Linking: Scraping vs. Copyright

 

Irish newspapers created quite a stir when they demanded a fee for incoming links to their content. Actually, this is a mere prelude to a much more crucial debate on copyrights,  robotic scraping and subsequent synthetic content re-creation from scraps. 

The controversy erupted on December 30th, when an attorney from the Irish law firm McGarr Solicitors exposed the case of one of its client, the Women’s Aid organization, being asked to pay a fee to Irish newspapers for each link they send to them. The main quote from McGarr’s post:

They wrote to Women’s Aid, (amongst others) who became our clients when they received letters, emails and phone calls asserting that they needed to buy a licence because they had linked to articles in newspapers carrying positive stories about their fundraising efforts.
These are the prices for linking they were supplied with:

1 – 5 €300.00
6 – 10 €500.00
11 – 15 €700.00
16 – 25 €950.00
26 – 50 €1,350.00
50 + Negotiable

They were quite clear in their demands. They told Women’s Aid “a licence is required to link directly to an online article even without uploading any of the content directly onto your own website.”

Recap: The Newspapers’ agent demanded an annual payment from a women’s domestic violence charity because they said they owned copyright in a link to the newspapers’ public website.

Needless to say, the twittersphere, the blogosphere and, by and large, every self-proclaimed cyber moral authority, reacted in anger to Irish newspapers’ demands that go against common sense as well as against the most basic business judgement.

But on closer examination, the Irish dead tree media (soon to be dead for good if they stay on that path) is just the tip of the iceberg for an industry facing issues that go well beyond its reluctance to the culture of web links.

Try googling the following French legalese: “A défaut d’autorisation, un tel lien pourra être considéré comme constitutif du délit de contrefaçon”. (It means any unauthorized incoming link to a site will be seen as a copyright infringement.) This search get dozens of responses. OK, most come from large consumers brands (carmakers, food industry, cosmetics) who don’t want a link attached to an unflattering term sending the reader to their product description… Imagine lemon linked to a car brand.

Until recently, you couldn’t find many media companies invoking such a no-link policy. Only large TV networks such as TF1 or M6 warn that any incoming link is subject to a written approval.

In reality, except for obvious libel, no-links policies are rarely enforced. M6 Television even lost a court case against a third party website that was deep-linking to its catch-up programs. As for the Irish newspapers, despite their dumb rate card for links, they claimed to be open to “arrangements” (in the ill-chosen case of a non-profit organization fighting violence against women, flexibility sounds like a good idea.)

Having said that, such posture reflects a key fact: Traditional media, newspapers or broadcast media, send contradictory messages when it comes to links that are simply not part of their original culture.

The position paper of the National Newspapers of Ireland association’s deserves a closer look (PDF here). It actually contains a set of concepts that resonate with the position defended by the European press in its current dispute with Google (see background story in the NYTimes); here are a few:

– It is the view of NNI that a link to copyright material does constitute infringement of copyright, and would be so found by the Courts.
– [NNI then refers to a decision of the UK court of Appeal in a case involving Meltwater Holding BV, a company specialized in media monitoring], that upheld the findings of the High Court which findings included:
- that headlines are capable of being independent literary works and so copying just a headline can infringe copyright
- that text extracts (headline plus opening sentence plus “hit” sentence) can be substantial enough to benefit from copyright protection
- that an end user client who receives a paid for monitoring report of search results (incorporating a headline, text extract and/or link, is very likely to infringe copyright unless they have a licence from the
Newspaper Licencing Agency or directly from a publisher.
– NNI proposes that, in fact, any amendment to the existing copyright legislation with regard to deep-linking should specifically provide that deep-linking to content protected by copyright without respect for  the linked website’s terms and conditions of use and without regard for the publisher’s legitimate commercial interest in protecting its own copyright is unlawful.

Let’s face it, most publishers I know would not disagree with the basis of such statements. In the many jurisdictions where a journalist’s most mundane work is protected by copyright laws, what can be seen as acceptable in terms of linking policy?

The answer seems to revolve around matters of purpose and volume.

To put it another way, if a link serves as a kind of helper or reference, publishers will likely tolerate it. (In due fairness, NNI explicitly “accepts that linking for personal use is a part of how individuals communicate online and has no issue with that” — even if the notion of “personal use” is pretty vague.) Now, if the purpose is commercial and if linking is aimed at generating traffic, NNI raises the red flag (even though legal grounds are rather brittle.) Hence the particular Google case that also carries a notion of volume as the search engine claims to harvest thousands of sources for its Google News service.

There is a catch. The case raised by NNI and its putative followers is weakened by a major contradiction: everywhere, Ireland included, news websites invest a great deal of resources in order to achieve the highest possible rank in Google News. Unless specific laws are voted (German lawmakers are working on such a bill), attorneys will have hard time invoking copyright infringements that in fact stem for the very Search Engine Optimization tactics publishers encourage.

But there might be more at stake. For news organizations, the future carries obvious threats that require urgent consideration: In coming years, we’ll see great progress — so to speak — in automated content production systems. With or without link permissions, algorithmic content generators will be able (in fact: are) to scrap sites’original articles, aggregate and reprocess those into seemingly original content, without any mention, quotation, links, or reference of any kind. What awaits the news industry is much more complex than dealing with links from an aggregator.

It boils down to this: The legal debate on linking as copyright infringement will soon be obsolete. The real question will emerge as a much more complex one: Should a news site protect itself from being “read”  by a robot? The consequences for doing so are stark: except for a small cohort of loyal readers, the site would purely and simply vanish from cyberspace… Conversely, by staying open to searches, the site exposes itself to forms of automated and stealthy depletion that will be virtually impossible to combat. Is the situation binary — allowing “bots” or not — or is there middle ground? That’s a fascinating playground for lawyers and techies, for parsers of words and bits.

frederic.filloux@mondaynote.com

2013: The Year Of…

 

As Samsung dominates the Android market, one has to wonder, who controls whom? Is Google really in charge, or is Samsung so strong it can now rule the Android game?

This morning’s thoughts are harder to focus than usual: I’m sitting across the street from Sciences Po — the Paris Institute of Political Studies — one of France’s elite graduate schools. As hundreds of students gather at the door, smoking (and littering the pavement with very Parisian hauteur), I’m dismayed by the thought that many of these smart, eagerly alive young people will die from lung cancer. Somber thoughts made more acute by the loss of a dear friend two days ago to that very illness — the third smoking-induced death of a close relation in a matter of months. This from a legal drug that’s much more dangerous than some that can land you in jail….

Back to less morbid topics: Like so many other high tech observers, the impending CES (Consumer Electronics Show) in Las Vegas has prompted me to take a guess at what — or who — will turn out to be 2103′s most important development. One name that isn’t on the list: Microsoft.

CES isn’t just an endless series of booths manned by barkers and BS artists where companies peddle their latest vacuum tube audio gear and touch-screen laptops, it’s also the venue for a conference with a series of keynote speeches. During the Golden Age of the PC, Bill Gates was the obligatory headliner on the eve of the trade show. Gates’ keynote was an opportunity for the head of the world’s most important software company to describe (and prescribe) the future according to Microsoft.

When he ceded the CEO title, Gates also passed the keynote baton to Steve Ballmer who continued the propaganda, although with progressively diminishing success. Last year’s keynote was widely trashed by the press (see here, here or here)

Microsoft CEO crashes and burns in final CES keynote.
At CES, Microsoft’s Steve Ballmer Strains For Relevance

There will be no keynote address from Ballmer or any other Microsoft representative at this year’s CES.
The baton has indeed been passed, but to whom?
The ascendancy will be decided in a fight between Google and Samsung — and that could turn out to be the most important 2013 development.

