Google’s SOE (Strategy of Everything)

As a Venture Capitalist, I occasionally hear entrepreneurs lay out a Strategy of Everything, a plan to be all things to all people. (SOE rhymes with TOE, the Theory of Everything, the Holy Grail of mathematical physics, only less attainable than the sacred object…)

In practice, “all things to all people” invariably becomes too many different services in too many market segments. “We don’t know what will work or for whom, so we’ll spray and pray. We’ll shoot arrows in the dark and when the sun rises, we’ll paint a target around the one that lands in a good spot. We’ll declare victory and raise a second round while claiming that this had been our strategy all along.”

VCs hate SOE. It’s a grand way to waste large amounts of capital. We’re measured on capital efficiency and, as result, tend to tell entrepreneurs with SOE dreams to go pitch our competitors.

From this perspective, Google’s strategy doesn’t make sense: They, indeed, are trying to be all things to all people. They even brag about it on one of their sites where they arrange their products as a Periodic Table of Elements. The real thing (see ptable.com for example) looks like this:

Google’s product line adopts a similar look:

Granted, Google’s table contains neat interactive features: If you hover over a category at the top – Mobile, Search, Data APIs — the related products light up. Well done. More proof of the breadth and depth of Google’s ambitions and skills.

So: Is this the type of SOE I just made fun of?

Yes and no. Yes, Google wants to be all things to all people, and, no, this is nothing to laugh at. Google continues to construct the largest computing infrastructure on the planet but still manages to generate large amounts of liquidities. At the end of March 2011, it had more than $36B in cash. Google is extremely capital efficient.

Let’s look at it from another angle.

Google’s one and only goal is to sell advertising. The path to this goal requires ‘‘radiation pressure’’: Google wants to make sure we don’t escape their ads. They want to insert themselves into all aspects of our lives, to find out much as they can about as many aspects, activities, and relationships as possible. In Eric Schmidt’s memorable Freudian slip at the D9 conference a few weeks ago: We know where you live… (The video is a bit long, not boring… and prescient.)

It’s that simple and complex — and breathtakingly audacious. And not without a downside.

The first general problem is quality. When you’re constantly pushing out new applications and services that compete on so many fronts, quality suffers. Bugs are inevitable, support is erratic, apps suffer from a “UI by — and for – Engineers” syndrome.

I have had several misadventures using Google Apps for Business, the paid-for variety. After waiting for days for the billing system to become “unstuck,” I finally contacted Customer Support — a needlessly complicated process. The suggested work-around was bizarre: Open an anonymous browsing window in Chrome. Things didn’t get much better. The billing system, which is clunky and displays inscrutable error messages, wouldn’t let me use Google’s own Checkout payment system — the same system I used when I purchased a domain name weeks ago. Ah well…

Regarding the UI, log onto Gmail and go the Settings page. What you see below is just the first of 13 settings tabs:

How does a normal human manage such complexity? Google’s engineering culture has made it the large-scale computing king, but these computer scientists don’t seem to have a feel for what lesser mortals experience.

Another problem is The Crack in the Wall. Google saw that smartphones were destined to be bigger than PCs. Android is a Google-scale success that shows what the company is capable of. But Google’s failure in social networking as Facebook and Twitter succeeded shows that you can’t man all the crenels in the fortress wall. Whatever the reason — management bandwidth, cultural deafness, lack of attention, arrogance as the toxic waste of success — Google either didn’t see Facebook or failed to develop the right service at the right time. And now Facebook has more than 750 million users worldwide. It’s become a kind of black hole sucking in Web traffic:

Facebook doesn’t have the kind of explosive revenue growth Google experienced at a comparable age, but they’re building an amazing ‘‘Overnet’’, a superstructure one level above the Internet.

Finally, Google is perceived as a threat. Following the lead of the European Union, the US FTC wants to take a close look at possible anti-competitive practices. On its official blog, Google responds with “Supporting choice, ensuring economic opportunity”. It reminds us of Steve Ballmer claiming that Microsoft is all about choice

Antitrust legislation is above my pay grade, but perceptions such as the one eloquently put forth by Bill Gurley have become pervasive. In The Freight Train That Is Android, Gurley argues that Google’s strategy is to flatten (kill or disintermediate) anything/anyone that stands between its advertising business and us, the eyeballs.

Does the FTC investigation confirm Google as Microsoft 2.0? Different times, different technology, but the same irrepressible need to dominate. Microsoft “ran” the PC industry, Google rules Internet advertising. Such dominion isn’t illegal per se, but many people and governments are unhappy about present and future consequences.

The Microsoft 2.0 moniker is a bit misleading. Microsoft built a franchise that’s easy to understand and manage: Windows + Office. With the possible exception of games, they haven’t fared well in other pursuits. The core business is likely to continue producing nice profits for a long time. PCs aren’t going to disappear overnight, and even if Web apps keep getting better, they aren’t yet as functional and pleasant as desktop apps.
Google, on the other hand, is much more complicated. They don’t make money from a simple Windows + Office combo. Indeed, they have to give away their products – smartphone OS, email, (excellent) maps, photo-editing, and many more — in order to sell ads.

This leaves Google with an interesting combination of threats. Actually, a chain of threats.

First, the need to be “all services to all people” exposes the company to sloppiness and to silos, to UI by and for engineers, to “featuritis”, to products that don’t interconnect.

Second, as if the threat of mediocrity wasn’t enough, the 360 degrees of products have only one role: sell the real thing, advertising. As a result, Google has to use its products/services to kill or disintermediate everything in the path of its advertising.

Third, for all Google’s “Don’t Be Evil” motto, the company has now reached a point where the more it excels, and it often does, the more it is perceived as a threat by individuals and governments around the world.

This is what a “successful” SOE yields.


Trifling Twitter

When a member of the old guard barges into their cozy backyard, the Digerati jump up and strike indignant poses. And when the intruder’s point is missed, its author gets crucified. This is what happened to Bill Keller, the New York Times’ executive editor, when he dared to write a column critical of Twitter. In short, Keller’s well-documented piece, titled “The Twitter Trap“, contends the medium’s shallowness encourages superficial exchanges to the detriment of in-depth discussions. When, as a minor provocation, he twitted “#TwitterMakesYouStupid. Discuss“, someone keyboarded back “Depends who you follow” — and should have added: “… Depends also on how you follow people”.

