Windows Phone 8. And said modern foundation would not run on today’s hardware. For Nokia’s sake, I hope this is incorrect. The company already convinced its customer Symbian-based phones had no future. Sales plunged as a result. Doing the same thing for today’s Lumia devices would be even more dangerous.

A little over a year ago, in February 2011, Nokia’s brand-new CEO, Stephen Elop issued his ‘‘memorable” Burning Platform memo. In it, the ex-Microsoft executive made an excellent point: Having no doubt observed the rise of Google’s Android and of Apple’s iOS, he concluded Nokia was no longer in a fight of devices but in a war of ecosystems. Elop next drew an analogy between Nokia’s jumbled smartphone product line and a burning North Sea oil-drilling rig. To him, the company had no choice: instead of staying on the platform and dying in the blaze, he suggested plunging in freezing waters — with a chance of staying alive. Which, as he soon revealed, meant jumping off Nokia’s Symbian and Meego software platforms and joining the Microsoft Windows Phone ecosystem.

Today, Nokia bleeds cash, its dumbphone business in a race to the bottom, and its plunge into the Microsoft ecosystem isn’t off to a good start. What’s next for the company? Can it turn itself around, and how?

With hindsight, it appears the premature announcement of the jump to Windows Phone osborned Nokia’s existing smartphones. Their sales dropped while the market waited for the new devices running Windows Phone. Some, like Tomi Ahonen, an unusually vocal — and voluminous — blogger, think Elop should be fired, and Symbian and Meego restored to their just place in Nokia’s product line. This isn’t very realistic.

Closer to reality is Microsoft’s determination to get back in the smartphone race, almost at any cost. (For reference look at the billions the company keeps losing in its online business. $449M this past quarter.)

At some point in time, if Lumia sales still barely move the needle, Microsoft would have to either drop Nokia and look for another vehicle for Windows Phone. Or it will have to assume full control of Nokia, pare down what it doesn’t need, and do what it does for the Xbox, that is be in charge of everything: hardware, software, applications.

JLG@mondaynote.com

Lumia 800: Nokia’s Comeback?

Let’s go back to Spring 2010. Nokia friends invite me to their US headquarters in White Plains, NY, where we’ll discuss Apple with an audience of local management and remote viewers in Europe.
As the conversation proceeds, I’m struck not by what I hear but by what I don’t. They’re right to wonder about Apple, about what makes it tick…but they have an even bigger problem called Android.
I venture a few politically impolite suggestions:

1. Replace your CEO. Olli-Pekka Kallasvuo, a little too proud to be a lawyer and an accountant, is way past his “best if used by” date.
2. Drop all your aging software platforms, your Symbian S60, S^3 and S^4, your Maeemo/Moblin/Meego chimera (I didn’t say clusterf#^k). You’re doomed by pursuing so many projects…and you might want to consider that your competitors are a bit better than you are at writing system software.
3. Go Android right now. Join the winning OS team.
4. Focus on your strengths: Hardware, industrial design, manufacturing, worldwide distribution.
5. Move to Silicon Valley, that’s where the action is. The future of smartphones won’t be decided in White Plains, NY.

People don’t appear overly upset. Actually, quite a few heads nod when I mention kicking the mercurial OPK upstairs. Judging by audience reaction, the Go Android suggestion isn’t news, it’s been debated already, heatedly it seems.

I get two kinds of pushback: “We’ll lose control of our destiny!” and “How will we achieve differentiation?”

With the regard to the former, by 2010 Nokia is already past the point of controlling their destiny; sales are “gaining vertical speed”…in the wrong direction. And to the differentiation objection, I suggest that the audience share my faith in Nokia’s proven hardware strengths and in their Finnish tradition of sparse, elegant designs.
It becomes an open — if occasionally pained – exchange. My hosts are visibly as concerned as I am about Nokia’s current direction.

On my way back to the Valley, I try to put a humorous spin on the discussion: I pen a Science Fiction: Nokia goes Android piece that shows the great company waking up and turning itself around. But, inside, I know humor is the politeness of despair, and I can’t avoid a somber note at the end of the otherwise lighthearted article:

In a more plodding reality, Nokia is likely to continue on its current course, believing their problem is one of execution, of putting more faith in their sisu.
The king will be deposed, Google and Apple will divide the spoils.

A few months later, Nokia’s situation worsens, OPK is deposed and Stephen Elop, a former Microsoft executive, replaces him.

