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Apple Buys Intel

 

Getting rid of Samsung as a processor supplier and, at the same time, capturing the crown jewel of the American semiconductor industry. How could Apple resist the temptation to solve its cash problem and make history again?

Halfway through the second quarter of the 2013 fiscal year, most of Apple’s top execs meet at an undisclosed location (Eddy Cue’s chair is empty – he’s been called away to a Ferrari board meeting). They’re joined by a few trusted industry insiders: Bill “the Coach” Campbell, Apple and Intuit Director and adviser to Google’s founders, Mssrs. Page and Brin; Larry Sonsini, the Silicon Valley consigliere of more than three decades; and Frank Quattrone, the star investment banker with nine lives.

The meeting isn’t about the company’s dwindling profit margins. The smaller margins were expected and invited: The reduced-price iPad and heavy promotion of the “old” iPhone 4 as an entry-level product are part of the long term strategy of guarding Apple’s lower end (so to speak). And no whining about AAPL’s grim slide over the last six months, a problem that has only one solution: Apple needs to record a series of better quarters.

The problem of the day is, once again, what to do with Apple’s obscene pile of cash.

By the end of December 2012, the company held about $137B in cash (or equivalents such as marketable securities), including $23B from operations for the quarter.

CFO Peter Oppenheimer delivers the bad news: It looks like operations will disgorge another $35B this quarter. The stock buy-back and dividend program that was designed to bleed off $45B over the next few years (see this March 2012 Monday Note) won’t be enough if the company continues at this rate.

Apple needs something bigger.

Quattrone has been sitting quietly at the end of the table. He clears his throat and speaks:

Buy Intel.

Well, yes, Frank (says Tim Cook), we’ve been buying Intel processors for the Mac since 2005.

Not the chips. The company. The planets are aligned for Apple to strike a blow that will leave the industry forever changed. Make history, acquire Intel.

Quattrone has their attention. He unfolds the celestial calibration:

  • Apple needs to extract itself from the toxic relationship with Samsung, its ARM supplier.
  • Intel is the best large-scale silicon manufacturer in the world. They have the people, the technology, and the plant capacity to match Apple’s needs for years to come.
  • “But Intel doesn’t do ARM!” you say. Indeed, Intel has no interest in the fierce competition and small margins in the ARM-based SoC market. Joining the ARM fray would severely disrupt Intel’s numbers and infuriate Wall Street. But if Intel were to essentially “go private” as Apple’s semiconductor manufacturing arm (pun intended), catering to all of Apple’s x86 and ARM needs (and whatever else Bob Mansfield is secretly plotting), Wall Street would have no such objection.
  • Intel is flailing. The traditional PC market – Intel’s lifeblood – continues to shrink, yet the company does nothing to break into the ARM-dominated mobile sector. In the meantime, the company makes perplexing investments such as buying McAfee for $7.68B.
  • There’s a leadership vacuum at Intel. Six months after announcing CEO Paul Otellini‘s “retirement”, Intel’s Board has yet to find a replacement who can sail the ship in more competitive waters. Apple could commission Pat Gelsinger, a 30-year Intel veteran and former CTO (Intel’s first) who fled to VMware after his career stalled at Intel. Despite being a bit of a Bill Gates look-alike (once upon a time), Gelsinger is a real technologist who would fit well within Apple, especially if he were given the opportunity to really “go for” the ARM architecture instead of iteratively tweaking x86 devices.
  • Last but not least, Intel’s market cap is about $115B, eminently affordable. The company is profitable and generates a good deal of cash, even after the heavy capital expenditures required by its constant need to build new and expensive manufacturing plants.
  • …oh, and one more thing: Wouldn’t it be fun to “partner” more closely with Microsoft, HP and Dell, working on x86 developments, schedules and… pricing?

A lively discussion ensues. Imagine solving many of Apple’s problems with a single sweeping motion. This would really make Cupertino the center of the high-tech world.

It’s an interesting idea, but there will be obstacles, both cultural and legal.

The Coach goes first: “Knowing both of these companies more than a little bit, I can attest to the pride they have in their respective cultures. They’re both disinclined to reconsider their beliefs in any meaningful way. Merging these two dissimilar groups, shedding unnecessary activities such as McAfee and the like would be dangerously disruptive to Apple’s well-honed, cohesive culture. As a general rule, merging two large organization rarely succeeds… unless you consider merging airlines a success…”

Finally, the Consigliere speaks: “It’s a tempting fantasy, it will mean years of work for my firm and many, many others, but as a friend of the company, as a past confidant of your departed Founder, don’t do it. There will be too much legal trouble with the Feds, with competitors, with Intel partners. Most fantasies aren’t meant to be enacted.”

I won’t dwell on the reality of the meeting: I made it up as a way to explain why Apple really has no choice other than submit to another cash phlebotomy, this time for an additional $60B. And, as with real-world phlebotomies, the procedure will treat the problem, but it won’t cure it. With $30B from operations per quarter, the $60B lancing will have to be repeated.

Some read the decision to return gobs of cash to shareholders as an admission of defeat. Apple has given up making big moves, as in one or more big acquisitions.

I don’t agree: We ought to be glad that the Apple execs (and their wise advisers) didn’t allow themselves to succumb to transaction fever, to a mirage of ego aggrandizement held out by a potential “game changing” acquisition.

A final word on taxes. To return the additional $60B (for a total of $100B when including the ongoing program announced last year) through increased dividends and repurchased shares, Apple will have to borrow money.

Borrow? When they have so much cash?

Yes, thanks to our mangled tax code. As explained here, about $100B of Apple’s cash is stored overseas. If repatriated, it would be “heavily” (read “normally”) taxed. Like most US companies that have international operations, Apple plays complicated, entirely legal tax games that allow their international profits to be taxed at very low rates as long as the profits — and the resulting cash — stay outside Uncle Sam’s reach. And thus we have the apparent paradox of borrowing money when cash-rich.

The benefit of these tax code contortions is difficult to explain to normal humans — as opposed to legislators who allowed the loopholes.

All this now makes Apple a different company. Once a fledgling challenger of established powerhouses such as IBM, Microsoft or HP, it now makes “too much cash” and is condemned to a life of paying dividends and buying back shares — like the old fogies it once derided.

JLG@mondaynote.com

 

 

The App Store: Good Deeds, Poor Communication

 

Apple does the right thing when striving to keep its App Store free from promotional trickery – but fails to shed light on the process and, as a result, damages its reputation.

Earlier this month, the Apple App Store removed the popular AppGratis application from its shelves. Then, last week, the App Store censors delivered a decisive blow by suppressing AppGratis’ push notifications to installed apps.
Apple’s reason for the ban: “… the app circumvented App Store rules preventing applications promoting other apps and direct marketing.”

AppGratis CEO Simon Dawlat took to the airwaves, loudly protesting his innocence. The aggrieved entrepreneur criticized Apple’s arbitrary and inconsistent approval process and “out of the blue” removal of AppGratis. He launched an online petition that gathered 571K signatures in just a few hours. He convinced Fleur Pellerin, France’s Minister of Digital Technologies, to run to the wounded company’s bedside and join the protest. Minister Pellerin added a bit of saber-rattling, calling Apple’s actions “brutal” and hinting at plans to ask the EU to examine the takedown.

But then the PR tide turned. An AppGratis document leaked to Business Insider by a “source in the developer community” hints at the company’s unspoken business model: AppGratis will raise your app’s rating in the App Store – for a fee.

Specifically, AppGratis gives developers an estimate of where in Apple’s App Store rankings an App can land based on how much the developer is willing to pay… [The] document shows AppGratis estimates a ~$300,000 buy will land an app in the top five slot in the US version of the App Store.

