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Cloud 2.0

Last July, I wrote about Google’s goal: Sink Microsoft by deploying Cloud-based Google Apps and, as a result, destroy the Microsoft Office money machine. Today, we’ll take another look at Google’s strategy and at Microsoft’s response with its just released Office 2010 which combines desktop and on-line apps.

First, the Cloud Gospel according to Google. Desktop bloatware is passé. Modern browsers can perform a magic trick: We, Google, maintain the applications on our servers, and we store your data as well—securely, trust us. For you, the experience is desktop-like. Word processing without Word. Spreadsheets without Excel. With one login and password, you can access your documents, create presentations, edit financials from any computer in the world that has an Internet connection.
If you’re on an airplane and want to edit your killer Board of Directors pitch, we’ll provide a local version of your files stored in what is technically called a cache inside your computer. You edit your slides and everything updates and re-syncs when you land and recover a Net connection. You have the best of both worlds: dual off-line/on-line modes. The magic relies on modern operating system, browser, and server technologies. The vast computing and storage power in today’s laptop does the rest.
To summarize: Take a laptop with a modern browser and you’re done. Everything–applications and data–resides in the Cloud. On-line or off-line doesn’t matter. It’s automagically synced.

Since it has no legacy business to protect, Google can offer free versions of its Web Apps. (As we’ll see later, they also offer paid-for versions.) Kill the $300-a-DVD Office Golden Goose and someday, my Son, all this will be yours: 1 billion users at $100/year…that’s a nice $100B/year service business. If you think I exaggerate, you’re right, but by how much? Facebook will have 500 million users sometime this year. The Google vs. Microsoft battle will play out over a decade or more. As a time perspective, Google will soon be twelve years old.

In the meantime, Microsoft isn’t asleep at the switch and they do have a huge legacy to protect. Last year, Microsoft’s total sales were $58B, down 3% from 2008.

(Numbers geeks can find Microsoft’s full 2009 Annual Report here. Note the Operating Profit, 35%. The company spends 15% of its revenue in R&D and 28% in Sales, Marketing and General Administration. Compare this to Apple’s 29.5% Operating Profit, 3% R&D, and 9% SG&A, with a comparable revenue level, in the $50B to $60B range annually. Microsoft’s Net Income is 25% of revenue, Apple’s is 22%. I used the latest available figures for both companies: FY 2009 for MS, Q1 2010 for Apple.) Microsoft Office represented 90% of the $19B Business Division sales, with a nice 64% Operating Profit:

Roughly 60% of all Microsoft’s profits come from Office and a little more than 53% from Windows OS licenses (or what MS calls its “Client” business):

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The Incumbent’s Curse: HP

Last week’s acquisition of Palm by HP makes a clear statement: HP recognizes we are at the beginning of the end of the classical PC era — and we’re witnessing the birth of a new generation, really personal computers, currently called smartphones (and tablets).

HP doesn’t want to be left behind, as it has been with its iPaq line of Windows Mobile devices, nor does it want to join the race to the bottom, again, to make profit-challenged Windows Phone 7 or Android clones.

This brings to mind an almost forgotten episode in HP’s past, one exemplary turn of events to keep in mind when looking at companies who dominate a market — for a while.

Once upon a time, HP owned the Personal Computer market. Then, in a characteristic case of the Incumbent’s Curse, lost it.
What? HP lost the PC market? But they’re the market leader with more than $10B in sales in the latest reported quarter.
That’s in today’s version of personal computers, the Wintel machines.
But the idea, the desire for a personal computer is very old.
For HP, it starts in the late sixties. They buy a design from Tom Osborne, the founder of a company called Logic Design.
I highly recommend reading Tom Osborne’s own words, it’s a long piece but one of the best I’ve ever read in the genre. You’ll find gems like:

‘I remember the overwhelming realization that sitting in front of me on a red card table in the corner of our bedroom/ workshop, sat more computing power per unit volume than had ever existed on this planet. I felt more like the discoverer of the object before me than its creator. I thought of things to come. If I could do this alone in my tiny apartment, then there were some big changes in store for the world.’

And, later in the same piece, his involvement in two more seminal products, the HP 35 and HP 65 pocket calculators, the latter being programmable and incorporating a magnetic stripe reader:

My role in the HP 35 was quite different than that in the HP 9100. Except for the card reader and the power supply, I did most of the circuit design in the HP 9100. I did none of it in the HP 35. Instead, almost all of my effort went into prescribing functional characteristics. This time, I knew that someone would want the calculator that followed the HP 35 to be programmable. A couple of times, I dug in and argued for features that would grease the slides for the follow-on product, the HP 65 (which, I think, was the best product I ever worked on).

