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Twitter, Facebook and Apps Scams

Here is the latest Twitter scam I’ve heard this week. Consider two fictitious media, the Gazette and the Tribune operating on the same market, targeting the same demographics, competing fort the same online eyeballs (and the brains behind those). Our two online papers rely on four key traffic drivers:

  1. Their own editorial efforts, aimed at building the brand and establishing a trusted relationship with the readers. Essential but, by itself, insufficient to reach the critical mass needed to lure advertisers.
  2. Getting in bed with Google, with a two-strokes tactic: Search Engine Optimization (SEO), which helps climb to the top of search results page; and Search Engine Marketing (SEM), in which a brand buys keywords to position its ads in the best possible context.
  3. An audience acquisition strategy that will artificially grow page views as well as the unique visitors count. Some sites will aggregate audiences that are remotely related to their core product, but that will better dress them up for the advertising market (more on this in a forthcoming column).
  4. An intelligent use of social medias such Facebook, Twitter, LinkedIn and of the apps ecosystem as well.

Coming back to the Tribune vs. Gazette competition, let’s see how they deal with the latter item.

For both, Twitter is a reasonable source of audience, worth a few percentage points. More importantly, Twitter is a strong promotional vehicle. With 27,850 followers, the Tribune lags behind the Gazette and its 40,000 followers. Something must be done. The Tribune decides to work with a social media specialist. Over a couple of months, the firm gets to the Tribune to follow (in the Twitter sense) most of the individuals who already are Gazette followers. This mechanically translates into a “follow-back” effect powered by implicit flattery: ‘Wow, I’ve been spotted by the Tribune, I must have voice on some sort…’ In doing so, the Tribune will be able to vacuum up about a quarter or a third — that’s a credible rate of follow-back — of the Gazette followers. Later, the Tribune will “unfollow” the defectors to cover its tracks.

Compared to other more juvenile shenanigans, that’s a rather sophisticated scam. After all, in our example, one media is exploiting its competitor’s audience the way it would buy a database of prospects. It’s not ethical but it’s not illegal. And it’s effective: a significant part of the the followers so “converted” to the Tribune are likely stick to it as the two media do cover the same beat.

Sometimes, only size matters. Last December, the French blogger Cyroul (also a digital media consultant) uncovered a scam performed by Fred & Farid, one of the hippest advertising advertising agencies. In his post (in French) Cyroul explained how the ad agency got 5000 followers in a matter of five days. As in the previous example, the technique is based on the “mass following” technique but, this time, it has nothing to do with recruiting some form of “qualified” audience. Fred & Farid arranged to follow robots that, in turn, follow their account.  The result is a large number of new followers from Japan or China, all sharing the same characteristic: the ratio between following/followed is about one, which is, Cyroul say, the signature of bots-driven mass following. Pathetic indeed. His conclusion:

One day, your “influence” will be measured against real followers or fans as opposed to bots-induced accounts or artificial ones. Then, brands will weep as their fan pages will be worth nothing; ad agencies will cry as well when they realize that Twitter is worth nothing.

But wait, there are higher numbers on the crudeness scale: If you type “increase Facebook fans” in Google, you’ll get swamped with offers. Wading through the search results, I spotted one carrying a wide range of products: 10,000 views on YouTube for €189; 2000 Facebook “Likes” for €159; 10,000 followers on Twitter for €890, etc. You provide your URL, you pay on a secure server, it stays anonymous and the goods are delivered between 5 and 30 days.

The private sector is now allocating huge resources to fight the growing business of internet scams. Sometimes, it has to be done in a opaque way. One of the reasons why Google is not saying much about its ranking algorithm is — also — to prevent fraud.

As for Apple, its application ecosystem faces the same problem in. Over time, its ranking system became questionable as bots and download farms joined the fray. In a nutshell, as for the Facebook fans harvesting, the more you were willing to pay, the more notoriety you got thanks to inflated rankings and bogus reviews. Last week, Apple issued this warning to its developer community:

Adhering to Guidelines on Third-Party Marketing Services

Feb 6, 2012
Once you build a great app, you want everyone to know about it. However, when you promote your app, you should avoid using services that advertise or guarantee top placement in App Store charts. Even if you are not personally engaged in manipulating App Store chart rankings or user reviews, employing services that do so on your behalf may result in the loss of your Apple Developer Program membership.

Evidently, Apple has a reliability issue on how its half million apps are ranked and evaluated by users. Eventually, it could affect its business as the AppStore could become a bazaar in which the true value of a product gets lost in a quagmire of mediocre apps. This, by the way, is a push in favor of an Apple-curated guide described in the Monday Note by Jean-Louis (see Why Apple Should Follow Michelin). In the UK, several print publishers have detected the need for independent reviews; there, newsstands carry a dozen of app review magazines, not only covering Apple, but the Android market as well.

Obviously there is a market for that.

Because they depend heavily on advertising, preventing scams is critical for social networks such as Facebook or Twitter. In Facebook’s pre-IPO filing, I saw no mention of scams in the Risk Factors section, except in vaguest of terms. As for Twitter, all we know is the true audience is much smaller than the company says it is: Business Insider calculated that, out of the 175 million accounts claimed by Twitter, 90 million have zero followers.

For now, the system stills holds up. Brands remain convinced that their notoriety is directly tied to the number of fan/followers they claim — or their ad agency has been able to channel to them. But how truly efficient is this? How large is the proportion of bogus audiences? Today there appears to be no reliable metric to assess the value of a fan or a follower. And if there is, no one wants to know.

frederic.filloux@mondaynote.com

Strange Facebook Economics

Exactly three years ago, Charlie Rose interviewed Marc Andreessen, the creator of Netscape and Facebook board member. In his trademark rapid-fire talk, Marc shared his views on Facebook. (Keep the February 2009 context in mind: the social network had 175 million users and Microsoft had just made an investment setting Facebook’s valuation at $15 billion.)

About Mark Zuckerberg’s vision:

The big vision basically is — I mean the way I would articulate it is connect everybody on the planet, right? So I mean [there are] 175 million people on the thing now. Adding a huge number of users every day. 6 billion people on the planet. Probably 3 billion of them with modern electricity and maybe telephones. So maybe the total addressable market today is 3 billion people. 175 million to 3 billion is a big challenge. A big opportunity.

Indeed.
About monetization:

There’s a lot of confusion out there. Facebook is deliberately not taking the kind of normal brand advertising that a lot of Web sites will take. So you go to a company like Yahoo which is another fantastic business and they’ve got these banner ads and brand ads all over the place, Facebook has made a strategic decision not to take a lot of that business in favor of building its own sort of organic business model; and it’s still in the process of doing that and if they crack the code, which I think that thy will, then I think it will be very successful and will be very large. The fallback position is to just take normal advertising. And if Facebook just turned on the spigot for normal advertising today, it’d be doing over a billion dollars in revenue. So it’s much more a matter of long term (…)  It could sell out the homepage and it would start making just a gigantic amount of money. So there’s just tremendous potential and it’s just a question exactly how they choose to exploit it. What’s significant about that is that Mark [Zuckerberg] is very determined to build a long term company.