$300k is a lot of money for a small app developer, but the promise is that the higher ranking will result in increased revenue that will more than cover AppGratis’ “service fee”.

Before the e-dust could settle, Dawlat posted a long-winded blog entry that I assume was meant as a rebuttal. Here’s an excerpt:

People have “accused us” of gaming the top. But the reality is that with or without the “rankings,” our community will still drive millions of installs for the apps we feature. Independently from the App Store. We have never based our business on ranking exposure, because we’ve always expected Apple to chime in at some point, and change that. 

He then went on to announce AppGratis’ “crazy cool” old-yet-new direction [emphasis mine]:

And even more exciting, we’re back to our roots. A crazy cool daily newsletter with millions of subscribers, that will very soon be complemented by the newest and nicest HTML5 WebApp you’ll ever see. Two things we fully own, and that no one can take away from us. So when I stated a week ago that the reports of our death were greatly exaggerated, I wasn’t kidding. Not kidding at all. AppGratis is just getting started.
Because from the bottom of our hearts, we know we add value to this whole ecosystem.
And we intend to keep doing just that.

To shed light on this complicated situation, let’s use an analogy. And since this about a French company, Apple will be represented by Carrefour, the hypermarché giant — something like Walmart, but less polite. If you ask to have your groceries packed up, the cashier throws a plastic bag at you and tells you to do it yourself. You’ll be playing Simon Dawlat.

You approach Carrefour with your unique line of heirloom yogurts made from free range goat milk. It’s an interesting product, but is Carrefour obligated to give you shelf space? Of course not. The store may be inelegant and the staff is rude, but the company has its standards. Carrefour offers to take you on if you agree to its rules concerning shelf displays and promotional activities.

One day, a store manager notices the coupons you’ve enclosed in your yogurt packs. These coupons promote other products that Carrefour stocks, offered at lower prices when purchased on-line. When asked about it, you finally admit that, yes, some of the other manufacturers pay you to include their coupons with your yogurt. Carrefour management throws a plastic bag at you and tells you to pack up and go home. Their store, their rules.

(The analogy is both transparent and flawed. There’s no perfect physical retail analogue for AppGratis’ virtual schtick — getting paid to bubble an app up the App Store rankings. And the App Store doesn’t have a great real-world analogue, either. The App Store’s raison d’être is to make iPhone and iPads more valuable; it’s not a business in itself. But you get the idea.)

To touch on the obvious, Apple isn’t obligated to publish AppGratis or any other app, regardless of a developer’s adherence to the rules.

As for the rules themselves, I read through the App Store Review Guidelines, bracing myself for Apple’s usual hauteur. What I found was a personable, (mostly) well-written document that addresses a number of complicated issues while (mostly) avoiding the opaque legalese found in the licensing agreements we all stopped reading long ago.

The rule that’s most pertinent to the AppGratis case is this [emphasis mine]:

If you attempt to cheat the system (for example, by trying to trick the review process, steal data from users, copy another developer’s work, or manipulate the ratings) your Apps will be removed from the store and you will be expelled from the developer program.

There seems little doubt that AppGratis crossed this line: Its business model is precisely one of artificially enhancing an app’s ratings.

This isn’t a new issue. In September 2012, Apple added a clause (section 2.25) to the Guidelines:

Apps that display Apps other than your own for purchase or promotion in a manner similar to or confusing with the App Store will be rejected.

A good deal of discussion ensued, most of which made clear what awaited AppGratis and others such as FreeAppADay, AppoDay, Daily App Dream, and App Shopper. As explained in a PocketGamer post [emphasis mine]:

The wording is typically vague, but clause 2.25 appears to give Apple carte blanche to put any app that promotes titles from a different developer out of action.
At the moment, we understand Apple’s likely prime targets are pure app promotion services, such as (but not necessarily including) FreeAppADay, AppoDay, AppGratis, Daily App Dream and AppShopper, amongst others.

That clause 2.25 was introduced more than six months ago puts Dawlat’s claim that Apple acted “out of the blue” and Minister Pellerin’s accusation of “brutality” in a different light: Dawlat had ample notice of Apple’s intent.

(Minister Pellerin might now be wondering if her staff performed sufficient research before letting her run to Dawlat’s rescue…or maybe not. Half-baked technopolicy is becoming politics-as-usual in France. Last year, the newly-elected government ran afoul of high-tech entrepreneurs when it announced legislation that would greatly increase taxes on their equity gains, only to beat a hasty half-retreat, leaving the tax question muddier than ever. Perhaps the AppGratis snafu was perceived as an opportunity to earn back some of the lost credit, especially when portraying the situation as a French David vs. an American Goliath.)

Ultimately, Dawlat’s cry of foul will probably be seen as disingenuous and tiresome, not to mention a wasteful distraction… Do the critics of the App Store approval process consider the noise level that approvers must endure? To get to the current 700,000 apps, the company has to scrutinize more than 3,000 new entries a week plus revisions of existing apps. Mistakes will be made. Some apps will be approved only to be yanked when their scheme becomes obvious. Developers will be incensed, and Apple, sensibly, has anticipated the backlash:

If your app is rejected, we have a Review Board that you can appeal to. If you run to the press and trash us, it never helps.

So it’s case closed, right?

Not quite. There remains the problem of perception.

I can’t provide a link to the Guidelines in this Note because the document is only accessible to dues-paying developers (of which I am one). There’s nothing mysterious, secret, or dangerous about these words, they provide no competitive insight that could work to Apple’s disadvantage. Charging a developer just to read the rules gains nothing, and contributes to Apple’s negative image. Attempting to keep them out of the public eye is insulting and futile – developers freely leak and comment on the content.

Far worse is that Apple appears to have a policy (with very few allowances) of refusing to publicly explain its App Store decisions. I realize that some judgments are ineffable, matters of taste, as explained in the Guidelines:

We will reject Apps for any content or behavior that we believe is over the line. What line, you ask? Well, as a Supreme Court Justice once said, “I’ll know it when I see it”. And we think that you will also know it when you cross it.

Apple isn’t wrong to reserve the right to make such decisions. Although insiders may depict the company as obsessive control freaks, “normal” customers seem to appreciate Apple’s efforts to keep the App Store a Clean, Well-Lighted Place.

But maintaining a stony silence when imposing a judgment call is a bad choice, it distances developers, and it inevitably triggers controversy. A few words of explanation would invite respect for having courageously taken a difficult stance.

As already discussed in a recent Monday Note (Apple is Losing The War – Of Words), I find the company’s refusal to engage in more public debate harmful and disrespectful. While the AppGratis incident in itself isn’t overly important, it could be an opportunity for Apple to reconsider its ways.

JLG@mondaynote.com

 

A lesson of Public e-Policy

 

The small Baltic republic of Estonia is run like a corporation. But its president believes government must to play a crucial role in areas of digital policy such as secure ID. 

Toomas Hendrik Ilves must feel one-of-a-kind when he attends international summits. His personal trajectory has nothing in common with the backgrounds of other heads of state. Born in Stockholm in 1953 where his parents had taken refuge from the Soviet-controlled Estonia, Ilves was raised mostly in the United States. There, he got a bachelor’s degree in psychology from Columbia University and a master’s degree in the same subject from the University of Pennsylvania. In 1991, when Estonia became independent, Ilves was in Munich, working as a journalist for Radio Free Europe (he is also fluent English, German and Latin.) Two years later, he was appointed ambassador to — where else? — the United States. In 2006, a centrist coalition elected him president of the republic of Estonia (1.4m inhabitants).