A year ago exactly, Nokia’s new CEO writes his infamous Burning Platforms memo. In it, Elop makes three crucial statements:

1. The smartphone war isn’t one of platforms any more, it is a war of ecosystems.
2. Our current system software won’t win.
3. To win the war, we’re joining the Windows Phone ecosystem via a special alliance with Microsoft.

The first point is beyond dispute. Two successful ecosystems, Google’s for Android and Apple’s for the iPhone, have settled that score.
To outsiders, Elop’s second statement is merely a frank assessment of Nokia’s failure to play in the same software league as its Californian competitors. A few insiders and fans take offense but…numbers are numbers.

Things take a turn for the worse with the jump to Windows Phone. In the abstract, the decision is defensible, but by announcing the switch ten to twelve months ahead of actual shipments, Elop has effectively osborned his current product. Who will buy Symbian-based smartphones when Nokia’s own CEO tells the world it’s a has-been platform with no future? Nokia’s fans are furious; so are the shareholders. (See Tomi Ahonen’s blog for a rich, vocal, well-argued compendium of everything wrong with Stephen Elop’s move.)

Nokia’s market share and profits drop precipitously. The December 2011 quarter shows a loss with little hope of a turnaround in the short term.

But the wait is finally over: Nokia now ships Lumia smartphones running on the latest Windows Phone 7.5 release. A Nokia friend asks if I want to try a Lumia 800, the top-of-the-line model in Europe. Having read good things about both hardware and software, I jump at the chance.

When the package lands on my desk, I ask myself The Question: Is this the phone that will put Nokia and Microsoft back in the race? By late 2011, Microsoft’s share of the smartphone market stood below 2%. Does the Lumia line of devices have what it takes to regain the ground lost to Samsung’s Android devices and to iPhones?

What follows, here, is a highly impressionistic diary, with no pretense of objectivity, chronicling a week of abuse of the Lumia 800. (I’ll skip over the phone waking up speaking Finnish, or that it arrived with a European plug for the power adapter. Not a problem, we have Google Translate and I have my own stash of euro-gizmos.) For a dispassionate and professional discussion, please turn to AnandTech’s exhaustive review (12 pages).

At first glance (literally), very good: Elegant, sleek hardware with equally elegant type on the welcome screen, followed by the clean Metro UI (Nokia UK provides a nice tour here). All it takes to get a pre-paid month-to-month subscription and micro-SIM is a short walk to the T-Mobile store.

I encounter my first problem when looking for ways to take screenshots for today’s note. The documentation is mute on the subject, and all Google can offer is that I need software developer tools. Is there really nothing for normal humans? I email my friends, I tweet nokia-connects (as recommended in a nice handwritten note that came with the phone)…still nothing. A simple two-button procedure, followed by a no-hands Photo Stream upload – in other words, the iPhone method — seems to be the type of solution to aspire to.

Cognoscenti will argue over details, but I was impressed by Lumia’s email presentation and management. Setting up my Exchange, Google, and iCloud accounts is as simple and reliable as the best of what I’ve seen with Android and iOS devices. So is the polished use of type, the ease of linking and unlinking mailboxes, handling single messages, and bulk-editing an inbox loaded with spam. Office attachments read well, naturally — as they do on all leading smartphones. But while competitors read PDF docs natively, Windows Phone tells you There’s An App For That. It’s free and installs easily, as every other app I tried. But, for such a basic function, rendering PDF files, why not make it part of the device?

Surfing the Web proves less satisfying. Tabbed browsing isn’t as intuitive as on an iPhone 4S, and there’s no “Reading List” of pages you can save for later or sync with your PC. Worse, there appears to be a purplish tinge on the screen as I read Web pages and the type rendering is lackluster — I wish I had screenshots to better explain what I see. I don’t know enough about what’s under the hood to place the blame, but perhaps it’s the lower screen resolution (480 by 800 vs. 640 by 960).

Music, at least on the device I got, is also disappointing. Contrary to the claims of the Nokia Music support page, there’s no Nokia Music Streaming on my Lumia. Perhaps this is just a temporary or regional situation. Downloading music from iTunes is theoretically possible, although it seems one needs a DRM Removal Tool, followed by a batch conversion to Windows Phone music files. Spotify offers a Windows Phone application, or one can turn to the Microsoft’s Zune Unlimited Pass, both with a $9.99/month subscription. Opinion will differ as to the attractiveness of these music offerings. In any case, there’s no ‘‘iPod Inside”, as I hear an AT&T salesperson say.