Samsung is, by far, the biggest promoter and the best advertisement for the Android platform. Not only does the Korean giant dominate the Android market in unit volume — about half if we believe the company’s necessarily imprecise numbers — it also sets the standard for quality with handsets such as the Galaxy S III. And when you consider the huge amount of money Samsung has spent promoting their devices (about $13B — see Horace Dediu’s chart, below, from yet another of illuminating posts, The Cost of Selling Galaxies), you would think that the two companies would be close allies.

But as Samsung dominates ever more of the Android market, one has to wonder: Who controls whom? Is Google really in charge, or is Samsung so strong it can now set the rules in the Android game?

I don’t think Samsung’s competitors fully appreciate the implications of the company’s spare-no-expense investment in securing a dominant market share. In particular, I wonder what Apple execs think of the disproportion between their own relatively tiny marketing expenses and Samsung’s gargantuan budget. Apple has shown, time and again, that they can do more with less, but have they let Samsung secure an inexpugnable market position? Perhaps the Cupertino team was simply unwilling to waste money stimulating a demand they knew they couldn’t satisfy due to iPhone supply chain bottlenecks.

Is Google truly happy with all this free advertisement? Samsung is firing on all cylinders: great Android handsets, apparently limitless manufacturing capacity, imaginative and prolific marketing campaigns. There may be a feeling in Mountain View that the tail is starting to wag the dog, the handset vassal could end up dictating terms to the platform creator. Samsung could parlay its dominant share of Android handsets in a number of ways.

For example: The Android economy doesn’t rely on licensing revenues but on user data that flows back to the Google mothership through the use of Google applications running on platform-compliant handsets. (Such data then flows through Google’s advertising money pump, but we’ll leave that aside for now.) What if Samsung could renegotiate its Android license and demand “role-appropriate” levies for running Google apps on its market-leading handsets? We’ve heard rumors of just such a levy before: Apple is said to receive significant payments for favoring Google’s search engine in iOS devices.

Another possibility is that Samsung could emulate Amazon’s practice of picking the Android lock. By modifying the Open Source Android source code — a completely legal maneuver — Samsung could create its own set of revenue-generating apps and services and thus cut Google out of the income stream. A number of other handset makers, particularly in China, are headed down this path, proposing devices based on Android-derived platforms such as Tapas and OPhone.

Lastly, although less seriously, Samsung has announced handsets based on Tizen, an OS that has joined the chorus line of Open Source platforms: Gram (née WebOS), Jolla (Nokia émigrés), Ubuntu (née Debian), Firefox OS. My apologies for possible oversights…

Samsung can’t possibly believe it can build a viable business on Tizen. It must know that the platform itself no longer matters, that this has become an ecosystem war. Even with Samsung’s resources and determination, betting on Tizen as an alternative to the Android ecosystem isn’t realistic — and can’t possibly impress Google execs. Complicating matters, Samsung also builds handsets on Windows Phone and Bada (developed in house). Such complexity isn’t sustainable.

Over in its corner, Google has Motorola. Ostensibly acquired for its patents, Motorola could    be the piece of the puzzle that Google needs to create a fully-integrated device, a “proper” Android handset that Google execs feel their ecosystem deserves and that independent handset makers have failed to deliver. Rumors of an xPhone are in the air, but they don’t say much about what the product will do, exactly, or when it will come out.(Google protests that it won’t give its Motorola team any unfair advantage…a promise that comes from a company that gives special access to partners-of-the-moment such as HTC, Samsung, and LG.)

Of course, creating a device in the numbers that can effectively compete with leading Samsung (and Apple) devices is easier said than done. Google/Motorola will need to convince component suppliers and device manufacturers — who are “controlled” by Samsung and Apple — to free up some space on their assembly lines.

So on one side, we have Samsung, an extremely capable and determined Korean giant with huge technical and financial resources — and little regard for niceties.

On the other, we have Google with its unparalleled infrastructure, full control of the Android ecosystem through its Google apps (think Maps) and services, very strong finances, and real long-term vision. As for niceties, Google’s style may be more “polished” than Samsung’s, but it isn’t a pushover. Google can stand toe-to-toe with anyone.

In the end, ownership of the ecosystem should tip the scales: Google will win the undeclared war with Samsung. The Mountain View company will help itself to the higher value of vertically integrated products and, at best, degrade the Korean giant’s margins or, worse, drive them into a PC-like race-to-the-bottom with other handset makers.

This isn’t an outcome Samsung will take lightly.

JLG@mondaynote.com

PS: Bill Clinton will attend Samsung’s CES keynote

Mobile’s Rude Awakening

 

Mobile audiences are large and growing. Great. But their monetization is mostly a disaster. The situation will be slow to improve, but the potential is still there — if the right conditions are met.    

This year, a major European newspaper expects to make around €16m in digital advertising revenue. The business is even slightly profitable. But there is a catch: while mobile devices now provide more than 50% of its traffic, advertising revenue from smartphones and tablets will only reach €1m. For this particular company, like many others, mobile advertising doesn’t work. It brings about 5% or 6% of what desktop web ads do — which, already, suffer from a 15 times cut in revenue when compared to print.

Call it a double whammy: Publishers took a severe hit by going digital in a way that compounded commoditization of contents with an endless supply of pages. The result is economically absurd: in a “normal” world, when audiences rise, advertising reaches more people and, as a result, rates rise. At least, that was the rule in the comfy world of print. No such thing in digital media. As many news sites experienced, despite double digit audience growth, CPMs (Cost per Thousand page impressions) actually declined over recent years. Fact is, this sector is much more sensitive to general economic conditions than to its extraordinary large adoption. And as if that wasn’t enough, publishers now take another blow as a growing share of their audience moves to mobile where money hasn’t followed… yet.

Granted, there are exceptions. Nordic media, for instance, benefit from an earlier and stronger mobile adoption (think Nokia and Ericsson, even before smartphones). Supported by many paid-for services, Scandinavian media houses extract a significant amount of profit from mobile. Similarly, Facebook mobile operations are faring quite well. According to the latest TBG Digital report, Click Through Rate (CTR) on ads placed on mobile News Feeds are 23 times higher than those displayed on the desktop version (respectively a CTR of 1.290% vs. 0.049%).

The digital mediasphere is struggling with mobile ads. In June, we went through most of the causes (see Jean-Louis’ note Mobile Advertising: The $20bn Opportunity Mirage). Problem is: there are still few signs of improvement. Inventories are growing, ad creativity remains at a low point (just look at the pixelated ads that plague the bottom of your mobile screens). As you can see below, programmatic buying is on the rise as this low-yield market remains vastly intermediated (click to enlarge):

– Too many middlemen? –

This results in the following eCPMs (effective CPM is the price advertisers are willing to pay for a given audience) as surveyed for different mobile platforms:

iOS iPad........... $0.90-$1.10
iOS iPhone......... $0.70-$0.80
Android Tablet..... $0.60-$0.70
Android Phones..... $0.40-$0.60

Advertising-wise, mobile is mostly a dry hole.

OK. Enough whining. Where do we go from here? What to expect in the next 18 months? How to build upon the inherent (and many) advantages offered by the mobile space?

For rate cards, we have some good news: prices on Android and iOS are converging upward as Android demographics are rising; soon, the two dominant mobile platforms will be in the higher price range. The value of ads is also likely to climb a little as screens gets better and larger, and as bandwidth increases: such improvements will (should) allow more visually attractive, more engaging ads. The ecosystem should also benefit from the trend toward more customized advertising. Ideally, promotional campaigns should be completely integrated and provide a carefully designed continuum within the three digital vectors: desktop web to be viewed at home or at the office; mobile formats for quick reading on the go; and tablet-friendly for a slower, more engaged, lean-back consumption (reading time is five or ten times higher on an iPad than on a PC). But, again, as long as creative agencies or media themselves do not commit adequate resources to such a virtuous chain, the value created will stay dangerously close to zero. (Those players better hurry up as a myriad of agile startups are getting ready to take control of this neglected potential.)