One more thing about Toomas Hendrik Ilves: he programmed his first computer at the age of 13. A skill that would prove decisive for his country’s fate.

Last week in Paris, president Ilves was the keynote speaker at a conference organized by Jouve Group, a 3,000 employees French company specialized in digital distribution. The bow-tied Estonian captivated the audience with his straight speech, the polar opposite of the classic politician’s. Here are abstracts from my notes:

“At the [post-independence] time, the country, plagued by corruption, was rather technologically backward. To give an example, the phone system in the capital [Tallinn] dated back to 1938. One of our first key decisions was to go for the latest digital technologies instead of being encumbered by analog ones. For instance, Finland offered to provide Estonia with much more modern telecommunication switching systems, but still based on analog technology. We declined, and elected instead to buy the latest digital network equipment”.  

Estonia’s ability to build a completely new infrastructure without being dragged down by technologies from the past (and by the old-guard defending it) was essential to the nation’s development. When I later asked him about the main resistance factors he had encountered, he mentioned legacy technologies: “You in France, almost invented the internet with the Minitel. Unfortunately, you were still pushing the Minitel when Mosaic [the first web browser] was invented”. (The videotext-based system was officially retired at last in… 2012. France lost almost a decade by delaying its embrace of Internet Protocols.)

The other key decision was introducing computers in schools and teaching programming on a large scale. Combined to the hunger for openness in a tiny country emerging from 45 years of Soviet domination, this explains why Estonia has become an energetic tech incubator, nurturing big names like Kazaa or Skype (Skype still maintains its R&D center in Tallinn.)

“Every municipality in Estonia wanted to be connected to the Internet, even when officials didn’t know what it was. (…) And we played with envy…. With neighbors such as Finland or Sweden, the countries of Nokia and Ericsson, we wanted to be like them.”  

To further encourage the transition to digital, cities opened Internet centers to give access to people who couldn’t afford computers. If, in Western Europe, the Internet was seen as a prime vector of American imperialism, up in the newly freed Baltic states, it was seen as an instrument of empowerment and access to the world:

“We wanted a take the leap forward and build a modern country from the outset. The first public service we chose to go digital was the tax system. As a result, not only we eliminate corruption in the tax collection system — a computer is difficult to bribe –, but we increased the amount of money the state collected. We put some incentives in: When filing digitally, you’d get your tax refund within two weeks versus several months with paper. Today, more than 95% of tax returns are filed electronically. And the fact that we got more money overcame most of the resistance in the administration and paved the way for future developments”. 

“At some point we decided to give to every citizen a chip-card… In other words, a digital ID card. When I first mentioned this to some Anglo-saxon government officials, they opposed the classic ”Big Brother” argument. Our belief was, if we really wanted to build a digital nation, the government had to be the guarantor of digital authentication by providing everyone with a secure ID. It’s the government’s responsibility to ensure that someone who connects to an online service is the right person. All was built on the public key-private key encryption system. In Estonia, digital ID is a legal signature.The issue of secure ID is essential, otherwise we’ll end-up stealing from ourselves. Big brother is not the State, Big Brother lies in Big Data.”

“In Estonia, every citizen owns his or her data and has full access to it. We currently have about 350 major services securely accessible online. A patient, never gets a paper prescription; the doctor will load the prescription in a the card and the patient can go to any pharmacy. The system will soon be extended to Sweden, Denmark, Finland, Norway, as our citizens travel a lot. In addition, everyone can access their medical records. But they can chose what doctor will see them. I was actually quite surprised when a head of State from Southern Europe told me some paper medical records bear the mention “not to be shown to the patient” [I suspect it was France...]. As for privacy protection, the ID chip-card works both ways. If a policeman wants to check on your boyfriend outside the boundaries of a legal investigation, the system will flag it — it actually happened.” 

As the Estonian president explained, some good decisions also come out of pure serendipity,:

“[In the Nineties], Estonia had the will but not all the financial resources to build all the infrastructure it wanted, such as massive centralized data centers. Instead, the choice was to interconnect in the most secure way all the existing government databases. The result has been a highly decentralized network of government servers that prevent most abuses. Again, the citizen can access his health records, his tax records, the DMV [Department of Motor Vehicles], but none of the respective employees can connect to another database”.

The former Soviet Union had the small Baltic state pay the hard price for its freedom. In that respect, I recommend reading CyberWar by Richard Clarke, a former cyber-security advisor in the Clinton administration, who describes multiple cyber-attacks suffered by Estonia in 2007. These actually helped the country develop skillful specialists in that field. Since 2008, Tallinn harbors NATO’s cyber defense main center in addition to a EU large-scale IT systems center.

Toomas Hendrik Ilves stressed the importance of cyber-defense, both at the public and private sector level:

“Vulnerability to a cyber attacks must be seen as a complete market failure. It is completely unacceptable for a credit card company to deduct theft from its revenue base, or for a water supply company to invoke cyber attack as a force majeure. It is their responsibility to protect their systems and their customers. (…) Every company should be aware of this, otherwise we’ll see all our intellectual property ending up in China”. 

–frederic.filloux@mondaynote.com

Yahoo: The Marissa Mayer Turnaround

 

Critics spew well-meaning generalities when criticizing Marissa Mayer’s first moves at Yahoo! They fail to see the urgency of the company’s turnaround situation, the need to refocus the workforce and spruce up the management.

Last July, Yahoo! elected a new CEO, their seventh or eight, I’ve lost count. Marissa Mayer is an ex-Google exec with a BS in symbolics systems and an MS in Computer Science from Stanford, just like Scott Forstall. After a 13-year career at the biggest Cloud company on Earth, Mayer brings relevant experience to the CEO position of the once-great Web company. She also happens to be female but, unlike a predecessor of the same gender, Mayer doesn’t appear to feel the need to assert power by swearing like a sailor.

Power she asserts nonetheless. Barely pausing to deliver her first child, Mayer set to work: Yahoo! apps were too many, she vowed to cut them from 60 to the dozen or so that support our “digital daily habit“. Hiring standards have been seriously upgraded, the CEO wants to review every candidate to weed out “C-list slackers“. People were shown the door, starting in the executive suite. Some were replaced by ex-Google comrades such as her newly-appointed COO, Henrique De Castro.

The changes have been met with intramural criticism, from charges of Google cronyism to moaning over her meddling with the hiring process (“Yahoo’s Mayer gets internal flak for more rigorous hiring“). The complainers might as well get used to it: Mayer knows who she’s competing against, she wants to win, and that means Yahoo! needs to attract Valley-class talent. If she can pull them from Google, even better. The insiders who complain to the media only advertise their fear — a bad idea — and unwittingly make the case for Mayer’s higher standards.

The new sheriff is a high-intensity person. Friends tell me she also reviews new apps in great detail, down to color choices. (Didn’t another successful leader so annoy people?)

The protests over Mayer’s hiring practices and (supposed) micromanagement are nothing compared to the howls of pain over Mayer’s most controversial decision: No more Working From Home.

The prohibition is an affront to accepted beliefs about white-collar productivity, work/life balance, working mothers, sending less CO2 into the atmosphere. Does Mayer oppose a balanced life and a greener planet?

No, presumably — but reality intrudes. Once the king of the Web, Yahoo! stood by and watched as Google and Facebook seduced their users and advertisers. In 2008, in an effort to bolster its flagging on-line fortunes, Microsoft offered more than $44B to acquire Yahoo. The Board nixed the deal and Yahoo! kept sinking. Right before Mayer took the helm in July 2012, Yahoo’s market cap hovered around $16B, a decline of more than 60%.