In another interview last year, commenting on Facebook’s generous cumulated funding ($1.3 billion as of January 2011), Andreessen said the whole amount actually was a shrewd investment as it translated into an acquisition cost of a “one or two dollars per user” ($1.53 to be precise), which sounded perfectly acceptable to him.

Now, take a look at last week’s pre-iPO filing: Marc Andreessen was right both in 2009 and in 2011.

Last year, each of the 845 million active members brought $4.39 in revenue and $1.18 in net income. Even better, based on the $3.9 billion in cash and marketable securities on FB’s balance sheet, each of these users generated a cosy cash input of $1.53 dollars.

How much is the market expected to value each user after the IPO? Based on the projected  $100 billion valuation, each Facebooker would carry a value of $118. Keep this number in mind.

How does it compare with other media and internet properties?

Take LinkedIn: The social network for professionals is fare less glamorous than Facebook, a fact reflected in its members’ valuation. Today, LinkedIn has about 145 millions users, for a $7.7 billion market cap; that’s a value of $57 per user, half a Facebooker. A bit strange considering LinkedIn demographics, in theory much more attractive than Facebook advertising wise. (See a detailed analysis here). Per user and per year, LindkedIn makes $3.5 in revenue and $0.78 in profit.

Let’s now switch to traditional medias. Some, like the New York Times, were put on “deathwatch” by Marc Andreessen three years ago.

Assessing the number of people who interact with NYT brands is quite difficult. For the company’s numerous websites, you have to deal with domestic and global reaches: 43 millions UVs for the Times globally, 60 millions for its guide site About.com, etc. Then, you must take into account print circulation for the NY Times and the Boston Globe, the numbers of readers per physical copy, audience overlaps between businesses, etc.

I’ll throw an approximate figure of 50 million people worldwide who, one way or the other, are in some form of regular contact with one of the NYT’s brands. Based on today’s $1.14 billion market cap, this yields a valuation of $23 per NYT customer, five times less than Facebook. That’s normal, many would say. Except for one fact: In 2011, each NYT customer brought $46 in revenue, almost ten times more than Facebook. As for the profit (a meager $56 million for the NYT), each customer brought a little more than a dollar.

I did the same math with various media companies operating in print, digital, broadcast and TV. Gannett Company, for instance, makes between $50 and $80 per year in revenue  per customer, and, depending on the way you count, the market values that customer at about $50.

Indeed, measured by trends (double digit growth), global reach and hype, Facebook or LinkedIn are flying high while traditional medias are struggling; when Facebook achieves a 47% profit margin, Gannett or News Corp are in the 10% range.

Still. If we pause at today’s snapshot, Facebook economics appear out of touch with reality: each customer brings then times less than legacy media, and the market values that customer up to five times more. And when News Corp gets a P/E of 17, Gannett a P/E of 8, Facebook is preparing to offer shares a multiple of 100 times its earnings and 25 times its revenue. Even by Silicon Valley ambitious standards, market expectation for Facebook seems excessive: Apple is worth 13 times its earnings and Google 20 times.

Facebook remains a stunning achievement: it combines long term vision, remarkable execution, and a ferociously focused founder. But, even with a potential of 3 billion internet-connected people in 2016 vs. 1.6 billion in 2010 (a Boston Consulting Group projection), it seems the market has put Facebook in a dangerous bubble of its own.

frederic.filloux@mondaynote.com

Facebook: The Revenge of the Nerds

We’ll look at the other side of the coin in a moment, but first let’s give credit where it’s due and admire the obverse: I’m delighted to see Facebook going public, just deserts for Mark Zuckerberg and his group of very smart techies.

If you have the time and inclination, take a walk through Facebook’s SEC S-1 filing in preparation for its IPO, you won’t regret it. Pay particular attention to the manifesto Zuckerberg calls The Hacker Way and allow this aging geek (I’ll soon be 28) to sing its praises. Consider this verse:

We have a saying: “Move fast and break things.” The idea is that if you never break anything, you’re probably not moving fast enough.

Where others have stumbled as they shuffled, Zuckerberg and his gang have raced to create a technical giant. The infrastructure required to support 845M “monthly active” users that upload 250M photos each day might not be Google-size (yet), but it’s definitely Google-class. To show off this plumbing, Zuckerberg & Co. took a few pages from Apple’s (and Google’s) stylebook: They stuck to a simple, clean UI, unlike Myspace and their pavement pizza chic.

Facebook’s success isn’t just a sweet retort to Zuckerberg’s critics, it’s a confirmation of what makes Silicon Valley tick: techies, geeks, and nerds. While the technoïds aren’t always right — far from it — the great ones end up making and running great companies. The establishment bluestockings may roll their eyes at the hoodies and bare feet, but look at what happens when the suits take over. Look at HP, Yahoo!, or Cisco; regard Apple during its dark age

It wasn’t very long ago, I recall gleefully, that the kommentariat cluck-clucked disapprovingly over the founder’s “obvious’’ immaturity, his tactless management style, his poor public-speaking manner. But when you read Facebook’s S1, you’ll realize how good a negotiator Zuckerberg must have been early on. Since its inception, the company has raised about $1.5B, an unusually large amount for a start up, and well above the threshold that usually translates into management castration as investors demand a bigger share of the spoils, ransom for their assumption of greater risk.

Instead, Zuckerberg got investors to go for the radius of the pizza as opposed to the angle of the slice, their ownership percentage. Zuckerberg may own “only” 28% of Facebook, but he manufactured agreements that give him effective control of the company with 57% of voting rights

Some will downplay the achievement: ‘He must have gotten good advice’ . Of course…but he followed it. When you’re in charge, the quality of the advice is no excuse for bad performance; conversely, good advice shouldn’t be used to dismiss good results.

Speaking of which, in 2011, the company’s revenue was $3.7B, with a tidy $1B profit and $3.8B in cash – to which they’ll be adding at least $5B in the upcoming IPO. This is a nicely profitable company. The Washington Post’s Wonkblog put Facebook’s performance in graphic perspective:

Take a look at the number of employees: a mere 3,200. With 3.7B in revenue, that works out to $1.2M per worker. Turning to cash per worker ($3.9B / 3,200 = $1.2M), Facebook is about as rich as Uncle Apple’s $1.3M cash per “full-time equivalent” employee. It’s a remarkable achievement for any company, and unheard of for one so young.

But it’s not all roses.

As Zuckerberg’s Letter To Investors properly contends, Facebook can “change how people relate to their governments and social institutions” and “improve how people connect to businesses and the economy”. Making tons of money in the process is totally legit…as long as a key condition is met: informed consent. And “informed consent” mean just that: Information that a reasonably attentive individual — as opposed to an Apple patent attorney — can understand.