A few more reasons for being bullish on mobile. For instance, the level of personalization has nothing to do with what we see on the PC; a smartphone is not shared; it’s personal; and it’s the best vector to carry an intimate environment in which to create one’s dedicated social interaction system, transactional tools, entertainment selections (games, movies, books, TV series), etc. Mobile devices come with other, high potential features such as geolocation, ability to scan a bar-code — all favoring impulse buying. (This happened to me more than once: In a Paris bookstore, if the only copy left of a book I want is worn-off, or if the salesperson seems annoyed by my mere presence, I quickly scan the bare-code and order it from Amazon on the spot, right from the store. Apparently, I’m not the only one: about 20% of mobile users admitted they scanned a bar-code, or took a picture of a product in a store). And soon, these features will be supplemented by electronic wallet functions. Think about it: which marketeer wouldn’t dreamed of having access to such capabilities?

frederic.filloux@mondaynote.com

Whitman: One Write-Off Too Far

 

Meg Whitman’s efforts to turn HP around follow a proven script. But, in her efforts to frame future results against a background of past misdeeds, she might have gone one excuse too far and engaged in a potentially embarrassing fight against Mike Lynch, Autonomy’s founder.

Turnaround Artist Manual – Chapter 1: Walk in with a frown; blame your predecessor; slash projects, budgets, people; lower expectations, loudly; and write off assets.

When you’re finished, any progress going forward will be attributed to your decisive surgery and skill at the helm. You reap the benefits of a statistical illusion: Cut something by 50%, use time, work, and a little bit of luck to bring it back to its pre-surgery size, and you’re a miracle worker! 100% growth!

When Meg Whitman became HP’s CEO in September 2011, she followed the manual to the letter, and how!

Whitman had more than one predecessor to blame: Leo Apotheker was culpable for sins that we’ll review in a moment; Mark Hurd for acquiring EDS for $13.9B, for starving R&D down to less than 2.5% of revenue, and for the ill-fated $1.2B Palm acquisition. For good measure, Whitman included Carly Fiorina in her “rotating cast of CEOs” who were at fault for their “multiple inconsistent strategic plans and executional miscues“.

Then we have the HP layoffs. Early in 2012, Meg projected 27,000 layoffs through 2014, a number that has since increased to 29,000. (HP employs about 300,000 people worldwide.)

Next in the manual: lower expectations. As reported by Business Insider, HP’s CEO calls 2013 a “fix and rebuild” year, warning that the company will experience a “broad-based profit decline”. But there’s a silver lining: Whitman promises that HP will not only hit its savings targets and complete its restructuring by the end of fiscal 2014, but that the company’s revenues will be “growing in line with gross domestic product”…by 2016. (A high-tech Valley company that won’t reach GDP growth rates for three years… really?)

Further, after stating how important smartphones are to HP…

“My view is we have to ultimately offer a smartphone because in many countries of the world, that is your first computing device.”

…Whitman makes it clear that we shouldn’t expect an HP device in 2013. Does this mean that HP will introduce a smartphone in 2014 when Samsung and Apple will have taken complete control of the market? With all due respect, Whitman shouldn’t take IDC’s bizarre and fluctuating predictions seriously (11% market share for Windows Phone by 2016). Few people do outside of Redmond.

Next up: Write-offs. Here, Meg doesn’t go for small numbers, starting with a $3.3B Palm/WebOS asset zap. As the übergizmo article points out, the Palm misadventure cost shareholders close to $5B. Imagine what a startup could do with that kind of money.

And then there’s EDS, an IT services company founded by the industry legend Ross Perot and acquired by HP in 2008. Whitman decided to write off $8B of the $13.8B purchase price (58%) and, in a masterful stroke of corpospeak, managed to convince an IDC analyst that this was “Really Good News In Disguise“. Yes, that’s exactly the point of the Turnaround Artist Manual.

The grand finale is the Autonomy write-off. Acquired in August 2011 for $11.1B, HP’s official documents at the time called the acquisition “accretive“, that it would add to shareholder wealth. It sounded like a great idea: HP would have vaulted itself into the front of the pack in the exploding unstructured data applications sector.

A year later, HP’s CEO writes down Autonomy to the tune of $8.8B — 80% of the acquisition price tag. In an alternate reality, Whitman places hand on heart and takes the blame:

“I was on HP’s Board of Directors when we made the decision to acquire Autonomy. I have been part of the problem and I will now lead the solution. I’m committed to give Autonomy the place it deserves in HP’s products portfolio.”

Wall Street grumbles a bit, but the industry — and the company — applauds Whitman’s frankness, her leadership by example.

But that’s not what happened. In the aftermath of the Autonomy fiasco, Whitman blames everyone but herself and the current HP directors. First she points a finger at her predecessor, Leo Apotheker. Leo smiles and benignly lets it be known he is ready to help: “I will make myself available, however I can, to assist HP…”

(Apotheker has since assumed a more assertive stance in reminding everyone of the role that Ray Lane, HP’s chairman, played in the Autonomy transaction: “No single CEO is ever able to make a decision on a major acquisition in isolation… and certainly not without the full support of the chairman of the board.”)

Whitman then focuses on the company’s then-CTO, Shane Robison, who led the team that performed the due diligence. Blaming the well-liked Robison, who recently — and conveniently — retired, hasn’t won Whitman any friends inside the company.

Finally, she accuses Mike Lynch, Autonomy’s founder and CEO, of “accounting improprieties”. HP considers a referral to the SEC’s Enforcement Division and the UK’s Serious Fraud Office, and threatens to force Lynch to testify “under the penalty of perjury“.

The amount of the alleged fraud, around $100M, can also be explained by revenue recognition difficulties. These are not infrequent, especially when different accounting standards are involved, IFRS for most European companies (such as Autonomy), vs. GAAP in the US.

And, yes, the $100M “problem” would impact the transaction price by perhaps $1.5B, but that leaves another $5B to account for. (About $2B of the Autonomy write-off come from convolute but legit accounting mechanics tied to HP’s own stock price decline.)

Despite this discrepancy, Whitman attributes the bulk of the write-off to irregularities under Lynch’s regime. Catherine Lesjak, HP’s CFO, explains it thus [emphasis mine]:

The majority of this impairment charge [i.e. write-off] is linked to serious accounting improprieties, disclosure failures and misrepresentations that occurred prior to HP’s acquisition of Autonomy and the associated impact on the financial performance of the business over the long term.”

Vague words such as “associated impact” and “long term” purposefully confound a modest revenue recognition question with a much bigger problem. Many think the accounting snafu is a smoke screen: The Autonomy acquisition was simply a bad decision.

With Autonomy, Meg Whitman may have gone one write-off too far. Mike Lynch is a Larry Ellison-grade adversary: intelligent, articulate, aggressively entrepreneurial, with a willingness to create a reality distortion field around his company and an unwillingness to back down.

Lynch immediately writes to HP’s Board and demands proof of the allegations. Nothing so far. He then launches a website to buttress his defense and counterattack. His thesis is simple:
– First, Autonomy’s books were vetted by world-class accounting and consulting firms (Deloitte and KPMG) during the acquisition’s due diligence process.
– Second, HP’s Board of Directors, which comprises industry experts such as Ray Lane (ex-Oracle) and Marc Andreessen (ex-Netscape, Opsware, and founder of the Andreessen Horowitz venture firm) to say nothing of Meg herself, unanimously supported the acquisition proposed by Léo, himself an Enterprise Software expert (22 years at SAP).
– Third, Lynch contends that HP’s ponderous bureaucracy completely misunderstood and mismanaged the entrepreneurial culture that made Autonomy successful. As a result, key people left and the business is now in shambles.

The too-convenient Autonomy write-off and the attacks on Lynch could badly backfire. Legal action against Autonomy’s founder could open a Pandora’s box of embarrassing information.