I will stop short of joining the crowd of zealous Bill Keller critics. But I’m not fond of the piece, either: on several counts, I consider it misguided.

1 / Twitter is in fact small, and therefore cognitively inoffensive. Officially, the micro-blogging network (we ought to call it a media) born five years ago has 200 million users. This supposedly huge user base allowed it to raise about $360m in capital, including a last round of $200m led by Kleiner Perkins, the Valley venture capital grandee, on a $3.7bn valuation. Stunning indeed.
Now, let’s get back to Earth. Over the last 18 months, traffic has stayed flat. Time spent is eroding: 14 mn 6 sec per user in March 2010 vs. 12 mn 37 sec in March 2011. Contrast this to more than 6 hours spent on Facebook. (According to a recent cover story in Fortune, Mark Zuckerberg is said to pay less and less attention to Twitter’s evolution). Despite occasional news cycle-triggered traffic outbursts (the Spring unrest in Arab countries is a good example), such spikes don’t really translate into audience gains. As for the number of accounts, half are idle. And, as usual on the internet, the usage is extremely concentrated: 10% of all users account for 90% of the twits.
In the latter figure lays Twitter’s peculiar character: as they get better at using the medium, its most powerful users’ voices becomes louder than ever.

2 / Twitter is controlled by the user. The most notable fact in Twitter’s evolution is the increasing sophistication of its users. The top ten percent have become good at finding the best “relevancy niche”, i.e. a sector in which they’ll be able to rise above the crowd. Many do so by mastering all the available tools: they look a their retweets data, monitor who retweets them, and watch their ranking.
Symmetrically, the passive audience (reading more than actually twitting), has become adept at continuously refining their feed selection. Prattlers prone to comment on the Saturday night sports games tend to be abandoned to the benefit of those who stick to their expertise. Trimming subscriptions has become mandatory on Twitter (as it is on Facebook).

3 / Twitter’s pervasiveness has nothing in common with what we observe on Facebook or Google. As a business, Twitter’s trajectory looks more like Yahoo’s (unfortunately in a more precocious way) than a Google’s or Facebook’s. Zuckerberg’s social network enjoys unabated growth and much better monetization: it extracts about $3 in revenue per user (and makes a profit at it) versus $0.25 for Twitter.
This gap allows Facebook to continuously roll out new features. As a result, its already faithful users end up even more solidly anchored, increasing their time spent on the service. Twitter, on the other hand, has yet to show a sustainable business model, and its small core of heavy users remains difficult to monetize. This results in a hard to break vicious circle: no cash-flow => no investment capacity => costly investments due to a theoretically large user base. Twitter’s inability to introduce new sticky features is likely to further concentrate the twitterer base, while the broader circle of less involved users will tend to look elsewhere for excitement.
It will be difficult for Twitter’s management and investors to find their way out of this decaying orbit.

Already, Twitters’s limitations are visible in the way users consume online news. According the a study conducted by the Pew Research Center for Excellence in Journalism and based on Nielsen data (PDF here), Twitter is an insignificant referral (1%) for news when compared to Facebook (5%) or Google (30%).  However, the use of Twitter deserves to be encouraged in the newsroom (and taught in journalism schools), since:
a) it is an effective promotional tool for value-added stories;
b) it allows reporters to actually pinpoint their most loyal audience – and establish a relationship with it;
c) it doesn’t kill value like RSS feeds do (see a previous Monday Note on that matter).

Twitter will increasingly be a one-to-a-few medium, with a small base of hard-core users, increasingly selective about the contents they broadcast and who they follow. In passing, this trend will further reinforce the ongoing news sites traffic concentration where about 5% of the users account for 75% of the page views. (As an example, the Pew Research study indicates that 85% of USA Today.com users visit the site less than 3 times a month. And for the top 25 American news sites, “power users”, i.e. visiting a site more than 10 times a month, account for only…. 7% of the total).

Bill Keller’s handwringing about Twitter largely miss the point. Twitter remains largely controlled by its users, on both emitting and receiving sides. That is not the case for the search business that relies on sophisticated and secret algorithms to serve contents supposedly tailored for us – without our knowledge of this invisible editing (see this enlightening TED video by Eli Pariser on what he calls the “Filter Bubble”). What Bill Keller ought to worry about is the algorithm-powered news stream, designed to maximize its audience — and the advertising revenue. Therein lies the real danger for the brains of our children and their ability to learn how to judge by themselves. In comparison to the AOL Way (I’m referring to the stats-based news master plan exposed by Business Insider), the use of Twitter is a trifling matter.


Media & tech: Reconcilable Differences

Media and tech worlds must work together. There is not a shred of a doubt about it. The former have lost the dual battle for growth and economic performance; the latter are attracting eyeballs and endless funding. Still. When combined, their relevance to society can be greater than the sum of their respective parts.

Last week in New York, I was asked to share my views on the matter. This was before an audience of 350 media executives gathered for the Inma World Congress. Most were looking for ways to effectively partner with digital companies. As I worked on my speech, I asked my tech world contacts how they see us, the media crowd. Here are some quotes, from people who requested not to be identified.

“You guys, are geared to compete rather than collaborate. You’re not getting that collaboration is the new name for the game”. “Even among yourselves, you are unable to cooperate on key industrial issues, shooting yourselves in the foot as a result”. “Your internal organizations are still plagued by a culture of silos. The winners will be the ones  who break silos”.

Tech executives also underline they see media companies as co-managed with unions – the consequence being a wage system that discourages rewarding valuable individuals. Media companies are also viewed as having a tech-averse culture. “Media don’t understand that their business has become engineering-intensive. Their investment in technology is grossly insufficient”.

Symmetrically, I collected adjectives summing up media people’s perception of the tech world. “Arrogant, condescending”: true, old media people always have the feeling of being looked down upon by the guys in chinos. “Nerdy, left-brained”: well, it goes along with the flip-flops and the hoodie… “Wealthy”, (I’ll come to that later). “Alien to the notion of value for content”: also true; and that might be the most difficult obstacle to a reconciliation.

