Microsoft Makes Clever Moves

 

by Jean-Louis Gassée

While Microsoft Office for mobile is a satisfying success, the company can’t seem to create — or even buy — a mobile operating system that can compete with iOS and Android. Perhaps they’ve been looking in the wrong direction and can return to their “trusted” Embrace and Extend tactics.

Microsoft published its numbers for its Fiscal Year 2015 2nd quarter ending in December 2014. While the company isn’t the money machine it once was, it is healthy: Revenue grew 8% to $26.5B, Operating Income declined only a bit (- 2%) at $7.8B, there will be another $.31 dividend for the quarter, and cash reserves stand at $90B.

Such numbers give Satya Nadella the space he needs to implement the Mobile First – Cloud First vision he outlined last year. A key component of this plan is to spread Office applications across all platforms and devices: PCs, tablets, and smartphones – native apps as well as Web versions. Last week, Microsoft took another step in this direction with the release of its historic Outlook PIM (Personal Information Manager) app for Android and iOS.

While the Outlook release was warmly received, I’ve learned to take enthusiastic press reviews with caution. I prefer to “play customer”: I buy and use the product in klutzy ways engineers can’t foresee and, as a result, I get a better idea of how the product will fare in the real world. So, I installed Outlook on my iPad mini and, not to pour salt on some wounds… It Just Works. It runs my Exchange account at work, and it speaks Gmail and iCloud as well. No ifs, no buts.

Perhaps the most interesting aspect of the release is that it completes the core components of the native MS Office bundle: Word, PowerPoint, Excel, and now Outlook. It doesn’t matter which platform you use — Windows, Mac, Android, or iOS — you now have the full complement of Microsoft’s productivity apps built specifically for your device.

I used to think that if Apple could get its software house in order and work out the  (numerous) bugs, iWork could easily displace Microsoft Office on Mac, iCloud, and iOS. After all, iWork is free… Now, I’m not so sure. With this release, MS Office provides a fit and finish, a safe and effective cross-platform solution that’s worth the price of admission, particularly in the Enterprise world.

But Apple isn’t the competitor Microsoft worries about. Cross-platform Office is a powerful countermove against Google Apps. Microsoft doesn’t have a dog in the old Web vs. Native Apps fight, it offers both everywhere.

In other matters, however, things aren’t entirely rosy for Microsoft. Its smartphone hardware business isn’t doing well. A look at the recent 10-Q and at the slide presentation for the Earnings Release shows hardware revenue of $2.3B, for 10.5M Lumia phones and 39.7M on-Lumia devices:

Phone Hardware

Microsoft’s smartphone business is still dealing with the Nokia acquisition trauma, so these numbers are less reliable than in a stable business. But even if we proceed with caution, when we divide the $2.3B revenue number by 50.2M (the total number of devices), we get a meager ASP (Average System Price) of $46.

One could argue that the computation is misleading because it throws Non-Lumia phones — such as the Nokia X running Android — into the same pot as worthier Lumia devices. So let’s take take another stab at the numbers: Let’s imagine that all non-Lumia phones are simply given away, $0 ASP. That leaves us with 10.5M Lumia phones divided into $2.3B revenue for a yield of $219 ASP. Compare this to the $687 ASP Apple got for its iPhones last quarter. Playing with numbers a bit more, if you assume a $20 ASP for non-Lumia “dumbphones”, the ASP for Lumia smart devices comes to $143.

As discussed here last December, even with “forever” cash reserves, why bother? Big enterprises such as Bank of America and Chase that have discontinued Windows Phone support agree.

After fruitlessly jumping into a Broad Strategic Partnership with Nokia and then promptly Osborning it, Microsoft acquired the company’s smartphone business rather than letting it die. It’s still not working and, as the most recent industry numbers show, there’s little hope that Microsoft’s phone hardware business, while saddled with the hapless Windows Phone OS, will be anything other than a waste of time, money, and reputation. Many have suggested that Microsoft drop its OS efforts and fork Android, returning, in Ben Thompson’s words, to “its roots of embracing and extending”.

That brings us to Cyanogen. In the grand tradition of Homebrew Computing that gave birth to Microsoft, Apple and countless others, developers have taken the Open Android operating system and opened it even more, creating a raft of improved versions.

Initially, many thought these variants were just for the hacker who wanted to play with his Android device, reflash its ROM, and grow hair on his chest. But one Android strain, CyanogenMod, exhibited such vitality hat it spawned an organized, for-profit company. In 2012, Benchmark and Redpoint led a $7M Series A investment in Cyanogen, Inc. (“Series A” is typically the first serious VC money, after a Seed Round.) In December, 2014, there was a more substantial $23M Series B round, led by another member of the Valley’s VC nobility, Andreessen Horowitz. And now, there is talk of a $70M round…  in which Microsoft might be a “minority” player.

Kirk McMaster, Cyanogen’s CEO, has been unusually candid about the company’s goal [emphasis mine]:

“I’m the CEO of Cyanogen. We’re attempting to take Android away from Google.”

and…

We’ve barely scratched the surface in regards to what mobile can be. Today, Cyanogen has some dependence on Google. Tomorrow, it will not. We will not be based on some derivative of Google in three to five years. There will be services that are doing the same old bulls— with Android, and then there will be something different. That is where we’re going here.”

