Tech as a boost for development

 

Moore’s Law also applies to global development. From futuristic wireless networks for rural Africa to tracking water well drillings, digital technology is a powerful boost for development as evidenced by a growing number of initiatives.  

Last week, The Wall Street Journal unveiled a Google project designed to provide wireless networks in developing countries, more specifically in sub-Saharan Africa and Southeast Asia. According to the Journal, the initiative involves using the airwaves spectrum allocated for television signals or teaming up with cellular carriers already working there. In its typical “outside-of-the-box” thinking, the project might also rely on high-altitude blimps to cover infrastructure-deprived areas. Coupled with low-cost handsets using the Android operating system, or the brand new Firefox OS for mobile, this would boost the spread of cellular phones in poor countries.

Previously unavailable, mobile access will be a game changer for billions of people. At the last Mobile World Congress in Barcelona, I chatted with an Alcatel-Lucent executive who explained the experiments she witnessed in Kenya, such as providing the equivalent of index cards to nurses to upgrade their knowledge of specific treatments; the use of mobile phone translated into an unprecedented reach, even in remote areas where basic handsets are shared among many people. Similarly, tests for access to reading material were conducted by UNESCO, the United Nations branch for education and culture. Short stories, some loaded with interactive features, were sent to phones and, amazingly, kids flocked to read, share and participate. All of this was carried on “dumb” phones, sometimes with only mono-color displays. Imagine what could be done with smartphones.

Moore’s Law will keep helping. Currently, high end smartphones are out of reach for emerging markets where users rely on prepaid cards instead of subscriptions. But instead of a $400-$600 handsets (without a 2-year contract) currently sold in Western markets, Chinese manufacturers are aiming at a price of $50 for a durable handset, using a slower processor but sporting all expected features: large screen, good camera, GPS module, accelerometers, and tools for collective use. On such a foundation, dedicated applications can be developed — primarily for education and health.

As an example, the MIT Media Labs has created a system for prescribing eyeglasses that requires only a one-dollar eyepiece attached to a smartphone; compared to professional equipment costing thousands times more, it runs a very decent diagnostic. (This is part of the MIT Global Challenge Initiative).

This, coupled with liquid-filled adjustable glasses such as this one presented at TED a couple of years ago, will help solve vision problems in poor countries for a couple of dollars per person. Other systems aimed at detecting vision-related illnesses such as cataract or glaucoma are in development. So are blood-testing technologies based on bio-chips tied to a mobile app for data collection.

Last week, I attended the Google’s Zeitgeist conference in the UK — two days of enthralling TED-like talks (all videos here). Among many impressive speakers, two got my attention. The first is Sugata Mitra, a professor of education technology at Newcastle University. In his talk — filled with a mixture of Indian and British humor — he described self-organizing systems experiments in rural India built around basic internet-connected computers. The results are compelling for language learning and basic understanding of science or geography.

The other speaker was the complete opposite. Scott Harrison has an interesting trajectory: he is a former New York nightclub promoter who changed drastically his life seven years ago by launching the organization Charity:Water. Harrison’s completely fresh approach helped him redefine how a modern charitable organization should work. He built his organization around three main ideas. First, 100% of donations should reach a project. To achieve this, he created two separate funding circuits: a public one for projects and another for to support operational costs.

Principle number two, build a brand, with all the attributes that go with it: Strong visual identity and well-designed web site (most of those operated by NGO’s are terrible); the web site is rich and attractive and it looks more like than an Obama campaign fundraising machine than a NGO, (I actually tested Charity:Water’s very efficient donation system by giving $100, curious to see where the money will land.)

The third and probably the most innovative idea was to rely on simple, proven digital technologies to guarantee complete project traceability. Donors can find precisely where their money ends up — whether it is for a $60 sand-filter fountain or a $2000 well. Last, Charity:Water funded a drilling truck equipped with a GPS tracker that makes it visible on Google Maps; in addition, the truck tweets its location on a real-time basis. Thanks to a $5 million Google funding, the organization currently works with seven high-tech US companies to develop robust water sensors able to show in real-time how much water is running on a given project. About 1000 of these are to be installed before year-end. This will help detect possible malfunctions and it will also carries promotional (read: fundraising) capabilities: thanks to a mobile app, a kid who helped raise few hundreds bucks among his friends can see where his or her water is actually flowing.

As I write this, I see comments coming, denouncing the gadgetization of charity, the waste of money in technologies not directly benefiting the neediest, Google’s obscure and mercantile motives, or the future payback for cellular carriers from the mobile initiatives mentioned earlier. Sure thing, objections must be heard. But, at this time, everyone who has traveled in poor areas — like I did in India or in sub-Saharan countries such as Senegal, Mauritania and Burkina-Faso — comes back with the strong conviction that all means must be used to provide these populations with basic things we take for granted in the Western world. As for Charity:Water, results speak for themselves: Over six years, the organization has raised almost $100m and it provided drinkable water to 3m people (out of 800m who don’t have access to it in the world — still lots of work left.) Like in many areas, the benefits of new, disruptive models based on modern technologies far outweigh the disadvantages.

frederic.filloux@mondaynote.com

Post-PC: Wall Street Likes the View

 

The conventional PC business is now on the decline and yet share prices for of key players Microsoft and HP are moving up. Why?

In an April press release, IDC painted a bleak picture for the PC. Compared to last year’s first quarter, worldwide shipments of PCs are down 13.9%, the “steepest decline ever in a single quarter”. US numbers are about the same: -12.7%. On a graph, the trend is unmistakable:

Is this a trend Wall Street likes?

When you consider Microsoft, it seems so. In a corporate blog post titled Windows 8 at 6 months, the company proudly claims to have “recently surpassed the 100 million licenses sold mark for Windows 8.” This is an interesting number. A quarter ago, MS announced it had sold 60 million licenses, meaning that only 40 million were sold in the last three months. That’s a 33% drop…hardly a rousing success. (The “licenses sold” phrase requires caution, it doesn’t only mean “sold with new PCs”, there are also updates to existing machines, with or without enthusiasm for the new Windows OS.)

“Ignore the Windows 8 numbers and IDC analysis”, says Wall Street. While the tech-heavy Nasdaq climbed only 6.6% in the last 60 days, Microsoft shares went up by 21%.