For example, at its October 3rd analyst meeting, HP tells Wall Street that 2013 profits will fall below expectations, $3.40 to $3.60 per share vs. earlier estimates of $4.16. The stock hits a 9-year low. That same day, HP puts out a lengthy (2056 words) news release as well as a link to the presentations to be used at the meeting. I downloaded the (excellent) slides, looked for the word “Autonomy”, and found a mere footnote in Meg’s presentation and, elsewhere, an upbeat slogan: “Taking Autonomy from start-up to grown-up”…. Neither the CEO nor Cathie Lesjak, the CFO, said a word to tell shareholders trouble was brewing.

Seven weeks later, HP reveals that the investigation into Autonomy’s alleged accounting improprieties had been going on since last May when an insider blew the whistle. If Whitman and her staff are invited by Lynch’s lawyers to give depositions under the  “penalty of perjury” they earlier waved in his face, they could face some painful What Did You Know and When Did You Know It questions.

HP was once a pillar of Silicon Valley, a shining example of technical and managerial culture at their best. Today, insignificance and mediocrity loom. Does Whitman, who waves a Make It Matter slogan to rally troops, really think an ugly, mud-slinging fight will make things better?

JLG@mondaynote.com

Google’s looming hegemony

 

If we factor Google geospatial applications + its unique data processing infrastructure + Android tracking, etc., we’re seeing the potential for absolute power over the economy. 

Large utility companies worry about Google. Why? Unlike those who mock Google for being a “one-trick pony”, with 99% of its revenue coming from Adwords, they connect the dots. Right before our eyes, the search giant is weaving a web of services and applications aimed at collecting more and more data about everyone and every activity. This accumulation of exabytes (and the ability to process such almost unconceivable volumes) is bound to impact sectors ranging from power generation, transportation, and telecommunications.

Consider the following trends. At every level, Western countries are crumbling under their debt load. Nations, states, counties, municipalities become unable to support the investment necessary to modernize — sometimes even to maintain — critical infrastructures. Globally, tax-raising capabilities are diminishing.

In a report about infrastructure in 2030 (500 pages PDF here), the OECD makes the following predictions (emphasis mine):

Through to 2030, annual infrastructure investment requirements for electricity, road and rail transport, telecommunications and water are likely to average around 3.5% of world gross domestic product (GDP).

For OECD countries as a whole, investment requirements in electricity transmission and distribution are expected to more than double through to 2025/30, in road construction almost to double, and to increase by almost 50% in the water supply and treatment sector. (…)

At present, governments are not well placed to meet these growing, increasingly complex challenges. The traditional sources of finance, i.e. government budgets, will come under significant pressure over the coming decades in most OECD countries – due to aging populations, growing demands for social expenditures, security, etc. – and so too will their financing through general and local taxation, as electorates become increasingly reluctant to pay higher taxes.

What’s the solution? The private sector will play a growing role through Public-Private-Partneships (PPPs). In these arrangements, a private company (or, more likely, a consortium of such) builds a bridge, a motorway, a railroad for a city, region or state, at no expense to the taxpayer. It will then reimburse itself from the project’s cash-flow. Examples abound. In France the elegant €320m ($413m) viaduct of Millau was built — and financed — by Eiffage, a €14 billion revenue construction group. In exchange for financing the viaduct, Eiffage was granted a 78-year toll concession with an expected internal rate of return ranging from 9.2% 17.3%. Across the world, a growing number of projects are built using this type of mechanism.

How can a company commit hundreds of millions of euros, dollars, pounds with an acceptable level of risk over several decades? The answer lies in data-analysis and predictive models. Companies engineer credible cash-flow projections using reams of data on operations, usages patterns and components life cycles.

What does all this have to do with Google?

Take a transportation company building and managing networks of buses, subways or commuter trains in large metropolitan areas. Over the years, tickets or passes analysis will yield tons of data on customer flows, timings, train loads, etc. This is of the essence when assessing the market’s potential for a new project.

Now consider how Google aggregates the data it collects today — and what it will collect in the future. It’s a known fact that cellphones send back to Mountain View (or Cupertino) geolocalization data. Bouncing from one cell tower to another, catching the signal of a geolocalized wifi transmitter, even if the GPS function is turned off, Android phone users are likely to be tracked in realtime. Bring this (compounded and anonymized) dataset on information-rich maps, including indoor ones, and you will get very high definition of profiles for who goes or stays where, anytime.

Let’s push it a bit further. Imagine a big city such as London, operating 500,000 security cameras, which represent the bulk of the 1.85 million CCTVs deployed in the UK — one for every 32 citizens. 20,000 of them are in the subway system. The London Tube is the perfect candidate for partial or total privatization as it bleeds money and screams for renovations. In fact, as several people working at the intersection of geo applications and big data project told me, Google would be well placed to provide the most helpful datasets. In addition to the circulation data coming from cellphones, Google would use facial recognition technology. As these algorithms are already able to differentiate a woman from a man, they will soon be able to identify (anonymously) ethnicities, ages, etc. Am I exaggerating ? Probably not. Mercedes-Benz already has a database of 1.5 million visual representations of pedestrians to be fed into the software of its future self-driving cars. This is a type of applications in which, by the way, Google possesses a strong lead with its fleets of driverless Prius crisscrossing Northern California and Nevada.

Coming back to the London Tube and its unhappy travelers, we have traffic data, to some degree broken down into demographics clusters; why not then add shopping data (also geo-tagged) derived from search and ads patterns, Street View-related informations… Why not also supplement all of the above with smart electrical grid analysis that could refine predictive models even further (every fraction of percentage points counts…)

The value of such models is much greater than the sum of their parts. While public transportation operators or utility companies are already good at collecting and analyzing their own data, Google will soon be in the best position to provide powerful predictive models that aggregate and connect many layers of information. In addition, its unparalleled infrastructure and proprietary algorithms provide a unique ability to process these ever-growing datasets. That’s why many large companies over the world are concerned about Google’s ability to soon insert itself into their business.

frederic.filloux@mondaynote.com

 

The enduring Apple TV Fantasy

 

We all want TV Done Right, free of the Soviet Era set-top box, UI and opaque contracts. We imagine Apple will put all the pieces together. But what’s desirable and “obvious” might not be so simple or soon…

“When I go into my living room and turn on the TV, I feel like I have gone backwards in time by 20 to 30 years,” Apple CEO Tim Cook told . NBC’s Brian Williams “It’s an area of intense interest. I can’t say more than that.”

These words — and similar ones in a substantial Bloomberg interview — launched yet another round of frenzied speculation about the mythical Apple TV.

Piper Jaffray’s Gene Munster insists that an Apple TV in 2013 is a sure thing. “It will be the biggest thing in consumer electronics since the smartphone“. (Of course, Munster has been saying this every year for the last three years…)

Another analyst, Wells Fargo’s Maynard Um, agrees that the device is inevitable, if only because a full-fledged television is “more in tune” with Apple than a simple set-top box.

Hmmm…

First, let’s take a calmer look at Tim Cook’s words. As many have noted, there’s nothing new here. Cook said essentially the same things at the D10 Conference last May and has repeated the message on earnings conference calls. The only changes to the Apple TV script in the past twelve months are the stated number of black pucks sold in the last fiscal year (more than 5 million), and an upgrade from “hobby” to “intense interest”. The actual meaning of this “interest” is widely open to interpretation.

Speculation aside, Cook has one thing right: The set-top box experience does place one back in time by 20 to 30 years:

– We still can’t order channels à la carte or search the program grid. For the latter you have to go to your tablet. And forget about the former.

– You can’t buy your own set-top box; you have to rent it from your carrier. For STB makers, there’s no incentive to build a better product.

– Add in the contorted rights and packages games played by the content providers and you end up with today’s mess.

The solution? Channels, shows, special events should all be presented as apps. Click, pay, and play, with standard fare for free. Catch the 6 pm news when you get home at 9:30; watch two programs side-by-side with Android 7 or iOS 9, all on your screen of choice: smartphone, tablet, PC, or TV.