Ambitious words, indeed, but they’re backed by some of the Valley’s smartest money.

Microsoft’s role in Cyanogen is probably just a minor one; perhaps it will help with the patent portfolio it unleashes on Android OEMs. But the company’s involvement at all could be seen as part of its long battle with Google. Recall that “Google acquired Android in 2005 as a defense against Windows Mobile dominating smartphones just as Windows dominated PCs.” Later, in 2008, Microsoft acquired Android founder Andy Rubin’s previous company Danger, whose Sidekick design inspired Google’s pre-iPhone G1 devices.

Cyanogen has long been in Google’s cross-hairs. In its early days, CyanogenMod (since renamed to Cyanogen OS) was perceived as such a nuisance — or a threat — that its users suddenly found that they needed to perform contorted workarounds to load Google’s proprietary apps (Google Map, YouTube, GTalk, and so on). Can Microsoft resist the temptation to aid this Google irritant?

Tantalizing as the Cyanogen investment is, it might not be enough to keep Microsoft in the brutal smartphone hardware business, but it’s consistent with the company’s efforts to undermine Google’s ecosystem by any means necessary. Including gathering allies to do to Android what Bill Gates once did to Lotus 1-2-3.

Let’s keep in mind that the mobile industry is no more mature than the PC industry was in the mid eighties. Things could get interesting as Cyanogen reveals more of the business model its muscular investors have bought into. And they will become particularly interesting if the company can corral support from industry players who are eager to get out from under Google’s thumb.

JLG@mondaynote.com

Forking Apple Brands

 

by Jean-Louis Gassée

After last week’s lengthy discussion of Apple’s software foibles, today’s fare is lighter but intriguing: The Apple logo is a stamp of excellence that’s proudly worn by the Mac, iPhone, iPad, Watch… why is it withheld from one of Apple’s other major group of products?]

Naming a computer company Apple was a true stroke of genius, the kind that sits beyond the reach of consciousness. With the name came a visual representation. The first, unofficial logo evoked Isaac Newton’s famous epiphany:

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(Source: Edible Apple)

Not a stroke of genius. It was a too kitschy, too busy, and failed to provide an easily memorized and recognized image, a signpost to the company’s products. It was quickly replaced with the simple Apple bite logo that we know today:

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(Source: Graphic Design 1)

Theories of the the logo’s meaning and construction occupy a corner of Apple mythology. Some are misguided (it’s an homage to Alan Turing, it’s a blasphemous reference to the forbidden fruit), while others are playful: A fellow named Barcelos Thiago points out the use of the Fibonacci series in the Apple logo (and in just about everything else).

Apple’s reputation, products, and imagery have coalesced into a brand, a mark that’s burned (as in the word’s origin) into the collective consciousness. Last year, Forbes called Apple the world’s most valuable brand. It’s impossible to measure contribution of the name and logo to the company’s success, but a peek at the Forbes’ list shows how little Apple spends advertising its products compared to Microsoft, Google, Samsung, or less technical companies such as Coca-Cola or Louis Vuitton:

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A brand exists in a circular relationship with the promises that it makes to the customer. If the products and services deliver on the pledge, the customer is more inclined to swear loyalty to the brand. A close examination of some of these circles brings up apparent paradoxes. Burberry’s, for example, was once credited for inventing the oxymoronic “mass-marketing of exclusivity” – a trick that Louis Vuitton now performs at the highest of levels, a feat that requires an advertising budget more than four times Apple’s.

The late Fred Hoar, an erudite Harvard graduate who once served as the head of Apple’s Marketing Communications, likened brand advertising to urinating inside one’s dark-blue flannel suit: It makes you feel warm but no one sees anything.

No such waste at at Apple. The product, not the brand, is the hero. Apple’s ads focus on the product, on what it does, on the feats that it allows unnamed customers to perform. The brand ascends to where it belongs, above specific products and promotions.

Apple ads are also (mostly) free from celebrity endorsements. The imprimatur of a noted figure can be effective — I’m thinking of George Clooney second banana persona in Nestlé’s tongue-in-cheek Nespresso ads. But we usually feel the use of endorsements as an admission that the product needs stilts, that it lacks differentiation.

If Apple ever hires a spokesperson for its iPhones, even if it’s Andrew Wiles or, in a couple of years, a happily retired Barack Obama, you should look elsewhere: The brand has started to unravel. (Apple does, of course, occasionally use celebrities — this ad featuring the Williams sisters for example — but as Adweek points out, it’s rare.)

Given this thinking, what do we make of Apple’s other brand, Beats?

Beats was acquired last year, for $3.2B. The reasons behind the price are still a bit unclear, but we already see ads that aren’t much more than mini-movies of celebrity athletes (Colin Kaepernick, Cesc Fabregas, LeBron James) shutting out the noise of irate fans and implications of social injustice by donning the company’s headphones.

Does the Beats lines needs stilts in order to achieve differentiation and justify its high pricetag? The quality of Beats headphones is a contested subject. One study shows they’re preferred by teens, other painstaking reviews claim there are many better headphones. On this, because of my old ears, I don’t have much of an opinion beyond Sound Holiday Thoughts written in December 2013.