The same apparent illogic holds for Hewlett-Packard. Last week, the largest PC maker disclosed its second quarter numbers. Compared to the same quarter last year, they’re not exactly pretty:

Revenue down by 10% to $27.6B
Operating Margin at 5.8%, down by about 20% (HP prefers “down 1.4 points”)
EPS (Earnings Per Share) at 55 cents, down 31%

Zeroing on HP’s PC business, things look worse:

Revenue down by 20% to $7.6B
Operating Margin at 3.2%, down 44% (“down 2.2 points” sounds better)

As one would expect, Wall Street reacted, and HP shares went…up. By 17.8% the day after the announcement:

What was the good news for investors? Resorting to one of the usual bromides, HP “handily beat Street expectations” by posting Earnings Per Share (EPS) of $0.55 vs. a projected $0.30 to $0.40.

As discussed in the December 16th Monday Note, Chapter 2 of the Turnaround Artist Manual prescribes exactly what we’re seeing: Drastically lower expectations within days of taking on the job. “Things are worse than I was told. We’ll have to touch bottom before we bounce back…'”

Following the script, HP CEO Meg Whitman called 2013 a “fix and rebuild year”. Everyone should expect a “broad-based profit decline”. But a 17% rebound in the stock price can’t be explained solely by a collective sigh of relief when the actual numbers aren’t as bad as the CEO had led everyone to expect.

(In its earnings release, HP still calls itself “The world’s largest technology company”. I guess they think smartphones and tablets aren’t “technology”, but PCs and printers are…)

As quoted in a VentureBeat post, Whitman thinks that the other US PC maker, Dell, is in no better shape:

“You saw a competitor, Dell, completely crater earnings,” Whitman said in response to a question. “Maybe that is what you do when you are going private. We are setting up the company for the long term.”

Ironically, and without a hint of self-awareness, she accuses Dell of playing the Setting Artificially Low Expectations game:

She implied that Dell did that on purpose, since Michael Dell is motivated to repurchase shares in the company as cheaply as possible, and deliberately lowering earnings is a good way to get the share prices to fall.

 Actually, Whitman must envy what Dell is attempting to do: Get out of the PC clone Race To The Bottom. Because PCs make half of Dell’s revenue, getting out of that hopelessly commoditized business would cause trouble if done in public. Going private allows Dell to close the curtain, perform the unappetizing surgery out of view and, later, return to Wall Street with a smaller company endowed with a more robust earnings engine, focused on higher-enterprise gear and services.

This helps explain the apparent paradox: Wall Street doesn’t like HP and Microsoft shares despite their lower PC numbers but because of them. Investors want to believe that future earnings (the ones they count on when buying shares today) will come from “Post-PC” products and services instead of being weighed down by shrinking PC volumes and margins. In particular, those who buy HP shares must believe that the company will sooner or later exit the PC clone business. For Microsoft, the bet is that the company will artfully manage a smooth transition to higher Enterprise and Entertainment revenues and their fatter margins.

I’m not in fond of the “Post-PC” label, it lacks nuance and it’s premature. The desktop and laptop machines we’ve known for more than three decades may no longer be the sole incarnations of our personal computing – our affection, time, and money have shifted smartphones and tablets – but the PC will continue to live in our offices and homes.

Regard Lenovo, the Chinese company that seized on IBM’s PC business when Big Blue decided to exit the race. They’re doing quite well, posting a record $34B in revenue for this year.

There is life left in the PC business, just not for US incumbents.

JLG@mondaynote.com

 

Why Google Will Crush Nielsen

 

Internet measurement techniques need a complete overhaul. New ways have emerged, potentially displacing older panel-based technologies. This will make it hard for incumbent players to stay in the game.

The web user is the most watched consumer ever. For tracking purposes, every large site drops literally dozens of cookies in the visitor’s browser. In the most comprehensive investigation on the matter, The Wall Street Journal found that each of the 50 largest web sites in the United Sates, weighing 40% of the US page views, installed an average of 64 files on a user device. (See the WSJ’s What They Know series and a Monday Note about tracking issues.) As for server logs, they record every page sent to the user and they tell with great accuracy which parts of a page collect most of the reader’s attention.

But when it comes to measuring a digital viewer’s commercial value, sites rely on old-fashioned panels, that is limited user population samples. Why?

Panels are inherited. They go back to the old days of broadcast radio when, in order to better sell advertising, dominant networks wanted to know which station listeners tuned in to during the day. In the late thirties, Nielsen Company made a clever decision: they installed a monitoring box in 1000 American homes. Twenty years later, Nielsen did the same, on a much larger scale, with broadcast television. The advertising world was happy to be fed with plenty of data — mostly unchallenged as Nielsen dominated the field. (For a detailed history, you can read Rating the Audience, written by two Australian media academics). As Nielsen expanded to other media (music, film, books and all sorts of polls), moving to the internet measurement sounded like a logical step. As of today, Nielsen only faces smaller competitors such as ComScore and others.

I have yet to meet a publisher who is happy with this situation. Fearing retribution, very few people talk openly about it (twisting the dials is so easy, you know…), but hey all complain about inaccurate, unreliable data. In addition, the panel system is vulnerable to cheating on a massive scale. Smarty pants outfits sell a vast array of measurement boosters, from fake users that will come in just once a month to be counted as “unique” (they are indeed), to more sophisticated tactics such as undetectable “pop under” sites that will rely on encrypted URLs to deceive the vigilance of panel operators. In France for instance, 20% to 30% of some audiences can be bogus — or largely inflated. To its credit, Mediametrie — the French Nielsen affiliate that produces the most watched measurements — is expending vast resources to counter the cheating, and to make the whole model more reliable. It works, but progress is slow. In August 2012, Mediametrie Net Ratings (MNR), launched a Hybrid Measure taking into account site centric analytics (server logs) to rectify panel numbers, but those corrections are still erratic. And it takes more than a month to get the data, which is not acceptable for the real-time-obsessed internet.

Publishers monitor the pulse of their digital properties on a permanent basis. In most newsrooms, Chartbeat (also imperfect, sometimes) displays the performance of every piece of content, and home pages get adjusted accordingly. More broadly, site-centric measures detail all possible metrics: page views, time spent, hourly peaks, engagement levels. This is based on server logs tracking dedicated tags inserted in each served page. But the site-centric measure is also flawed: If you use, say, four different devices — a smartphone, a PC at home, another at work, and a tablet — you will be incorrectly counted as four different users. And if you use several browsers you could be counted even more times. This inherent site-centric flaw is the best argument for panel vendors.

But, in the era of Big Data and user profiling, panels no longer have the upper hand.