The Lumia 800 features an 8 megapixel camera with a “Carl Zeiss Tessar” lens. As a test, I took side-by-side pictures using the Lumia and an iPhone 4S, both in idiot mode (auto white balance mode, auto everything else).

First, my two pigs. I found them 20 years ago in an antique shop in Arcachon, France, and christened them Victor and Charles, as in VC. This was in my early entrepreneurial days, when I thought VCs were…you know. Now that I’ve gone over to the Dark Side, I still keep them on my desk and show them to entrepreneurs who give me lip about my brotherhood.

The Lumia photo:

…and the iPhone:

To the inexperienced viewer, the iPhone 4S picture looks better

I tried another subject: Handwritten numbers on a piece of paper.

The Lumia:

…and iPhone:

Take a close look at these pictures and you’ll see that the iPhone images are marginaly sharper.

The rather dull tint of the Lumia pictures can be corrected using any decent photo processing program (I just did it in iPhoto, it works quite well). Of course, that means moving the pictures to a “real” machine.
Perhaps the dull tint is unique to the phone I got. If it isn’t, it needs to be fixed in order not to disappoint. The Autofix feature in the phone’s camera software didn’t fix the picture.

I used Microsoft’s SkyDrive, a free “drive in the Cloud” that appears as one of the sharing options in Windows Phone. It’s not as clever as DropBox, or as automated as parts of iCloud, but it works well (and reliably) on PCs, Macs, Windows Phone, Android, and iOS.

Still on the camera topic: unlike other leading smartphones, there is no front-facing camera. As a result, no video calls in Skype or FaceTime fashion.

Using Nokia-owned Navteq maps, navigation work as expected: very well.

Last item for this cursory review: battery life. The Lumia’s screen dims in a matter of seconds and shuts down soon thereafter. My unscientific impression is that the battery drains quickly if you do a lot of browsing and downloading on 3G or WiFi. A glance at AnandTech’s thorough numbers shows that this is indeed the case.

…or nearly the last item: I forgot to mention phone calls, we use smartphones for those, too. Nothing to report; voice, SMS…everything works as expected.

This is a well-made, elegantly designed, and capable phone. But let’s return to The Question: Is this the Killer Phone? Will the Lumia 800 and its siblings put Nokia and Microsoft back in contention? My answer is, regretfully, No.

The Lumia contains neither the revolutionary new features nor the fresh approach that any serious smartphone needs to compete with the two new giants, Samsung and Apple. The Korean company is very, very determined; it takes no prisoners — ask Sony. And Apple is no longer Little David fighting the Microsoft Goliath: Last quarter, the iPhone alone generated more revenue and profit than all of Microsoft.

I can’t help but retro-fantasize an alternate reality: In 2010, Nokia starts a secret project with Google and an Asian contract manufacturer. The industrial design is done in-house, the rest in collaboration. In February 2011, Elop announces a special relationship with Google — and starts shipping the device immediately. No osborning, no revenue gap.

This fantasy comes with a bonus: Google doesn’t have to buy Motorola and it gets Nokia’s patent portfolio – infringement of which Apple has paid more than $600M — as part of the “special relationship”.

Back to reality: Without a clearly superior product and a dominant ecosystem, Microsoft and Nokia are now forced to shell out big marketing dollars against richer adversaries. This isn’t going to be pretty: Microsoft can ill afford to be a bit player in the smartphone revolution and Nokia can’t keep bleeding money, squeezed between the new giants and the emerging Asian providers of entry-level devices.

JLG@mondaynote.com

Will Microsoft buy RIM or Nokia?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JLG@mondaynote.com

Samsung vs. Google

Android is a huge success. Google bought Andy Rubin’s company in 2005 and turned it into a smartphone operating system giant, with more than 50% of the global market and 700,000 activations a day this past December.

Perhaps, as Steve Jobs seemed to think, it was Eric Schmidt’s position on Apple’s Board of Directors that infected Google with an itch to enter the smartphone OS market. Or maybe Larry Page and Sergey Brin simply recognized the Next Big Thing when they saw it. (As Page points out, the company had begun Android development a year before Schmidt joined the Apple Board.)

Regardless of the “authenticity” of Google’s smartphone impulse, it’s the execution of the idea, the integration of Android into Google’s top-level strategy where the product really shines. Android improves quickly; the “free and open” platform is popular with developers and, perhaps even more so, with handset makers who no longer have to create their own software, a task they’re culturally ill-suited to perform. And everyone loves being associated with a technically competent winner. (I might be a little biased in my regard for the Android engineering team: Comrades from a previous OS war work there.)