The HP 65

I can’t resist adding this last quote:


We had no idea whether the HP 35 would be a success or a dud. (Before it was introduced, a market analysis by a major consulting firm had determined that it would fail because of the tiny keys and the RPN notation. In my opinion, it succeeded for those reasons.) Anyway, we gave it our all and found that it was so well received that overnight, it made the slide rule a relic.’

There is also an EDN interview of Tom Osborne here.

I was there. My biggest break in business, even bigger than being hired by Apple to start Apple France, happens when, in June 1968, HP France takes me off the streets. After dropping out of college and going through four years of what Californian therapists delicately call a “psycho-social moratorium”, I am ready, I get lucky. More

Aligning The Digital Planets

Let’s pause and look at trends that have emerged over the last few years: How will they affect the digital newsmedia industry? First, we’ll try and list a few undisputed facts. Then we’ll drift towards conclusions bordering the uncharted territory of predictions. It’s worth the risk.

The web fuel problem. The internet economic engine isn’t firing on all cylinders. For online news, that’s an understatement. The primary source of income, advertising, has proven itself unable to sustain ambitious journalism. There might be exceptions here and there, a few news organizations have found their way to profitability, but they flourish in niche beats. For example, Politico, which covers Washington DC’s arcana — but it relies on hybrid model (web and print).

Others benefits from a powerful mothership such as New York Times Digital’s DealBook on finance: with a 2.5 to 3m unique visitors a month, this eight journalists operation could break even if it were granted a separate P&L. (DealBook also brings intangible but highly valuable status to the NYT in its fight against the Wall Street Journal.) But these are specialized products.

Observers mention the Huffington Post, with its presumed 10m UV/month, as the prototype for a popular internet news success. To me, the HuffPo is not a journalistic product per se. Taking third party content, the HuffPo builds a clever participatory mash-up, with a focus on juicy stuff. The whole thing is staged it in such a way (splashy editing, pictures, headlines) that it triggers loads of prattling — and page views. Fine. But this is not hardcore journalism.

As we speak, a 50-100 people newsroom stands no chance of living by advertising alone.
This state of affairs won’t change anytime soon. Last year, US ad spending fell by 9% and we know the recovery will take a while. As the CEO of Zenith Optimedia (Publicis Group) said last week in Paris: “In terms of revenue, 2012 will be like 2006″. This even though he predicts the money invested on the internet will keep progressing and will end up coinciding with the time people spend online.

That’s fact #1: don’t count on advertising. At least not in full ad-supported mode, not for a while.

Audience concentration. Worldwide traffic on social networks has doubled in one year. If we go back to December 2007, it grew threefold since then.

On major markets, there is no sign of saturation. Actually, quite the contrary: in the US, the growth is 43% in just two years. This growth partly organic, with Facebook now beyond the 400m members mark. But time spent is increasing as well. On Facebook, it now reaches almost 6 hours a month, six times more than its nearest competitor MySpace, and two more hours than just a year ago.

In the meantime, the time spent on clever utilitarian sites such as free classifieds is still growing in less-mature markets. In France, Le Bon Coin (see our story Learning from free Classifieds) is still growing at a triple digit rate and serving about 4.5 billion page views a month, with users viewing 30 or 40 pages for each visit. Worldwide, an increasing number of people rely on LinkedIn for job-hunting, as scores of large companies use it for recruitment (read this piece in Fortune).

Each time I travel to the United States, I see thirty-somethings glued to an increasingly dominant triple-windows setup: Facebook for social interaction, Craigslist for daily dealings, and Hulu for catch-up TV viewing. (Add a couple of news aggregators from Google and others and you get the whole picture). That was in case you still wondered why time spent on newspapers has gone down, from 42 minutes a month in 2006 to 32 minutes now (these are US figures, to large extent applicable elsewhere).

That’s Fact #2: the audience is flocking to social nets, and to a narrow group of useful/entertaining sites, at the expense of newsmedia. More

Digital Takeover, The Fairfax way

New world, new approaches. Australia is a vibrant, younger economy. You can feel it everywhere. It moves on, it changes, it adapts. And, in the media business, it seems to adjust pretty fast.

Fairfax Digital is, by far, the leading online group in Australia and in the region. It is a division of Fairfax Media Ltd., with the following perimeter:
- 434 publications between Australia and New Zealand (for a country of 21.3m people!)
They include:
- 248 newspapers in Australia: among them two of the country most influential dailies, The Sydney Morning Herald and The Age published in Melbourne
- 80 newspapers in New Zealand
- 46 magazines in both countries
- 15 radio stations
- 24 printing plants
- 284 web sites (229 in Australia, 51 in NZ and 4 in the US).