The developing field of statistical pairing technology shows great promise. It is now possible to pinpoint a single user browsing the web with different devices in a very reliable manner. Say you use the four devices mentioned earlier: a tablet in the morning and the evening; a smartphone for occasional updates on the move, and two PCs (a desktop at the office and a laptop elsewhere). Now, each time you visit a new site, an audience analytics company drops a cookie that will record every move on every site, from each of your devices. Chances are your browsing patterns will be stable (basically your favorite media diet, plus or minus some services that are better fitted for a mobile device.) Not only your browsing profile is determined from your navigation on a given site, but it is also quite easy to know which sites you have been to before the one that is currently monitored, adding further precision to the measurement.

Over time, your digital fingerprint will become more and more precise. Until then, the set of four cookies is independent from each other. But the analytics firm compiles all the patterns in single place. By data-mining them, analysts will determine the probability that a cookie dropped in a mobile application, a desktop browser or a mobile web site belongs to the same individual. That’s how multiple pairing works. (To get more details on the technical and mathematical side of it, you can read this paper by the founder of Drawbridge Inc.) I recently discussed these techniques with several engineers both in France and in the United Sates. All were quite confident that such fingerprinting is doable and that it could be the best way to accurately measure internet usage across different platforms.

Obviously, Google is best positioned to perform this task on a large scale. First, its Google Analytics tool is deployed over 100 millions web sites. And the Google Ad Planner, even in its public version, already offers a precise view of the performance of many sites in the world. In addition, as one of the engineers pointed out, Google is already performing such pairing simply to avoid showing the same ad twice to a someone using several devices. Google is also most likely doing such ranking in order to feed the obscure “quality index” algorithmically assigned to each site. It even does such pairing on a nominative basis by using its half billion Gmail accounts (425 million in June 2012) and connecting its Chrome users. As for giving up another piece of internet knowledge to Google, it doesn’t sounds like a big deal to me. The search giant knows already much more about sites than most publishers do about their own properties. The only thing that could prevent Google from entering the market of public web rankings would be the prospect of another privacy outcry. But I don’t see why it won’t jump on it — eventually. When this happens, Nielsen will be in big trouble.

frederic.filloux@mondaynote.com

Otellini’s Striking Confession

 

We know Intel shunned ARM processors and played virtually no role in the smartphone revolution. But we now learn Steve Jobs asked Intel to build the iPhone microprocessor. Paul Otellini, Intel’s departing CEO, admits he should have followed his gut – and made the smartphone world a very different place.

CEO valedictions follow a well-known script: My work is done here, great team, all mistakes are mine, all good deeds are theirs, I leave the company in strong hands, the future has never been brighter… It’s an opportunity for a leader to offer a conventional and contrived reminiscence, what the French call la toilette des souvenirs (which Google crudely translates as toilet memories instead of the affectionate and accurate dressing up memories).

For his farewell, Paul Otellini, Intel’s departing CEO, chose the interview format with The Atlantic Monthly’s senior editor Alexis Madrigal. They give us a long (5,700+ words) but highly readable piece titled Paul Otellini’s Intel: Can the Company That Built the Future Survive It?

Photo: Guardian.co.uk

The punctuation mark at the title’s end refers to the elephantine question in the middle of Otellini’s record: Why did Intel miss out on the smartphone? Why did the company that so grandly dominates the PC market sit by while ARM architecture totally, and perhaps irretrievably, took over the new generation of phones — and most other embedded applications?

According to Otellini, it was the result of Intel’s inertia: It took a while to move the machine.

Madrigal backfills this uneasy explanation with equal unease:

“The problem, really, was that Intel’s x86 chip architecture could not rival the performance per watt of power that designs licensed from ARM based on RISC architecture could provide. Intel was always the undisputed champion of performance, but its chips sucked up too much power. In fact, it was only this month that Intel revealed chips that seem like they’ll be able to beat the ARM licensees on the key metrics.”

Note the tiptoeing: Intel’s new chips “seem like” they’ll be fast enough and cheap enough. Madrigal charitably fails to note how Intel, year after year, kept promising to beat ARM at the mobile game, and failed to do so. (See these 2010, 2011 and 2012 Monday Notes.) Last year, Intel was still at it, dismissively predicting “no future for ARM or any of its competitors“. Tell that to ARM Holdings, whose licensees shipped 2.6 billions chips in the first quarter of this year.

Elsewhere in the article, Otellini offers a striking revelation: Fresh from anointing Intel as the microprocessor supplier for the Mac, Steve Jobs came back and asked Intel to design and build the CPU for Apple’s upcoming iPhone. (To clarify the chronology, the iPhone was announced early January, 2007; the CPU conversation must have taken place two years prior, likely before the June, 2005 WWDC where Apple announced the switch to x86. See Chapter 36 of Walter Isaacson’s Jobs bio for more.)

Intel passed on the opportunity [emphasis mine]:

“We ended up not winning it or passing on it, depending on how you want to view it. And the world would have been a lot different if we’d done it, […]

Indeed, the world would have been different. Apple wouldn’t be struggling through a risky transition away from Samsung, its frenemy CPU supplier; the heart of the iPhone would be Made In America; Intel would have supplied processors for more than 500 million iOS devices, sold even more such chips to other handset makers to become as major a player in the smartphone (and tablet) space as it is in the PC world.

Supply your own adjectives…

Indulging briefly in more What If reverie, compare the impact of Intel’s wrong turn to a better one: How would the world look like if, at the end of 1996, Gil Amelio hadn’t returned Apple back to Steve Jobs? (My recollection of the transaction’s official wording could be faulty.)

So, again, what happened?

At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn’t see it. It wasn’t one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.

A little later, Otellini completes the train of thought with a wistful reverie, a model of la toilette des souvenirs:

“The lesson I took away from that was, while we like to speak with data around here, so many times in my career I’ve ended up making decisions with my gut, and I should have followed my gut,” he said. “My gut told me to say yes.”

The frank admission is meant to elicit respect and empathy. Imagine being responsible for missing the opportunity to play a commanding role in the smartphone revolution.

But perhaps things aren’t as simple as being a “gut move” short of an epochal $100B opportunity.

Intel is a prisoner of its x86 profit model and Wall Street’s expectations. It’s dominant position in the x86 space give Intel the pricing power to command high margins. There’s no such thing in the competitive ARM space, prices are lower. Even factoring in the lower inherent cost of the somewhat simpler devices (simpler for the time being; they’ll inevitably grow more complex), the profit-per-ARM chip is too thin to sustain Intel’s business model.