On this count, Facebook’s actions have been less than transparent. Perhaps it’s a consequence of the Hacker Way: Ship first, ask questions later. Or perhaps Facebook is betting we’re too lazy and ignorant to read the fine print, just like wireless carriers who try to dazzle us with their sleight-of-plan hoodwinks.

Furthermore, Facebook’s ubiquity and power raises the spectre of yet another Walled Garden: Is Zuckerberg’s company killing the Open Web by superimposing a proprietary lattice of connections between users, including companies that use Facebook to do business with its community? Many have noted that Google can’t really index the Facebook web. As John Batelle puts it:

Sure, Google can crawl Facebook’s “public pages,” but those represent a tiny fraction of the “pages” on Facebook, and are not informed by the crucial signals of identity and relationship which give those pages meaning.

(True. But does Google want to index Facebook? Behind the Open posture stands Google’s real aim: Bulldozing anything and anyone standing between their ad engines and their targets.)

Lastly, let’s consider the Web 2.0 proverb: If the product is free, You are the product. With that in mind, I couldn’t help wince at the opening of Zuckerberg’s Letter To Investors:

Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected.

It reminded me of the Don’t Be Evil puffery in Google’s own S-1:

Don’t be evil. We believe strongly that in the long term, we will be better served — as shareholders and in all other ways — by a company that does good things for the world even if we forgo short term gains. This is an important aspect of our culture and is broadly shared within the company.

When I read those words back in 2004, I thought Google was either incredibly naive or a little too obvious in their do-good posture. Either way, we know what has happened: Google needs to be all things to all people, all the time, everywhere, on every device, in order to irradiate us with their advertising photons. Google’s motto should be Disintermediation R’Us. Instead, their mission statement reads:

Organize the world’s information and make it universally accessible and useful.

…all in the name of selling ads.

In his letter, Zuckerberg comes up with a similarly lofty sentiment:

There is a huge need and a huge opportunity to get everyone in the world connected, to give everyone a voice and to help transform society for the future.

I don’t mean to diminish Zuckerberg’s accomplishments. He’s built an epoch-making company, I’m delighted by the team of highly skilled technologists he’s assembled — a team that includes some dear friends of mine — and the tech culture they evince. He’s surrounded himself with sharp business people and extracted oodles of money from strong investors; he’s Bill Gates/Larry Ellison/Page+Brin caliber or above…and I’m thrilled to see the former naysayers now eating out of his hand.

So why not just say something like…

We help people connect in safe, convenient, and innovative ways. In doing so, we’ve built a business of historic proportions. We make money selling advertising that is finely tuned to reach our users in cost-competitive ways. Because we believe in Facebook’s unlimited potential, we will manage ourselves for the long term rather than for short-term profit. We have built an ownership and control structure to accomplish this goal.

There’s good evidence that the people who buy Amazon, Google, and Facebook shares are willing to let these companies run for the long term rather than for the next quarter. Smart people don’t need lofty mission statements to guide their investments, they watch what the execs do and decide if they’re using “the long term” as an excuse or if they’re really aiming for it.

JLG@mondaynote.com

Piracy is part of the digital ecosystem

In the summer of 2009, I found myself invited to a small party in an old bourgeois apartment with breathtaking views of the Champ-de-Mars and Eiffel Tower. The gathering was meant to be an informal discussion among media people about Nicolas Sarkozy’s push for the HADOPI anti-piracy bill. The risk of a heated debate was very limited: everyone in this little crowd of artists, TV and movie producers, and journalists, was on the same side, that is against the proposed law. HADOPI was the same breed as the now comatose American PIPA (Protect Intellectual Property Act) and SOPA (Stop Online Piracy Act). The French law was based on a three-strikes-and-you-are-disconnected system, aimed at the most compulsive downloaders.

The discussion started with a little tour de table, in which everyone had to explain his/her view of the law. I used the standard Alcoholic Anonymous introduction: “I’m Frederic, and I’ve been downloading for several years. I started with the seven seasons of The West Wing, and I keep downloading at a sustained rate. Worse, my kids inherited my reprehensible habit and I failed to curb their bad behavior. Even worse, I harbor no intent to give up since I refuse to wait until next year to see a dubbed version of Damages on a French TV network… In can’t stand Glenn Close speaking French, you see…” It turned out that everybody admitted to copious downloading, making this little sample of the anti-Sarkozy media elite a potential target for HADOPI enforcers. (Since then, parliamentary filibuster managed to emasculate the bill.)

When it come to digital piracy, there is a great deal of hypocrisy. One way another, everyone is involved.

For some large players — allegedly on the plaintiff side — the sinning even takes industrial proportions. Take the music industry.

In October 2003, Wired ran this interesting piece about a company specialized in tracking entertainment contents over the internet. BigChampagne, located in Beverly Hills, is for the digital era what Billboard magazine was in the analog world. Except that BigChampagne is essentially tracking illegal contents that circulates on the web. It does so with incredible precision by matching IP numbers and zip code, finding out what’s hot on peer-to-peer networks. In his Wired piece, Jeff Howe explains:

BigChampagne’s clients can pull up information about popularity and market share (what percentage of file-sharers have a given song). They can also drill down into specific markets – to see, for example, that 38.35 percent of file-sharers in Omaha, Nebraska, have a song from the new 50 Cent album.

No wonder some clients pay BigChampagne up to 40,000$ a month for such data. They  use BigChampagne’s valuable intelligence to apply gentle pressure on local radio station to air the very tunes favored by downloaders. For a long time, illegal file-sharing has been a powerful market and promotional tool for the music industry.

For the software industry, tolerance of pirated contents has been part of the ecosystem for quite a while as well. Many of us recall relying on pirated versions of Photoshop, Illustrator or Quark Xpress to learn how to use those products. It is widely assumed that Adobe and Quark have floated new releases of their products to spread the word-of-mouth among creative users. And it worked fine. (Now, everyone relies on a much more efficient and controlled mechanism of test versions, free trials, video tutorials, etc.)

There is no doubt, though, that piracy is inflicting a great deal of harm on the software industry. Take Microsoft and the Chinese market. For the Seattle firm, the US and the Chinese markets are roughly of the same size: 75 million PC shipments in the US for 2010, 68 million in China. There, 78% of PC software is pirated, vs. 20% in the US; as a result, Microsoft makes the same revenue from the Chinese than from… the Netherlands.

More broadly, how large is piracy today? At the last Consumer Electronic Show, the British market intelligence firm Envisional Ltd. presented its remarkable State of Digital Piracy Study (PDF here). Here are some highlights:
- Pirated contents accounts for 24% of the worldwide internet bandwidth consumption.
- The biggest chunk is carried by BitTorrent (the protocol used for file sharing); it weighs about 40% of the illegitimate content in Europe and 20% in the US (including downstream and upstream). Worldwide, BitTorrent gets 250 million UVs per month.
- The second tier is made by the so-called cyberlockers (5% of the global bandwidth), among them the infamous MegaUpload, raided a few days ago by the FBI and the New Zealand police. On the 500 million uniques visitors per month to cyberlockers, MegaUpload drained 93 million UVs. (To put things in perspective, the entire US newspaper industry gets about 110 million UVs per month). The Cyberlockers segment has twice the users but consumes eight times less bandwidth than BitTorrent simply because files are much bigger on the peer-to-peer system.
- The third significant segment in piracy is illegal video streaming (1.4% of the global bandwidth.)