Below are basic numbers for FY 2009 ending in June 2009 (the annual report is here), in US dollars and in euros (conversions are at today’s rate)

Fairfax Digital (FD) accounted for about 10% of Fairfax Media Ltd. revenue and 16% of its EBITDA for FY 09 (and a hefty 52% for the first half on FY 2010). This give FD’s chief executive Jack Matthews and his crew a great deal of pride — and sustains their fierce independence. This American-born TV and digital media veteran is passionate about the business he’s been building within Fairfax. “We treat this change as a point of singularity, he says, you know, when rules break down, and nothing make sense anymore. Usually, in technology, we tend to overestimate the short term impact and underestimate the long term”. For Jack Matthews, it is more a question of transformation rather than a matter of development or evolution of existing lines of business. More

Windows Mobile Reset

Microsoft is doing the right thing: at the Mobile World Conference in Barcelona, two weeks ago, Steve Ballmer hit the reset button and announced an entirely new smartphone OS, Windows Phone 7 Series. This is fundamentally better than flogging yet another ‘’new and improved’’ rev of the aging, failing Windows Mobile (née Windows CE) platform.

This is a new approach for Microsoft — with some old tricks mixed in.

So far, on the desktop or with mobile devices, Microsoft has played the evolutionary game,  trodding  (1) the cautious backward compatibility path. To this day, the message always has been: Stay with us, your investment in your (or our) applications is safe.

Since the 1.0 release of Windows CE in 1996, the credo was: Stretch but don’t tear; improve, expand but don’t break existing programs. See this Wikipedia timeline.
But three factors came to break the faith.

First, in mobile phones, Microsoft never managed to establish the kind of dominion it enjoys on the desktop. On PCs, the company first used tied sales, or bundling: if an OEM  (Dell, HP) bought Windows but not Office, the OS license price was much higher than with a Windows + Office combo. Then, to thwart competing OS such as Linux, it used licensing agreement tricks. Yes, you, the OEM, could sell dual boot PCs, meaning a PC that could launch Windows or Linux when turned on. But, an important but, the Windows license contained a clause obligating you to only use Microsoft’s Boot Loader, the program that loads on start-up and manages the process of choosing which OS to boot. An even more important ‘’but’’: when you looked into the Boot Loader’s license language, you found it was licensed to you for the sole purpose of booting Microsoft OSes. You were forbidden to use the MS Boot Loader to boot Linux. If you wanted to have a Windows license, you had to agree to the exclusive and exclusionary use of the MS Boot Loader. This explains why, to this day, Dell and any other OEM don’t sell a dual-boot Linux/Windows system. It’s not because Linux is bad or expensive. Most users, reasonably, would want the safety of Windows as the fall-back toolkit as they experiment with a different platform they’re not sure of: see what happens on the Macintosh with virtual machines running Windows. Microsoft managed to prevent such experiments on Windows PCs. More

The iPad Media Expectations

For a large part, the Apple tablet was seen as a potential solution for the media industry problem: a digital infrastructure for delivery and transactions encompassing a vast array of media products — instantiated in a device destined to become a de facto standard.

Many blame the media industry for not being able to come up with such an ecosystem. This is an unfair criticism. Building a universal payment system for the web, even at the limited scale of a single country is already complicated. Let alone an interconnected system allowing users to jump from one country to another. Even the music industry — can’t we think of more global product? – couldn’t do it. As for agreeing on a set of specifications for a device, it would have been impossible. Too many views, ideas, concepts, priorities to unify. To say nothing of egos.

Hence the reliance on Steve Jobs’ vision. As the media industry kept unraveling, such reliance mutated into a desperate hope. Can he save us? Can he do for the media business what he did to the music industry with the iPod + iTunes magic combination?

In this respect, the January 27th release of the iPad fell below expectations. The device is great, it has all the attributes of an Apple product: a sleek design and a gorgeous interface. But Steve Job’s presentation was short on contents. We had a glimpse of the New York Times reader apparently crash-coded in three weeks, but no magazine, nor mind-blowing hybrid content (I’ll come to that notion later). Given the hype, maybe Apple could have waited until May or September to roll-out its magic slate fully loaded with ready-to-purchase news contents. Evidently, Apple is hampered by its obsession with secrecy and its habit of making deals on its own terms – a “here-is- our-device-now-here-is-the-deal ” posture.

Granted, the product won’t ship for two or three months, depending on the version (wifi or 3G). Then, let’s give Apple and its partners the benefit of the doubt and let’s move the clock forward to spring 2011 to see what a true news media game changer could look like.