The technology isn’t an issue. There’s enough bandwidth on cable (or pretend-fiber) networks, plenty of storage on servers, and all the required computing power in current or future TV boxes, from Apple and its competitors.

But there’s an obstacle in the tangled, encrusted business models that the Comcasts, CBSs, and Disneys cling to out of fear that Apple will wrest control of their content, that they’ll be disintermediated a la iTunes or the iPhone/iPad App Store.

Second, I simply don’t believe Apple will make, or even wants to make, a TV set. To realize the dream, as discussed previously, you need to put a computer — something like an Apple TV module — inside the set. Eighteen months later, as Moore’s Law dictates, the computer is obsolete but the screen is just fine. No problem, you’ll say, just make the computer module removable, easily replaced by a new one; more revenue for Apple…and you’re right back to today’s separate box arrangement. And you can spread said box to all HDTVs, not just the hypothetical Apple-brand set.

If carriers and content owners can be tricked, bribed, sued, or otherwise made to see the light and wisdom of higher revenue per subscriber, the TV Done Right will descend from Heaven in the form of a next generation Apple set-top box, not a TV set.

So why is Tim Cook talking about Apple TV at all?

The simplest explanation is that he’s simply answering an interviewer’s question. Possible… but not likely in such tightly choreographed exercises.

A cheekier possibility is that the answer is a head fake. Cook, a noted College Football fan, is trying to draw Google offsides, to provoke then into yet another embarrassing Google TV moment. And maybe even goad Microsoft into another WebTV dud.

Amusing… but not likely.

In Google’s case, the failed experiment has been digested and the next iteration will be much sharper. (Note well that Google’s subsidiary Motorola is putting its set-top box business up for bids, with “vendor financing possible”…)

For Microsoft, the company is happy with its successful Xbox ecosystem and its ability to provide TV content through its game console, even if that content doesn’t flow onto its phone and tablets as nicely as they would like. In any event, Tim Cook wishes Steve Ballmer no ill — au contraire, Cook wants Ballmer to stay on the job as long as he keeps helping his friends in Cupertino.

A more serious interpretation: Apple’s CEO is indicating that he’ll continue to invest talent and money until the TV obstacles are finally surmounted. In other words: “Join us and ride the wave that will sweep away the competition”.

Speaking of the competition, Sony is trying to break free from its profitless HDTV past by building a new 4K TV business.

If you have the opportunity, treat yourself to a 4K TV demo at a Sony Store. The spectacle is stunning: You see the delicate capillaries on a baby’s eyelids, feathers on birds, minute details on street scenes without any of the blurring you get on today’s HDTV.

With 3,840 by 2,160 pixels on an 80-inch TV screen, the 4K boasts 4 times the resolution of 1080p (1920 by 1080)… and an even greater price tag ratio: $25K vs $2K or less. The 4K TV is delivered with a server that contains full-resolution movies because cable and satellite carriers provide no such content — and have no plans to do so.

Sony has a valuable asset in its movie library and a need to push its new 4K TV technology. Could this portend an Apple-Sony alliance? The two companies have worked well together in the past, a CEO-level conversation could easily happen. But even if an Apple TV box provided a strong showcase for a Sony 4K TV set, carriers would still have to be shown how to milk the opportunity.

On still more sober musings, let’s consider Apple TV’s place in the company’s business. In the 2012 fiscal year ending last september, Apple’s total revenue was $156B. 5 million Apple TVs translates into $500M; that’s 0.3% of the company’s total.

Why bother? In 2014, Apple’s revenue could exceed $250B. Even if Apple TV sales were to grow by ten times, they would still represent no more than a 2% fragment of the total.

The answer is that Apple TV isn’t meant to generate revenue but to enhance the value of the more muscular, profit-making members of the ecosystem: iPhones, iPads and, to a lesser extent, Macs. In a similar, grander, and now well-understood way, iTunes isn’t in the business of making money by itself. iTunes made the iPod larger than the Mac in 2006, and it made the App Store possible — and the iPhone and the iPad as profit engines.

For Apple TV, is there a path from today’s supporting role to a $50B size, to 20% of Apple’s revenue in 2014? (Gene Munster thinks there is.)

My belief is that Apple TV sales numbers will continue to increase as the device is slowly, patiently improved and the ecosystem is enhanced. In a not-too-distant future we’ll see explicit Apple TV apps, similar to those on iPhones and iPads.

And someday, Apple will reach a limited agreement with a carrier such as Comcast. The enhanced experience will create a wedge — and will spur competitors. As a result, TV will at last become “modern” — sitting down in front of your TV set will no longer send you time traveling to 1992.

JLG@mondaynote.com

——————
Late update, an amusing coincidence: a just-discovered “Apple TV set” at Lyfe, a modern Palo Alto eatery.
With my apologies for the low quality pictures, this is the menu on five TV sets, side-by-side in portrait mode:

And, if you’re curious, you discover five Mac Minis bolted to the back of the TV sets:

Gene Munster should take a look.

Schibsted’s extraordinary click machines

 

The Nordic media giant wants to be the #1 worldwide of online classifieds by replicating its high-margin business one market after another, with great discipline. 

It all starts in 2005 with a Power Point presentation in Paris. At the time, Schibsted ASA, the Norwegian media group, is busy deploying its free newspapers in Switzerland, France and Spain. Schibsted wants its French partner Ouest-France — the largest regional newspapers group — to co-invest in a weird concept: free online classifieds. As always with the Scandinavian, the deck of slides is built around a small number of key points. To them, three symptoms attest to the maturity of a market’s online classified business:  (a) The number one player in the field ranks systematically among the top 10 web sites, regardless of the category; (b) it is always much bigger than the number two; (c) it reaps most of the profits in the sector. “Look at the situation here in France”, the Norwegians say, “the first classifieds site ranks far down in Nielsen rankings. The market is up for grabs, and we intend to get it”. The Oslo and Stockholm executives already had an impressive track record: in 2000, they launched Finn.no in Norway and, in 2003, they acquired Blocket.se in Sweden. Both became incredible cash machines for the group, with margins above 50% and unabated growth. Ouest-France eventually agreed to invest 50% in the new venture. In november 2010, they sold their stake back to Schibsted at a €400m valuation. (As we’ll see in a moment, the classified site Le Bon Coin is now worth more than twice that number.)

November 2012. I’m sitting in the office of Olivier Aizac, CEO of Le Bon Coin, the French iteration of Schibsted’s free classifieds concept. The office space is dense and scattered over several floors in a building near the Paris Bourse. Since my last 2009 visit (see a previous Monday Note Learning from free classifieds), the startup grew from a staff of 15 to 150 people. And Aizac tells me he plans to hire 70 more staff in 2013. Crisis or not, the business is booming.

A few metrics: According to Nielsen, LeBonCoin.fr (French for The Right Spot) ranks #9 in France with 17m monthly unique users. With more than 6 billion page views per month, it even ranks #3, behind Facebook and Google. Revenue-wise, Le Bon Coin might hit the €100m mark this year, with a profit margin slightly above… 70%. Fort the 3rd quarter of this year, the business grew by 50% vs. a year ago.

In terms of competition it dominates every segment: cars, real estate (twice the size of Axel Springer’s SeLoger.com) and jobs with about 60,000 classifieds, roughly five times the inventory of a good paid-for job board (LeBonCoin is not positioned in the upper segment, though, it mostly targets regional small to medium businesses).

Le Bon Coin’s revenue stream is made of three parts: premium services (you pay to add a picture, a better ranking, tracking on your ad); fees coming from the growing number professionals who flock to LBC (many car dealerships put their entire inventory here); and advertising for which the primary sectors are banking and insurance, services such as mobile phone carriers or pay-TV, and automobile. Although details are scarce, LBC seems to have given up the usual banner sales, focusing instead on segmented yearly deals: A brand will target a specific demographic and LBC will deliver, for half a million or a million euros per annum.