More than anything else, techies view the contents news outlets painstakingly put together as an annoyance. They don’t have a clue, nor are they interested in getting one, to the complex, costly and often dangerous process of collecting original information. “Euro-ignorant”: let’s just recall what the geographic distribution looks like in large tech corporations. The often-used EMEA  acronym encompasses Europe, Middle East, and Africa, i.e. from Germany to Burundi. Practically, when landing in Silicon Valley from Paris, you’re often made to feel you’re dropping in from the Third World.

“Contract Nuts”: when a 30 pages contract lands in your inbox from California, written in knotty legal English (even for a France-based deal), stipulating the relevant jurisdiction will be the Santa Clara County Superior Court, you can’t help but feeling a bit bewildered and put off. In dealing with tech companies, the amount of money spent in legal fees suddenly appears out of proportions. We have no choice but getting used to it.

The only identical critic, evenly spread on both sides, concerns bureaucracy: medias point at intricate technostructures staffed with legions of people working on the same subject; tech people mock news media needing six weeks to sign the innocuous non-disclosure agreement covering a routine project.

Let’s stop for a moment on the financial issue. Three key factors differentiate the tech from the media world.

1 / Size. The combined revenue of the US newspaper + magazine industry, all sources combined is about $60bn. This is sector is facing the following: Apple (most likely $100bn in revenue this year); Google ($29bn last year); Microsoft ($62bn) or Yahoo ($6bn). As for stock valuations over the last 10 years, consider the graphic below. It shows the performances of three mostly newspapers groups with market values above $1bn: Gannett Co. (market cap: $3.5bn), The Washington Post Co. ($3.33bn), The New York Times Co. ($1.13bn). Over the last 10 years, their stock prices went like this :

Now, on the same 10-year scale, let’s superimpose, Apple, Google, Microsoft; the scale flattens quite a bit:

You get the point. The media industry faces dramatic value depletion.

2 / Access to cash. Technology companies have access to a huge pool of money. After years of disappointing results, the Venture Capital industry is red hot again. In a previous Monday Note, I mentioned Flipboard – great app for the iPad, 32 people, no revenue –  with a current valuation of $200m, roughly the equivalent of the McClatchy Company with its 20 newspapers, 7700 employees, 24% EBITDA for a revenue of  $1.4bn.

3 / How to spend it. In itself, the cash allocation illustrates the cultural gap. In a tech company, once a project is approved, money will be injected until the outcome becomes clear: success or failure. As I asked an exec in a large tech group what the budget of the project we were discussing was, he answered: “Look, honestly I’ve never seen any spreadsheets on this. This project has been decided at the highest level of the corporation. We’ll pour money into it until it works or closes”.

By contrast, in a media company, investment will be kept at a bare minimum. Any engagement is set as low as possible: temporary staffing,  outsourced work, everything is in penny-pinching mode. Not exactly the “No Guts, No Glory” way…

Nevertheless, the more I’m involved in digital media projects, the more I’m convinced that both worlds need a rapprochement. Medias have a lot to learn from tech companies. The way they conduct projects, their relentless drive for innovation, their bold imagination, coupled with a systematic and agile “Test & Learn” approach…  For the news industry, drawing inspiration from such a culture is a matter or survival.

As for the tech ventures, they must admit they need the media industry more than they like to think. Flipboard, Google Reader, Bing: all aggregators would lose a great deal of their appeal if they no longer had original contents to aggregate or organize.

Over the past fifteen years, we kept hearing stories telling us Google or Yahoo could swallow any old media in a single gulp. It didn’t happen. Nor did these deep-pocketed corporations find within themselves the vision and skills to create a decent news gathering operation from scratch. The reason is simple and complicated: it’s a métier of its own; thousands of people have been practicing and evolving it for decades.

People like me, working on both sides of the fence, strongly believe in the virtues of cross-pollination. On the media side, it might have to start by finding out what we expect from the tech world, whether they are aggregators, distributors, or search engines. Then, we’ll need to change the way we innovate. In a nutshell, screw the bean-counters that will strangle decisive investments while being unable to stop the hemorrhage in their “legacy” businesses; assign small teams on a small numbers of really (as opposed to cosmetically) crucial projects; do more prototypes and less spreadsheets. Be bold and fearless. As the techies like to say: Go big, or go home!

Failure must be an option. Paralysis is not.


Freemium Revisited: Paying For Content-Based Applications

Last week, Instapaper’s founder Marco Arment gave us a remarkable insight into the economics of content applications. For readers who haven’t used Instapaper on their iPad or iPhone (preferably on both): this application is an absolute must-have.
This is what I call a Real-Life App. Minimalist design, no frills, no “wow effect”. But, in return for the sobriety, unparalleled efficiency. Instapaper was born from a need, not from a marketing concept or PowerPoint vaporware. In last October’s Wired profile,  Arment explained himself: at Tumblr, the blog platform where he was Chief Technologist, a draining job that made concentration difficult, he began to feel the need for such an app.
Reading text longer than a two-page business memo has become everyone’s daily challenge. The inability to allocate time for lengthy, in-depth reading is a contemporary disease – well portrayed in Nicolas Carr’s last book The Shallows.

Hence Instapaper: a service based on a bookmarklet that lets you to save browser pages for later reading. When you want to save a page for later reading, you click on your browser’s Read Later bookmark . Like this:

The pages you save get automagically synchronized with your iPhone and iPad Instapaper apps; they become available for online and offline reading. This makes Instapaper ideal when traveling. For the Kindle, Instapaper features an easy setup to send all your saved stories to the device.

Instapaper is a one-man operation. It has three (modest) revenue streams: apps sales, a tiny one-dollar a month subscription via PayPal, and a small amount of ad space on the website. So far, Marco Arment checks all of today’s smart Internet relevant boxes:

  • a straightforward application with a clear purpose: saving long texts for later reading
  • a clearcut business model, one that doesn’t depends on “eyeballs” hypothetically pimped at bargain-basement prices
  • a remarkable implementation of its own API model: see Instapaper’s API’s how-to page. The Read Later API allows 140 third party applications (news-related aggregators, RSS feeds readers, Twitter apps) to upload and sync pages for later reading on your devices.
  • good execution: Instapaper works flawlessly, exactly as advertised
  • the AppStore ecosystem is a perfect fit for such an ultra-light operation. The developer focuses on what he does best and Apple takes care of the rest: worldwide app distribution, updates… and monthly checks — minus its usual 30% cut
  • it addresses a well identified market: upmarket information consumers, willing to take the time to read quality, long-form text – and willing to pay a small amount of money for the service. This is a solvent niche market. Small revenues but nice margins — as opposed to the thin or inexistent ones ‘‘enjoyed” in mass markets.