It’s a novel situation: Apple Thinks Different about the two brands it now owns. The personal computing brand is carefully nurtured, pruned, protected, now at the pinnacle. The other is just as carefully kept apart.

Walk into an Apple store and you’ll see Beats headphones and speakers next to Bose, B&O, and Logitech products. Before the acquisition, this was no surprise, Beats products were just third party accessories. Now, they’re Apple products, even if they don’t carry the Apple logo. They sit on the shelves next to their competitors, such as the $999.95 Denon Music Maniac Artisan headphones. Can you imagine the Apple Store selling Surface Pro hybrids, stocking them right next to the iPads?

You won’t find Apple logos on Beats headphones, and you won’t find any Apple references in a Beats headphone commercial. The headphones are part of the Beats Music streaming music ecosystem whose goal is to play everywhere, including the Windows Phone Store.

But there’s a problem. As Horace Dediu notes, Apple’s music business has stopped growing, vastly overwhelmed by apps:

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The Beats acquisition raised many questions still unanswered: Why get into the headphones and loudspeakers business? What is the Job To Be Done here?  Same queries for the Beats Music streaming service, one that might benefit from its bundling with Apple hardware, but whose curation “sounds” less than enthralling thus far, notwithstanding Tim Cook’s enthusiasm.

As the year unfolds, we’ll see how Beats products and services grow the brand, if its isolation from the Apple brand merely is prophylactic caution, or part of a bigger plan to stay on top of the music world.

The Apple Watch won’t be the only development to… watch this year.

JLG@mondaynote.com

2015 Digital Media: A Call For a Big Business Model Cleanup 

 

by Frédéric Filloux

Digital media are stuck with bad economics resulting in relentless deflation. It’s time to wake-up and make 2015 the year of radical — and concerted — solutions.

Trends in digital advertising feel like an endless agony to me. To sum up: there is no sign of improvement on the performance side; a growing percentage of ads are sold in bulk; click-fraud and user rejection are on the rise, all resulting in ceaseless deflation. Call it the J-Curve of digital advertising, as it will get worse before it gets better (it must – and it will).

Here is a quick summary of issues and possible solutions.

The rise of Ad Blocking system, the subject of a December 8th, 2014 Monday Note. That column was our most viewed and shared ever, which measures a growing concern for the matter. Last week, AdBlockPlus proudly announced a large scale deployment solution: with a few clicks, system administrators can now install AdBlockPlus on an entire network of machines. This yet another clue that the problem won’t go away.

There are basically three approaches to the issue.

The most obvious one is to use the court system against Eyeo GmBH, the company operating AdBlockPlus. After all, the Acceptable Ads agreement mechanism in which publishers pay to pass unimpeded through ABP filters is a form of blackmail. I don’t see how Eyeo will avoid collective action by publishers. Lawyers — especially in Europe — are loading their guns.

The second approach is to dissuade users from installing ABP on their browsers. It’s is up to browser makers (Google, Microsoft, Apple) to disable ABP’s extensions. But they don’t have necessarily much of an incentive to do so. Browser technology is about user experience quality when surfing the web or executing transactions. Performance relies on sophisticated techniques such as developing the best “virtual machines” (for a glimpse on VM technology, this 2009 FT Magazine piece, The Genius behind Google’s browser  is a must-read). Therefore, if the advertising community, in its shortsighted greed, ends up saturating the internet with sloppy ads that users massively reject, and that such excesses led a third party developer to create a piece of software to eliminate the annoyance, it should be no surprise to see the three browsers providers tempted to allow ad blocking technologies.

Google’s is in a peculiar position on this because it also operates the ad-serving system DFP (DoubleClick for Publishers). Financially speaking, Google doesn’t necessarily care if a banner is actually viewed because DFP collects its cut when the ad is served. But, taking the long view, as Google people usually do, we can be sure they will address the issue in coming months.

The best way to address the growing ad rejection is to take it at its root: It’s up to the advertising sector to wake up and work on better ads that everybody will be happy with.

But reversing this trends will take time. The perversity of ad-blocking is that everyone ends up being affected by the bad practices of a minority: Say a user installs ABP on her computer after repeated visits on a site where ads are badly implemented, chances are that she will intentionally disconnect ABP on sites that carefully manage their ads are next to zero.

As if the AdBlock challenge wasn’t not enough, the commercial internet has to deal with growing “Bot Fraud”. Ads viewed by robots generating fake — but billable — impressions become a plague as the rate of bogus clicks is said to be around 36% (see this piece in MIT’s Technology Review). This is another serious problem for the industry when advertisers are potentially defrauded with such magnitude: as an example, last year, the FT.com revealed that up to 57% of a Mercedes-Benz campaign viewers actually were robots.

In the digital advertising sector, the places to find some relief remain branded content or native ads. Depending on how deals are structured, prices are still high and such ad forms can evade blocking. Still, to durably avoid user rejection, publishers should be selective and demanding on the quality of branded content they’ll carry.

