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Freemium Revisited: Paying For Content-Based Applications

Uncategorized By May 1, 2011 8 Comments

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.


The Communication Paradox

Uncategorized By April 3, 2011 11 Comments

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.


WebOS Everywhere

hardware, Uncategorized By March 13, 2011 Tags: , 30 Comments

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

Uncategorized By February 27, 2011 43 Comments

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

Uncategorized By January 30, 2011 10 Comments

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?

Uncategorized By November 29, 2010 1 Comment

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

Uncategorized By November 22, 2010 Tags: 9 Comments

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.


What If Google Stored All Our Medical Records?

Uncategorized By October 17, 2010 Tags: 18 Comments

Regard the horrified looks on the faces of the attendees at a California Council on Science and Technology meeting in Irvine six or seven years ago. I’m the only member from the Dark Side, from the venture capital milieu, inside an institution “designed to offer expert advice to the state government and to recommend solutions to science and technology-related policy issues”. The other members are scientists and scholars.

The question of the day is electronic medical records: How do we computerize, standardize, store, secure, exchange our corpus info with a reasonable assurance of privacy?

My answer: Give the job to Google. And thus follows the politely alarmed reaction…and the objections.

Our records won’t be secure! Google will exploit our most personal history to make money on our backs (or other organs)! They’ve digitized books, is this yet another step towards a privately-controlled but overly powerful public utility/institution?

Years later, what do we know?

First, doctors and patients still have trouble finding and exchanging records. I have, as attorneys are fond of saying, “personal knowledge” of this fact. The exchange of records between my politically-incorrect internist, the Palo Alto Medical Foundation and the Stanford Hospital—organizations within a mere mile of one other—takes multiple phone calls, visits in person, fax machines.

Now try one of the blood-sucking medical insurance companies. To gain access to your own record, they send you, by fax, an authorization form for your signature…but there’s no return number, there’s no way to return the fax. It’s not personal, it’s systemic, an obstacle course to minimize claim payments.

Second, the current system, notwithstanding HIPAA regulations, leaves our records open to outsourcing subcontractors in the US and elsewhere, to poorly qualified claim adjudicators inside insurance companies and to employers’ HR personnel. In theory, there are walls. In practice, expediency: there’s “cost containment”, there’s an astounding number of people, “trusted” or not, who get to look at your records. Compared to this, Google looks pretty good. Yes, they have security breaches, people occasionally lose their password or get their accounts hacked, but these events are statistically insignificant. Add penalties for such incidents, weigh them against what we’d pay Google for the service, and we’d have a decent level of protection, an SLA for our medical records.

Few companies have dealt with size, with what we call “scalability” as successfully as Google has. They have the human expertise and the computer systems to store and index “everything”, this is what they do for a living, with more than 2.5 million servers that keep their data intact.

As to Google’s exploitation of our records… Of course Google cares, they can wring billions from our personal health history? All we have to do is write a contract to share the loot, we call this “revenue-sharing”. Think of what a relentless crawl through billions of medical records will garner them… Take a transversal look at all the patients who take high blood pressure (antihypertensive) drugs, look at morbidity (how often, when, and how severely they get sick) and mortality (when and how we die) rates. Or look at the more subtle but important combinations such as ancestry (the best way to get low cholesterol is to choose your parents well), other drugs, lifestyle (a.k.a. good and bad exercise, food intake, alcohol, tobacco and other substances soon to be legal in California).

This would be much better than the current and deeply corrupt system of medical studies. You think I exaggerate? I wish. See this sobering David H. Freedman story in the November issue of the Atlantic (a treasure of literate America).


HP’s Board of Directors: Redemption or More Insanity Ahead?

hardware, Uncategorized By September 19, 2010 Tags: 11 Comments

HP’s Board of Directors has accumulated an impressive record of bad judgment calls, the latest being the lame lawsuit against their recently deposed CEO, Mark Hurd, who quickly joined Oracle as Co-President and Director.

The History

Once a revered Silicon Valley icon, HP was arguably the first worldwide success to emerge from pre-war Stanford where Bill Hewlett and Dave Packard studied under the illustrious Frederick Terman. Unfortunately, the insiders who were groomed to replace “Bill & Dave”—first John Young, an HP lifer (1968-1992), followed by Lew Platt, another long-termer (1966-1999)—presided over the company’s long slide into comfortable bureaucracy and middling financial performance.