One preconceived idea depicts Le Bon Coin as sitting at the cheaper end of the consumer market. Wrong. In the car segment, its most active advertiser is Audi for whom LBC provides tailored-made promotions. (Strangely enough Renault is much slower to catch the wave.) “We are able to serve any type of market”, says Olivier Aizac who shows an ad peddling a €1.4m Bugatti, and another for the brand new low-cost Peugeot 301, not yet available in dealerships but offered on LBC for €15,000. Similarly, LBC is the place to go to rent a villa on the Cote d’Azur or a chalet for the ski season. With more than 21 millions ads at any given moment, you can find pretty much anything there.

Now, let’s zoom out and look at a broader picture. How far can Le Bon Coin go? And how will its cluster of free classifieds impact Schibsted’s future?

Today, free online classifieds weigh about 25% of Schibsted revenue (about 15bn Norwegian Kroner, €2bn this year), but it it accounts for 47% of the group’s Ebitda (2.15bn NOK, €300m). All online activities now represent 39% of the revenue and 62% of the Ebitda.

The whole strategy can be summed up in these two charts: The first shows the global deployment of the free classifieds business (click ton enlarge):

Through acquisitions, joint ventures or ex nihilo creations, Schibsted now operates more than 20 franchises. Their development process is highly standardized. Growth phases have been codified in great detail, managers often gather to compare notes and the Oslo mothership watches everything, providing KPIs, guidelines, etc. The result is this second chart showing the spread of deployment phases. More than half of the portfolio still is in infancy, but most likely to follow the path to success:

Source: Schibsted Financial Statements

This global vision combined to what is seen as near-perfect execution explains why the financial community is betting so much on Schibsted’s classified business.

When assessing the potential of each local brand, analysts project the performances of the best and mature properties (the Nordic ones) onto the new ones. As an example, see below the number of visits per capita and per month from web and mobile since product launch:

Source : Dankse Market Equities

For Le Bon Coin’s future, this draws a glowing picture: according to Danske Market Equities, today, the Norwegian Finn.no generates ten times more revenue per page view than LBC, and twenty times more when measured by Average revenue per user (ARPU). The investment firm believes that Le Bon Coin’s revenue can reach €500m in 2015, and retain a 65% margin. (As noted by its CEO, Le Bon Coin has yet to tap into its trove of data accumulated over the last six years, which could generate highly valuable consumer profiling information).

When translated into valuation projections, the performance of Schibsted classifieds businesses far exceed the weight of traditional media properties (print and online newspapers). The sum-of-the-parts valuations drawn by several private equities firms show the value of the classifieds business yielding more than 80% of the total value of this 173 year-old group.

frederic.filloux@mondaynote.com
Disclosure: I worked for Schibsted for nine years altogether between 2001 and 2010; six years indirectly as the editor of 20 minutes and three years afterwards, in a business development unit attached to the international division.
——- 

Wintel: Le Divorce Part II

 

At CES 2011, Ballmer told the world Windows would “fork”, that it would also run on lower power ARM chips for mobile devices. This was seen as a momentous breach in the long-standing Wintel duopoly. Two years later, the ARM tooth of the fork looks short and dull.

This is what I wrote almost two years ago:

After years of monogamy with the x86 architecture, Windows will soon run on ARM processors.

As in any divorce, Microsoft and Intel point fingers at one another. Intel complains about Microsoft’s failure to make a real tablet OS. They say MS has tried to shoehorn “Windows Everywhere” onto a device that has an incompatible user interface, power management, and connectivity requirements while the competition has created device-focused software platforms.

Microsoft rebuts: It’s Intel’s fault. Windows CE works perfectly well on ARM-based devices, as do Windows Mobile and now Windows Phone 7. Intel keeps telling us they’re “on track”, that they’ll eventually shrink x86 processors to the point where the power dissipation will be compatible with smartphones and tablets. But…when?

Today, a version of Windows (RT) does indeed run on an ARM processor, on Microsoft’s Surface tablet-PC hybrid. Has Microsoft finally served Intel with divorce papers?

Not so fast. The market’s reaction to Redmond’s ambitious Surface design has fallen far short of the heights envisioned in the company’s enthusiastic launch: Surface machines aren’t flying off Microsoft Store shelves. Ballmer himself admits sales are “modest” (and then quickly backpedals); Digitimes, admittedly not always reliable, quotes suppliers who say that Surface orders have been cut by half; anecdotally, but amusingly, field research by Piper Jaffray’s Gene Munster (who can be a bit excitable) shows zero Surfaces sold during a two hour period at the Mall of America on Black Friday, while iPads were selling at a rate of 11-an-hour.

Traditional PC OEMs aren’t enthusiastic either. Todd Bradley, head of HP’s Personal Systems Group, is unimpressed:

“It tends to be slow and a little kludgey as you use it .…”

Acer exec Linxian Lang warns:

“Redmond will have to eat ‘hard rice’ with Surface…it should stick to its more readily-chewed software diet.”

To be sure, there are happy Surface users, such as Steve Sinofsky, the former Windows Division President, as captured in lukew’s Instagram picture:

(An aside: I went back to Sinofsky’s 8,000 words blog post that lovingly describes the process of developing “WOA” — Windows on ARM. At the time, WOA was presented as part of the Windows 8 universe. Later, Microsoft swapped the “8″ designation and chose to use “RT” instead. These naming decisions aren’t made lightly. Is there any wonder why WOA was moved out of the Windows 8 camp?)

It’s possible that the jury is still out… Surface sales could take off, Windows RT could be embraced by leading PC OEMs… but what are the odds? In addition to the tepid reception from customers and vendors alike, Microsoft must surmount the relentless market conquest of Android and iOS tablets whose numbers (210 million units) are expected to exceed laptop sales next year.

So, no… the Wintel Divorce isn’t happening. Intel’s x86 chips will remain the processors of choice to run Windows. Next month, we’ll have CES and its usual burst of announcements, both believable and dubious (remember when 2010 was declared the Year Of The Tablet PC?). We’ll have to sort the announcements that are merely that from those that will yield an actual device, but in the end I doubt we’ll see many new and really momentous Windows RT products out there.

Microsoft’s lackluster attempt at Post-PC infidelity doesn’t help Intel in its efforts to gain a foothold in the mobile world. Intel’s perennial efforts to break into the mobile market with lower power, lower cost x86 chips have, also perennially, failed. As a result, there is renewed speculation about a rapprochement between Intel and Apple, that the Santa Clara microprocessor giant could become an ardent (and high-volume) ARM SoC foundry.

As discussed here, some of this makes sense: Samsung is Apple’s biggest and most successful competitor in the smartphone/tablet space, spending billions more than anyone else in global marketing programs. At the same time, the South Korean company is Apple’s only supplier of ARM chips. Intel has the technology and manufacturing capacity to become an effective replacement for Samsung.

This wouldn’t be an easy decision for Intel: the volumes are high — as high as 415M ARM chips for 2013 according to one analyst — but the margins are low. And Intel doesn’t do low margins. Because of the Wintel duopoly, Intel’s x86 chips have always commanded a premium markup. Take Windows out of the picture and the margin disappears.

(As another aside, the 415,000 ARM chips number seems excessive. Assuming about 50 million iPhone 5s and 15 million iPads in the current quarter, and using the 4X rule of thumb for the following calendar year, we land somewhere between 250M and 300M ARM chips for Apple in 2013.)

Also, Intel would almost certainly not be Apple’s sole supplier of ARM chips. Yes, Apple needs to get out of its current and dangerous single source situation. But Tim Cook’s Supply Chain Management expertise will come into play to ensure that Apple doesn’t fall into a similar situation with Intel, that the company will secure at least a second source, such as the rumored TSMC.