Another ingredient of the cleanup involves Internet usage metrics — fixed and mobile. More than ever, our industry calls for reliable, credible and, above all, standardized measurement systems. The usual ‘Unique Visitor’ or page views can’t remain the de rigueur metrics as both are too easily faked. The ad market and publishers need more granular metrics to reflect actual reader engagement (a more critical measure when reading in-depth contents vs. devouring listicles dotted with cheap ads). Could it be time spent on a piece of content or shares on social networks? One sure thing, though: the user needs to be counted across platforms she’s using. It is essential to reconcile the single individual who is behind a variety of devices: PC, smartphone or tablet. To understand her attention level — and to infer its monetary value, we need to know when, for how long, and in which situations she uses her devices. Wether it is anonymously or based on a real ID, retrieving actual customer data is critical.

The answer is complicated, but one thing is sure: to lift up its depleted economics, the industry needs to agree on something solid and long-lasting.

The media industry solutions to the problems we just discussed will have a significant impact on digital information. As long as the advertising market remains in today’s mess, everybody loses: Advertisers express their dissatisfaction with more pressure on the prices they’re willing to pay; intermediaries — media buying agencies — come under more scrutiny; and, in the end, publisher P&Ls suffer. The two digital world ‘mega-gatekeepers’ — Facebook and Google — could play a critical role in such normalization. Unfortunately, their interests diverge. There is not a month when we do not see competition increase between them, on topics ranging from user attention, to mobile in emerging markets, internet in the sky, and artificial intelligence… At this stage, the result of this multi-front war is hard to predict.

frederic.filloux@mondaynote.com

Apple Software Quality Questions

 

by Jean-Louis Gassée

A flurry of recent software accidents in iOS and OS X raises questions about Apple’s management of its relentless increase in R&D spending.

For the past six months or so, I’ve become increasingly concerned about the quality of Apple software. From the painful gestation of OS X 10.10 (Yosemite) with its damaged iWork apps, to the chaotic iOS 8 launch, iCloud glitches, and the trouble with Continuity, I’ve gotten a bad feeling about Apple’s software quality management. “It Just Works”, the company’s pleasant-sounding motto, became an easy target, giving rise to jibes of “it just needs more work”.

I felt this was an appropriate Monday Note topic but kept procrastinating. Then the Holidays break came, including time on a boat with worse than no Internet – meaning frustratingly unpredictable and slow when on.

Coming back to the Valley, I read Marco Arment’s January 4th, 2015 post titled Apple has lost the functional high ground:

“We don’t need major OS releases every year. We don’t need each OS release to have a huge list of new features. We need our computers, phones, and tablets to work well first so we can enjoy new features released at a healthy, gradual, sustainable pace.

I fear that Apple’s leadership doesn’t realize quite how badly and deeply their software flaws have damaged their reputation, because if they realized it, they’d make serious changes that don’t appear to be happening. Instead, the opposite appears to be happening: the pace of rapid updates on multiple product lines seems to be expanding and accelerating.”

(Unfortunately, this well-meaning, reasoned critique from a respected Apple developer became fodder for the usual click-baiters, leading Arment to regret that he wrote it. This is sad.)

Arment isn’t the only one lamenting Apple’s software quality. See Glenn Fleishman’s well-documented list of nontrivial issues, or Michael Tsai’s compilation of comments from developers and engineers, such as this one from Geoff Wozniak (no relation to Woz):

“At this point, my default position on Apple software in OS X has moved from ‘probably good’ to ‘probably not OK’. They seem more interested in pumping out quantity by way of more upgrades. It’s death by a thousand cuts, but it’s death nonetheless.”

I’m late to this discussion but I’d like to add a few detailed observations of my own, examples of questionable design decisions, poor implementation, and other “broken windows”. Boredom may ensue.

We’ll start with Apple’s Pages word processor. When it was introduced ten years ago, I found it mostly pleasant, easy for my limited use, progressively improved over a succession of releases, with welcome features such as Google Search, Wikipedia, and Dictionary/Thesaurus integration.

Curiously, however, Pages did some things differently. Hyperlink creation, for example, was inconsistent with Apple Mail, TextEdit, and Microsoft Word conventions. With these “older” products, you select some text, press cmd-K, paste the URL of the desired destination, and you’re good to go:

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In the new Pages, no cmd-K joy. You have to bring up the Inspector, paste the link in the URL field, and press Enter.

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It’s not overly complicated, but why abandon the simple ⌘-K convention used elsewhere on the Mac?

With each Pages update I hoped for a return to the ancient ways, and when Pages 5 came out in late 2013, I thought my prayers had been answered. I select some text, type ⌘-K, and up pops the link editor:

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I paste the target URL into the Link field, press Enter, and I’m done, right? I’ve just created a link to a MacWorld story.

But, no. If I go back to the link I just entered, I see this:

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The MacWorld URL I entered is gone, replaced by the “helpful” default, www.apple.com. I also try clicking on Go to Page; indeed, it takes me to www.apple.com.

This can’t be right…I click Edit and go through the process again, the intended link sticks this time. Out of fear of having stumbled on an unreproducible phantom quirk, I carefully step through the procedure several times from different angles.