Coming back to today’s subject – the monetization of content based applications – Marco Arment sheds an interesting light on pricing strategies.

Credit: Flickr Webstock Photostream (cc)

In the beginning (Fall of 2008), his iPhone app came in two flavors: free for the light edition, and $9.99 for the full-featured one. In June 2009, he lowered the price to $4.99 — where it stands now. When the iPad launched, Arment decided against a free version for Apple’s new tablet. And, last Fall, he ran an experiment: the free iPhone version disappeared from the AppStore for three days. Sales increase immediately. Then he reiterates the experiment:

On March 12 [2011], knowing I was heading into very strong sales from the iPad 2’s launch, I pulled Free again, this time for a month. Again, nobody noticed, and sales increased (although it’s hard to say which portion of the increase, if any, is attributable to Free’s absence, since most of it is from the iPad 2’s launch).

This break went so well that I pushed the return date back by another month. I may keep it out indefinitely, effectively discontinuing Instapaper Free. More

The Communication Paradox

Remember The West Wing, the cult TV series? Its last episodes describe the end of President Jed Bartlet’s term and portray his Chief of Staff and former Press Secretary, C.J. Craig, deluged with job offers as she struggles with the emotions of leaving her beloved President. Emissaries of Fortune 500 corporations, CEOs of fictitious tech companies, heads of NGOs are all making the trip to 1600 Pennsylvania Avenue with high six-figure contracts in hand. Because she’s a smart and generous women – and the series is suffused with utter political correctness – C.J. Craig leans toward a big foundation, eager to build highways in Africa — it could have been worse: a Carbon-Free nuculear plant, for instance.

As you’ll see in a few seconds, there is great irony in the following coincidence: the West Wing’s main writer was Aaron Sorkin, who also happens to have won an Oscar for his Facebook movie script…

Reality beats fiction: Robert Gibbs, Barack Obama’s former press secretary definitely looks less idealistic than the sharp-tongued West Wing character. Having left office in February, Gibbs is said to be in talks with Facebook (story in Times’Dealbook).  The stakes are high: Facebook’s IPO looms. Private stock transactions currently put a $60bn valuation on the company and such lofty expectations come with many PR challenges. And the West Wing “high six figures” will be suitably updated to seven or more…
Gibbs won’t be the first White House hand to move to Silicon Valley. As Politico recalls, Joe Lockhart, Bill Clinton’s Press Secretary, joined Oracle. And former John McCain’s communication chief Jill Hazelbaker is now at Google. Even higher, we have former Vice-President Al Gore: he now is a rain-making General Partner at Kleiner Perkins Caufield & Byers, the venture capital giant and, for good measure, also sits on Apple’s Board. When it is about lobbying, tech firms don’t cheap. They hire the best talent money can buy.

The paradox: Then, why do these high-tech firms do such poor public communication? The answer lies two or three levels below the big hired guns, where talent and decision-making power disappear. There, PR people are mostly employed in stonewalling tasks. And the corpocracy likes them that way. The power structure condones an incestuous hiring process. Senior flacks recruit junior flacks.  And, as in all consanguineous reproductive activities, DNA rarely improves. Most hires are expected to be docile; initiative is strongly discouraged by paranoid upper management layers. More

WebOS Everywhere

by Jean-Louis Gassée

Where have we heard a similar mantra? Despite their apparent divorce from Microsoft, it sounds like HP’s brains have been infected with a mutation of the “Windows Everywhere” virus.

Let’s recap.

Late April 2010, HP acquires Palm for $1.2B. In July 2010, then-CEO Mark Hurd tells us he didn’t buy WebOS just for smartphones, but also for printers and tablets:

“We didn’t buy Palm to be in the smartphone business. And I tell people that, but it doesn’t seem to resonate well. We bought it for the IP. The WebOS is one of the two ground-up pieces of software that is built as a web operating environment [...] We have tens of millions of HP small form factor web-connected devices [...] Now imagine that being a web-connected environment where now you can get a common look and feel and a common set of services laid against that environment. That is a very value proposition.”

This sends two messages:

- No more Windows Mobile or Windows Phone 7, we “go Apple’’. We’ll own the entire hardware/software combo. (Contrast this with Nokia which is heading in the opposite direction, abandoning Symbian to “go Microsoft”, literally this time.)

- We’ll put WebOS everywhere: tens of millions of HP small form factor web-connected devices.

Mark Hurd steps on a mine, moves to Oracle and, in September 2010, HP gets a new CEO, Leo Apotheker.

Does he change strategy?

Not at all. On February 9th, HP announced its WebOS tablet, the TouchPad, and two smartphones, the Pre 3 and the neat-looking, diminutive Veer.

These products haven’t shipped yet. We’re told “Summer” for the TouchPad and Pre3, and “Spring” for the Veer. I hope to get my mitts on them as soon as I can. I’m intrigued: How will the HP devices fare in a market where Google/Android, RIM, and Apple keep strengthening their positions? To borrow from Stephen Elop’s “Burning Platforms” memo, this is no longer is a war of platforms, it’s a war of ecosystems:

“The battle of devices has now become a war of ecosystems, where ecosystems include not only the hardware and software of the device, but developers, applications, e-commerce, advertising, search, social applications, location-based services, unified communications and many other things.”

Regarding product details and the agility of the UI, HP’s announcement is enticing…but little is said about the company’s plans to build a viable universe around these new devices. Perhaps the plan is to announce the products early so developers, content providers, and channels have enough time to evaluate the opportunity and, if committed, be ready when the products ship.

This week, Leo Apotheker went one step further. On page 2 of a meaty Bloomberg Businessweek article, we learn that “… starting next year, every one of the PCs shipped by HP will include the ability to run WebOS in addition to Microsoft Corp.’s Windows… The move is aimed at enticing software developers to create a wider range of applications that would differentiate HP PCs, printers, tablets and phones from those sold by rivals.