(Of course, this assumes a substitution, an ARM chip that displaces an x86 device. As it turns out, the smartphone business could have been largely additive, just as we now see with tablets that cannibalize classical PCs.)

Another factor is the cultural change that would have been required were Intel to have gotten involved in making ARM devices. As both the designer and manufacturer of generation after generation of x86 microprocessors, Intel can wait until they’re good and ready before they allow PC makers to build the chips into their next products. The ARM world doesn’t work that way. Customers design their own chips (often called a System on a Chip, or SoC), and then turn to a semiconductor manufacturer (a foundry) to stamp out the hardware. Taking orders from others isn’t in Intel’s DNA.

And now?

The answer might lie in another French expression: L’histoire ne repasse pas les plats. Google Translate is a bit more felicitous this time: History does not repeat itself. I prefer the more literal image — History doesn’t come around offering seconds — but the point remains: Will there be seconds at the smartphone repast?

Officially, Intel says its next generation of x86 processors will (finally!) topple the ARM regime, that their chips will offer more computing might with no cost or power dissipation penalty. In their parlance “the better transistor” (the basic unit of logic processing) will win.

I doubt it. The newer x86 devices will certainly help Microsoft and its OEMs make Windows 8 devices more competitive, but that won’t prevent the spread of ARM in the legion of devices on which Windows is irrelevant. For these, Intel would have to adopt ARM, a decision Otellini has left to the new tandem leadership of Brian Krzanich (CEO) and Renée James (President). Will they stick to the old creed, to the belief Intel’s superior silicon design and manufacturing technology will eventually overcome the disadvantages of the more complex x86 architecture? Or will they take the plunge?

They might be helped by a change in the financial picture.

In 2006, that is after throwing Jobs in Samsung’s arms (pun unintended), Intel sold its ARM business, the XScale line, to Marvell. The reason was purely financial: for similar capital expenditures (costly fabs), ARM processors achieved much lower per-unit profit, this because of the much more competitive scene than in the x86 space.

Now, if Intel really wants to get a place at the smartphone table with new and improved x86 devices, the company will have to price those to compete with established ARM players. In other words, Intel will have to accept the lower margins they shunned in 2006. Then, why not do it with the ARM-based custom processors Apple and others require?

JLG@mondaynote.com

—————————-

(I’ll confess a weakness for The Atlantic and, in particular, for its national correspondent James Fallows, a literate geek and instrument-rated pilot who took upon himself to live in Beijing for a while and, as a result, can speak more helpfully about China than most members of the Fourth Estate. Going back to last week’s reference to the Gauche Caviar, when my Café de Flore acquaintances fall into their usual rut of criticizing my adopted country for its lack of “culture”, I hold out that The Atlantic — which sells briskly at the kiosk next door — is one of many examples of American journalistic excellence.

And, if you’re interested in more strange turns, see this other string Alexis Madrigal piece in the same Atlantic: The Time Exxon Went Into the Semiconductor Business (and Failed). I was there, briefly running an Exxon Information Systems subsidiary in France and learning the importance of corporate culture.)–JLG

Two strategies: The Washington Post vs. The NYT

 

Both are great American newspapers, both suffer from the advertising slump and from the transition to digital. But the New York Times’ paywall strategy is making a huge difference. 

The Washington Post’s financials provide a good glance at the current status of legacy media struggling with the shift to digital. Unlike others large dailies, the components of the Post’s P&L clearly appear in its statements, they are not buried under layers of other activities. Product-wise, the Post remains a great news machine, collecting Pulitzer Prizes with clockwork regularity and fighting hard for scoops. The Post also epitomizes an old media under siege from specialized, more agile outlets such as Politico, ones that break down the once-unified coverage provided by traditional large media houses. In an interview to the New York Times last year, Robert G. Kaiser, a former editor who had been with the paper since 1963, said this:

“When I was managing editor of The Washington Post, everything we did was better than anyone in the business,” he said. “We had the best weather, the best comics, the best news report, the fullest news report. Today, there’s a competitor who does every element of what we do, and many of them do it better. We’ve lost our edge in some very profound and fundamental ways.”

The iconic newspaper has been slow to adapt to the digital era. Its transformation really started around 2008. Since then, it has checked all the required boxes: integration of print and digital productions; editors are now involved on both sides of the news production and all relentlessly push the newsroom to write more for the digital version; many blogs covering a wide array of topics have been launched; and the Post now has a good mobile application. The “quant” culture also set in, with editors now taking into account all the usual metrics and ratios associated with digital operations, including a live update of Google’s most relevant keywords prominently displayed in the newsroom. All this helped the Post collect 25.6 million unique visitors per month, vs. 4 to 5 million for Politico, and 35 million for the New York Times that historically enjoys a more global audience.

Overall, the Washington Post Company still relies heavily on its education business, as show in the table below :

 Revenue:.......$4.0bn (-3% vs. 2011)
 Education:.....$2.2bn (-9%)
 Cable TV:......$0.8bn (+4%)
 Newspaper:.....$0.6bn (-7%)
 Broadcast TV:..$0.4bn (+25%)

But the education business no is longer the cash cow it used to be. Not only did its revenue decrease but, last year, it lost $105m vs. a $96m profit in 2011. As for the newspaper operation, it widened its losses to $53m in 2012 from $21m in 2011. And the trend worsens: for the first quarter of 2013, the newspaper division’s revenue decreased by 4% vs. a year ago and it lost $34m vs. $21m for Q1 2011.

Now, let’s move to a longer-term perspective. The chart below sums up the Post’s (and others legacy media’s) problem:

Translated into a table:

                  Q1-2007   Q1-2013  Change %
 Revenue (All):....$219m.....$127m.....-42%
 Print Ad:.........$125m.....$49m......-61%
 Digital Ad:.......$25m......$26m......+4%

A huge depletion in print advertising, a flat line (at best) for digital advertising, the elements sum up the equation faced by traditional newspapers going from print to online.

Now, let’s look at the circulation side using a comparison with the New York Times. (Note that it’s not possible to extract the same figures for advertising from the NYT Co.’s financial statements because they aggregate too many items.) The chart below shows the evolution of the paid circulation for the Post between 2007 and 2013:

..and for the NY Times:

Call it the paywall effect: The New York Times now aggregates both print and digital circulations. The latter now amounts to 676,000 digital subscribers that have been recruited using the NYT’s metered system (see previous Monday Notes under the “paywall” tag). (Altogether, digital subscribers to the NYT, the International Herald and the Boston Globe now number 708,000). It seems the NYT found the right formula: its digital subscribers portfolio grows at a 45% per year rate, thanks to a combination of sophisticated marketing, mining customer data and aggressive pricing (it even pushes special deals for Mother’s Day.) All this adds to the bottom line: if each digital sub brings $12 a month, the result is about $100m that didn’t exist two years ago. But it does not benefit the advertising side as it continues to suffer. For the first quarter of 2013 vs. the same period last year, the NYT Company lost 13% in print ads revenue and 4% for digital ads. (As usual in their earning calls, NYT officials mention the deflationary effects of ad exchanges as one cause of erosion in digital ads.)