For the past three years, Android has experienced a kind of free space expansion: The platform has grown without hitting obstacles. I’m not ignoring the IP wars, they’re real and the outcome(s) are still unclear, but these fights haven’t slowed Android’s triumphant march.

As we enter 2012, however, it seems the game may be changing. Looking at last week’s numbers for Motorola, HTC, and Samsung, we see a different picture. Instead of the old “there’s more than enough room for every Android handset maker to be a winner”, we have a three-horse’s-length leader, Samsung, while Motorola and HTC lag behind.

From October to December of last year, a.k.a. Q4CY11, Samsung is said to have shipped 35 million smartphones, taking it to the number one spot worldwide. Citing “competitive reasons”, Samsung no longer makes its sales/shipment numbers public, so we have to rely on ‘‘independent” observers to tally up the score. Having worked in the high-tech industry for decades, I’ve seen how this information game is played: firm XYZ sells its “research” to manufacturer W…and ends up as its mouthpiece. I’d love to follow the money, but these private firms don’t have to reveal who their clients are and how much they pay for their services. (For a more detailed discussion of these shenanigans, read an excellent piece by The Guardian’s Charles Arthur: Dear Samsung: could we have some clarity on your phone sales figures now? Another possible bias: The Guardian re-publishes the Monday Note on its site.)

But even if we “de-propagandize” the numbers, Samsung is clearly the number one Android handset maker, and, just as clearly, it’s taking large chunks of market share from the other two leading players: Motorola and HTC both announced lower than expected Q4CY11 numbers. HTC’s unit volume was 10 million units, down from 13.2 million in Q3; Motorola got 10.5 million units in Q4, down from 11.6 million in Q3.

This leaves us with the potential for an interesting face-off. Not Samsung vs Motorola/HTC, but…Samsung vs. Google. As Erik Sherman observes in his CBS MoneyWatch post, since Samsung ships close to 55% of all Android phones, the company could be in a position to twist Google’s arm. If last quarter’s trend continues — if Motorola and HTC lose even more ground — Samsung’s bargaining position will become even stronger.

But what is Samsung’s ‘‘bargaining position’’? What could they want? Perhaps more search referral money (the $$ flowing when Google’s search engine is used on a smartphone), earlier access to Android releases, a share of advertising revenue…

Will Google let Samsung gain the upper hand? Not likely, or at least not for long. There’s Motorola, about to become a fully-owned but “independent” Google subsidiary. A Googorola vertically-integrated smartphone line could counterbalance Samsung’s influence.

And so it would be Samsung’s move…and they wouldn’t be defenseless. Consider the Kindle Fire example: Just like Amazon picked the Android lock, Samsung could grab the Android Open Source code and create its own unlicensed but fully legal smartphone OS and still benefit from a portion of Android apps, or it could build its own app store the way Amazon did. Samsung is already showing related inclinations with its Music Hub and its iMessage competitor.

Samsung is a tough, determined fighter and won’t let Google dictate its future. The same can be said of Google.

This is going to be interesting.

JLG@mondaynote.com

The Apple Wireless Carrier (Part 2)

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

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

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

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

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

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

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

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

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

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

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

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

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

End of story? Not quite.

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

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

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

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

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

———–
An afterthought before we close.

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

More disruption on the way?

JLG@mondaynote.com

Mobile + Cloud + Social

These are the three interdependent forces that power the biggest wave of growth, change, and destruction I’ve seen since I have been allowed to take part in the high-tech industry.

In the beginning (or mine, anyway), back in 1968 when I was, miraculously, offered a salary to be part of HP France there was the mainframe. IBM – “The Company” — reigned supreme, a dynasty that seemed unassailable. The IBMer wore a suit and tie when approaching the punch card feeder. Big Blue’s competitors, the BUNCH, were also called the Seven Dwarfs because their combined market share couldn’t compare to IBM’s dominance.

A few years later, the dress code relaxed a bit and Digital Equipment Corporation’s minicomputer displaced mainframes. IBM still exists, of course, although under a different guise, but DEC is no more. They were acquired by Compaq in 1998, killed by the Personal Computer.

The PC era lasted longest of all, more than 30 years, partly due to Moore’s Law: “The microprocessor shall double its power every 18 months”, and then repurposed as a transmission medium with the advent of the Internet. Thanks to the standardization enforced by the Wintel duopoly, the industry manufactured hundreds of millions of PCs, giving rise to an inexpensive clone organ bank that largely displaced higher lifeforms such as Sun servers (the company that once claimed to ‘put the dot in dot.com’). As an example, the five million servers deployed by Google use a combination of such parts — and private versions of Linux.