On the surface, WebOS developers will have the tens of millions of PCs and laptops HP sells every year as targets for their applications. More devices, bigger opportunity.

But the reality is much more complicated.

First, is this an either/or proposition, run Windows or run WebOS? Or is this a quickboot arrangement similar to Splashtop, a customized Linux software packages that boots in 5 seconds or so, versus the minute or more it takes with Windows. (I checked, after more than a minute no have apps have loaded on my Dell netbook.)

With Splashtop, you can quickly take a look at web pages or Gmail, but you still need to boot into Windows if you want to run Office applications. Splashtop doesn’t appear to be gaining much traction. Early adopters such as Asus (and HP) don’t seem eager to make it a standard offering on their products.

We also have virtual machine solutions such as Parallels and VMware Fusion. These products run Windows within a Mac — and they do a pretty good job of it in my experience. The dueling OSs now both use Intel chips and the virtual machine lets you use both without rebooting.

Rebooting annoys users. Very few use such a procedure — hence the popularity of virtual machines. If users won’t reboot, there’s no opportunity for developers. This leads me to believe that the WebOS “graft” on the HP PCs will be more like a quickboot proposition where you’d first boot into WebOS, and then into Windows. Or, as HP might discreetly hope, you’d boot into WebOS and stay there. If the user finds enough useful applications in the WebOS environment, why boot Windows?

Then we have the Intel chip problem: WebOS and its applications run on ARM hardware. This would force HP to develop and maintain two versions of its OS. It’s feasible, but it adds complexity, costs, and bugs. And for developers, it’s far from ideal: WebOS applications would have to run on two processors and on an indeterminate number of form factors: netbooks, laptops, tablets, printers. (Digressing again on Nokia: The number of target devices and form factors is what caused Nokia to buy TrollTech for Qt, its cross-device development tools and UI. With the MicroNokia deal, Qt is no longer strategic and will be sold to Digia.)

But wait, there’s more. At CES this year, Steve Ballmer announced that the next version of Windows (8?) will be ported to ARM. This is Microsoft’s likely path back into the tablet market it lost to Apple and the coming wave of Android tablets. If we are to believe Bloomberg, an ARM-based Microsoft tablet will be available for the 2012 back-to-school season.

Is this what Leo Apotheker had in mind when he mentioned WebOS on PCs?

If so, here is how the HP PC scene could look like “sometime” in 2012:

- Intel-based PCs and laptops running the “mature” Windows 7.
- ARM-based laptop and netbooks on Windows 8?
- Tablets using a version of Windows 8 with a touch interface?
- Some, but not all, “will include the ability to run WebOS in addition to Microsoft Corp.’s Windows”

Simple, easy to understand. Can you imagine what the sneers and the giggles, at Apple and Google, when looking at such a picture?

On Monday March 14th, HP’s CEO will outline his vision in greater detail.

Understandably, he wants to “decommoditize” HP’s PCS, he’s looking for a way out of the life as a Microsoft serf. PC makers are racing to the bottom, a race Leo Apotheker knows he can’t win. Hence “WebOS Everywhere”: a way for HP to better its destiny.

But another “everywhere’’ story won’t work.

Let’s hope he’ll explain instead where WebOS will focus and how it’ll make a difference for customers and app developers.


The Publisher’s Dilemma

Today’s title pays homage to The Innovator’s Dilemma, Clayton Christensen’s seminal 1997 book. In it, the Harvard Professor describes the effect of what he calls “Disruptive Technologies” on pre-existing markets or businesses. Fifteen years after the concept’s emergence, the impact of digital media on the news industry could be added to the list of most quoted examples of disrupted (devastated?) sectors.

Before we go further, let’s pause a moment and reflect on the Washington Post Company’s latest financial statements: the Q4 2010 earnings released last week. The “WaPo” is the only major US newspaper to provide helpful P&L data (multi-publications media houses usually don’t go into the same level of detail).

Here are the key figures for the full year 2010:
- Revenue for all activities: $4.7bn  (+8% vs 2009)
- Operating income: $546m vs. $259m in 2009
- The Kaplan Education division accounts for 62% of the revenue and 61% of the operating income.
- The Cable television business accounts for 16% of the revenue and 30% of the operating income.
- Broadcasting television revenue increased by 25% to $342m (7% of the total) and its operating income rose by 72% to $121m and accounts for 22% of the total operating income (most of the Y/Y growth is due to an improving advertising market, especially in the automotive sector).

For the newspaper division (mostly the eponymous daily): 2010 revenue was stable at $680m (14% of the total) and the operating loss was reduced to $9.8m — against the 2009 hemorrhage of $163m.
In passing, the Washington Post’s situation shows the importance of a diversified structure; without its education unit, the company might not have survived the last few years. The acquisition of Kaplan Inc. was suggested by Warren Buffett in 1984 and it was the best advice the Post’s owners ever got. (The great billionaire sage is due to step down from WaPo’s board later this year).

Let’s now look at the underlying trends: a persistent erosion in circulation (-7.5% in 2010) and the growth in the Post’s online activities.

The good news: on the fourth quarter of 2010, online accounted for 43% of the newspaper’s revenue, the result of seven years of steady improvements:

Now the bad news: this trend is more a reflection of the print’s business continued erosion than of a sufficient growth on the online side. The next chart shows the parallel evolution of print advertising and online revenues (the latter is totally ad-based). These are quarterly figures are from Q4 2004 to Q4 2010.

Over the last seven years, for each dollar added to online revenue, the WaPo lost five dollars on print. During that time, the Post has lost $88m of print ad revenue and it improved its online business by only $18m. This leads us to a key realization, a sobering one: there is no hope current online revenue stream will someday offset the past decade’s tremendous losses.

Let’s face it: the online advertising business model, when applied to the transformation of the newspaper industry, is largely failure. The reasons are well known:
- The profusion of free, news-related contents diluted the perceived value of editorial-rich “trusted brands”.
- More agile competitors, quite adept at using sophisticated audience-catching techniques (that are implemented at a fraction of the cost of a modern printing plant).
- The endless stream of pages with hundreds of URLs added each day ended up destroying any balance in the supply vs. demand mechanism.
- The resulting pressure on prices, as “premium” ad formats slowly yielded to bulk fire sales.
- An unreliable audience measurement system that rewards cheating instead of editorial quality or relevance.
- The advertising community’s inability to base their purchases on solid market analyses.