One additional sign that digital advertising will remain in the doldrums: Politico, too, is exploring alternatives; it will be testing a paywall in a sample of six states and for its readers outside the United States. The system will be comparable to the NYT.com or the FT.com, with a fixed number of articles available for free (see Politico’s management internal memo.)

It is increasingly clear that readers are more willing than we once thought to pay for content they value and enjoy. With more than 300 media companies now charging for online content in the U.S., the notion of paying to read expensive-to-produce journalism is no longer that exotic for sophisticated consumers.

frederic.filloux@mondaynote.com

 

Elon Musk’s Sweet Revenge

 

Elon Musk, Tesla’s CEO, saw its latest creation, the Model S – and himself – criticized by traditional media. Now, Tesla just scored its first profitable quarter and Consumer Reports put the Model S at the top of its rankings, making it possible for Musk’s company to become more than a niche player.

Palo Alto is known, primarily, as the cradle of high-tech. Its birth registry stretches from pre-World War II Hewlett-Packard, to Cisco, Sun Microsystems (after Stanford University Network), Logitech, and on to Google and Facebook.

But there’s an aspect of the town that’s rarely remarked upon. As a happy Palo Alto resident for 25 years as well as a half-century regular at the Café de Flore and Au Sauvignon, I can attest that Palo Alto vies with Paris’ Left Bank as the cynosure of the Gauche Caviar — the Caviar Left, the Volvo Liberals as they were known eons ago. Palo Altans, like the residents of the sixth arrondissement, have money and they’re willing to spend it (this isn’t constipated New England, after all) — but they only spend it in the proper way. And there’s no better way to demonstrate that you’re spending your money in a seemly fashion than to be seen driving the proper car.

The combination of tech culture, money, and sincere (if easily lampooned) social/ecological awareness make Palo Alto an interesting place to watch automotive fashion wax and wane.

Walking Palo Alto’s leafy streets in the early 2000’s, I witnessed the rise of the Prius. Rather than grafting “green” organs onto a Camry or a disinterred Tercel, Toyota’s engineers had designed a hybrid from the tires up…and they gave the car a distinctive, sui generis look. It was a stroke of genius, and it tickled us green. What better way to flaunt our concern for the environment while showing off our discerning tech taste than to be spotted behind the wheel of a Prius? (I write “us” without irony: I owned a Gen I and a Gen II Prius, and drive a Prius V in France.) Palo Alto was Prius City years before the rest of the world caught on. (Prius is now the third best-selling car worldwide; more than a million were sold in 2012.)

The cute but artificial Volkswagen Beetle came and went. The Mini, on the other hand, has been a success. A coupling of British modesty and German engineer (the car is built by BMW), the Mini proved that Americans could fall in love with a small car.

The Smart, an even smaller car, hasn’t fared well at all. There are now more older Citroëns than Smarts on our streets. I also see some tiny Fiat 500s, but too few so far to call it a durable trend.

Then there’s Tesla. In 2008, when the Tesla Roadster came out, I watched it with mixed feelings: some in my neighborhood ended up on flatbeds, but I smiled as I saw Roadsters smoothly (and silently) outrun a Porsche when the traffic light turned green.

As much as I admired Elon Musk, Tesla’s founder and a serial entrepreneur of PayPal fame, I was skeptical. A thousand-pound battery and electric drive train in a Lotus frame…it felt like a hack. This was a beta release car, a $100k nano-niche vehicle. It wasn’t seemly.

Musk muscled his way through, pushed his company onto firmer financial ground, and, in June 2012, Tesla began delivery of the Model S. This is a “real” car with four doors, a big trunk (two, actually, front and back), and a 250 mile (400 km) range. Right away, the sales lot at Tesla’s corporate store in nearby Menlo Park was packed. I started to see the elegant sedan on our streets, and within a few months there were three Model Ss in the parking garage at work. With their superior range, they rarely feed from the EV charging stations. (The Nissan Leaf, on the other hand, is a constant suckler.)

This was a big deal. The company had jumped straight from beta to Tesla 2.0. The bigwigs in the automotive press agreed: Motor Trend and Automobile Magazine named the Model S their 2012 Car of the Year.

Actually, not all the bigwigs agreed. The New York Times’ John Broder gushed over the Model S’s futuristic engineering (“The car is a technological wonder”), but published an ultimately negative story titled Stalled Out on Tesla’s Electric Highway. The battery wouldn’t hold a charge, the car misreported its range, Tesla support gave him bad information… The car ended up being hauled off on a flatbed.

Broder’s review didn’t evince much empathy from Elon Musk, a man who clearly doesn’t believe the meek will inherit the Earth. In a detailed blog post backed up by the data the data that was logged by the car, Tesla’s CEO took Broder to task for shoddy and fallacious reporting:

As the State of Charge log shows, the Model S battery never ran out of energy at any time, including when Broder called the flatbed truck…
During the second Supercharge… he deliberately stopped charging at 72%. On the third leg, where he claimed the car ran out of energy, he stopped charging at 28%.

More unpleasantness ensued, ending with an uneasy statement from Margaret Sullivan, The NYT’s Public Editor: Problems With Precision and Judgment, but Not Integrity, in Tesla Test, and with Musk claiming that the NYT story had cost Tesla $100M in market cap.

Other writers, such as David Thier in Forbes, rushed to Broder’s defense for no reason other than an “inclination”:

I’m inclined to trust the reporter’s account of what happened, though at this point, it barely matters. The original story is so far removed that mostly what we have now is a billionaire throwing a temper tantrum about someone who said mean things about him.

In “Why the great Elon Musk needs a muzzle” (sorry, no link; the article is iPad only) Aaron Robinson of Car and Driver Magazine condemns Musk for the sin of questioning the infallibility of the New York Times:

(There’s no need to pile onto this argument, but let’s note that the NYT’s foibles are well-documented, such as, I can’t resist, its tortured justification for not using the word “torture” when dealing with “enhanced interrogation”.)