Referring to the PC era in the past tense is contentious. In a now famous post, Frank Shaw, the literate head of Microsoft’s Corporate Communications, contends that  ‘the 30-year-old PC isn’t even middle aged yet, and about to take up snowboarding’. I’m writing this on an Intel-powered personal computer and don’t feel particularly necrophiliac. But the marketplace has spoken: The PC is, at best, stalled. Looking at last quarter’s Microsoft numbers, shipments to business customers are still growing, about 5% year-to-year, while the consumer market is flat. (From Gartner, more details on the PC sales slowdown here.)

Contrast this with the rise of Google’s Android smartphones, Facebook, Twitter, Apple’s iOS devices (iPhone, iPad, iPod Touch), Zynga, LinkedIn… And the fate of the incumbents, Nokia, Palm, RIM, Microsoft… They’ve all been displaced, ‘‘flummoxed” in Steve Jobs’ words.

We just got the latest Mary Meeker presentation, now on the Kleiner Perkins web site as she joined the grand Valley venture capital firm, a great combination of PR and talent acquisition. Mary Meeker’s opus is 66 slides long and covers so much ground it could become overwhelming, but it’s worth your time. The range of topics is impressive: e-commerce, the global race to adopt mobile devices and apps, on-line payments, social networking as a pervasive wave of opportunity spanning the online experience. She ‘posits that the mobile revolution is still in its infancy and poised for tremendous growth’.
Regarding the changing of the guard:

She then points to the new entrants clobbering the smartphone incumbents:

But, there’s more than clobbering, there’s location. When it comes to operating systems, ‘Made in USA’ – and, more specifically, Silicon Valley, the Detroit of computing – still means something:

As much as I like and admire her presentations, I’d take a slightly different angle.

First, as Horace Dediu meticulously points out in his Asymco blog, I’d emphasize the startling creation and destruction of value that has taken place in the past four years, since Apple and Google have entered the field. (For a slightly less analytical and more animated take, there is also Brian Hall’s Smartphone Wars, occasionally NSFW, never dull.)
Calling what’s taking place “the biggest wave of growth, change and destruction” is no hyperbole: One company, Apple, went from zero to $70B in mobile revenue in 4 years; another, Google, propelled its Android platform to the top of the smartphone class; Samsung ships more phones than anyone else; Nokia lost its crown, it sales went down 13% year-to-year last quarter; Palm is no more; and Microsoft Windows Mobile sales are so small the company omits them in its latest quarter release, merely mentioning ‘favorable reviews’, confirming Ballmer’s earlier statement: “In a year, we’ve gone from very small to … very small.” This from the man who once predicted Windows Phone would get a 40% market share in 2012. When Nokia finally starts shipping Windows Phone 7 devices, we’ll see how Microsoft manages in the unusual role of being number three in a race.

Second, the combination. While both mobile revenue displacement and growth are impressive, the real revolution is in the Mobile + Cloud + Social explosion.
Why does Google ‘‘give away’’ Android, both the OS and applications? Android is a Trojan Horse that protects Google’s one and only business model, advertising, on mobile devices: Cloud + Mobile.

Facebook, an interesting challenge to Google, isn’t just a Social company, it could only reach its current 800 million registered users by deploying a scalable Cloud infrastructure.

Apple, rightly described as focused on great devices (read “hardware”), could only succeed with the iPod because of its iTunes service in the Cloud. This is the same iTunes that gave birth to the iPhone App Store, the great game changer, the Cloud service that morphed smartphones into app phones. Apple’s Cloud maneuvers haven’t always been felicitous — the company struggled with MobileMe — but they never gave up. We’ll soon see if the newly available iCloud, with its original approach to local caching and synchronization finally ‘‘Just Works”.

Lastly, emphasizing Meeker’s point about geography, inside a tiny circle, ten miles in diameter, we have three cities: Mountain View, Palo Alto and Cupertino. Google, Facebook, and Apple. Three companies redefining the future of computing, the new Mobile + Cloud + Social wave.
In the history of computing, there’s never been so much power concentrated in such a small area.

JLG@mondaynote.com

Steve, Please Buy Us A Carrier!