In 1999, HP’s Board was seduced into giving the CEO mantel to Carly Fiorina, a gerontophiliac sales exec from AT&T/Lucent…only to fire her in early 2005. Known for her posturing and opaque pronouncements, Fiorina antagonized and mystified insiders and industry observers alike. John Cooper, CNET’s Executive Editor and longtime tech writer, characterized one of her more frustrating talks as “a Star Trek script” containing “enough business-babble to reduce even the most hardened McKinsey consultant to a state of dribbling catatonia”. Nice.

To succeed Fiorina, HP went outside again and, this time, managed to snare an experienced and accomplished CEO: As head of NCR, Mark Hurd had led the company through a successful turnaround.

About a year after Hurd’s election, HP’s Board became embroiled in the Pretexting scandal. Board members spied on employees and journalists—and even on each other—in an attempt to track down leaks of confidential strategy documents. This ugly episode led to several Board and executive departures: Chairwoman Patricia Dunn was thrown under bus; HP’s General Counsel, Ann Baskins, “took the Fifth” at a Senate hearing; another director, Tom Perkins, and several employees left as well. What Mark Hurd actually knew or did in relationship to this episode has never been clarified.

Despite the scandal and the departures, Hurd made good on his reputation as a turnaround CEO and, through carefully crafted acquisitions and cost-cutting, put HP back at the top of the computer industry in just five years. His wizardry with numbers, his sober talk, and his attention to execution left the impression that HP had finally found the right helmsman.

But then disaster struck. As discussed in our August 29th Monday Note, HP’s Board unceremoniously fired Hurd, publicly berating him for conduct unbecoming a CEO and barely stopping short of accusing him of fraud. And then, after pillorying him, the company inexplicably paid off the “disgraced” Hurd to the tune of $30M to $40M. HP shareholders sued the directors and the media roasted them.

Enter Ellison

Larry Ellison and Mark Hurd have known each other for several years. They’d been business partners when HP and Oracle allied themselves in serving large government and enterprise clients—and they’re tennis buddies as well.

After harshly criticizing HP’s trustees for firing a star executive, Ellison hired Hurd. In keeping with his leadership style, Ellison made room for the new lieutenant by summarily chucking the previous tenant, Charles Phillips, who, ironically, had also become embroiled in a “relationship contretemps” with an ex-paramour. I’ll hasten to say that I prefer Larry’s summary and clean manner to HP’s: Chuck Phillips had a successful career at Oracle, Larry wished him well on his way out, the money flowed, and everyone moved on to the next stage of their lives.


Understanding the Digital Natives

social networks, Uncategorized By July 25, 2010 32 Comments

They see life as a game. They enjoy nothing more than outsmarting the system. They don’t trust politicians, medias, nor brands. They see corporations as inefficient and plagued by an outmoded hierarchy. Even if they harbor little hope of doing better than their parents, they don’t see themselves as unhappy. They belong to a group — several, actually — they trust and rely upon.

“They”, are the Digital Natives.

The French polling institute BVA published an enlightening survey of this generation: between 18-24 years of age, born with a mouse and a keyboard, and now permanently tied to their smartphone. All of it shaping their vision of an unstable world. The study is titled GENE-TIC for Generation and Technology of Information and Communication. Between November 2009 and February 2010, BVA studied hundred young people in order to understand their digital habits. Various techniques where used: spyware in PCs , subjective glasses to “see what they see”, and hours of video recording. (The 500 pages survey is for sale but abstracts, in French, are here ; BVA is considering a similar study for the US market). Here are the key findings:

The constant gamer. The way a Digital Native see his (or, once for all “her“) environment is deeply shaped by computer games. “When he is buying something”, says Edouard Le Marechal who engineered the survey, “finding the best bargain is a process as important as acquiring the good. The Digital Native enjoys using all tools available in his arsenal to outsmart the merchant system and to find the best deal. He doesn’t trust the brand. Like in a game, the brand is the enemy to defeat”.

According to the study, brands face a serious challenge from the Digital Native. Not only does he gets a kick out of triumphing over the brand, but he is not deceived by the marketing pitch. To make things worse, he’ll become an expert, he’ll achieve more knowledge than the merchant trying to lure him. That’s part of the game. Reading the GENE-TIC survey, brands and their vector (advertising), appear under siege in multiple ways. They look increasingly disconnected and outpaced by their target. In addition, advertising is reduced to its utilitarian dimension: if an ad message does not carry an explicit promotion, it is unlikely to lead to a good bargain.

Weirdly enough, when I asked Edouard Le Marechal if big ad agencies were flocking to subscribe to his survey, he replied they were not. Instead, GENE-TIC is massively subscribed to by clients such as high tech or telecommunications companies. (That also reinforces the idea that the brand – whether it is a manufacturer or a service – is willing to (re)connect more directly with its customer base at the expense of the advertising intermediary which appears to have lost its power).