There are three ways to fight piracy: endless legal actions, legally blocking access, or creating alternative legit offers.

The sue-them-untill-they-die approach is mostly a US-centric one. It will never yield great results (aside from huge legal fees) due to the decentralized nature of the internet (there is no central servers for BitTorrent) and to the tolerance in countries in harboring cyberlockers.

As for law-based enforcement systems such has the French HADOPI or American SOPA/PIPA, they don’t work either. HADOPI proved to be porous as chalk, and the US lawmakers had to yield to the public outcry. Both bills were poorly designed and inefficient.

The figures compiled by Envisional Ltd. are indeed a plea for the third approach, that is the  creation of legitimate offers.

Take a look at the figures below, which shows the peak bandwidth distribution between the US and Europe. You will notice that the paid-for Netflix service takes exactly the same amount of traffic as BitTorrent does in Europe!

US Bandwidth Consumption:

Europe Bandwidth Consumption:

Source : Envisional Ltd

These stats offer a compelling proof that creating legitimate commercial alternatives is a good way to contain piracy. The conclusion is hardly news. The choice between pirated and legit content is a combination of ease-of-use, pricing and availability on a given market. For contents such as music, TV series or movies, services like Netflix, iTunes or even BBC iPlayer go in the right direction. But one key obstacle remains: the balkanized internet (see a previous Monday Note Balkanizing the Web), i.e. the country zoning system. By slicing the global audience in regional markets, both the industry (Apple for instance) and the local governments neglect a key fact: today’s digital audience is getting increasingly multilingual or at least more eager to consume contents in English as they are released. Today we have entertainment products, carefully designed to fit a global audience, waiting months before becoming available on the global market. As long as this absurdity remains, piracy will flourish. As for the price, it has to match the ARPU generated by an advertising-supported broadcast. For that matter, I doubt a TV viewer of the Breaking Bad series comes close to yield an advertising revenue that matches the $34.99 Apple is asking for the purchase of the entire season IV. Maintaining such gap also fuels piracy.

I want Netflix, BBC iPlayer and an unlocked and cheaper iTunes everywhere, now. Please. In the meantime, I keep my Vuze BitTorrent downloader on my computer. Just in case.

frederic.filloux@mondaynote.com

2011: Shift Happens

Whatever 2011 was, it wasn’t The Year Of The Incumbent. The high-tech world has never seen the ground shift under so many established companies. This causes afflicted CEOs to exhibit the usual symptoms of disorientation: reorg spams, mindless muttering of old mantras and, in more severe cases, speaking in tongues, using secret language known only to their co-CEO.

Let’s start with the Wintel Empire

Intel. The company just re-organized its mobile activities, merging four pre-existing groups into a single business unit. In a world where mobile devices are taking off while PC sales flag, Intel has effectively lost the new market to ARM. Even if, after years of broken promises, Intel finally produces a low-power x86 chip that meets the requirements of smartphones and tablets, it won’t be enough to take the market back from ARM.

Here’s why: The Cambridge company made two smart decisions. First, it didn’t fight Intel on its sacred PC ground; and, second, it licensed its designs rather than manufacture microprocessors. Now, ARM licensees are in the hundreds and a rich ecosystem of customizing extensions, design houses and silicon foundries has given the architecture a dominant and probably unassailable position in the Post-PC world.

We’ll see if Intel recognizes the futility of trying to dominate the new theatre of operations with its old weapons and tactics, or if it goes back and reacquires an ARM license. This alone won’t solve its problems: customers of ARM-based Systems On a Chip (SOC) are used to flexibility (customization) and low prices. The first ingredient isn’t in evidence in the culture of a company used to dictate terms to PC makers. The second, low prices, is trouble for the kind of healthy margins Intel derives from its Wintel quasi-monopoly. Speaking of which…

Microsoft. The company also reorged its mobile business: Andy Lees, formerly President of its Windows Phone division just got benched. The sugar-coating is Andy keeps his President title, in “a new role working for me [Ballmer] on a time-critical opportunity focused on driving maximum impact in 2012 with Windows Phone and Windows 8”. Right.

Ballmer once predicted Windows Mobile would achieve 40% market share by 2012, Andy Lee pays the price for failing to achieve traction with Windows Phone: according to Gartner, Microsoft’s new mobile OS got 1.6% market share in Q2 2011.

Microsoft will have to buy Nokia in order to fully control its destiny in this huge new market currently dominated by Android-based handset makers (with Samsung in the lead) and by Apple. In spite of efforts to ‘‘tax” Android licensees, the old Windows PC licensing model won’t work for Microsoft. The vertical, integrated, not to say “Apple” approach works well for Microsoft in its flourishing Xbox/Kinect business, it could also work for MicroNokia phones. Moreover, what will Microsoft do once Googorola integrates Moto hardware + Android system software + Google applications and Cloud services?
In the good old PC business Microsoft’s situation is very different, it’s still on top of the world. But the high-growth years are in the past. In the US, for Q2 2011, PC sales declined by 4.2%; in Europe, for Q3 this time, PC sales went down by 11.4% (both numbers are year-to-year comparisons).

At the same time, according to IDC the tablet market grew 264.5% in Q3 (admire the idiotic .5% precision, and consider tablets started from a small 2010 base). Worldwide, including the newly launched Kindle Fire, 2011 tablets shipments will be around 100 million units. Of which Microsoft will have nothing, or close to nothing if we include a small number of the confidential Tablet PC devices. The rise of tablets causes clone makers such as Dell, Samsung and Asus (but not Acer) to give up on netbooks.

In 2012, Microsoft is expected to launch a Windows 8 version suited for tablets. That version will be different from the desktop product: in a break with its monogamous Wintel relationship, Windows 8 will support ARM-based tablets. This “forks” Windows and many applications in two different flavors. Here again, the once dominant Microsoft lost its footing and is forced to play catch-up with a “best of both world” (or not optimized for either) product.

In the meantime, Redmond clings to a PC-centric party line, calling interloping smartphones and tablets “companion products’’. One can guess how different the chant would be if Microsoft dominated smartphones or tablets.

Still, like Intel, Microsoft is a growing, profitable and cash-rich company. Even if one is skeptical of their chances to re-assert themselves in the Post-PC world, these companies have the financial means to do so. The same cannot be said of the fallen smartphone leaders.