We’re at the end of the 2011 iPhone 5 launch. The demos went well; Steve Jobs has come back on stage to thank everyone and conclude the proceedings, “…but before you go, just One More Thing. I’d like you to meet someone.” And the CEO of Deutsche Telekom walks onstage. “Deutsche Telekom owns a company you know as T-Mobile USA, but let’s start calling it by its new name: Apple Wireless.”

An audible gasp — louder than the one when Jobs announced the $499 price for the iPad – and then the room erupts in applause. At long last, iPhone users will enjoy the level of carrier service and support that is their birthright.

This is fiction, of course, wishful thinking. But bear with me…

The idea came up during a “what if” conversation with my wife Brigitte, while walking along University Avenue in Palo Alto. What should Apple do with its almost beyond comprehension $76B in cash? The COO of the Gassée family is creative and practical, an abstract painter turned “lumber VAR”–she builds or rebuilds houses in Palo Alto. She’s not enthralled by technology and takes a utilitarian view of computers, phones, navigation systems, tablets…an attitude that provides a useful counterpoint to my sometimes overly-enthusiastic embrace of anything that computes.

She immediately nixes a big acquisition that could dilute Apple’s culture, an aspect of the company that’s integrally important to Steve. She has no interest in financial engineering and concludes that Apple will continue to make small acquisitions that pose few cultural challenges–but small buyouts won’t solve the cash “problem”. What to do with all that money?

As we chat, we walk by the wireless carrier stores: T-Mobile, a couple AT&T retailers (one is shutting down), Verizon and, next to the Apple Store, Sprint, a big store with a bored sales staff that easily outnumbers the customers. “Why doesn’t Jobs buy a carrier?” she asks, “He’d easily do a better job than these people….”

As befits our well-debugged relationship, I immediately launch into a critique of her suggestion: “This is a terrible idea, on so many counts!”.

First, there are regulatory problems. Getting FCC approval for a new iPhone is one thing; wrestling with Washington bureaucrats for spectrum allocation is another.  Apple’s maverick culture, its blatant spite for government bureaucrats and Congress windbags won’t do well there.

Second, carriers are capital intensive: Their return on equity (the profit-per-dollar invested in the business) is way below what Apple enjoys, in spite of its having “way too much cash for its own good.” For example, last quarter, AT&T’s Net Income was $3.6B for $113.8B in Equity, a ratio of 3.16%. Apple’s numbers were $7.3B for $69.3, a ratio of 10.5% — more than 3 times AT&T’s.

And just imagine the other carriers’ reactions. Not only would they kick Apple products from their networks and stores, Apple would find itself in court for anticompetitive practices, for unfairly favoring its own wireless arm.

One can see Apple’s stock losing 10% on the day of the announcement and critics would have yet another field day: “Apple does it again, their Walled Garden™ just grew taller walls!”.

But it’s also a beguiling idea. Let me count the ways.

Imagine the dancing in the streets. Apple would be finishing the job it started when it broke AT&T’s err… back, when it took over content distribution with iTunes. We don’t like carriers; we experience their service as both poor and expensive, to say nothing of their impenetrable and ever-changing contract pricing:

(Not to pick on AT&T. Every carrier offers a similar, bewildering array of entrapping offers.)

By contrast, imagine Apple’s simpler pricing. Three tiers to fit your appetite for data: $49, $79, $129 per month. No gimmicks, no SMS surprises, no fees piled up at the bottom of the bill: Just the price in your contract, plus taxes. If you approach the data limit for your plan, you get an SMS offering to upgrade you to the next level–but only for this month. No underhanded up-sell.

With $76B in cash and another $10B or so per quarter, a carrier is certainly within Apple’s budget. AT&T, with its $167B market cap, is probably out of reach (and too complicated, too many businesses), and Verizon ($97B), with its dying landline business and unionized workforce, isn’t in keeping with Apple’s ways.

But consider another carrier, T-Mobile USA. It no longer offers landline services, it’s non-union, and it’s affordable—it got a $39B offer from AT&T. Acquiring T-Mobile from its parent company Deutsche Telekom offers several advantages.

To start with, it prevents an abomination before the lord: It kills AT&T’s predatory acquisition attempt. Furthermore, as my friend Peter Yared noted, Apple might very well have big mounds of cash sitting outside the US, potentially subject to taxation if repatriated. Problem solved. Peter Oppenheimer, Apple’s CFO, shows up at Deutsche Telekom’s HQ in Bonn bearing a smile and an RSA dongle: “You have a Mac I can use to make the wire transfer?” No, they don’t. But a nice 30-year Anniversary Lenovo PC will do for the transaction.