The niceties of peacetime prosperity had to go. Unlike her “explicit” predecessor, Mayer doesn’t stoop to lash out at the protesters but one can imagine what she thinks: “Shut up, you whiners. This is a turnaround, not a Baja California cruise!”

In the Valley, WFH has long been controversial. In spite of its undeniable benefits, too-frequent abuses led to WFH becoming a euphemism for goofing off, or for starting a software business on one’s employer’s dime, an honored tradition.

Telecommuting requires a secure VPN (Virtual Private Network) connection from your computer at home to the company’s servers. These systems keep a traffic log, a record of who connects, from what IP address, when, for how long, how much data, and so on. Now, picture a CEO from the Google tradition of data analysis. She looks at the VPN logs and sees too much “comfort”, to be polite.

Mayer did what leaders do: She made a decision that made some people unhappy in order to achieve success for the whole enterprise (toned-up employees and shareholders). After seeing Yahoo! lose altitude year after year, the criticism leveled at Mayer makes me optimistic about the company’s future: Mayer’s treatment hurts where it needs to.

Among the many critics of Mayer’s no-WHF decision, the one I find most puzzling — or is it embarrassing? — emanates from the prestigious Wharton School of Business (at the University of Pennsylvania). In a Knowledge@Wharton article, scholars make sage but irrelevant comments such as:

Wharton faculty members who specialize in issues pertaining to employee productivity and work/life balance were similarly surprised by Mayer’s all-encompassing policy change. “Our experience in this field is that one-size-fits-all policies just don’t work,” notes Stewart Friedman, Wharton practice professor of management and director of the school’s Work/Life Integration Project. “You want to have as many tools as possible available to you as an executive to be able to tailor the work to the demands of the task. The fewer tools you have available, the harder it is to solve the problem.”

Nowhere in the article do the Wharton scholars consider the urgency of Yahoo’s situation, nor do they speculate that perhaps Mayer didn’t like what she found in the VPN logs. And, speaking of numbers, the Wharton experts provide no numbers, no sample size, no control group to buttress their statements. Our well-meaning academics might want to take a look at a recent blog post by Scott Adams, the prolific creator of corpocrat-skewering Dilbert cartoons. Titled Management/Success/Leadership: Mostly Bullshit, the post vigorously delivers what the title promises, as in this paragraph:

The fields of management/success/leadership are a lot like the finance industry in the sense that much of it is based on confusing correlation and chance with causation. We humans like to feel as if we understand and control our environments. We don’t like to think of ourselves as helpless leaves blowing in the wind of chance. So we clutch at any ridiculous explanation of how things work. 

Or this one, closer to today’s topic [emphasis mine]:

I first noticed the questionable claims of management experts back in the nineties, when it was fashionable to explain a company’s success by its generous employee benefits. The quaint idea of the time was that treating employees like kings and queens would free their creative energies to create massive profits. The boring reality is that companies that are successful have the resources to be generous to employees and so they do. The best way a CEO can justify an obscene pay package is by treating employees generously. To put this in another way, have you ever seen a corporate turnaround that was caused primarily by improving employee benefits?

Tony Hsieh, the founder and CEO of on-line shoe store Zappos, isn’t a blogger, cartoonist, or academic theoretician; he leads a very successful company that’s admired for its customer-oriented practices (culture, if you will). In this Business Insider piece, titled Here’s Why I Don’t Want My Employees To Work From Home, Hsieh is unequivocal about the value of Working From Work [emphasis mine]:

Research has shown that companies with strong cultures outperform those without in the long-term financially. So we’re big, big believers in building strong company cultures. And I think that’s hard to do remotely.

We don’t really telecommute at Zappos. We want employees to be interacting with each other, building those personal relationships and relationships outside of work as well.

What we found is when they have those personal connections that productivity increases because there’s higher levels of trust. Employees are willing to do favors for each other because they’re not just co-workers, but also friends, and communication is better. So we’re big believers in in-person interactions.

Who in good conscience believes that Mayer’s edict is absolute and permanent? You have a sick child at home, will you be granted the permission to work from home for a few days? Of course. Or, you’re an asocial but genius coder, will you be allowed to code at home from 10 pm to 7 am? Again, yes. Mayer saw it done, with good results, at her previous company.

With Mayer’s guidance, the patient has been stabilized and is on the road to recovery. But where does that road lead to? What does Yahoo! want to be now that it’s starting to act like a grownup? A better portal, a place to which we gravitate because, as an insider says, we’ll find more relevant fodder — without relying on “friends”? This would be a return to Yahoo’s original mission, one of cataloguing the Web, only with better technology and taste than Facebook, Google, AOL or even Microsoft’s Bing (Yahoo’s supplier of search data).

This leads to the $$ question, to Yahoo’s business model: advertising or services? With Google and now Facebook dominating the advertising space, how much room is left?

We hear Mayer is focusing Yahoo! on mobile applications. This sounds reasonable… but isn’t everyone?

In the search for a renewed identity (and profits), the question of alliances comes up. Who’s my enemy, my enemy’s enemy, irreplaceable partner/supplier, natural complement? In this regard, the Microsoft question will undoubtedly pop up again. I doubt Mayer has the utmost regard for Microsoft or for its CEO’s bullying style, but can she live without Bing? Is there an alternative? Also, what, if anything, could a healthier Yahoo! offer to Facebook or Apple?

The fun is just starting.

JLG@mondaynote.com

Data in the driver’s seat

 

Autonomous vehicles — fully or partially — will rely on a large variety of data types. And guess who is best positioned to take advantage of this enormous new business? Yep, Google is. 

The Google driveless car is an extraordinary technical achievement. To grasp the its scope, watch this video featuring a near-blind man sitting behind the wheel of an autonomous Prius as the car does the driving. Or, to get an idea of the complexity of the system, see this presentation by Sebastian Thrun (one of the main architects of Google’s self-driving car project) going through the multiple systems running inside the car.

Spectacular as it is, this public demonstration is merely the tip of the iceberg. For Google, the economics of self-driving cars lie in a vast web of data that will become a must to operate partially or fully self-driving vehicles on a massive scale. This network of data will require immense computational and storage capabilities. Consider the following needs in the context of Google’s current position in related fields.

Maps. Since the acquisition of Where2 Technologies and Keyhole Inc. in 2004, Google has been refining its mapping system over and over again (see this brief history of Google Maps). After a decade of work, Google Maps feature a rich set of layers and functions. Their mapping of the world has been supplemented by crowdsourcing systems that allow corrections as well as the creation of city maps where data do not exist. Street View has been launched in 2007 and more than 5 million miles of metropolitan area have been covered. Today, maps are augmented with satellite imagery, 3D, 45-degree aerial views, buildings and infrastructure renderings. All this is now merged, you can plunge from a satellite view to the street level.

Google’s goal is building the most complete an reliable map system in the world. Gradually, the company replaces geo-data from third party suppliers with data collected by its own crews around the world. To get an idea of how fast Google progresses, consider the following: In 2008, Google mapping covered 22 countries and offered 13 million miles with driving directions. In 2012, 187 countries where covered, 26 million miles with driving directions, including 29 countries with turn-by-turn directions. On the chart below, you can also see the growing areas of Google-sourced maps (in green) as opposed to licensed data (in red):

Apple’s failure in maps shows that, regardless of the amount of money invested, experience remains a key element. In California and India, Google maintains a staff of hundreds if not thousands of people manually checking key spots in large metropolitan areas and correcting errors. They rely on users whose individual suggestions are manually checked, using Street View imagery as shown here (the operator drags the 360° Street View image to verify signs at an intersection — click to enlarge.)