Still, publishers had the means to attenuate the effects of this unfortunate conjunction.

For instance:
- Cutting down at their inventory by at least 50% in order to revive a sense of market scarcity.
- Investing much more in technology in order to match the sophistication of clever pure players.
- Refusing to sell the lower end of their inventories to bottom-feeding “ad networks” that act as powerful deflationary engines.
- Getting out of the audience-measurement systems that are ridiculously inaccurate and setting up their own system of traffic analysis.

That’s the theory. In reality, all of the above implies a kind of collective action that is beyond the intellectual and emotional reach of the newspaper industry (although it is not a given that such set of measures could have reversed today’s trend).

Which brings us back to the title of this column. Mere adaptive tactics won’t save the traditional news industry in their multi-front war against “disruptive technologies”.

Some radical re-engineering is needed.

For instance, very few publishers of money-losing dailies can elude the following question:  Wouldn’t it be smarter to accelerate the downward spiral of their print activity in order to feed more oxygen and nutrients to the emerging online business? Each time I’m testing the idea with my fellow European publishers, I’m getting a straight answer: “No f**** way, pal. Print is still where the revenue is!”  I politely refrain from saying “so are your losses, pal “. Beyond this thin-skinned reaction lies a more rational fear: brand dissolution into the digital maelstrom. And there is no successful example of the kind of bold move I recommend.


I don’t see any newspaper surviving without a major structural change in its business. An example: Being published every day will make less and less sense as most of the developing and breaking news is read (and heard or viewed) on a smartphone. On the contrary, long form reporting, or visually rich storytelling could still thrive on paper, a format in which glossy ads will stay in high demand and command correspondingly high prices. Such publications — one or two days a week — have the ability to remain powerful brands vectors.

Don’t dream on it, it’s over

In parallel, newsrooms will have to adapt.
Gone are the football-size open spaces with hundreds of staffers, a small fraction of which work extremely hard and burn themselves out while legions of others parsimoniously manage their output. The next breed of newsrooms will be smaller, more agile and decentralized; it will be built around an inner core of seasoned editors managing in-house or external — and decently paid — reporters and writers (I’m not referring to today’s low cost digital serfs toiling in writing pens, endlessly recycling second-hand material).

Change is also needed on the business side. As the failure of advertising-based  models sinks in, the paid-for model is gaining traction. It is not likely to work on the web but it is finding its way on mobile devices where payment is (slightly) more natural and easier to implement. But prices will have to adjust (downward). Today, the vast majority of publishers are tempted by a mirage: they think they can “protect” their eroding print business by setting high prices for their digital products; others invoke the need to support the industrial costs of print as a reason to oppose low prices on digital.
As long as this mentality prevails, the transition from print to digital will keep stalling — and low-market pure players will thrive. Dinosaurs: It’s time to edit your DNA, or face a world with more HuffPos and no WashPo.


Earnings Season

With three high-tech earnings announcements to cover, this week’s Note will have more breadth than depth.

We’ll start with Amazon. The company’s Q4 2010 sales grew 36% to $12.95B, vs. $9.5B for the same quarter in 2009. Great! But not so fast–investors trashed the stock because Amazon’s numbers were “below expectations.” Yet despite losing 7% after the earnings announcement, AMZN shares are up 36% over the past year:

Across the past five years that number is…+278%.

More interesting than these Wall Street games are the e-book numbers. Earlier in the year, Amazon said e-book sales surpassed hardcover sales for the first time, 180 e-books for every 100 hardcover versions. Now we have a more important milestone, 115 e-books for 100 paperbacks. A tip of the hat to Jeff Bezos for catalyzing the e-publishing phenomenon. This wouldn’t have happened, or at least not so quickly, without the Kindle. Curiously, Amazon releases a lot of numbers, but no hard data for Kindle sales. “Millions,” we’re told and that’s it.

Which leads us to the iPad and tablets.

With 14.8 million iPads sold in nine months and a forecast of 40 million in 2011, one is tempted to eulogize the Kindle. It’s just not needed anymore, right?

Tempting but premature. Ask Kindle fans: They love the device; it’s simple and inexpensive (starting at $139), the battery lasts forever, the e-ink is pleasing to the eye and can be read in full daylight. The Kindle is a well-executed, single-purpose device and will coexist with multi-use tablets, especially if Amazon lowers the price in order to sell even more e-books (or newspapers and magazines which, so far, haven’t done as well as books).

Speaking of newspapers and magazines, Rupert Murdoch’s iPad special, “The Daily,” will be introduced on February 2nd. We’re told that The Daily isn’t the Wall Street Journal or some kind of subset or subsidiary. It’ll provide “entirely original content” and is rumored to cost 99 cents a week. We can assume loads of ads.

In last week’s Monday Note, Frédéric described the tension between publishers and Apple over subscriptions and customer data. We’ll watch what happens with The Daily. Will Apple sell subscriptions exclusively through the app and iTunes? Will Murdoch let Apple keep customer data to itself? One can imagine Apple sharing customer data if, in exchange, Murdoch lets Apple “run the table” for subscription sales. News Corp’s founder is a hard bargainer and a trend setter. Whatever agreement emerges between Apple and The Daily will impact the rest of the publishing industry.

Next up, Microsoft.

While profit slipped by 4%, revenue grew 5% ($20B for the quarter) and cash is abundant, $41.3B, up $4.4B from the same quarter last year. Good numbers. With its traditional Windows + Office cash cow, MS still looks prosperous. But the company said “tablets were a little bit of a drag” last quarter. We’ll watch how that “drag” manifests itself when the 100+ different tablets we’re promised for this year hit the market.

In the meantime, some observers aren’t impressed. In this ComputerWorld article, Gregg Keizer drills into Windows licensing numbers, untangles accounting gimmickry and concludes they have, in fact, plunged by 30%, thus confirming the “tablet drag” comment from company execs.