Once the deed is inked, the hard work starts. This will probably be a two-year exercise.

Decisions will have to be made. Tactfully convert existing T-Mobile users to iPhones or free them go elsewhere? (The competition will, of course, welcome these ‘‘victims’’ with open arms.) Retrain employees or offer them a decent exit package?

But the big task, the goal of the acquisition: Play the Apple vertical integration game and adapt the network to support one and only one type of smartphone, Apple’s.

Other cellular networks have to serve a wide range of devices — from basic phones to gluttonous high-end smartphones — and support a mess of protocols: Ancient ones with layer upon layer of patches, more modern ones with their factory-fresh bugs. Contrast this with Apple Wireless’ simpler task of serving one type of phone, one type of protocol. Given the two-year time frame, let’s assume the protocol will be a stable variant of what markitects call LTE or 4G. And, from there, voice and data coexistence, smoother video calls, voice-mail on iCloud, and so on.

And that’s just T-Mobile. Need more spectrum? $10B, three months of net cash flow, gets you Sprint.

Another possibility, admittedly remote, is to use tight wireless network integration with iCloud to create an inexpensive “smart dumbphone”.

What I mean is: Today’s iPhone is an app phone. It has enough hardware oomph to run a wide range of applications, all “wired” to a screen size. Because of this, cutting the iPhone’s bill of materials in half is well-nigh impossible — an “iPhone Nano” would be a much more difficult proposition than the iPod Nano. Apple would need to send developers back to their Xcode.

A better alternative would be to jettison native apps altogether, to go back to the Summer of 2007, when Steve Jobs promoted Web 2.0 apps for the first iPhone. Today, the pitch would be HTML5 Web Apps. We can already see a few good ones on iPhones and iPads, such as the new HTML5 Kindle app:

Or the nicely interactive iPhone manual, which feels like a “real” app:

A putative iPhone Nano on the no-less putative Apple Wireless network would be a dumbphone with HTML5 smarts and tightly integrated (I’ll use the P-word) proprietary services to make it sing and dance.

(As it happens, someone else already came up with the name Cloud Phone, see Trevor Sheridan’s post on the Apple’N’Apps site.)

As for the reaction from competing carriers, one has only to turn to the history of Apple Stores to get an answer. Existing retailers didn’t ditch Apple products when the company started its own retail chain. In fact, Apple Stores set a new standard in pre- and post-sale service. As a result, competing retailers raised their game. One can expect a similar reaction from AT&T and Verizon when faced with Apple Wireless.

So, yes, it’s a beguiling idea, but…

Would buying a carrier make sense financially? Look at AT&T’s iPhone ARPU, reported at more than $100/month. For Apple Wireless, this translates into more than $1B per million iPhones on its network. In 2010, T-Mobile’s ARPU was approximately $50/month for its 33.7 million customers. It’s tempting to look at the potential billions in service revenue and pronounce Apple Wireless the next big revenue opportunity.

But service isn’t Apple’s way of making money. Their one and only goal is selling devices. Everything else is in support of that goal. Execs, starting with the CEO, will wax poetic about the crystalline purity of software, more/better/faster content, new iCloud services; but what really counts is device revenue and profit. In the iPod days, iTunes didn’t make money, but it boosted device volume and margin. For today’s $100B Apple, a couple of billions in iTunes revenue is nice, it pays the bills, but it doesn’t move the needle. The iPhone is what does.

A wireless carrier owned, operated and integrated by Apple would only take two or three years to generate (much) more revenue than iTunes. But would it sell twice as many iPhones? Probably not.

It’s a nice fantasy, a carrier with the service quality and simplicity we get today when we enter an Apple Store. But for the fantasy to become reality, Apple Wireless would need to give birth to services that generate significant new hardware opportunities – opportunities that would need to be unavailable through Verizon and AT&T (otherwise, what’s the point?).

Another way to deflate the fantasy is to consider the US-only nature. Apple can’t and won’t go around the world and buy wireless carriers. With China soon to become Apple’s largest and most profitable market, the company isn’t about to lose sight of that prize, to be distracted by the complicated task of acquiring and integrating a US carrier.

That was the reverie…

Back to reality, why can’t carriers stop playing their games and show us some decency?

JLG@mondaynote.com

The New Faces of Digital Readers

First of all, note the evolving language: the term Online Readers is now passé as it morphed into Digital Readers. The shift reflects two trends: a broader range of device types and, in news consumption, the spectacular rise of mobility. Today, we’ll focus on a recent set of surveys that quantify these trends. And we’ll take a look at their impact on business models and strategies.