Google’s engineers even developed algorithms aimed at correcting slight misalignments between “tiles” (pieces of satellite imagery stitched together) that could result from… tectonic plates movement — it could happen when two pictures are taken two years apart. Such accuracy is not a prerequisite for current navigation, but it could be important for autonomous cars that will depend heavily on ultra-precise (think what centimers/inches mean when cars are close on the road) mapping of streets and infrastructures.

But, one might object, Google is not the only company providing geo-data and great mapping services. True: The Dutch company Tom-tom, or the Chicago-based Navteq have been doing this for years. As geo-data became strategically important, Tom-tom acquired TeleAtlas for $2.9bn in 2008, and Nokia bought Navteq in 2007. But Google intends to move one step ahead by merging its mapping and imagery technologies with its search capabilities. Like in this image:

Accurate, usable and data-rich maps are one thing. Now, when you consider the variety of data needed for autonomous or semi-autonomous vehicles, the task becomes even more enormous. The list goes on:

Traffic conditions will be a key element. It’s pointless to envision fleets of self-driving, or assisted-driving cars without systems to manage traffic. These goes along with infrastructure development. For instance, as  Dr. Kara Kockelman, professor of transportation engineering at the University of Texas at Austin explained to me, in the future, we might see substantial infrastructure renovation aimed at accommodating autonomous vehicles (or vehicles set on self-driving mode). Dedicated highway corridors would be allocated to “platoons” of cars driving close together, in a faster and safer way, than manned cars. Intersections, she said, are also a key challenge as they are responsible for most traffic jams (and a quarter of accidents). With the advent of autonomous vehicles, we can see cars taken over by intersection management systems that will regroup them in platoons and feed them seamlessly in intersecting traffic flows, like in this spectacular simulation. If traffic lights are still needed, they will change every five or six seconds just to optimize the flow.

Applied to millions of vehicles, traffic and infrastructure management will turn into a gigantic data and communication problem. Again, Google might be the only entity able to write the required software and to deploy the data centers to run it. Its millions of servers will be of great use to handle weather information, road conditions (as cars might be able to monitor their actual friction on the road and transmit the data to following vehicles, or detect humidity and temperature change), parking data and fuel availability (gas or electricity). And we can even think of merging all this with day-to-day life elements such as individual calendars, commuting patterns and geolocating people through their cell phones.

If the data collection and crunching tasks can conceivably be handled by a Google-like player, communications remain an issue. “There is not enough overlap between car-to-car communication and in other fields”, Sven Beiker, director Center for Automotive Research  (CARS) at Stanford told me (see his recent lecture about The Future if the Car). He is actually echoing executives from Audi (who made a strategic deal with Google), BMW and Ford; together at the Mobile World Congress, they were critical of cell phone carriers’ inability to provide the right 4G (LTE) infrastructure to handle the amount of data required by future vehicles.

Finally, there is the question of an operating system for cars. Experts are divided. Sven Beiker believes the development of self-driving vehicles will depend more on communication protocols than on an OS per se. Others believe that Google, with its fleet of self-driving Priuses criss-crossing California, is building the first OS dedicated to autonomous vehicles. At some point, the search giant could combine its mapping, imagery and local search capabilities with the accumulation of countless self-driven miles, along with scores of specific situations “learned” by the cars’ software. The value thus created would be huge, giving Google a decisive position in yet another field. The search company could become the main provider of both systems and data for autonomous or semi autonomous cars.

frederic.filloux@mondaynote.com

Linking: Scraping vs. Copyright

 

Irish newspapers created quite a stir when they demanded a fee for incoming links to their content. Actually, this is a mere prelude to a much more crucial debate on copyrights,  robotic scraping and subsequent synthetic content re-creation from scraps. 

The controversy erupted on December 30th, when an attorney from the Irish law firm McGarr Solicitors exposed the case of one of its client, the Women’s Aid organization, being asked to pay a fee to Irish newspapers for each link they send to them. The main quote from McGarr’s post:

They wrote to Women’s Aid, (amongst others) who became our clients when they received letters, emails and phone calls asserting that they needed to buy a licence because they had linked to articles in newspapers carrying positive stories about their fundraising efforts.
These are the prices for linking they were supplied with:

1 – 5 €300.00
6 – 10 €500.00
11 – 15 €700.00
16 – 25 €950.00
26 – 50 €1,350.00
50 + Negotiable

They were quite clear in their demands. They told Women’s Aid “a licence is required to link directly to an online article even without uploading any of the content directly onto your own website.”

Recap: The Newspapers’ agent demanded an annual payment from a women’s domestic violence charity because they said they owned copyright in a link to the newspapers’ public website.

Needless to say, the twittersphere, the blogosphere and, by and large, every self-proclaimed cyber moral authority, reacted in anger to Irish newspapers’ demands that go against common sense as well as against the most basic business judgement.

But on closer examination, the Irish dead tree media (soon to be dead for good if they stay on that path) is just the tip of the iceberg for an industry facing issues that go well beyond its reluctance to the culture of web links.

Try googling the following French legalese: “A défaut d’autorisation, un tel lien pourra être considéré comme constitutif du délit de contrefaçon”. (It means any unauthorized incoming link to a site will be seen as a copyright infringement.) This search get dozens of responses. OK, most come from large consumers brands (carmakers, food industry, cosmetics) who don’t want a link attached to an unflattering term sending the reader to their product description… Imagine lemon linked to a car brand.

Until recently, you couldn’t find many media companies invoking such a no-link policy. Only large TV networks such as TF1 or M6 warn that any incoming link is subject to a written approval.

In reality, except for obvious libel, no-links policies are rarely enforced. M6 Television even lost a court case against a third party website that was deep-linking to its catch-up programs. As for the Irish newspapers, despite their dumb rate card for links, they claimed to be open to “arrangements” (in the ill-chosen case of a non-profit organization fighting violence against women, flexibility sounds like a good idea.)

Having said that, such posture reflects a key fact: Traditional media, newspapers or broadcast media, send contradictory messages when it comes to links that are simply not part of their original culture.

The position paper of the National Newspapers of Ireland association’s deserves a closer look (PDF here). It actually contains a set of concepts that resonate with the position defended by the European press in its current dispute with Google (see background story in the NYTimes); here are a few:

– It is the view of NNI that a link to copyright material does constitute infringement of copyright, and would be so found by the Courts.
– [NNI then refers to a decision of the UK court of Appeal in a case involving Meltwater Holding BV, a company specialized in media monitoring], that upheld the findings of the High Court which findings included:
- that headlines are capable of being independent literary works and so copying just a headline can infringe copyright
- that text extracts (headline plus opening sentence plus “hit” sentence) can be substantial enough to benefit from copyright protection
- that an end user client who receives a paid for monitoring report of search results (incorporating a headline, text extract and/or link, is very likely to infringe copyright unless they have a licence from the
Newspaper Licencing Agency or directly from a publisher.
– NNI proposes that, in fact, any amendment to the existing copyright legislation with regard to deep-linking should specifically provide that deep-linking to content protected by copyright without respect for  the linked website’s terms and conditions of use and without regard for the publisher’s legitimate commercial interest in protecting its own copyright is unlawful.

Let’s face it, most publishers I know would not disagree with the basis of such statements. In the many jurisdictions where a journalist’s most mundane work is protected by copyright laws, what can be seen as acceptable in terms of linking policy?

The answer seems to revolve around matters of purpose and volume.

To put it another way, if a link serves as a kind of helper or reference, publishers will likely tolerate it. (In due fairness, NNI explicitly “accepts that linking for personal use is a part of how individuals communicate online and has no issue with that” — even if the notion of “personal use” is pretty vague.) Now, if the purpose is commercial and if linking is aimed at generating traffic, NNI raises the red flag (even though legal grounds are rather brittle.) Hence the particular Google case that also carries a notion of volume as the search engine claims to harvest thousands of sources for its Google News service.