RIM: ‘Amateur hour is over.This is what the company imprudently claimed when introducing its PlayBook tablet. It is an expensive failure ($485M written off last quarter) but RIM co-CEOs remain eerily bullish: ‘Just you wait…’ For next quarter’s new phones, for the new BlackBerry 10 OS (based on QNX), for a software update for the PlayBook…

I remember being in New York City early January 2007 (right before the iPhone introduction). Jet-lagged after flying in from Paris, I got up very early and walked to Avenue of The Americas. Looking left, looking right, I saw Starbucks signs. I got to the closest coffee shop and saw everyone in the line ahead of me holding a BlackBerry, a.k.a. CrackBerry for its addictive nature. Mid-december 2011, RIM shares were down 80% from February this year:

Sammy the Walrus IV provides a detailed timeline for RIM’s fall on his blog, it’s painful.

On Horace Dediu’s Asymco site, you’ll find a piece titled “Does the phone market forgive failure?”. Horace’s answer is a clear and analytical No. Which raises the question: What’s next for RIM? The company has relatively low cash reserves ($1.5B) and few friends, now, on financial markets. It is attacked at the low end by Chinese Android licensees and, above, by everyone from Samsung to Nokia and Apple. Not a pretty picture. Vocal shareholders demand a change in management to turn the company around. But to do what? Does anyone want the job? And, if you do, doesn’t it disqualify you?

Nokia: The company has more cash, about 10B€ ($13B) and a big partner in Microsoft. The latest Nokia financials are here and show the company’s business decelerates on all fronts, this in a booming market. Even if initial reactions to the newest Windows Phone handsets aren’t said to be wildly enthusiastic, it is a bit early to draw conclusions. But Wall Street (whose wisdom is less than infinite) has already passed judgment:

Let’s put it plainly: No one but RIM needs RIM; but Microsoft’s future in the smartphone (and, perhaps, tablet) market requires a strong Nokia. Other Windows Phone “partners” such as Samsung are happily pushing Android handsets, they don’t need Microsoft the way PC OEMs still need Windows. Why struggle with a two-headed hydra when you can acquire Nokia and have only one CEO fully in charge? Would this be Andy Lees’ mission?

All this stumbling takes place in the midst of the biggest wave of growth, innovation and disruption the high-tech industry has ever seen: the mobile devices + Cloud + social graph combination is destroying (most) incumbents on its path. Google, Apple, Facebook, Samsung and others such as Amazon are taking over. 2012 should be an interesting year for bankers and attorneys.

JLG@mondaynote.com


HP Kicks webOS To The Kerb

We strongly believe that the best days for webOS are still ahead.

Thus spake Meg Whitman in her memo to the troops, an intramural rendition of HP’s official announcement that webOS will be “contributed” to the Open Source community.

…the executive team has been working to determine the best path forward for this highly respected software. We looked at all the options in the market today…By providing webOS to the open source community…we have the potential to fundamentally change the landscape.

Either she thinks we’re dimwits, or she’s being cleverly cheeky. Does she think we’ll fall for the tired corpospeak? “Victory! WhatWereWeThinking v3.0 has been released to the Open Source community”. Or is she slyly fessing up? “After much abuse inside the HP cage, it’s clear that webOS can only be restored to health if released into the wild.”

Releasing a product as Open Source isn’t always an admission of failure; see exhibits Linux or, more recently, WebKit. But the successful Open Source offerings were created in Open Source form. They weren’t “contributed” in a last-ditch effort to save face after unsuccessful attempts to monetize a proprietary version.

Furthermore, there’s real money to be made with an Open Source product…if you know what you’re doing. Look at Red Hat: nicely profitable, with nearly a $10B market cap. They make a lot of money selling Linux…or, more accurately, by selling a Linux “distro”, a suite of products and services that surround the free Linux kernel. They make money the iTunes way: Customers won’t pay for tunes that are otherwise (more or less legally) freely available, but they will pay for services around the music.

So is Open Source the way to go for webOS? I don’t think so.

Let’s look at Symbian, a product that’s similar to webOS in its complicated history: Born at Psion; moved to a Nokia-Motorola-Ericsson-Matsushita-Psion joint venture; thrown into Open Source by the Symbian Foundation, an even more complicated JV. Lately, things have become even murkier as Symbian appears to have been “outsourced to Accenture”.

Adobe’s Flex is another kicked-to-the-kerb example. When HTML5 appeared to displace Flash, Adobe officially open-sourced Flex to the non-profit Apache Software Foundation.

Even the success of Firefox, certainly the most visible Open Source application, might not be as indisputable as we first thought.  With net assets of $120M at the end of 2009, the “non-profit” Mozilla Foundation, Firefox’s progenitor, has been the great Open Source success story. 2009 revenues were $104 million, most of which was generated by sending searches to Google from the Firefox browser. In other words, Google has been Firefox’ sugar daddy as the Mountain View company battles Microsoft’s Internet Explorer quasi-monopoly.

But things have changed. Google Chrome is in its ascendancy; Google points to security holes in Firefox. Firefox served at Google’s pleasure, but is no longer needed.

Not exactly a bona fides Open Source success.

(Ironically — or at least amusingly — Meg Whitman singled out Firefox as an example of Open Source success in a post-announcement interview. To add tech credentials to appearance, she had HP director, venture investor, and Netscape founder Marc Andreessen sitting by her side. We won’t dwell on the admission that trotting out Andreessen represents.)

A closer look at HP’s official statements makes things even less clear:

HP will engage the open source community to help define the charter of the open source project under a set of operating principles:
. The goal of the project is to accelerate the open development of the webOS platform
. HP will be an active participant and investor in the project
. Good, transparent and inclusive governance to avoid fragmentation
. Software will be provided as a pure open source project
HP also will contribute ENYO, the application framework for webOS, to the community in the near future along with a plan for the remaining components of the user space.
Beginning today, developers and customers are invited to provide input and suggestions at http://developer.palm.com/blog/.

This is language designed to obfuscate rather than clarify, filled with qualifiers and weasel words. Read it again and ask yourself: Is there even one actionable sentence? are we given numbers, dates, some measurable commitment?

No. Instead, we get lame HR-like phrases:

. HP will engage the open source community — in what kind of embrace?
. active participant and investor — by how much and when?
. transparent and inclusive governance — why not opaque and exclusionary?
. a pure open source project — as opposed to yesterday’s impure and proprietary?
. near future… along with a plan — we don’t know, we’re just saying

Nowhere does Whitman state how much money, how many people, or when things might coalesce.

Allow me to translate:

We tried and tried and found no takers for webOS. Android is too strong, our old partner Microsoft leaned on us, and webOS is seen as damaged goods. We used the Open Source exit to get kudos from vocal enthusiasts. We know it’s cynical, but what do you want us to say? Good bye and good luck?

The charade (and cynicism) doesn’t stop there. Now we’re told HP might make webOS-powered tablets. Not in 2012, that year’s roadmap has been inked, HP is committed to Windows 8 tablets. Maybe in 2013. That, ladies and gentlemen, attests to HP’s unwavering commitment to webOS.

By 2013 there will be tablets coming from all the usual suspects (except RIM): Samsung, Googorola and other Android players, Amazon, Microsoft’s OEMs and newly acquired subsidiary Nokia…and, of course, Apple’s iPad HD2.