This explains why, in one year, Microsoft’s stock as gone nowhere, losing 1.5%:

Across the past five years that number is a similar – .1%. Ten years: – 13%…

Still, with the Xbox and Kinect, Microsoft is doing quite well. See this Business Insider article and chart:

The division report, however, omits a crucial detail: Windows Phone 7 numbers. Microsoft says its OEMs have shipped 2 million handsets but neglects to say how many have actually been sold to subscribers. Further, the company “bought” that business. In addition to a $500M marketing budget, they paid developers to write apps and provided financial incentives (versus charging for licenses) to handset makers. No criticism, here. That’s what Microsoft has to do to catch up with Android, Apple, RIM, and even Nokia.

But how long will they have to spend that sort of money before they make any of it back?

If Microsoft’s on-line services business is any guide, a long time. The division might lose $2B this year, something it’s been doing for the past 5 years. Still, we can be sure Microsoft will hang onto its smartphone business indefinitely.


They agree with Lenovo’s chairman, Liu Chuanzhi, who, in an interview at the World Economic Forum in Davos, said this:

‘We have an extreme focus on the innovation of LePad and LePhone because these products will dominate the future market. Anyone who loses this battle will be phased out from the history of this industry.’

Microsoft feels it has no choice but try to be a serious player in the exploding smartphone ecosystem.

That ecosystem word leads us to the king of phones: Nokia. They just announced their 2010 Q4 results…and they’re not good. The Devices and Services business is up only 4% (or down 3% at constant currency) in a market that grew by some 73% last year. Digging a bit deeper, while Nokia managed to slightly increase the average price of its feature phones to $59, the ASP for its smartphones fell to $214. (Apple’s comparable number is a stable $620.) This is one of the reasons why the operating profit for Nokia’s Devices fell by 24%.

All of this led Nokia’s new CEO, Stephen Elop, to send signals that things are going to change. And not just spending less, cutting jobs and the like–that’s for “normal” trouble. Nokia needs to deal with systemic trouble, an ecosystem upheaval. More-of-the- same-but-better won’t help Nokia.

In one year, Nokia’s shares lost 22.8%:

Across the past five years that number is – 41%…

Here are some choice morsels from Elop’s Seeking Alpha earnings call transcript:

‘We also continue to learn that we need an attitudinal shift within Nokia.

The game has changed from a battle of devices to a war of ecosystems and competitive ecosystems are gaining momentum and share. The emergence of ecosystems represents the broad convergence of the mobility, computing and services industries.’

And the money quote:

[W]e must build, capitalize and/or join a competitive ecosystem. The ecosystem approach we select must be comprehensive and cover a wide range of utilities and services that customers expect today and anticipate in the future.’

The full transcript is a bit long, but if you search for these passages you’ll find a courageous, straightforward CEO who doesn’t shy away from calling the problems and their causes as he sees them, politely but without obfuscation.

The “build, capitalize and/or join a competitive ecosystem” line has raised eyebrows. Is Nokia telegraphing a move to Android? Last June I wrote a Nokia Science Fiction piece that made just such a recommendation. Nokia people weren’t pleased: ‘If we do this, we lose control of our destiny!’ To which I replied: It’s already done. OPK and a couple of other execs got the boot and Elop, after just six months, is asking some tough questions.

The other choice is, of course, Microsoft, where Mr. Elop comes from. There, we have two sub-choices.

First, Microsoft “goes Apple”. They decide to make their own smartphones. That’s why they bought Danger and shipped the misbegotten Kin, remember? They’ve built their own MP3 player, the Zune, and a game console, the Xbox. If Microsoft acquired Nokia they’d instantly catapult themselves back at, or close to, the top of the mobile industry.
Easier said than done: Incompatible existing product lines, cultures would get in the way. As for the price, today the market says Nokia is worth $40B, up a little in a down market as  buyers smell an opportunity.

Second, Nokia goes Windows Phone 7…and becomes a Microsoft vassal–I mean licensee. But they’d be (potentially) MS’s largest partner and, as such, able to receive special treatment from the needy platform vendor. The execs know one another, the lord and the liege could become mutual lifesavers. (Or anchors. We’ve seen how these partnerships can degenerate. Ask Carol Bartz at Yahoo!)

We’re promised specifics of Nokia’s plans by February 11th, right before the Mobile World Congress in Barcelona. Stay tuned!


Channel Checks: Smart or Illegal?

by Jean-Louis Gassée

Insider trading isn’t new but it’s still exciting, especially if you don’t play the stock market. For spectators, the cops and robbers game mixes ingenuity, mischief, furtiveness and confederacies. And the unavoidable dunces who talk or do too much and get the miscreants in serious trouble with the Law.

The latest episode of the insider trading, as revealed here by the Wall Street Journal, appears to be of epic proportions: ‘[It] could eclipse the impact on the financial industry of any previous such investigation…’

Among the specifics described in the WSJ article and in other pieces such as this one, I note a new and intriguing reference to Channel Checks. In layperson’s terms, the practice sounds more than reasonable. To get an idea of a company’s business, you can listen to their officials, or you can go around and check their distribution channels. Walk into a store, feel the pulse, ask employees how business is doing. Or if you have the time and inclination, stay around a little bit and count customers walking in, and those walking out with a purchase. Rinse and repeat. Do this on a representative sample and you do get very useable data. That’s what I did 31 years ago in Paris: I was interested in buying a franchise of a US business and wanted to have my own set of data before meeting company execs and their glowing projections. I stood in and out of their Champs Elysées store and counted the take. It helped: I stayed in the computer business.

No less an authority than Peter Lynch, the famed Magellan Fund investor, recommended doing precisely that type of legwork and homework. His investing motto was ‘Buy What You Know’. By which he meant studying the business you considered investing in, the product, the books, management, suppliers, distributors, everything. (See his very good books, One Up On Wall Street and Beating the Street for more. Regrettably not available in electronic form.)

What Peter Lynch recommended a couple of decades ago is alive and well, still recommended by pros. But the originally healthy practice appears to have undergone a malignant mutation. Critics and cops allege the pros went deeper and deeper into “channels”, mostly upstream into suppliers. If you manage to know how many processors or screens of a particular spec Motorola ordered, you gain a very precise estimate of their projections. Especially in an age of Just-in-time inventory management. Add information gained from shippers, ship or air, containers or palettes, and you’re on top of things.