The speculation by an RBC analyst that Intel will offer its services to build ARM chips for the iPhone on the condition Apple picks an x86 device for the iPad is nonsensical: Apple won’t fork iOS. Life is complicated enough with OS X on Intel and iOS on ARM.

Historically, a sizable fraction of Intel’s profits came from the following comparison. Take two microprocessor chips of equal “merit”: manufacturing cost, computing output, power dissipation… And add one difference: one runs Windows, the other doesn’t. Which one will get the highest profit margin?

In the ARM world and its flurry of customized chips and software platforms, the “runs Windows” advantage is no longer. ARM chips generate significantly lower margins than in the Intel-dominated world (its competitor AMD is ailing).

This leaves the chip giant facing a choice: It can have a meager meal at the tablet/smartphone fest, or not dine at all at the mobile table…while it watches its PC business decline.

In other news… Paul Otellini, Intel’s CEO, unexpectedly announced he’ll leave next May, a couple years ahead of the company’s mandatory 65-year retirement age. No undignified exit here. Intel’s Board pointedly stated they’ll be looking outside as well as inside for a successor, another unusual move in a company that so far stuck to successions orchestrated around carefully groomed execs. This could be seen as a sanction for Otellini missing the mobile wave and, much more important, a desire to bring new blood willing and able to look past the old x86 orthodoxy.

JLG@mondaynote.com

 

The Release Windows Archaism

 

Television and media industry are stuck in a wasteful rear-guard fight for the preservation of an analog era relic: the Release Windows system. Designed to avoid destructive competition among media, it ends up boosting piracy while frustrating honest viewers willing to pay.  

A couple of months ago, I purchased the first season of the TV series Homeland from the iTunes Store. I paid $32 for 12 episodes that all landed seamlessly in my iPad. I gulped them in a few days and was left in a state of withdrawal. Then, on September 30th, when season 2 started over, I would have had no alternative to downloading free but illegal torrent files. Hundreds of thousands of people anxious to find out the whereabouts of the Marine turncoat pursued by the bi-polar CIA operative were in the same quandary (go to the dedicated Guardian blog for more on the series).

In the process, the three losers are:
– The Fox 21 production company that carries the risk of putting the show together (which costs about $36m per season, $3m per episode)
– Apple which takes its usual cut. (The net loss for both will actually be $64 since the show has been signed up for a third season by the paid-for Showtime channel and I wonder if I’ll have the patience to wait months for its availability on iTunes.)
– And me, as I would have to go through the painstaking task of finding the right torrent file, hoping that it is not bogus, corrupted, or worse, infected by a virus.

Here, we put our finger on the stupidity of the Release Windows system, a relic of the VHS era. To make a long story short, the idea goes back to the 80′s when the industry devised a system to prevent different media — at the time, movie theaters, TV networks, cable TV and VHS — from cannibalizing each other. In the case of a motion picture, the Release Windows mechanism called for a 4 months delay before its release on DVD, additional months for the release on Pay-TV, Video-On-Demand, and a couple of years before showing up on mainstream broadcast networks (where the film is heavily edited, laced with commercial, dubbed, etc.)

The Western world was not the only one to adopt the Release Window system. At the last Forum d’Avignon cultural event a couple of weeks ago, Ernst & Young presented a survey titled  Mastering tempo: creating long-term value amidst accelerating demand (PDF in English here and in French here).

The graph below shows the state of the windows mechanism in various countries:

Europe should be happy when comparing its situation to India’s. There, it takes half a year to see a movie in DVD while the box-office contributes to 75% of a film’s revenue. Ernst & Young expects this number to drop only slightly, to 69%, in 2015 (by comparison, the rate is only 28% in the UK). Even though things are changing fast in India, internet penetration is a mere 11.4% of the population and movie going still is a great popular entertainment occasion.

In the United States, by comparison, despite a large adoption of cable TV, Blue-Ray or VOD, and a 78% penetration rate for the internet (84% in the UK and higher in Northern Europe), the Release Windows system shows little change: again, according to the E&R survey, it went from 166 days in 2000 to 125 days in 2011:

Does it makes sense to preserve a system roughly comparable to the one in India for the US or Europe where the connected digital equipment rate is seven times higher?

Motion pictures should probably be granted a short head start in the release process. But it should coincide with the theatrical lifetime of a production that is about 3-4 weeks. Even better, it should be adjusted to the box-office life — if a movie performs so well that people keep flocking to theaters, DVDs should wait. On the contrary, if the movie bombs, it should be given a chance to resurrect online, quickly, sustained by a cheaper but better targeted marketing campaign mostly powered by social networks.

Similarly, movie releases should be simultaneous and global. I see no reason why Apple or Microsoft are able to make their products available worldwide almost at the same time while a moviegoer has to wait three weeks here or two months there. As for the DVD Release Windows, it  should go along with the complete availability of a movie for all possible audiences, worldwide and on every medium.  Why? Because the release on DVD systematically opens piracy floodgates (but not for the legitimate purchase on Netflix, Amazon Prime or iTunes).

As for the TV shows such as Homeland and others hits, there is not justification whatsoever to preserve this calendar archaism. They should be made universally available from the day when they are aired on TV, period. Or customers will vote with their mouse anyway and find the right file-sharing sites.

The “Industry” fails to assess three shifts here.

–The first one is the globalization of audiences. Worldwide, about 360m people are native English speakers; for an additional 375m, it is the second language, and 750m more picked English as an foreign language at school. That’s about 1.5 billion people likely to be interested in English-speaking culture. As a result, a growing proportion of teenagers watch their pirated series without subtitles — or scruples.

–Then, the “spread factor”: Once a show becomes a hit in the United States, it becomes widely commented in Europe and elsewhere, not only because a large number of people speak serviceable English, but also because many national websites propagate the US buzz. Hollywood execs would be surprised to see how well young (potential) audiences abroad know about their productions months before seeing them.

–And finally, technology is definitely on the side of the foreign consumer: Better connectivity (expect 5 minutes to download an episode), high definition image, great sound… And mobility (just take a high-speed train in Europe and see how many are watching videos on their tablets).

To conclude, let’s have a quick look at the numbers. Say a full season of Homeland costs $40m to produce. Let’s assume the first release is supposed to cover 40% of the costs, that is $16m. Homeland is said to gather 2 million viewers. Each viewer will therefore contribute for $8 to the program’s economics. Compare to what I paid through iTunes: my $32 probably leave about half to the producers; or compare to the DVD, initially sold for $60 for the season, now discounted at $20. You get my point. Even if the producer nets on average $15 per online viewer, it would need only 1.6 million paid-for viewers worldwide to break-even (much less when counting foreign syndication.) Even taking in account the unavoidable piracy (which also acts as a powerful promotional channel), with two billion people connected to the internet outside the US, the math heavily favors the end of the counter-productive and honest-viewer-hostile Release Windows archaism.

–frederic.filloux@mondaynote.com

Apple Can Finish What Microsoft’s Sinofsky Started

 

In 2007, Microsoft introduces a new version of Windows called Vista, a grand name for what turns out to be an embarrassing dud. (Memories of my first and determining interaction with Vista can be found here.)

Steven Sinofsky, once a Bill Gates technical assistant and, at the time, head of Microsoft Office development, is given a shovel (and a pad of pink slips) and told to clean the stables. To create a new, respectable version of Windows in a mere 30 months will require great discipline, a refusal to compromise, the rejection of distracting advice, relentless attention to the schedule, as well as the merciless pruning of features and people who get in the way. Sinofsky had it all: superb technical skills, the dogged drive of a rassar, and the political will to mow down the obstacles.

In July 2009, Microsoft unveils Windows 7, a product widely acclaimed as absolving Vista’s sins, and Sinofsky is promoted to president of the Windows division, a title parsimoniously bestowed.