If I tiptoe to the File menu and click Save after I’ve pasted the URL but without pressing Enter, the intended link stays; it’s not replaced by www.apple.com:

351-5unnamed-7

However, this only works if I Tab into the Link field and paste my URL. If I double-click on the pre-filled www.apple.com, paste the URL, and Save from the File menu, the link is gone. (Again, I carefully reproduced the procedure.)

This is madness.

But it doesn’t stop there.

Befuddled users found they couldn’t send Pages 5 files through Gmail. It’s now fixed, as the What’s New in Pages screen proudly claims…

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…but how could such an obvious, non-esoteric bug escape Apple’s attention in the first place?

Then we have “deprecated” features. Gone are the convenient Writing Tools:

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Search with Google is still there, but it’s harder to find; a Look-Up function bundles the Dictionary and Wikipedia but, believe it or not, there’s no Thesaurus. I also liked the Search function in Pages 4.3:

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It’s gone in Pages 5. Admittedly, this might not be a big deal for most users, but it allowed me to have kremlinology fun with executive abuse of words such as “incredible” and other platitudinous phrases.

We know the official excuse for removing features: iOS compatibility. It’s a noble goal on paper, and it sounds good on stage and in Keynote slides, but iWork on iOS is far from a godsend. Creating even a moderately complex document on an iPad is an unpleasant, frustrating experience.

Even if we concede that iOS compatibility may mean some amount of “dumbing down” (and we’ll note that the MacWorld review was careful to call Pages 5 a different product rather than a mere update), why didn’t Apple catch more of the obvious bugs? I’d like to have a quiet on-on-one with the Pages product manager to hear his/her explanations for the state of the product.

I can’t leave Pages without a stop at the iCloud version. (Apple, probably taking a page from Google’s old playbook, labels all three iWork products “beta”.) I tried writing a Monday Note article in iCloud. Impossible, no links. If I turn to the version of Microsoft Word on their One Drive service…It Just Works:

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Imagine Microsoft running an ad campaign: I’m One Drive, You’re iCloud…

To be complete, Microsoft’s Office Online isn’t without its own quirks. It loves me so much it refuses to sign me out:

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We now turn to iTunes. Pages might not concern a majority of Mac users, but iTunes sure does, and it presents an even sorrier spectacle than Apple’s productivity apps.

A good product allows its users to build a mental model of what it does and how it does it. Paraphrasing Alan Kay, the user forms a what/how idea at the product’s door, then walks in and finds an Ali Baba cave full of pleasant surprises. How this applies to iTunes is left to the reader. iTunes is a mess, an accumulation of debris and additions without a discernible backbone. I won’t go as far as the Valley wag who calls iTunes Apple’s Vista, but iTunes reflects poorly on a company that takes prides in the fit and finish of its products.

For example, this is what I see when I open iTunes on my Mac:

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If you squint, you’ll see the same Bach Orchestral Suites repeated six times, and Mozart’s Requiem four times. Entries in the Playlist are duplicated for no apparent reason. And let’s not even try to make and manage folders to group playlists by artist or other criteria. Nor can I make sense of the presentation of TV Show episodes. On my Apple TV, iTunes sometimes shows episodes in natural order, but then reverses them for no reason.

No need to continue the litany, the One Cockroach Theory tells us there are many more under the sink. Such as, I can’t resist, iMessages inconsistencies between devices.

Of course, making bugs lists is easier than finding solutions, particularly if we want to avoid “all you have to do” bromides. So, we’ll proceed with caution and look at some numbers.

In 2012, Apple revenue grew by 45% to $156.5B and R&D went up by 39% to $3.4B.
In 2013, revenue grew 9% to $171B but R&D went up 32% to $4.5B.
In 2014, revenue went up 7% to $183B while R&D grew 35% to $6B.

Such relentless increase in R&D spending isn’t “free”, it means hiring lots of people and starting many projects, or, worse, piling more people onto existing ones. This results in management problems, less visibility over a larger number of teams and, vertically, more opaque layers, less ability to diagnose people problems.

Another consideration is priorities. The received wisdom is that Apple engineers hail from Lake Wobegon: They’re “all above average”. But in a fight for resources, where do you put your best soldiers, on iOS or OS X? On Pages or Mail?

Apple execs aren’t indifferent to the company’s software quality problems, and they’re not unaware of the management pitfalls in fixing them. Take Apple Mail: For several years (close to five by my memory of conversations with Bertrand Serlet, then Apple’s head of OS development), Apple Mail had been a painful, many times a day irritant. It consumed so much computing power that the Activity Monitor on my MacBook Pro sometimes showed a CPU usage number as high as 257%, with fans spinning loudly, and general mail operations getting mysteriously stuck. Messages would disappear from a mailbox and yet be found by Spotlight, the Mac’s internal Search engine.

A recent OS X update seems have fixed these problems. A better manager was put in charge, people decisions were finally made, and Apple Mail is now (almost) boringly normal, receiving, sending, deleting, and sorting junk without fuss.

Let’s just hope that the all-important iTunes development team gets the “cure” it deserves, and iWorks after that.