The first survey was released last week in Paris by Havas Media, a major European advertising player with a 25% market share in France. Last May, the polling company CSA surveyed a panel of 600 people reading 20 major French publications: national dailies and weeklies. Because the French rate of ownership for digital devices is comparable to what happens in other markets, the survey’s findings can be safely extrapolated outside of France.

Here are the key findings:

Respondents declare spending 37 minutes a day on digital publications as opposed to 22 minutes a day on print press. This number is astonishingly high. It shows the switch to digital has occurred – at least for readers of large national medias. It also confirms the segmentation of digital audiences. More broadly, when Nielsen finds that, on all mature markets, internet users spend no more than 30 minutes a month on digital newspapers, it also proves how important it is to go after the most loyal customers as opposed to collecting eyeballs – and flybys – for the sake of raw audience numbers that carry less and less economic meaning…)

How media consumption is distributed: according to the Havas Media survey, 51% of the respondents prefer web sites, 31% go for electronic editions, and 17% use applications. In these numbers, the web’s dominance reflects (a) the high volume of contents that are still free as many publications keep playing both sides of the fence, meaning both ad-supported and paid-for models, and (b) the importance of real time news.
In contrast, the lower score of digital editions stems from the fact most still use a basic PDF format. This doesn’t deliver the best reader experience, nor does it fit the needs of mobility: download speed and reading comfort on a smartphone screen. (I’ll come back to the future of digital editions in a next Monday Note by talking about the ePresse.fr kiosk we launched last week in France).
As for the poor scoring of apps, it can be explained by the lack of great interfaces for smartphones, and the still relatively small penetration of tablets.

When do people actually read their news on digital devices? Mid-morning breaks constitute the first of two prime times during which web consultation is favored by most users (36% of respondents), while digital editions and apps account each for 21-22%  (apps are doing quite well at lunch time). The second prime time occurs in the evening, after work, when use is evenly distributed between devices.

The Havas Media / CSA survey also points to the prime motives in news consumption:

#1: Real Time information, mentioned by 48% of the respondents.
#2: Free access. Not really surprising, it will be difficult to get people to pay for news. But there is hope: 29% say they’d be willing  to buy a digital edition. Interestingly enough (and sweet to Havas’ ears): 72% of respondents would be ready to trade a digital subscription in exchange for advertising, and 54% would trade the ability to get free downloads of digital contents in exchange for more advertising.
#3: Availability. A notion that encompasses accessibility and ease of use.
#4: Selectiveness is seen as print’s privilege and a key factor of for liking it.

As for the tablets, 56% of their use involves reading the branded press; that’s behind internet usage (77%), email (66%), or watching videos (62%). Respondents are not apps freaks: they have downloaded only 7 free apps and a bit less that 4 paid-for apps in their devices. These surprisingly low figures appear to be specific to the French market.
In the United States, according to recent Nielsen survey, the picture is different: iPhone/iPad users have an average of 48 apps of all kinds in their device, vs. 35 for Android users and 15 for RIM users (read Jean-Louis’s recent Monday Note to understand the Blackberry’s problem).
But if you factor the actual use of these apps by counting people who open them several times a day (68% of the users for iOS, 60% for Android and 45% for RIM), you’ll see what provides the best return on effort in the application business. In terms of numbers of app loaded and used, if we take a base of 100 for iOS,  Android will score 64 and the Blackberry 21.
Of course, the picture needs refinement: on the tablet market, Apple still dwarf Android by 100 to 2 but in the smartphone business, Android enjoy a 38% penetration (according to Nielsen), vs. 27% for the iPhone and 21% for RIM. Altogether, between a higher Android penetration and more usage by iPhone users, building apps for each platform will yield the same result in terms of market reach.

In conclusion, what does this mean for our media business?

1 / There is still a long way to go for applications to match browser adoption; it is mostly a question of interface quality.
2 / People expect real-time news, including in applications, or the added value needs to be outstanding.
3 /  Digital editions carry more of the brand attributes; but as long as they are not supported by better applications, and able to provide real time news updates, they will remain a relatively small market.
4 / The advertising model needs a bigger dose of creativity: a large chunk of readers would agree to more ads as long as their publication remains free — which paves the way to reinventing the sponsoring model for digital editions or for encapsulated contents.

frederic.filloux@mondaynote.com