Sinofsky immediately begins work on the next version of Windows, following his proven strategy of adding solid, well-defined details while maintaining backwards compatibility and avoiding the rat trap of “feature creep”. But something happens along the way: In early 2010, the iPad comes out. Although the device is initially misunderstood by Microsoft — Steve Ballmer speaks of “slates and tablets and blah blah blah” — it doesn’t take long for the Redmond company to realize that it needs an answer, it needs to defend its PC empire against the interloping tablet that has been so warmly embraced by the public.

The company changes course and Sinofsky gets a new mission: Windows 8 isn’t going to be a mere clean-up job, it’s not an “embrace and extend” improvement, but a new ”reimagined” Windows, a PC Plus that will straddle the PC and tablet worlds. The new OS will provide a radically new look-and-feel, a touch-screen interface in addition to a keyboard and mouse (or trackpad), and it will stray from the comfy x86 monogamy to also work on ARM processors.

A little over three years later, right after delivering Windows 8, Sinofsky is abruptly sacked.(Excuse me, he’s “amicably” sacked… by his own “personal and private” choice).

Windows 8, Windows RT, and the Surface tablet are now on full display, as are the reviews — and they’re not pretty. As summarized in this June 2012 Business Insider piece, the pundits were concerned and baffled right from the start:

“Worst of all, the traditional desktop is buried — it’s just another Metro app — but there are still some things you can only do from the desktop, and some only from Metro.” (Matt Rosoff)

“In my time with Windows 8, I’ve felt almost totally at sea — confused, paralyzed, angry, and ultimately resigned to the pain of having to alter the way I do most of my work.” (Farhad Manjoo)

“Windows 8 looks to me to be an unmitigated disaster that could decidedly hurt the company and its future… The real problem is that it is both unusable and annoying.” (John Dvorak)

Perhaps these were simply hasty judgments meant to capture eyeballs, maybe customers would ignore the critics and embrace Windows 8. But no. Five months later, Paul Thurrott, the author of the respected Windows Supersite blog, gives us this post:

“Sales of Windows 8 PCs are well below Microsoft’s internal projections and have been described inside the company as disappointing.”

As head of HP’s Personal Systems Group (PCs and printers, a $55B/year business), Todd Bradley’s opinion of Microsoft’s latest creations carries considerable weight. Last week, in a long CITEworld interview, Bradley wasn’t impressed:

“I’d hardly call Surface competition.

CITEworld: Why not?

TB: One, very limited distribution. It tends to be slow and a little kludgey as you use it. I just don’t think it’s competitive. It’s expensive. Holistically, the press has made a bigger deal out of Surface than what the world has chosen to believe.”

As reported two weeks ago, I quickly encountered Windows 8′s split personality when I tried to use my new Surface, but I wanted the bigger picture.

Was Windows 8 running on a PC — Microsoft’s home turf — really an “unmitigated disaster”? I head over to the big Microsoft Store in the Stanford Shopping Center to buy the full version of the new OS — and they don’t have it. The upgrade version, yes, but no copies of the “System Builder” DVD that you need for a complete, from-scratch installation. Curious.

I head back home, order a copy from Amazon, buy an additional license from Microsoft for my second machine, and two days later I’m in business. The installation process is flawless (one with VMware Fusion, the other with Parallels), but things quickly go downhill. The problems I had with the Surface are just as distracting and frustrating on a PC: One moment you’re in the new, elegant, and, yes, reimagined User Interface, the next moment you’re foraging in the old Windows 7 Desktop. And, of course, existing Office apps have no place in the new UI.

It’s no wonder that customers aren’t keen to buy Windows 8. As a recent survey shows, “about one-third of Windows 7, Windows Vista and Windows XP users who are ready to buy a new personal computer say they intend to switch to an Apple product.

According to the Thurrott post mentioned earlier, the inside story is that Sinofsky was let go because of his “divisiveness”, that his departure isn’t a consequence of Window 8′s poor numbers. But if we imagine a different reality, one in which Sinofsky stands before a big Mission Accomplished banner, where critics rave about the beauty, harmony, and impeccable polish of a Windows 8 that runs flawlessly on PCs, laptops, tablets, and Surface-like hybrids…do we think for a moment Ballmer would have shown Sinofsky the door?

I think the real story behind Sinofsky’s removal contains elements of both personality and (Windows 8) performance. It’s no secret that Sinofsky made a lot of enemies while he pulled off a not-so-minor miracle with Windows 7. As a reward for his accomplishment, he was given a much more difficult assignment. Windows 8 had become a 21-blade Swiss Army knife: a great list of features on paper, dubious usability in practice. Add the need to adapt the operating system and the sacrosanct (and golden goose) Office applications to the new ARM processor and you end up with a Mission Impossible.

The same traits that made Sinofsky an extremely successful turnaround artist after the Vista mess — his monomaniacal pursuit of a clear goal — became liabilities in this reimagined world. He slipped and fell, the enemies saw their chance, the bayonets came out. Even supremely gifted [redacted] have a sell-by date.

Of course, none of this says anything about who came up with the mission. Was it Ballmer’s idea or Sinofsky’s? Microsoft isn’t talking.

Now let’s turn to Apple. The “recomplicated” Windows hands the Cupertino company an intriguing opportunity. They can capitalize on Microsoft’s misstep, extend a welcoming hand to the Windows users who intend to switch to Apple, and make the iPad the sine qua non of what a Post-PC device should be. (I use the “Post-PC” moniker for lack of a better one. For me, it doesn’t stand for the end of the PC but for its broadening into three instances: classic, tablet, smartphone.)

From the beginning, the iPad, designed to be a new genre, not a derivative, came with limitations. Yes, you could do some productivity work, but iOS’s lack of multi-tasking, a favorite whipping boy of the critics, made it difficult. To be sure, the OS supported concurrent activities inside the device, but running several applications at the same time was a no-no. The processor couldn’t handle it and, even if it could have, battery life would have been terrible.

So whether it was divine inspiration or simply a bowing to necessity, Apple shunned the temptation to make a PC-only-smaller, and created a whole new genre of personal computers. Microsoft couldn’t resist and gave us Windows Mobile with a Start button.

Almost five years have elapsed since the birth of iOS. (We’ll give a quick but deep hat tip to its ferocious and now deposed champion, Scott Forstall, and leave the discussion of his own exit for a future Monday Note.) With the latest iPad hardware, we have a fast processor and there are even faster ones in the making. Does the more muscular hardware and road-tested OS portend a future that supports the running of two applications side-by-side in a split-screen arrangement? Or perhaps a slidebar that reveals and hides the second app.

This isn’t exactly an original idea: Samsung just released a firmware update providing a split-screen multitasking view. And, of course, as explained here, the Snap feature in Windows 8 provides a neat way to run two apps side-by-side on a laptop or tablet.

Today, preparing a Keynote document that incorporates elements from other apps requires clumsy mental and physical gymnastics. Having access to the source and destination documents at the same time would be a welcome relief and a boost to business uses.

There are other quirks. You can edit a Mac-originated Pages or Numbers document on your iPad, but no such joy awaits users of Apple’s well-loved Preview. Upload a Preview PDF into iCloud from your MacBook and then grab your iPad and see if you can find it… No, you need to use DropBox or the (excellent) Microsoft SkyDrive. (One “explanation” for this state of affairs is the strong security that pervades iOS. Inter-application communication can open backdoors to malware, which is still quite rare in iOS. But if it can be done for Pages and other iWork apps…)

Now that all OS X and iOS software is under one hat, Craig Federighi‘s, perhaps we can expect these workflow speed bumps to be ironed out. Multiple concurrent applications, a document store that’s common to all apps… This is Apple’s opportunity: Stick to its guns, keep laptops and tablets clearly distinct, but make iPads easier to love by business users. The comparison between a worst-of-both-worlds Surface hybrid and the iPad would be no contest. iPad mini for media consumption, everywhere; iPad for business and everything else.

Apple can finish the job Sinofsky started.

JLG@mondaynote.com