None of this dampened the enthusiasm of customers living in our sunnier physical and psychological clime. I saw more and more Model Ss on the streets and freeways. Most telling, the Model S became a common sight in the parking lot at Alice’s Restaurant up the hill in Woodside, a place where bikers and drivers of fashionable cars, vintage and cutting edge, gather to watch and be watched.

Publishing deadlines can be cruel. A few days after Robinson’s story appeared in Car and Driver, Tesla released its quarterly numbers for Q1 2013 (click to enlarge):

Tesla’s $555M in revenue is an astonishing 20x increase compared to the same quarter a year ago. Tesla is now profitable; shares jumped by more than 37% in two trading sessions. On Wall Street paper, the company’s $8.77B market cap makes it worth about 20% of GM’s $42.93B capitalization… Musk got his “lost $100M” back and more.

Curiously, the numbers also show that while Operations were in the red, the company recorded a Net Income of $11M. How is that possible? The explanation is “simple”: If your car company manufactures vehicles that surpass (in a good way) California’s emissions standards, the state hands you Zero Emissions Vehicle Credits for your good behavior. You can then sell your virtue to the big car companies – Chrysler, Ford, GM, Honda — who must comply with ZEV regulations. For Tesla, this arrangement resulted in “higher sales of regulatory credits including $67.9 million in zero emission credit sales”.

Tesla is careful to note that this type of additional income is likely to disappear towards the end of 2013. (For a more detailed analysis of Tesla’s numbers see this post from The Truth About Cars, a site that recommends itself for not being yet another industry mouthpiece.)

The numbers point to a future where Tesla can leave its niche and become a leading manufacturer in a too-often stodgy automotive industry. And, of course, we Silicon Valley geeks take great pleasure in a car that updates it software over the air, like a smartphone; that has a 17″ touchscreen; and that’s designed and built right here (the Tesla factory is across the Bay in the NUMMI plant that was previously occupied by Toyota and GM).

A last dollop of honey in Elon’s revenge: Coinciding with the Car and Driver screed, Consumer Reports gave the Model S its top test score. After driving a friend’s Model S at adequate freeway speeds, I agree, it’s a wonderful car, a bit of the future available today.

Some say the Model S is still too pricey, that it’s only for the very well-off who can afford a third vehicle, that it will never reach a mass audience. It’s a reasonable objection, but consider Ferrari: It sold 7318 cars in 2012 and says it will restrict output in 2013 to less than 7,000 to “keep its exclusivity” – in other words, it must adapt to the slowing demand in Europe and, perhaps, Asia. Last year, Land Rover sold about 43,000 cars in the US. By comparison, Tesla will sell about 20,000 cars this year and expects to grow further as it opens international distribution.

One more thing: Elon Musk is also the CEO of SpaceX, a successful maker of another type  of vehicles: space-launch rockets.

JLG@mondaynote.com

Carriers Still Think We’re Idiots

 

“Carriers are confident we won’t read the small print that contradicts their tricky advertising. Once in a while, a public servant really does his job and forces a retraction. Why so rarely?.”

‘My goal in life has been to have just enough money to ignore 8-point Helvetica!’ Thus spake a close friend one night in a quiet San Francisco bar. His objection was neither stylistic nor ophthalmologic. We were, once again, lamenting the shenanigans and ruses, the hidden fees and “some restrictions apply” (see, if you can, Sprint’s mendacious use of Truly Unlimited here and here), the roach motels of mileage plans, the nickels and dimes extracted by subterfuge, legally or not. In a word, or six, the tyranny of the fine print.

By accumulating “just enough money”, my friend has the luxury of not having to fight the schemers to the last dollar, of not spending hours on the phone arguing with a robohuman who has been cruelly programmed to confuse and outlast the overly-curious customer. His benign neglect allows him to keep a sunny view of life and a calm mind.

Lucky man.

Most of us don’t lead such a charmed life. We can’t, or shouldn’t, ignore the amendments, refinements, and exceptions that belie the marketing come-ons. But the fine printers — the airlines, credit card companies, internet providers and, most of all, the cell phone carriers — rely on our neglect, benign or not. They think they can prey on us, that we’re too stupid or lazy to fight back, to protest their obfuscating plans and bizarre bills.

Because of their ubiquity, the cell phone carriers get the most heat. They’ll sell you a $650 iPhone for a mere $200…and then recoup the $450 shortfall by adding a bit of the difference to each installment of your (mandatory) 24 month “service” contract. If you try to break the manacles, you’ll pay for the fractured iron. It’s right there in the fine print.

Last year, a group of concerned professionals called for an end to the confusing and wasteful smartphone subsidies. The group? The carriers themselves (see Carriers Whine: We Wuz Robbed!).

Verizon and AT&T make a spectacle of groaning under the weight of these awful subsidies. They get the Wall Street Journal and others to repeat their stories wholesale in articles such as this one: How the iPhone Zapped Carriers.
Horace Dediu, for one, doesn’t buy the sob story:

“I repeat what I’ve mentioned before: The iPhone is primarily hired as a premium network service salesman. It receives a ‘commission’ for selling a premium service in the form of a premium price. Because it’s so good at it, the premium is quite high.”

Dediu’s observation applies equally well to all the top smartphone brands. They’re all bait, a great way to hook the customer into a revolving 24 month agreement, with high ARPUs (Average Revenue Per User) stemming from the nature, the breadth and attractiveness of services provided by these high-end devices.

T-Mobile, the perennial dark horse, has been one of the more vocal plaintiffs. Besides clearly stating that the company didn’t need the iPhone, T-Mobile has hinted that it would get rid of the blood-sucking payments to handset makers altogether.
Last month, the hints became reality. T-Mobile “re-imagined” itself as the Un-Carrier:

T-Mobile’s pitch:

With no more annual service contract required, we don’t lock you into a big commitment with our Simple Choice Plan.

It’s a clever idea: T-Mobile has seemingly decoupled hardware and service. If you bring your own phone, you just pay for service. If you need a phone, T-Mobile will be happy to sell you one, let’s say a 16Gb iPhone 5 for $99…and as an added convenience (watch the left hand), they’ll offer you a 24-month contract at just $20/month! You want out before serving your 2-year sentence? No problem! Just pony up the full price of the phone; other terms and conditions may apply.

Inexplicably, some pundits (who should know better) have fallen for the pitch. Here’s David Pogue in the New York Times:

“Last week, the landscape changed. T-Mobile violated the unwritten conspiracy code of cellphone carriers. It admitted that the emperors have no clothes.”