There is a catch. The case raised by NNI and its putative followers is weakened by a major contradiction: everywhere, Ireland included, news websites invest a great deal of resources in order to achieve the highest possible rank in Google News. Unless specific laws are voted (German lawmakers are working on such a bill), attorneys will have hard time invoking copyright infringements that in fact stem for the very Search Engine Optimization tactics publishers encourage.

But there might be more at stake. For news organizations, the future carries obvious threats that require urgent consideration: In coming years, we’ll see great progress — so to speak — in automated content production systems. With or without link permissions, algorithmic content generators will be able (in fact: are) to scrap sites’original articles, aggregate and reprocess those into seemingly original content, without any mention, quotation, links, or reference of any kind. What awaits the news industry is much more complex than dealing with links from an aggregator.

It boils down to this: The legal debate on linking as copyright infringement will soon be obsolete. The real question will emerge as a much more complex one: Should a news site protect itself from being “read”  by a robot? The consequences for doing so are stark: except for a small cohort of loyal readers, the site would purely and simply vanish from cyberspace… Conversely, by staying open to searches, the site exposes itself to forms of automated and stealthy depletion that will be virtually impossible to combat. Is the situation binary — allowing “bots” or not — or is there middle ground? That’s a fascinating playground for lawyers and techies, for parsers of words and bits.

frederic.filloux@mondaynote.com

Google’s looming hegemony

 

If we factor Google geospatial applications + its unique data processing infrastructure + Android tracking, etc., we’re seeing the potential for absolute power over the economy. 

Large utility companies worry about Google. Why? Unlike those who mock Google for being a “one-trick pony”, with 99% of its revenue coming from Adwords, they connect the dots. Right before our eyes, the search giant is weaving a web of services and applications aimed at collecting more and more data about everyone and every activity. This accumulation of exabytes (and the ability to process such almost unconceivable volumes) is bound to impact sectors ranging from power generation, transportation, and telecommunications.

Consider the following trends. At every level, Western countries are crumbling under their debt load. Nations, states, counties, municipalities become unable to support the investment necessary to modernize — sometimes even to maintain — critical infrastructures. Globally, tax-raising capabilities are diminishing.

In a report about infrastructure in 2030 (500 pages PDF here), the OECD makes the following predictions (emphasis mine):

Through to 2030, annual infrastructure investment requirements for electricity, road and rail transport, telecommunications and water are likely to average around 3.5% of world gross domestic product (GDP).

For OECD countries as a whole, investment requirements in electricity transmission and distribution are expected to more than double through to 2025/30, in road construction almost to double, and to increase by almost 50% in the water supply and treatment sector. (…)

At present, governments are not well placed to meet these growing, increasingly complex challenges. The traditional sources of finance, i.e. government budgets, will come under significant pressure over the coming decades in most OECD countries – due to aging populations, growing demands for social expenditures, security, etc. – and so too will their financing through general and local taxation, as electorates become increasingly reluctant to pay higher taxes.

What’s the solution? The private sector will play a growing role through Public-Private-Partneships (PPPs). In these arrangements, a private company (or, more likely, a consortium of such) builds a bridge, a motorway, a railroad for a city, region or state, at no expense to the taxpayer. It will then reimburse itself from the project’s cash-flow. Examples abound. In France the elegant €320m ($413m) viaduct of Millau was built — and financed — by Eiffage, a €14 billion revenue construction group. In exchange for financing the viaduct, Eiffage was granted a 78-year toll concession with an expected internal rate of return ranging from 9.2% 17.3%. Across the world, a growing number of projects are built using this type of mechanism.

How can a company commit hundreds of millions of euros, dollars, pounds with an acceptable level of risk over several decades? The answer lies in data-analysis and predictive models. Companies engineer credible cash-flow projections using reams of data on operations, usages patterns and components life cycles.

What does all this have to do with Google?

Take a transportation company building and managing networks of buses, subways or commuter trains in large metropolitan areas. Over the years, tickets or passes analysis will yield tons of data on customer flows, timings, train loads, etc. This is of the essence when assessing the market’s potential for a new project.

Now consider how Google aggregates the data it collects today — and what it will collect in the future. It’s a known fact that cellphones send back to Mountain View (or Cupertino) geolocalization data. Bouncing from one cell tower to another, catching the signal of a geolocalized wifi transmitter, even if the GPS function is turned off, Android phone users are likely to be tracked in realtime. Bring this (compounded and anonymized) dataset on information-rich maps, including indoor ones, and you will get very high definition of profiles for who goes or stays where, anytime.

Let’s push it a bit further. Imagine a big city such as London, operating 500,000 security cameras, which represent the bulk of the 1.85 million CCTVs deployed in the UK — one for every 32 citizens. 20,000 of them are in the subway system. The London Tube is the perfect candidate for partial or total privatization as it bleeds money and screams for renovations. In fact, as several people working at the intersection of geo applications and big data project told me, Google would be well placed to provide the most helpful datasets. In addition to the circulation data coming from cellphones, Google would use facial recognition technology. As these algorithms are already able to differentiate a woman from a man, they will soon be able to identify (anonymously) ethnicities, ages, etc. Am I exaggerating ? Probably not. Mercedes-Benz already has a database of 1.5 million visual representations of pedestrians to be fed into the software of its future self-driving cars. This is a type of applications in which, by the way, Google possesses a strong lead with its fleets of driverless Prius crisscrossing Northern California and Nevada.

Coming back to the London Tube and its unhappy travelers, we have traffic data, to some degree broken down into demographics clusters; why not then add shopping data (also geo-tagged) derived from search and ads patterns, Street View-related informations… Why not also supplement all of the above with smart electrical grid analysis that could refine predictive models even further (every fraction of percentage points counts…)

The value of such models is much greater than the sum of their parts. While public transportation operators or utility companies are already good at collecting and analyzing their own data, Google will soon be in the best position to provide powerful predictive models that aggregate and connect many layers of information. In addition, its unparalleled infrastructure and proprietary algorithms provide a unique ability to process these ever-growing datasets. That’s why many large companies over the world are concerned about Google’s ability to soon insert itself into their business.

frederic.filloux@mondaynote.com

 

Schibsted’s extraordinary click machines

 

The Nordic media giant wants to be the #1 worldwide of online classifieds by replicating its high-margin business one market after another, with great discipline. 

It all starts in 2005 with a Power Point presentation in Paris. At the time, Schibsted ASA, the Norwegian media group, is busy deploying its free newspapers in Switzerland, France and Spain. Schibsted wants its French partner Ouest-France — the largest regional newspapers group — to co-invest in a weird concept: free online classifieds. As always with the Scandinavian, the deck of slides is built around a small number of key points. To them, three symptoms attest to the maturity of a market’s online classified business:  (a) The number one player in the field ranks systematically among the top 10 web sites, regardless of the category; (b) it is always much bigger than the number two; (c) it reaps most of the profits in the sector. “Look at the situation here in France”, the Norwegians say, “the first classifieds site ranks far down in Nielsen rankings. The market is up for grabs, and we intend to get it”. The Oslo and Stockholm executives already had an impressive track record: in 2000, they launched Finn.no in Norway and, in 2003, they acquired Blocket.se in Sweden. Both became incredible cash machines for the group, with margins above 50% and unabated growth. Ouest-France eventually agreed to invest 50% in the new venture. In november 2010, they sold their stake back to Schibsted at a €400m valuation. (As we’ll see in a moment, the classified site Le Bon Coin is now worth more than twice that number.)