When I hear Whitman make such statements, I’m reminded of the old joke about the difference between a computer salesperson and a used-car salesman: The used-car gent knows he’s lying. For my alma mater’s sake, for HP’s good, let’s hope Meg Whitman knows she’s putting us on.

JLG@mondaynote.com

Datamining Twitter

On its own, Twitter builds an image for companies; very few are aware of this fact. When a big surprise happens, it is too late: a corporation suddenly sees a facet of its business — most often a looming or developing crisis — flare up on Twitter. As always when a corporation is involved, there is money to be made by converting the problem into an opportunity: Social network intelligence is poised to become a big business.

In theory, when it comes to assessing the social media presence of a brand, Facebook is the place to go. But as brands flock to the dominant social network, the noise becomes overwhelming and the signal — what people really say about the brand — becomes hard to extract.

By comparison, Twitter more swiftly reflects the mood of users of a product or service. Everyone in the marketing/communication field becomes increasingly eager to know what Twitter is saying about a product defect, the perception of a strike or an environmental crisis. Twitter is the echo chamber, the pulse of public feelings. It therefore carries tremendous value.

Datamining Twitter is not trivial. By comparison, diving into newspaper or blog archives is easy; phrases are (usually) well-constructed, names are spelled in full, slang words and just-invented jargon are relatively rare. By contrast, on Twitter, the 140 characters limit forces a great deal of creativity. The Twitter lingo constantly evolves, new names and characterizations flare up all the time, which excludes straightforward full-text analysis. The 250 million tweets per day are a moving target. A reliable quantitative analysis of the current mood is a big challenge.

Companies such as DataSift (launched last month) exploit the Twitter fire hose by relying on the 40-plus metadata included in a post. Because, in case you didn’t know it, an innocent looking tweet like this one…

…is a rich trove of data. A year ago, Raffi Krikorian, a developer on Twitter’s API Platform team (spotted thanks to this story in ReadWriteWeb) revealed what lies behind the 140 characters. The image below…

…is a tear-down of a much larger one (here, on Krikorian’s blog) showing the depth of metadata associated to a tweet. Each comes with information such as the author’s biography, level of engagement, popularity, assiduity, location (which can be quite precise in the case of a geotagged hotspot), etc. In this WiredUK interview, DataSift’s founder Nick Halstead mentions the example of people tweeting from Starbucks cafés:

I have recorded literally everything over the last few months about people checking in to Starbucks. They don’t need to say they’re in Starbucks, they can just be inside a location that is Starbucks, it may be people allowing Twitter to record where their geolocation is. So, I can tell you the average age of people who check into Starbucks in the UK.
Companies can come along and say: “I am a retail chain, if I supply you with the geodata of where all my stores are, tell me what people are saying when they’re near it, or in it”. Some stores don’t get a huge number of check-ins, but on aggregate over a month it’s very rare you can’t get a good sampling.

Well, think about it next time you tweet from a Starbucks.

DataSift further refined its service by teaming up with Lexalytics, a firm specialized in the new field of “sentiment analysis“, which measures the emotional tone of a text — very useful to assess the perception of a brand or a product.

Mesagragh, a Paris-based startup with a beachhead in California plans a different approach. Instead of trying to guess the feeling of a Twitter crowd, it will create a web of connections between people, terms and concepts. Put another way, it creates a “structured serendipity” in which the user will naturally expand the scope of a search way beyond the original query. Through its web-based application called Meaningly, Mesagraph is set to start a private beta this week, and a public one next January.

Here is how Meaningly works: It starts with the timeline of tens of thousands Twitter feeds. When someone registers, Meaningly will crawl his Twitter timeline and add a second layer composed by the people the new user follows. It can grow very quickly. In this ever expanding corpus of twitterers, Meaningly detects the influencers, i.e. the people more likely to be mentioned, retweeted, and who have the largest number of qualified followers. To do so, the algorithm applies an “influence index” based on specialized outlets such as Klout or Peer Index that measure someone’s influence on social medias. (I have reservations regarding the actual value of such secret sauces: I see insightful people I follow lag well behind compulsive self-promoters.) Still, such metrics are used by Meaningly to reinforce a recommendation.

Then, there is the search process. To solve the problem of the ever morphing vernacular used on Twitter, Mesagraph opted to rely on Wikipedia (in English) to analyze the data it targets. Why Wikipedia? Because it’s vast (736,000 subjects), it’s constantly updated (including with the trendiest parlance), it’s linked, it’s copyright-free. From it, Mesagraph’s crew extracted a first batch of 200,000 topics.

To find tweets on a particular subject, you first fill the usual search box; Meaningly will propose a list of predefined topics, some expressed with its own terminology; then it will show a list of tweets based on the people you’re following, the people they follow, and “influencers” detected by Meaningly’s recommendation engine. Each Tweet comes with a set of tags derived from the algorithm mapping table. These tags will help to further refine the search with terms users would have not thought of. Naturally, it is possible to create all sorts of custom queries that will capture relevant tweets as they show up; it will then create a specific timeline of tweets pertaining to the subject. At least that’s the idea; the pre-beta version I had access to last week only gave me a sketchy view of the service’s performances. I will do a full test-drive in due course.

Datamining Tweeter has great potential for the news business. Think of it: instead of painstakingly building a list of relevant people who sometimes prattle endlessly, you’ll capture in your web of interests only the relevant tweets produced by your group and the group it follows, all adding-up in real-time. This could be a great tool to follow developing stories and enhance live coverage. A permanent, precise and noise-free view of what’s hot on Twitter is a key component of the 360° view of the web every media should now offer.

frederic.filloux@mondaynote.com

Behind RIM’s $485M Write-off

On December 5th, three days ago, RIM announced a $485M write-off “related to its inventory valuation of BlackBerry PlayBook tablets”. Wall Street didn’t like the news and dumped the stock, it went down 9.7% in one session. One of the last analysts supporting RIM, Scotia Capital’s Gus Papageorgiou, finally gave up and turned vocally bearish. Others, as in this Reuters summary, grumble and suggest “necessary changes at the top of the company.”
Those are rote comments over an half-expected development: everybody knew PlayBook tablets weren’t selling well and the latest stock movement was but another step in a year-long descent:

But a second look at the numbers and at RIM’s communiqué itself raises more questions, ones I’m surprised analysts didn’t ask. Was it because RIM’s disclosure took place on a Friday, an oft-used maneuver to limit the spread of bad news?
We’ll focus on the $485M number and a look at RIM’s two previous quarters. As the company’s fiscal year starts March 1st, we have Q1 (ending in May 2011) numbers here and Q2 (ending in August 2011) results here.
For Q1 the company claims it sold 500,000 PlayBooks; for Q2, RIM says it sold 200,000 of the same tablets. Sold, in accounting parlance, is a precise term: this isn’t just a shipment, it’s a financial transaction whereby the buyer now owes RIM money, and RIM counts this as revenue and, after costs, profit.