The forums buzzed with the party line: It’s the end of contracts and subsidies.
But the company’s too-clever way with words didn’t sit well with other observers. The no-contract claim is obviously disingenuous; it only applies to people bringing their own phone, a tiny minority. For typical customers — those who get their phones from their carriers — the manacles are too familiar.
The claim also didn’t sit well with Bob Ferguson, Washington State’s Attorney General. Ferguson didn’t dither, saying “No Dice” to T-Mobile’s deceptive “No-Contract” advertising:

“As Attorney General, my job is to defend consumers, ensure truth in advertising, and make sure all businesses are playing by the rules.” 

T-Mobile backed down. The company admitted that there actually is a contract, a subsidy, and they offered to make things right with customers who accepted the agreement under murky pretenses.
Happy ending, congratulations to the vigorous AG.

Still, what were T-Mobile execs thinking? Did they really think that we’re such idiots that we can’t see a 24 month obligation as a contract? What sort of corporate culture produces this type of delusion?
In theory, T-Mobile was onto a good idea. You bring your own phone, you truly pay less and you’re not tied to a contract. Come in, stay as long or as little as you’d like, pay by the month.
But this isn’t how the market works in practice. The rapid succession of new phones makes the latest model more desirable. As a result, carriers have an opportunity to tie their customers down by offering the newest device at an artificially low price — and get a comfortable two-year income stream to recoup the subsidy.
Meanwhile, there’s other news in the carrier world:

  • Verizon is locked in difficult negotiations for the purchase of Vodafone’s 45% share of the company. This is in a context where, two years ago, Vodafone made the decision to shed its participation in other carriers such as Orange, SFR or China Mobile. In their bid/ask conversations, Vodafone and Verizon are $30B apart, Verizon offering a mere $100B while Vodafone won’t take a penny less than $130B.
  • Softbank and Dish Network are in a bidding war for Sprint, probably out of gluttony for more punishment. Masayoshi Son, Softbank’s leader, graciously spared us the carrier-as-victim lament. But if Dish Chairman Charlie Ergen prevails, we can be sure this seasoned sob story practitioner will fit right in once he becomes a cellular operator.

These are the people who tell us subsidies are killing them. They really do think we’re idiots.

JLG@mondaynote.com

This Wristband Could Change Healthcare

 

Jawbone is launching is UP wristband in Europe. Beyond the quirky gadget lies a much larger project: Changing healthcare — for better or for worst. 

 Hyperkinetic as he is, Hosain Rahman, the Jawbone founder, must be saturating his Jawbone UP wristband with data. The rubberized band, nicely designed by Yves Behar, is filled with miniaturized electronics: accelerometers and sensors monitor your activity through out the day, recording every motion in your life, from walking in the street to the micro-movements of your hand in a paradoxical sleep phase. For the fitness freak, the Up is a great stimulus to sweat even more; for the rest of us, it’s more like an activity and sleep monitoring device. (For a complete product review, see this article from Engadget, and also watch Hosain Rahman’s interview by Kevin Rose, it’s well worth your time.) Last week in Paris, after my meeting with Hosain, I headed straight to the nearest Apple Store to pick-up my Up (for €129), with the goal of exploring my sleeping habits in greater depth.

After using the device for a couple of days, the app that comes with it tells me I’m stuck in a regime of 5 to 6 hours of bad sleep — including less than three hours of slow-wave sleep commonly known as deep sleep. Interesting: Two years ago, I spend 36 hours covered with electrodes and sensors in a hospital specializing in studying and (sometimes) treating insomnia — after a 6 months on a wait list to get the test. At one point, to monitor my sleep at home, doctors lent me a cumbersome wristband, the size of a matchbox. The conclusion was unsurprising: I was suffering from severe insomnia, and there was very little they could do about it. The whole sleep exploration process must have cost 3000€ to the French public health care system, 20 times more than the Jawbone gadget (or the ones that do a similar job). I’m not contending that medical monitoring performed by professionals can be matched by a wristband loaded with sensors purchased in an electronics store. But, aside from the cost, there is another key difference: the corpus of medical observations is based on classic clinical tests of a small number of patients. On the other hand, Jawbone thinks of the UP wristband — to be worn 24/7 by millions of people — in a Big Data frame of mind. Hosain Rahman is or will soon be right when he says his UP endeavor contributes to the largest sleep study ever done.

Then it gets interesting. As fun as they can be, existing wearable monitoring devices are in the stone age compared to what they will become in three to five years. When I offered Hosain a list of features that could be embedded in future versions of the UP wristband — such as a GPS module (for precise location, including altitude), heartbeat, blood pressure, skin temperature and acidity sensors, bluetooth transmitter — he simply smiled and conceded that my suggestions were not completely off-track. (Before going that far, Jawbone must solve the battery-life issue and most likely design its own, dedicated super-low consumption processor.) But Hosain also acknowledges his company is fueled by a much larger ambition than simply build a cool piece of hardware aimed at fitness enthusiasts or hypochondriacs.

His goal is nothing less than disrupting the healthcare system.

The VC firms backing Jawbone are on the same page. The funding calendar compiled by Crunchbase speaks for itself: out of the stunning $202m raised since 2007, most of it ($169m), has been raised since 2011, the year of the first iteration of the UP wristband (it was a failure due to major design flaws). All the big houses are on board: Khosla Ventures, Sequoia, Andreessen-Horowitz, Kleiner Perkins, Deutsche Telekom… They all came with an identical scheme in mind: a massive deployment of the monitoring wristband, a series of deals with the biggest healthcare companies in America to subsidize the device. All this could result in the largest health-related dataset ever build.

The next logical step would be the development of large statistical models based on customers’ recorded data. As far as privacy is concerned, no surprise: Jawbone is pretty straightforward and transparent: see their disclosure here. It collects everything: name, gender, size and weight, location (thanks to the IP address) and, of course, all the information gathered by the device, or entered by the user, such as the eating habits. A trove of information.

Big Data businesses focusing on health issues drool over what can be done with such a detailed dataset coming from, potentially, millions of people. Scores of predictive morbidity models can be built, from the most mundane — back pain correlated to sleep deprivation — to the most critical involving heart conditions linked to various lifestyle factors. When asked about privacy issues, Hosain Rahman insists on Jawbone’s obsessive protection of his customers, but he also acknowledges his company can build detailed population profiles and characterize various risk factors with substantially greater granularity.