November 2012. I’m sitting in the office of Olivier Aizac, CEO of Le Bon Coin, the French iteration of Schibsted’s free classifieds concept. The office space is dense and scattered over several floors in a building near the Paris Bourse. Since my last 2009 visit (see a previous Monday Note Learning from free classifieds), the startup grew from a staff of 15 to 150 people. And Aizac tells me he plans to hire 70 more staff in 2013. Crisis or not, the business is booming.

A few metrics: According to Nielsen, LeBonCoin.fr (French for The Right Spot) ranks #9 in France with 17m monthly unique users. With more than 6 billion page views per month, it even ranks #3, behind Facebook and Google. Revenue-wise, Le Bon Coin might hit the €100m mark this year, with a profit margin slightly above… 70%. Fort the 3rd quarter of this year, the business grew by 50% vs. a year ago.

In terms of competition it dominates every segment: cars, real estate (twice the size of Axel Springer’s SeLoger.com) and jobs with about 60,000 classifieds, roughly five times the inventory of a good paid-for job board (LeBonCoin is not positioned in the upper segment, though, it mostly targets regional small to medium businesses).

Le Bon Coin’s revenue stream is made of three parts: premium services (you pay to add a picture, a better ranking, tracking on your ad); fees coming from the growing number professionals who flock to LBC (many car dealerships put their entire inventory here); and advertising for which the primary sectors are banking and insurance, services such as mobile phone carriers or pay-TV, and automobile. Although details are scarce, LBC seems to have given up the usual banner sales, focusing instead on segmented yearly deals: A brand will target a specific demographic and LBC will deliver, for half a million or a million euros per annum.

One preconceived idea depicts Le Bon Coin as sitting at the cheaper end of the consumer market. Wrong. In the car segment, its most active advertiser is Audi for whom LBC provides tailored-made promotions. (Strangely enough Renault is much slower to catch the wave.) “We are able to serve any type of market”, says Olivier Aizac who shows an ad peddling a €1.4m Bugatti, and another for the brand new low-cost Peugeot 301, not yet available in dealerships but offered on LBC for €15,000. Similarly, LBC is the place to go to rent a villa on the Cote d’Azur or a chalet for the ski season. With more than 21 millions ads at any given moment, you can find pretty much anything there.

Now, let’s zoom out and look at a broader picture. How far can Le Bon Coin go? And how will its cluster of free classifieds impact Schibsted’s future?

Today, free online classifieds weigh about 25% of Schibsted revenue (about 15bn Norwegian Kroner, €2bn this year), but it it accounts for 47% of the group’s Ebitda (2.15bn NOK, €300m). All online activities now represent 39% of the revenue and 62% of the Ebitda.

The whole strategy can be summed up in these two charts: The first shows the global deployment of the free classifieds business (click ton enlarge):

Through acquisitions, joint ventures or ex nihilo creations, Schibsted now operates more than 20 franchises. Their development process is highly standardized. Growth phases have been codified in great detail, managers often gather to compare notes and the Oslo mothership watches everything, providing KPIs, guidelines, etc. The result is this second chart showing the spread of deployment phases. More than half of the portfolio still is in infancy, but most likely to follow the path to success:

Source: Schibsted Financial Statements

This global vision combined to what is seen as near-perfect execution explains why the financial community is betting so much on Schibsted’s classified business.

When assessing the potential of each local brand, analysts project the performances of the best and mature properties (the Nordic ones) onto the new ones. As an example, see below the number of visits per capita and per month from web and mobile since product launch:

Source : Dankse Market Equities

For Le Bon Coin’s future, this draws a glowing picture: according to Danske Market Equities, today, the Norwegian Finn.no generates ten times more revenue per page view than LBC, and twenty times more when measured by Average revenue per user (ARPU). The investment firm believes that Le Bon Coin’s revenue can reach €500m in 2015, and retain a 65% margin. (As noted by its CEO, Le Bon Coin has yet to tap into its trove of data accumulated over the last six years, which could generate highly valuable consumer profiling information).

When translated into valuation projections, the performance of Schibsted classifieds businesses far exceed the weight of traditional media properties (print and online newspapers). The sum-of-the-parts valuations drawn by several private equities firms show the value of the classifieds business yielding more than 80% of the total value of this 173 year-old group.

frederic.filloux@mondaynote.com
Disclosure: I worked for Schibsted for nine years altogether between 2001 and 2010; six years indirectly as the editor of 20 minutes and three years afterwards, in a business development unit attached to the international division.
——- 

It’s the Competitive Spirit, Stupid

 

Legacy media suffer from a deadly DNA mutation: they’ve lost  their appetite for competition; they no longer have the will to fight the hordes of new, hungry mutants emerging from the digital world. 

For this week’s column, my initial idea was to write about Obama’s high tech campaign. As in 2008, his digital team once again raised the bar on the use of data mining, micro-targeting, behavioral analysis, etc. As Barack Obama’s strategist David Axelrod suggested just a year ago in Bloomberg BusinessWeek, compared to what they were working on, the 2008 campaign technology looked prehistoric. Without a doubt, mastering the most sophisticated practices played a crucial role in Obama’s November 6th victory.

As I researched the subject, I decided against writing about it. This early after the election, it would have been difficult to produce more than a mere update to my August 2008 story, Learning from the Obama Internet Machine. But, OK. For those of you interested in the matter, here are a couple of resources I found this week: An interesting book by Sasha Issenberg, The Victory Lab, The Secret Science of  Winning Campaigns, definitely worth a read; or previously unknown tidbits in this Stanford lecture by Dan Siroker, an engineer who left Google to join the Obama campaign in 2008. (You can also feast on a Google search with terms like “obama campaign + data mining + microtargeting”.)

I switched subjects because something jumped at me: the contrast between a modern election campaign and the way traditional media cover it. If it could be summed up in a simplistic (and, sorry, too obvious) graph, it would look like this :

The 2012 Election campaign carries all the ingredients of the fiercest of competitions: concentrated in a short time span; fueled by incredible amounts of cash (thus able to get the best talent and technology money can buy); a workforce that is, by construction, the most motivated any manager can dream of, a dedicated staff led by charismatic stars of the trade; a binary outcome with a precise date and time (first Tuesday of November, every four years.) As if this was not enough, the two camps actually compete for a relatively small part of the electorate, the single digit percentage that will swing one way or the other.

At the other end of the spectrum, you have traditional media. Without falling into caricature, we can settle for the following descriptors: a significant pool of (aging) talent; a great sense of entitlement; a remote connection with the underlying economics of the business; a remarkably tolerance for mediocrity (unlike, say, pilots, or neurosurgeons); and, stemming from said tolerance, a symmetrical no-reward policy — perpetuated by unions and guilds that planted their nails in the media’s coffin.

My point: This low level of competitive metabolism has had a direct and negative impact on the economic performance of legacy media.

In countries, regions, or segments where newsrooms compete the most on a daily basis (on digital or print), business is doing just fine.

That is the case in Scandinavia which enjoys good and assertive journalism, with every media trying to beat the other in every possible way: investigation, access to sources, creative treatment, real-time coverage, innovations in digital platforms… The UK press is also intensively competitive — sometimes for the worse as shown in the News Corp phone hacking scandal. To some extent, German, Italian, Spanish media are also fighting for the news.