We now turn to the cost of the PlayBook tablet. We know it’s made by Quanta, a reputable Taiwanese ODM, with approximately the same contents as Amazon’s Kindle Fire, also made by Quanta and, reportedly costing around $200 to make. Other reports peg the Playbook’s manufacturing cost around that same $200 number
Accounting rules say inventories are to be valued at the “lowest of cost or market”. If my widget costs $100 to make and sells for more, the accountants will value the inventory at $100 per unit. If, sadly, I can only sell it for $50, the inventory valuation must be $50. And, if an optimistic valuation of $100 was once used, it must now be “written down” to $50, causing a loss, even in the absence of commercial transaction. This is an inventory write-off or write-down. (This type of cashless loss mystifies normal humans who have trouble with the notion you can be profitable and go bankrupt. It’s ‘‘easy”: You make a profit the moment you sell a product for more than it costs. And you go bankrupt if your customers don’t pay but your suppliers insist on being paid. And there’s Uncle Sam to whom you owe tax on your “profit’’.)

Turning back to RIM’s $485M write-off, how many PlayBook tablets does it represent? Using the $200 cost figure as an assumption, we get 2.4 million tablets all written down to zero! This doesn’t quite make sense.
First, why write the inventory down to zero? HP’s TouchPad fire sale demonstrated the existence of demand at the $99 price level. Admittedly, Amazon’s $199 price for its Kindle Fire makes it difficult for RIM to get to that price at this stage of the PlayBook life and tattered reputation.
Second, even if we accept a write-down to zero, 2.4 million tablets is a strange number. How could RIM have accumulated such large inventory? And if the inventory hit is less than $200 per device, this increases the number of tablets in RIM’s cellar: $100 write-off per tablet yields 4.8 million devices. Impossible.

A possible explanation lies in the way ‘‘sales’’ were reported in previous quarters. Perhaps these transactions weren’t totally final, meaning they shouldn’t have been recorded as revenue because the buyer had the right to return Playbooks to RIM. Faulty reporting of revenue could spell trouble with shareholders, the SEC and hungry attorneys.
Still, RIM only reported a total of 700,000 tablets “sold” for the Q1 and Q2, they can’t have all been returned and massive returns would have been disclosed previously, one hopes.
RIM’s Q3 numbers will be released in a week, on December 12th, giving the company an opportunity to explain this strange $485M number. This should be interesting.
There’ll be more to watch, such as the year-to-year change in smartphone sales, the state of relations with applications developers and, crucially, how much cash is left in RIM’s coffers. For the last reported quarter, it was $1.15B, down from $2.1B the previous period. This isn’t much to wage today’s smartphone wars.

JLG@mondaynote.com

Unaccounted For Readers

Newspaper publishers need to quickly solve a troublesome equation. As carbon-based readership keeps dwindling, the growing legion of digital readers is poorly accounted for. This benefits advertisers who pay less for their presence.

Putting aside web sites audience measurement, we’ll focus instead on the currently ill-defined notion of digital editions. A subject of importance since digital editions are poised to play a key role in the future of online information.

First, definitions. The International Federation of Audit Bureaus of Circulation (IFABC) makes several distinctions that are adopted by most certification agencies around the world. The most straightforward is the “Digital Version” of a publication based on PDF. To be counted in the paid circulation of a newspaper or a magazine, a Digital Version must carry the same editorial content as well as the same advertising (volume and placement) as the paper version.

The second category, “Digital Edition”, is much fuzzier. Digital Editions come in different sizes and shapes, tailored for tablets or smartphones. Examples include The Guardian for iPad, Bloomberg Business Week+ and The Economist versions for iPad or iPhone (see previous Monday Note The Capsule’s Price). These editions have little to do with the print version. They are usually loaded with the same set of stories as their paper sibling, but add more pictures and, sometimes, animated infographics and video. The layout is designed to fit gesture-based navigation. Ads are different, too: far fewer modules, but with multiple screens and multimedia packages. The idea is less ads carrying more value per unit.

Here comes the absurdity.

Digital Versions (in PDF) are often hosted by digital kiosks carrying hundreds of publications, most often magazines in PDF facsimile. On many such kiosks, the best-selling product is the all-you-can-eat flat plan; for users, the 20 dollars or euros per month plan encourages indiscriminate downloading. I chose the word users on purpose. Readers would be presumptuous. On their first month, users will download about 60 to 80 publications. After a quarter or so, downloads stabilize to about 30 publications a month. Are those actually read? Maybe some, but the rest of the bulk is barely leafed through. As a result, the value of the advertising carried by these glanced-at publications trends to zero (the value of an ad being — at least in theory — a function of the eyeballs it will capture). It’s ridiculous to expect a “reader” who gulps down 30 publications to memorize a stack of 40 ad pages.

Nevertheless, such Digital Versions fall into the crucial “paid circulation” category which is still, unfortunately, the main gauge of market performance.

Noticing the absurdity of the open-bar kiosks, various circulations bureaus across the world have worked on ways to account for the behavior of this super-fly-by readership. In France, the OJD says that, in order to be counted as sold, the revenue derived from a digital publication must be higher than 25% of the single copy price, all taxes included. As an example, let’s take a user who opted for a €20 monthly unlimited plan, downloading 40 magazines in one month, each priced at €4.00 in a physical newsstand. To be counted as a valid sale, each magazine should bring at least €1.00. But a consumption of 40 magazines for €20 will only yield €0.5, half of the required minimum. Therefore, the OJD will only count half of the volume sold.

These audit agencies efforts are fine but, regardless of all the tweaks in the way copies are counted, they don’t solve the problem of ads that remains vastly inefficient.

Turning now to Digital Editions, their adaptation to the needs of tablets and smartphones much improves advertising performance. Modules will be fewer, but far more engaging. Interactive ads will lead to what marketers call transformation, which is when someone actually orders an item or interacts with a seller (by requesting a test-drive of a car, for instance). All such things are impossible with a static ad embedded in a PDF.

In addition, Digital Editions can point to an individual reader. When I subscribed to the iPad version of the Guardian, or of BusinessWeek, I actually gave permission to what I consider trusted editorial brands to get my coordinates from Apple. (For high quality publications, the rate of opt-in is said to be above 50%. Not bad.) Practically speaking, it means the publisher will be able to directly interact with me. And, in the near future, for my very own digital edition, that same publisher will inject ads tailored to my socio-demographic profile, my location, etc. (don’t rush folks, I can wait for this type of targeting).

Summing-up: We have Digital Versions that are basically PDF images of the original print publications and Digital Editions that are more sophisticated and built — for obvious reasons — on different structure.

And guess what? Most circulation bureaus segregate the two products; static ones are counted in the paid-circulation line — and consolidated with the paper’s global  circulation — but the tablet or smartphone-designed versions appear in a separate line.

No big deal, you might say. But it actually is.

Problem is, media buyers almost exclusively consider the aggregated figure. They tend to overlook the value of itemized lines. As a consequence, the most sophisticated products, the ones able to deliver engagement and value to advertisers are simply ignored.