Last, there is the mixed bag of comparisons. One side of the coin is Apple’s numbers are splendid. The quarterly results that will be disclosed next week (January 27th) are likely to show strong iPhone 6 sales and a continuation of Mac progress. And despite my bug list, Apple software still compares favorably to Windows 8 and Android offerings.

The other view is that the quality lapses we observe are the beginning of a slide into satisfied mediocrity, into organizations and projects that “run themselves”, that are allowed to continue for political reasons without regard for the joy of customers.

I know what I hope for. I don’t expect perfection, I’ve lived inside several sausage factories and remember the smell. If Apple were to spend a year concentrating on solid fixes rather than releasing software that’s pushed out to fit a hardware schedule, that would show an ascent rather than a slide.

JLG@mondaynote.com

Fear is not an editorial option

 

by Frédéric Filloux

Anglo-saxon media that refused to publish religious caricatures should revise their position. This is the worst time to surrender to self-censorship and politically correctness. There is a too much at stake, here. 

As I’m writing this column, sharpshooters are positioned on the roofs of my neighborhood, a hundred yards away from Place de la Nation where hundreds of thousands of people will gather in the memory of the 17 people killed in last week terror attacks. France is in a state of shock, the emotion is overwhelming, and the concern is growing as everyone realizes the size and depth of French Jihad networks.

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[Place de la Nation Sunday night, photo Zoé Filloux]

While anti-semitic attacks are, unfortunately, not a novelty in France, the retaliation on news media now takes the shape of professionally executed targeted assassinations. From now on, every media publishing offensive cartoons could suffer Charlie Hebdo’s fate. This is what happened to the Hamburger Morgenpost: firebombed this Sunday at 2:00am — exactly in the same way as Charlie Hebdo was four years ago.

France is not through with terrorist attacks. Friday evening, hours after SWAT teams stormed the kosher supermarket, the Interior minister painted a grim picture of what’s ahead. ‘Over the recent months’, he said, ‘103 legal procedures have been initiated against terror cells, involving 505 people. There is not a single day in which I don’t take an operational decision regarding this issues’. More broadly, law enforcement estimates the threat at 1200 “potential jihadists”. Several hundreds of them are under surveillance.

On the investigative site Mediapart, former counter-terrorism magistrate Gilbert Thiel said this:

“Our problem, today, is that we went from 100 people to monitor in 1995 to 1000 today. Between 12 and 20 law enforcement people are needed to keep track of one single individual on a 24-hour basis. Then we discover that the individual’s friends and relatives need to be monitored as well. At some point, we’re swamped.”

To make the problem worse, counterterrorism experts quoted in Le Monde believe than 3000 to 5000 Europeans are fighting in the name of Jihad in Syria and Irak; half of them are said to be identified after their departure and 20% are coming back, most of them brainwashed and not in a sunny mood.

Unlike the September 11th era of terrorism where attacks were engineered from abroad, today, Al Qaeda and ISIS have been very good at exporting terrorism into the social fabric of Western countries, encouraging the emergence of widespread, independent micro-cells with people, usually coarse (as heard in the audio recordings of last week’s perpetrators), but quite effective at using kalashnikov rifles and explosives.

Let’s come back to the cartoons. I think news media that balk at republishing caricatures of the Prophet Mahomet are ill-advised. This is the worst time to yield to self-censorship and politically correctness.

I wasn’t personally a fan of Charlie Hebdo. Ten years ago, it published an article saying, in substance, that the newspaper I was editing at the time — 20 Minutes with its 3 million readers and a staff of 80 fine reporters and editors — didn’t deserve to exist. The Charlie Hebdo author said that he’d prefer that people read nothing rather than a free newspaper – a genre that was unanimously loathed by the “noble” paid-for news media at the time. Charlie was then under the editorship of a sectarian character, a friend of Nicolas Sarkozy’s wife Carla Bruni, a fact that helped him land a managing job at Radio France for a quickly forgotten tenure. At the time, the written part of Charlie wasn’t the paper’s best. But its cartoons were. Definitely. I deeply believe that satire and caricatures are an important component of free speech; because of this, Charlie has every right to exist and I really hope it will survive. (Frankly, I doubt it as most of its great talents have been killed.)

Among many comments I read, I spotted an editor saying that he doesn’t feel like putting his staff at risk by re-publishing Charlie’s cartoons.

I can’t disagree more. As unpleasant it is, I think it’s part of the job.

In February 1989, I was a young reporter at Libération when a fatwa was issued by Iran then leader Ayatollah Ruhollah Khomeini against the Salman Rushdie author of The Satanic Verses.  The first reaction of Libération was to publish large abstract of Rushdie’s novel. Needless to say, in the months afterward, we operated under serious police protection. To every staffer of the paper, this was obviously the right decision to make (we were actually quite proud our editors.) Later, when the Danish newspaper Jyllands Posten published 12 cartoons that trigged scores of violent demonstrations across the world, Libé republished most of the cartoons.

In his style, Charlie Hebdo went many steps further, its editor Stephane Charbonnier (“Charb”) was put on a hit-list by the Yemen-based, pro-Jihad, magazine Inspire, along with other writers and cartoonists.