At the other end of the spectrum, the French press mostly gave up competing. The market is more or less distributed on the basis readers’ inclinations. The biggest difference manifests itself when a source decides to favor one media against the others. Reminding someone of the importance of competing, of sometimes taking a piece of news from someone else’s plate tends to be seen as ill-mannered, not done. The result is an accelerating drop in newspapers sales. Strangely enough, Nordic media will cooperate without hesitation when it comes to sharing industrial resources such as printing plants and distribution channels while being at each other’s throat when it comes to news gathering. By contrast, the French will fight over printing resources, but will cooperate when it’s time to get subsidies from the government or to fight Google.

Digital players do not suffer from such a cumbersome legacy. Building organizations from scratch, they hired younger staff and set up highly motivated newsrooms. Pure players such as Politico, Business Insider, TechCrunch and plenty of others are fighting in their beat, sometimes against smaller but sharper blogs. Their journalistic performance (although uneven) translates into measurable audience bursts that turn into advertising revenues.

Financial news also fall into that same category. Bloomberg, DowJones and Reuters are fighting for their market-mover status as well for the quality — and usefulness — of their reporting; subscriptions to their service depends on such performance. Hence the emergence of a “quantifiable motivation” for the staff. At Bloomberg — one of the most aggressive news machine in the world — reporters are provided financial incentives for their general performance and rewarded for exclusive information. Salaries and bonuses are high, so is the workload. But CVs are pouring in — a meaningful indicator.

Digital newsrooms are much more inclined to performance measurements than old ones. This should be seen as an advantage. As gross as it might sound to many journalists, media should seize the opportunity that comes with modernizing their publishing tools to revise their compensation policies. The main index should be “Are we doing better than the competition? Does X or Y contribute to our competitive edge?”. Aside from the editor’s judgement, new metrics will help. Ranking in search engines and aggregators; tweets, Facebook Likes; appearances on TV or radio shows; syndication (i.e. paid-for republication elsewhere)… All are credible indicators. No one should be afraid to use them to reward talent and commitment.

It’s high time to reshuffle the nucleotides and splice in competitive DNA strands, they do contribute to economic performance.

frederic.filloux@mondaynote.com

 

Minding The (Apple)Store

 

As I’ve written many times in the past, I’m part of the vast chorus that praises the Apple Store. And not just for the uncluttered product displays, the no-pressure sales people (who aren’t on commission), or the Genius Bar that provides expert help, but for the impressive architecture. Apple beautifies existing venues (Regent Street in London, rue Halevy near the Paris Opera) or commissions elegant new buildings, huge ones at times.

It’s a relentlessly successful story. Even the turmoil surrounding John Browett’s abbreviated tenure as head of Apple’s worldwide retail organization hasn’t slowed the pace  of store openings and customer visits. (As always, Horace Dediu provides helpful statistics and analysis in his latest Asymco post.)

It has always struck me as odd that in Palo Alto, Apple’s heartland and Steve Jobs’ adopted hometown, Apple had only a modestly-sized, unremarkable venue on University Avenue, and an even smaller store in the Stanford Shopping Center.

All of that changed on October 27th when the black veil that shrouded an unmarked project was removed, and the newest Apple Store — what some are calling a “prototype” for future venues, a “flagship” store — was revealed. (For the civic-minded — or the insomniac — you can read the painfully detailed proposal, submitted to Palo Alto’s Architectural Review Board nearly three years ago, here.)

I came back from a trip on November 2nd, the day the iPad mini became available, and immediately headed downtown. The new store is big, bold, elegant, even more so at night when the very bright lights and large Apple logo on its front dominate the street scene. (So much so I heard someone venture that Apple has recast itself as the antagonist in its 1984 commercial.)

The store is impressive… but its also unpleasantly, almost unbearably noisy. And mine isn’t a voice in the wilderness. The wife of a friend walked in, spent a few minutes, and vowed to never return for fear of hearing loss. She’d rather go to the cramped but much more hospitable Stanford store.

A few days later, I heard a similar complaint from the spouse of an Apple employee. She used to enjoy accompanying her husband to the old Palo Alto store, but now refuses because of the cacophony.

‘Now you know the real reason for Browett’s firing’, a friend said, half-seriously. ‘How can you spend North of $15M on such a strategically placed, symbolic store, complete with Italian stone hand-picked by Jobs himself…and give no consideration to the acoustics? It’s bad for customers, it’s bad for the staff, it’s bad for business, and it’s bad for the brand. Apple appears to be more concerned with style than with substance!’

Ouch.

The sound problem stems from a combination of the elongated “Great Hall”, parallel walls, and reflective building materials. The visually striking glass roof becomes a veritable parabolic sound mirror. There isn’t a square inch of sound-absorbing material in the entire place.

A week later, I returned to the store armed with the SPL Meter iPhone app. As the name indicates, SPL Meter provides a Sound Pressure Level (SPL) measurement in decibels.(Decibels form a logarithmic scale where a 3 dB increase means roughly twice as much sound pressure — noise in our case; +10 dB is ten times the sound pressure.)

For reference, a normal conversation at 3 feet (1m) is 40 to 60 dB; a passenger car 30 feet away produces levels between 60 and 80 dB. From the Wikipedia article above: “[The] EPA-identified maximum to protect against hearing loss and other disruptive effects from noise, such as sleep disturbance, stress, learning detriment, etc. [is] 70 dB.”

On a relatively quiet Saturday evening, the noise level around the Genius Bar exceeded 75 dB:

Outside, the traffic noise registered a mere 65 dB. It was 10 db noisier inside the store than on always-busy University Avenue!

Even so, the store on that Friday was a virtual library compared to the day the iPad mini was launched, although I can’t quantify my impression: I didn’t have the presence of mind to whip out my iPhone and measure it.

Despite the (less-than-exacting) scientific evidence and the corroborating anecdotes, I began to have my doubts. Was I just “hearing things”? Could Apple really be this tone deaf?

Then I saw it: An SPL recorder — a professional one — perched on a tripod inside the store.

I also noticed two employees wearing omnidirectional sound recorders on their shoulders (thinking they might not like the exposure, I didn’t take their pictures.) Thus, it appears that Apple is taking the problem seriously.

But what can it do?

It’s a safe bet that Apple has already engaged a team of experts, acousticians who tweak the angles and surfaces in concert halls and problem venues. I’ve heard suggestions that Apple should install an Active Noise Control system: Cancel out sound waves by pumping in their inverted forms — all in real time. Unfortunately, this doesn’t work well (or at all) in a large space.

Bose produces a rather effective solution…in the controlled environment of headphones.

This prompted the spouse mentioned above to suggest that Apple should hand out Bose headphones at the door.

Two days after the noisy Apple store opened its doors, Browett was shown the exit. Either Tim Cook is fast on the draw or, more likely, my friend is wrong: Browett’s unceremonious departure had deeper roots, most likely a combination of a cultural mismatch and a misunderstanding of his role. The Browett graft didn’t take on the Apple rootstock, and the newly hired exec couldn’t accept that he was no longer a CEO.

Browett’s can’t be scapegoated for the acoustical nightmare in the new Apple Store. Did the rightly famous architectural firm, Bohlin Cywinski Jackson, not hear the problem? What about the highly reputable building contractor (DPR) which has built so many other Apple Stores? Did they stand by and say nothing, or could they simply not be heard?

Perhaps this was a case of “Launchpad Chicken”, a NASA phrase for a situation where many people see trouble looming but keep quiet and wait for someone else to bear the shame of aborting the launch. It reminds me of the Apple Maps fiasco: An obvious problem ignored.

What a waste spending all that money and raising expectations only to move from a slightly undersized but well-liked store to a bigger, noisier, colder environment that turns friends away.

Having tacitly admitted that there’s a problem, Apple’s senior management can now show they’ll stop at nothing to make the new store as inviting as it was intended to be.

JLG@mondaynote.com