Hence the publishers’ furious lobby to convince circulation bureaus to include Digital Editions in their global circulation numbers.

The British Audit Bureau of Circulation was quick to understand the importance of aggregating all forms of circulations on the sole basis of the editorial content. Probably because many UK publishers developed good tablet and smartphone editions. Just a year ago, they issued this unambiguous communiqué:

ABC announced today that it has agreed new Reporting Standards that will allow publishers to present both print and digital editions on one certificate. This offers more flexibility to publishers in how they can claim digital editions.

The new Cross Platform Certificate of Circulation enables publishers to provide a single view of their circulation figures. This includes the circulation of digital editions of magazines designed especially for mobile devices such as Apple’s iPad.

In many countries the issue is still on the table. To their consternation, newspapers and magazines publishers see the constant erosion of their paper versions; at the same time, they are required to serve the booming tablet and smartphone markets with dedicated digital editions that remain undervalued by the advertising community. Frustrating.

frederic.filloux@mondaynote.com

A Facebook Smartphone – Why?

At the end of last week’s Monday Note, I briefly wondered about the rumored Amazon smartphone. Would it follow the Kindle Fire strategy: Pick Android’s lock and sell the device at or below cost in order to lubricate the wheels of Amazon’s e-commerce of tangible and intangible things?

This week, we have the rebirth of another story: the Facebook phone. All Things D, the Wall Street Journal’s site dedicated to… All Things Digital, aired a series of posts focused on Facebook’s hypothetical jump into the smartphone fray. Given the site’s reputation for reliable sources and real writing, this must be more than idle speculation floated for pageviews.

But what’s going on? Why would Facebook — or Amazon — create its own smartphone?

(For the time being, I’ll set aside the 4-year parade of “Google phones”: T-Mobile’s G1 and G2; the ill-fated Nexus One built by HTC and sold by Google; Samsung’s Nexus S and now the Galaxy Nexus. Sign up here; Steve Wozniak got his a few days ago, my turn will surely come soon.

What HTC thinks of its erstwhile beautiful friendship with Google isn’t known, neither is Samsung’s view of being last year’s model now that Google owns Motorola. Nor is Moto’s serenity, or lack of it, when competing with the muscular Korean for the sultan’s favors. This brings back memories of the sorry parade of companies touting their shiny new partnerships with Microsoft, only to be discarded for the next pony in the carousel. We need a little time to figure out who’s playing whom.)

Looking at the PC market, we wonder: There’s no Amazon PC, or Facebook notebook, so why would these companies launch their own Really Personal Computer? What changed?

Google.

When Microsoft unified the PC industry under its tender care, the Web — and thus Web advertising — didn’t exist. For Microsoft, the game was the two-way Windows/Office leverage; the rest of the industry picked up the crumbs that fell from the Wintel table.

When the Web changed the game in the mid-90s, Netscape emerged as the dominant player, at least until Microsoft added Internet Explorer to the Windows/Office engine. Then Google entered the market with what initially looked like a search engine but turned out to be a huge, highly efficient advertising money pump. This left Microsoft (and others) reeling. The Redmond company’s online business keeps losing large amounts of money: $8.5B in the last 9 years!

Although Google confused things by attacking the Office franchise with its Google Docs service, the company’s true M.O. is nonetheless very clear. Advertising generates 95% of Google’s revenue and, probably, 105% of its profits. Google will say and do everything needed to ensure we’re exposed to its advertising radiation pressure at all times, in all venues, and on all devices. Everything is either a means to that end, or an obstacle that must be leveled, disintermediated.

Enter the smartphone.

Google saw it coming. Whether it did or didn’t get the idea because Eric Schmidt, Google’s CEO at the time, sat on Apple’s Board of Directors doesn’t matter for today’s purpose. In August 2005, Google bought Android, a company started by Andy Rubin and others after they sold Danger (no pun) to Microsoft. Google’s first smartphone, the aforementioned G1, looked a lot like Danger’s Sidekick device. After the iPhone came out in 2007, Google’s products took a distinctly Apple bent. Unsurprisingly, Google disagrees with Steve Jobs’ strongly expressed opinion of their “sincere flattery.”

Regardless, Google was right, the smartphone wars are on: This is the new PC, only bigger because it’s smaller, more ubiquitous, more connected, more personal.  Google doesn’t want anyone (but themselves) to control the smartphone market the way Microsoft dominated the PC; they don’t want anyone to stand between the viewer and the ads they serve up. With Android, they engineered a Trojan Horse: The ‘‘free and open” smartphone OS came with mandatory Google applications that guarantee the vital revenue-generating exposure to advertising. As Bill Gurley explains in his memorable “The Freight Train That Is Android” post, Google wants its smartphone OS to flatten everything in its path — and they’re succeeding: Android now has more 50% of the smartphone market. That dominant position was taken from Nokia, the former king; from Palm, now deceased; from RIM, sinking fast; and from Microsoft, struggling to get in third place with its truly modern but late to the game Windows Phone 7, this after losing the market because of its creaky Windows Mobile.

(Apple plays a different game. In the quarter ending in September 2011, they had a mere 14% smartphone share, but managed to get more than 52% of smartphone profits.)

Back to Facebook. Both Google and Zuckerberg’s company vie for the same advertising dollars. This makes Google Facebook’s biggest, most direct competitor. The Trojan Horse applications on Android-powered smartphones are a direct threat to Facebook’s advertising business. Just like Google, Facebook wants to maximize our exposure to ads that are finely-tuned using the personal data we provide as a payment for the service. For this, the company needs a well-controlled smartphone.

Apparently, Facebook’s first home grown project was ditched and a manufacturing partner such as HTC is now being considered. For the software, let’s assume that Facebook will following Amazon’s lead and develop an Android “fork”: Open Source code without the Android license and obligations.

The Amazon parallel is useful when considering the technical solution, but it breaks down when we think about revenue generation. Amazon’s forked-Android device, the Kindle Fire, is a way to sell more content by lubricating the purchase and consumption processes. They sell more physical goods as well, all integrated into their very successful Prime deal. We see no such processes and revenues for Facebook. The only justification for a Facebook smartphone would be a better user experience and a more effective vehicle for its advertising business.

It boils down to a comparison. On the one hand, an Android-powered smartphone — a Samsung Galaxy device, perhaps — with one good Facebook application and all the Google applications, the “evil” Google+ insinuating itself everywhere. On the other, a Facebook smartphone, with the Facebook experience on top of everything, its own app store, a Facebook browser, and Facebook Cloud Services.

I can’t help but think that there’s more to this hypothetical Facebook phone than a play against today’s Google+ in defense of today’s Facebook money pump. There must be something else in Facebook’s future, a new revenue stream that it will eventually need to promote/protect. But what?

JLG@mondaynote.com

PS: If we needed confirmation of the impact of smartphones on e-commerce, we just got early reports on Thanksgiving shopping behavior. According to Forbes and IBM Mobile Sales Hit It Out of the Park on Black Friday.