Or, as the FBI and SEC allege: inside. You’re now trading on information not available to the investing public, you’re guilty of insider trading.

Quoting from a related WSJ piece:

“Insider trading basically comes down to where you know or ought to know that the person from whom you’re getting this information has a duty to someone else to keep it confidential,” said former Securities and Exchange Commissioner Paul Atkins in a video interview with The Wall Street Journal. “If you go in and pay the mail clerk to give you special information, that’s not proper.”

Channel Checks now becomes an underhanded, criminal activity. For amateurs of sweet ironies, above, this note’s third link takes you to a site titled… Wall Street Cheat Sheet.

We’ll have to see what skilled attorneys on both sides do with the accusations. Insider trading isn’t always easy to prove and provokes an abundance of academic discussions: see this Wharton overview. Some libertarians even contend insider trading ought to be legal… Others allege insider trading by members of Congress, their staffs and government officials is facilitated by loopholes.

This doesn’t help the mood on the street — not the Street.

The Channel Checks evolution must be viewed through four filters. Common sense, legal logic, policy and politics.

Common sense, visceral, emotional, clamors insider trading is unfair. It tilts the playing field against You and Me investors. Trading ought to take place on the proverbial Level Playing Field, meaning everyone having the same information for their trading decisions. Nice sentiment but delusional: What about intellect and homework, the legal kind? Now, everyone has access to satellite pictures of parking lots on heavy shopping days.

Legal logic is a complicated, tortuous, ever changing matter. Case law evolves, Supreme Court interpretations zig and zag. In theory, above the rabble’s emotions but, in practice, tainted by politics.

Speaking of which, politics, our government’s latest bout of against insider trading seems driven by the need to deal with the post-bailout outcry against Wall Street. I’m not saying the outcry isn’t justified, au contraire. From here, it looks like We The People have been stiffed: Wall Street, the cause of the 2008 catastrophe, has been saved at our expense. Yes, it was for our own good. But the obscenity of today’s bonuses and CEO compensation hurts. Good politicians — attorneys general are elected in our country — can’t let the opportunity to run to our defense go unexploited. This isn’t to say some good won’t come out of it. But we have the Sarbox example to the contrary: there, the outcry following scandals such as the Enron affair led to regulations hurting businesses, especially smaller ones, only benefiting accountants and attorneys, not investors as the 2008 crash proved.

Lastly, policy: how we run ourselves. Insider trading lowers confidence in markets, it makes people distrust Wall Street, it limits amount of money available to finance businesses and thus hurts the economy, that is all of us. Based on past examples, one has to worry about politics overrunning policy, about posturing leading to bad law. Still, let’s hope pragma wins over drama…

For myself, I don’t play the stock market. Across the table, I see PhDs, the famous quants, with brains bigger than mine, computers bigger and faster than mine, and wallets fatter than mine. Even if they don’t cheat, how can I win?


Fighting Unlicensed Content With Algorithms

It’s high time to fight the theft of news-related contents, really. A couple of weeks ago, Attributor, a US company, released the conclusions of a five-month study covering the use of unauthorized contents on the internet. The project was called Graduated Response Trial for News and relied on one strong core idea: once a significant breach is established, instead of an all-out legal offensive, a “friendly email”, in Attributor’s parlance, kindly asks the perpetrator to remove the illegal content. Without a response within 14 days, a second email arrives. As a second step, Attributor warns it will contact search engines and advertising networks. The first will be asked to suppress links and indexation for the offending pages; the second will be requested to remove ads, thus killing the monetization of illegal content. After another 14 days, the misbehaving site receives a “cease and desist” notice and faces full-blown legal action (see details on the Fair Syndication Consortium Blog). Attributor and the FSC pride themselves with achieving a 75% compliance rate from negligent web sites taking action after step 2. In other words, once kindly warned, looters change their mind and behave nicely. Cool.

To put numbers on this, the Graduated Response Trial for News spotted 400,000 unlicensed cloned items on 45,000 sites. That is a stunning 900 illegal uses per site. As reported in a February 2010 Monday Note (see Cashing in on stolen contents), a previous analysis conducted by Attributor pointed to 112,000 unlicensed copies of US newspapers articles found on 75,000 sites; this is a rate of of 1.5 stolen articles per site. Granted, we can’t jump to the conclusion of a 900x increase; the two studies were not designed to be comparable, the tracking power of Attributor is growing fast, the perimeter was different, etc. Still. When, last Friday, I asked Attributor’s CEO Jim Pitkow how he felt about those numbers, he acknowledged that the use of stolen content on the internet is indeed on the rise.

No doubt: the technology and the deals organized by Attributor with content providers and search engines are steps in the right direction. But let’s face it: so far, this is a drop the ocean.
First, the nice “Graduated Response” tested by the San Mateo company and its partners needs time to produce its effects. A duo of 14 day-notices before rolling out the legal howitzer doesn’t make much sense considering the news cycle’s duration: the value of a news item decays by 80% in about 48 hours. The 14-days spacing of the two warning shots isn’t exactly a deterrent for those who do business stealing content.
Second, the tactics described above rely too much on manual operations: assessing the scope of the infringement, determining the response, notifying, monitoring, re-notifying, etc. A bit counter, to say the least, to the nature of the internet with its 23 billion pages.

You get my point. The problem requires a much more decisive and scalable response involving all the players: content providers, aggregators, search engines, advertising networks and sales houses. Here is a possible outline:

1/ Attributor needs to be acquired. The company is simply too small for the scope of the work. A few days of Google’s revenue ($68m per 24 hrs) or less than a month for Bing would do the job. Even smarter, a group of American newspapers and book publishers gathered in an ad hoc consortium could be a perfect fit.

2 / Let’s say Google or Bing buy Attributor’s core engineering know-how. It then becomes feasible to adapt and expand its crawling algorithm so it runs against the entire world wide web — in real time. Two hours after a piece of news is “borrowed” from a publisher, it is flagged, the site receives an pointed notification. This could be email, or an automatically generated comment below the article, re-posted every few hours. Or, even better, a well-placed sponsored link like the fictitious one below:

Inevitably, ads dry up. First, ad networks affiliated to the system stop serving display ads. And second, since the search engine severed hyperlinks, ads on orphan pages become irrelevant. Every step is automated. More