In 2011, the paper a satirical issue titled “Charia Hebdo”, “guest edited” by the Prophet Mahomet with this front page:

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[“100 lashes if you don’t die laughing”]

Quickly after, the magazine was firebombed, and English and American newspapers published this pixelated image:

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And last week, The Telegraph, among many others, opted for a carefully cropped version of the photograph of “Charb” holding the controversial front page:

350-cropped

Certainly not the finest hours of the Anglo-saxon press.

That’s why, I felt bad for The New York Times when I read its convoluted justification for censoring itself. (BuzzFeed and The Huffington Post did publish the drawings.)

Publishing controversial caricatures is a mandatory mission for news media.

First, because it’s newsworthy; readers must see by themselves what this is about without the filtering of virtuous editors who entitle themselves with the right to decide what their audience should or should not see.

Two, when it comes to caricatures, the line between fun, sharp and excessive treatment is blur. It is completely subjective. In 2011, Le Monde cartoonist Plantu published this drawing:

350_Plantu-Mahomet
[The handwriting says: “I must not draw Mahomet…”]

He might be seen by devout muslims as crossing a religious boundary (Plantu is one of France’s most talented and courageous cartoonist.)

Would the New York Times, The Telegraph and others, pixelize Plantu’s work as well under the pretext might find if offensive and retaliation might ensue?

Then what about real journalistic work, investigative series, video reporting, documentaries about such sensitives issues? If one day extremists decide to use rifles and explosives against journalists and documentary makers, to what extent will these cautious news organizations refrain from picking up great — but dangerously hot — stories ?

Over the last days, we’ve seen pundits stating that the millions people marching in France were the proof that extremism had failed. They are wrong. The battle has just begun, and it’s not the time to balk.

frederic.filloux@mondaynote.com

350_Pencils
[3.7 million people marched this Sunday across France. Photo: “Charlie”]

The iPhone’s 8th Anniversary

 

by Jean-Louis Gassée

Smartphones existed before Steve Jobs introduced the iPhone on January 9th, 2007. But by upending existing technology platforms, application distribution, and carrier business models, he kickstarted a new era of computing whose impact is yet to be fully understood.

I knew one of the victims of the Charlie Hebdo massacre: Bernard Maris. We weren’t friends, just pleasantly casual acquaintances through the in-law side of my family. Typical Parisian dinner conversations “rearranging the world” led to a Palo Alto visit and an interview for a small Charlie Hebdo piece, complete with the requisite risqué drawing.

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[Bernard Maris]

After several false starts writing about the events in Paris, I’ve come to the conclusion that I’m too angry at too many targets, starting with certain cowards in the media who don’t understand that the fear of antagonizing oppressors perpetuates their power, that no good culture can exist without a dose of bad taste, that the demand to never be offended is inhumane. As Cardinal André Vingt-Trois, archbishop of Paris puts it: ‘A caricature, even in bad taste, criticism, even extremely unfair, cannot be put on the same plane as murder.

(Lovers of ironic detail will note that Cardinal Vingt-Trois was once the titular bishop of Thibilis, Algeria. In partibus infidelium.)

Instead, I will turn to a more positive train of thought: The beginning of the Smartphone 2.0 era.

Eight years ago, Steve Jobs walked onto the stage at MacWorld San Francisco and gave a masterful performance. His presentation is worth revisiting from time to time, a benchmark against which to evaluate a PowerPoint-addled CEO pitch or a product intro cum dance number.

In his talk, Jobs tells us that the iPhone is one of these products that, like the Mac and the iPod before, “changes everything”. He was right, of course, but one wonders… even with his enormous ambition, did Jobs envision that the iPhone would not only transform Apple and an entire industry, but that it would affect the world well beyond the boundaries of the tech ecosystem?

If the last sentence sounds a bit grand, let’s look at the transformation of the smartphone industry, starting with Apple.

In 2006, the year before the iPhone, Apple revenue was $19B (for the Fiscal Year ending in September). That year, iPod revenue exceeded the Mac, $7.7B to $7.3B…but no one claimed that Apple had become an iPod company.

In 2007, revenue climbed to $24B, a nice 26% progression. Mac sales retook the lead ($10.3B vs. $8.3B for the iPod), and iPhone sales didn’t register ($123M) as shipments started late in the Fiscal Year and accounting’s treatment of revenue blurred the picture.

In 2008, revenue increased to $32.5B, up 35%. iPhone revenue began to weigh in at $1.8B, far behind $9B for the iPod and $14.3B for the Mac (a nice 39% uptick).

In 2009, revenue rose by a more modest 12%, to $36.5B — this was the financial crisis. iPod declined to $8B (- 11%) as its functionality was increasingly absorbed by the iPhone, and the Mac declined a bit to $13.8B (- 3%). But these shortfalls were more than compensated for by iPhone revenue of $6.8B (+ 266%), allowing the company to post a $4B increase for the year. This was just the beginning. (And even the beginning was bigger than originally thought: Due to a change in revenue recognition esoterica, 2009 iPhone revenue would be recalculated at $13.3B.)

In 2010, iPhone revenue shot up to $25B, pushing Apple’s overall revenue up by a phenomenal 52% to $65B. The iPhone now represented more than 1/3rd of total revenue.