This means serious business for the health care and insurance sectors — and equally serious concerns for citizens. Imagine, just for a minute, the impact of such data on the pricing structure of your beloved insurance company? What about your credit rating if you fall into a category at risk? Or simply your ability to get a job? Of course, the advent of predictive health models potentially benefits everyone. But, at this time, we don’t know if and how the benefits will outweigh the risks.

frederic.filloux@mondaynote.com

Apple Buys Intel

 

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

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

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

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

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

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

Apple needs something bigger.

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

Buy Intel.

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

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

Quattrone has their attention. He unfolds the celestial calibration:

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

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

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

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

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

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

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

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

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

Borrow? When they have so much cash?

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

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

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

JLG@mondaynote.com

 

 

What’s the Fuss About Native Ads?

 

In the search for new advertising models, Native Ads are booming. The ensuing Web vs. Native controversy is a festival of fake naïveté and misplaced indignation. 

Native Advertising is the politically correct term for Advertorial, period. Or rather, it’s an upgrade, the digital version of an old practice dating back to the era of typewriters and lead printing presses. Everyone who’s been in the publishing business long enough has in mind the tug-of-war with the sales department who always wants its ads to to appear next to an editorial content that will provide good “context”. This makes the whole “new” debate about Native Ads quite amusing. The magazine sector (more than newspapers), always referred to “clean” and “tainted” sections. (The latter kept expanding over the years). In consumer and lifestyle sections, editorial content produced by the newsroom is often tailored to fit surrounding ads (or to flatter a brand that will buy legit placements).

The digital era pushes the trend several steps further. Today, legacy media brands such as Forbes, Atlantic Media, or the Washington Post have joined the Native Ads bandwagon. Forbes even became the poster child for that business, thanks to the completely assumed approach carried out by its chief product officer Lewis DVorkin (see his insightful blog and also this panel at the recent Paid Content Live conference.) Advertising is not the only way DVorkin has revamped Forbes. Last week, Les Echos (the business daily that’s part of the media group I work for) ran an interesting piece about it titled “The Old Press in a Startup mode” (La vielle presse en mode start-up). It details the decisive — and successful — moves by the century-old media house: a downsized newsroom, external contributors (by the thousand, and mostly unpaid) who produce a huge stream of 400 to 500 pieces a day. “In some cases”, wrote Lucie Robequain, Les Echos’s New York correspondent, “the boundary between journalism and advertorial can be thin…” To which Lewis DVorkin retorts: “Frankly, do you think a newspaper that conveys corporate voices is more noble? At Forbes, at least, we are transparent: We know which company the contributor works for and we expose potentials conflicts of interests in the first graph…” Maybe. But screening a thousand contributors sounds a bit challenging to me… And Forbes evidently exposed itself as part of the “sold” blogosphere. Les Echos’ piece also quotes Joshua Benton from Harvard’s Nieman Journalism Lab who finds the bulk of Forbes production to be, on average, not as good as it was earlier, but concedes the top 10% is actually better…

As for Native Advertising, two years ago, Forbes industrialized the concept by creating BrandVoice. Here is the official definition:

Forbes BrandVoice allows marketers to connect directly with the Forbes audience by enabling them to create content – and participate in the conversation – on the Forbes digital publishing platform. Each BrandVoice is written, edited and produced by the marketer.

Practically, Forbes lets marketers use the site’s Content Management System (CMS) to create their content at will. The commercial deal — from what we can learn — involves volumes and placements that cause the rate to vary between $50,000 to $100,000 per month. The package can also include traditional banners that will send traffic back to the BrandVoice page.

At any given moment, there are about 16 brands running on Forbes’ “Voices”. This revenue stream was a significant contributor to the publisher’s financial performances. According to AdWeek (emphasis mine):

The company achieved its best financial performance in five years in 2012, according to a memo released this morning by Forbes Media CEO Mike Perlis. Digital ad revenue, which increased 19 percent year over year, accounted for half of the company’s total ad revenue for the year, said Perlis. Ten percent of total revenue came from advertisers who incorporated BrandVoice into their buys, and by the end of this year, that share is estimated to rise to 25 percent.

Things seemed pretty positive across other areas of Forbes’ business as well. Newsstand sales and ad pages were up 2 percent and 4 percent, respectively, amid industry-wide drops in both areas. The relatively new tablet app recently broke 200,000 downloads.

A closer look gives a slightly bleaker picture: According to latest data from the Magazine Publishers Association, between Q1 2013 and Q1 2012, Forbes Magazine (the print version only) lost 16% in ads revenues ($50m to $42m). By comparison, Fast Company scored +25%, Fortune +7%, but The Economist -27% and Bloomberg Business Week -30%. The titles compiled by the MPA are stable (+0.5%).

I almost never click on banners (except to see if they work as expected on the sites and apps I’m in charge of). Most of the time their design sucks, terribly so, and the underlying content is usually below grade. However, if the subject appeals to me, I will click on Native Ads or brand contents. I’ll read it like another story, knowing full well it’s a promotional material. The big difference between a crude ad and a content-based one is the storytelling dimension. Fact is: Every company has great stories to tell about its products, strategy or vision. And I don’t see why they shouldn’t be told  resorting to the same storytelling tools news media use. As long as it’s done properly, with a label explaining the contents’ origin, I don’t see the problem (for more on this question, read a previous Monday Note: The Insidious Power of Brand Content.) In my view, Forbes does blur the line a bit too much, but Atlantic’s business site Quartz is doing fine in that regard. With the required precautions, I’m certain Native Ads, or branded contents are a potent way to go, especially when considering the alarming state of other forms of digital ads. Click-through rates are much better (2%-5% vs. a fraction of a percentage for a dumb banner) and the connection to social medias works reasonably well.

For news media companies obsessed with their journalistic integrity (some still do…), the development of such new formats makes things more  complicated when it comes to decide what’s acceptable and what’s not. Ultimately, the editor should call the shots. Which brings us to the governance of media companies. For digital media, the pervasive advertising pressure is likely keep growing. Today, most rely on a Chief Revenue Officer to decide what’s best for the bottom line such as balancing circulation and advertising, arbitraging between a large audience/low yield or smaller audience/higher yield, for instance. But, in the end, only the editor must be held accountable for the contents’ quality and the credibility — which contribute to the commercial worthiness of the media. Especially in the digital field, editors should be shielded from the business pressure. Editors should be selected by CEOs and appointed by boards or better, boards of trustees. Independence will become increasingly scarce.

frederic.filloux@mondaynote.com