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The Monday Note iPhone Application

Our App is up and running. You can download it here.

Now you can read the Monday Note on your iPhone, store stories, even, if you are offline.

In addition to the weekly Monday Note, you’ll get a daily QuickNote, short bursts of news with links to relevant stories and documents.
- At launch, the application displays the latest 30 stories (that’s about 15 weeks of Monday Note). Stories are stored in the device for offline reading.
- Each story can be saved in for a preset period for online or offline browsing.
- MondayNote and QuickNotes links open in the browser within the application (no need to quit).

Please send any comments or suggestions to iphone@mondaynote.com

The app has been developped by Idriss Nouar from SecondWeb.  

The Healthcare debate

Before I jump into the topic, you might want to know: Why do we, venture investors, care about the debate? Is this another case of financially comfortable people getting in touch with their inner left-winger? I can’t answer for the deeper layers of my psyche, I’ve given up on such explorations. All I can say is: We The VCs don’t like the ever escalating portion of our GDP spent on healthcare, 17.6% in 2009 and expected to rise to 19.5% by 2017.
 More specifically, for our startups, the cost of employer-sponsored health insurance has risen by 119% (!) in the last decade. We’re in the business of financing the dreams of entrepreneurs, not lining the pockets of insurance companies.

(For more on the the GDP threat and other toxic issues see my January 11th, 2009 Monday Note here.) And, on the unproven assumption we have a heart and soul, how could we like the spectacle of close to 50 million (this is likely to be the 2009 number) uninsured people?

With this out of the way, on to the debate.

First, I see a terrible error in reasoning: we can’t keep treating healthcare like a business. We’re not dealing with the financials of Boeing, Walmart or Apple. Once upon a time, an aspiring executive, I wanted to be initiated into the brotherhood of executives. Knowing my pangs and playing on them, McGraw Hill,

 the publishing giant now trying to get rid of Business Week,
 sold me a subscription to management books series. Luckily, these were good books, I fondly remember Robert Townsend’s Up The Organization! and, to today’s point, Peter Drucker’s
 The Practice of Management.

 Take a look at the enthusiastic Amazon reviews. More than thirty-five years later, one idea from the book still sticks to my mind: the difference between businesses and institutions. The Army, Congress and, according to the great management sage, hospitals all are institutions; they shouldn’t be thought of, or managed like businesses. (I won’t get into the “business” of Congress with lobbyists.)
To our now costly regret, we’ve allowed medicine to be run like a business. When doctors mortgage themselves to buy expensive imaging equipment installed right into their office, guess what happens? Medicine leaving, rightly, much to the doctor’s judgement, a doctor now motivated to run expensive diagnostics, just in case.
If you have the time and stamina, read the great New Yorker article on a Texas town, McAllen, featuring the highest per capita medical costs in the entire country. Why? The equipment and a culture of treating medicine as a business, of milking/bilking patients and, in most cases, their insurance companies. The latter always have the solution of raising premiums on customers who can’t go elsewhere for fear of being denied coverage because of a pre-existing condition.
If you want an even more disheartening read on the state of healthcare in the US, versus the rest of the world, grab T.R. Reid’s The Healing of America. 
Again, take a look at the Amazon reviews. The subtitle reads: A Global Quest for Better, Cheaper, and Fairer Health Care; it foretells the awful story inside, not by a left-wing firebrand but by a moderate soft-spoken scholarly but readable writer.
In a nutshell: We, the US, are number one (we always like the sound of that) in per capita spending; but, depending on the way outcomes are measured, we rank something like thirty-seventh on the quality/efficiency of our healthcare.
To quote the author: “You don’t need an advanced degree in yajnopathy to recognize that the stars are aligned and the timing is propitious for the United States to establish a new national healthcare system.”

Yet, we’re mired in heated controversy and ugly lies. More

Time to think seriously about the iPhone

4:00am. I find myself reading an interesting story covering Portfolio’s web site – on my iPhone. As sleep comes back, I reflexively reach for the “save” (for later reading) button that is on every iPhone news application. But I am reading from the magazine’s site, as opposed to running an app on my smartphone; web sites don’t have a save button. I just became aware of a new set of habits, barely conscious and now ingrained thoughts/actions created by reading news stories on an iPhone (or an iPod Touch). A good sign.

In the Monday Note, for quite a while, Jean-Louis and I have been discussing the development of news-related iPhone apps (our first story “Why Publishers should grab the iPhone” goes back to a year ago,
or follow the iPhone tag on the Note). Since then, several news organizations have developed specific applications (not just tailored websites) for the iPhone. More