In 2011, growth accelerates, revenue reaches $108B (+ 66%), more than five times the pre-iPhone 2006 number. iPhone reaches $47B (+ 87%), now almost half of the company’s total.

For 2012, sales shoot up to $156.5B (+ 45%), and the iPhone reaches $80.5B (+ 71%). At such massive absolute numbers, 45% and 71% growth look almost unnatural as they appear to violate the Law of Large Numbers. As this happens, the iPhone crosses the 50% of total revenue threshold, and accounts for probably 2/3rd of Apple’s total profit.

Apple’s growth slowed in 2013 to a modest + 9%, with $171B overall revenue. The iPhone, weighing in at $91.3B (+ 16%), provides most ($12.6B) of the modest ($14B) overall revenue increase and 53% of total sales.

Last year, growth slows just a bit more: $182.8B (+ 7%) with the iPhone reaching $102B (+12%). Once again, the iPhone contributes most of the total revenue growth ($10.7B of $11.9B) and fetches 56% of the company’s sales. Notably, the iPad shows a 5% decrease and, at $2.3B, the iPod is becoming less and less relevant. (Although, how many companies would kill for $2.3B in music player revenue?)

The excellent Statista portal gives us picture of the iPhone’s emergence as Apple’s key product:

350_jlg_

While the company is about ten times larger than it was before the iPhone came out, the smartphone industry has become a nearly trillion dollar business. Depending on how we count units and dollars, if we peg Apple at 12% market share, that means the worldwide number across the smartphone industry reaches $800B. If we grant Apple just a 10% share, we have our $1T number.

For reference, still according to Statista, the two largest auto companies, Toyota and the Volkswagen Group, accounted for $485B in revenue in 2013:

350_JLG2-1

However we calculate its size, whether we place it at $800B or $1T, what we mustn’t do is think that the smartphone industry merely grew to this number. Today’s smartphone business has little in common with what it was in 2006.

Consider that Motorola “invented” the cell phone. Now Motorola is (essentially) gone: Acquired by Google, pawned of to Lenovo, likely to do well in its new owner’s Chinese line.

Nokia: The Finnish company stole the crown from Motorola when cell phones became digital and once shipped more than 100M phones per quarter. Since then, Nokia was Osborned by its new CEO, Stephen Elop, an ex-Microsoft  exec, and is now owned by Elop’s former employer. With 5% or less market share, Nokia is waste of Microsoft resources and credibility… unless they switch to making Android phones as a vehicle for the company’s  “Cloud-First, Mobile-First” apps.

Palm, a company that made a credible smartphone by building on their PDA expertise, was sold to HP and destroyed by it. They’re worse than dead, with a necrophiliac owner (TCL), and LG humping other parts of the corpse for their WebOS TVs and a WebOS smartwatch.

And then there’s the BlackBerry. Once the most capable of all the smartphones with a Personal Information Manager that was ahead of its time, it was rightly nicknamed CrackBerry by its devoted users. Now BlackBerry Limited is worth less than a 1/100th of Apple, and is trying to find a niche – or a seeker of body parts.

The change in the industry is, of course, far from being solely Apple’s “fault”. In many ways, Google destroyed more incumbents than Apple. Google acquired Android in 2005, well before the iPhone appeared. According to the always assertive Tomi Ahonen, China now sports more than 2000 (!) phone brands, all based on some Android derivative. And let’s not forget the voraciousness of Apple’s giant Korean frenemy Samsung, which acts as both a supplier of key iPhone components and a competitor.

But is the industry now settled? Are any of the current incumbents, including Apple, unassailable? Market-leading Samsung appears to be challenged by both Apple at the high end and Xiaomi from below, and has announced more recent troubles. Our friend Tomi argues that Xiaomi isn’t the new Apple but that Lenovo and Huawei are the ones to watch. And, of course, Apple is seen as a “hits” company, a business that lives and dies by its next box-office numbers — and the numbers for the new iPhone 6 aren’t in, yet They’re likely be very strong.

Regardless of any individual company’s business case, the overall of impact of the smartphone on the world is what counts the most. In a blog post titled Tech’s Most Disruptive Impact Over the Next Five Years, Tim Bajarin argues that the real Next Big Thing isn’t the Internet of Things, Virtual Reality, or BitCoin. These are all important advances, but nothing compared to the impact of smartphones [emphasis mine]:

“Another way to think of this is that smart phones or pocket computers connecting the next two billion people to the internet is similar to what the Gutenberg Press and the Bible were to the masses in the Middle Ages.”

As Horace Dediu notes, we’re on track to 75% US smartphone penetration by the end of 2014. The big impact to come will be getting the entire world to reach and exceed this degree of connectivity, especially in areas where there’s little or no wired connectivity.

This is what Steve Jobs started eight years ago by upending established players and carrier relationships.

JLG@mondaynote.com

My Best Reads This Year

by Frédéric Filloux

For this year’s last Monday Note, I chose to share a few interesting topics I followed in 2014. I expect many of them will stay high in next year’s news cycle. Here are my picks, in about 40 links.

The Great Mobile Takeover…

Next year, the vast majority of media will see more than 50% of their traffic coming from mobile devices (Facebook is way ahead with 65%). We might see a new breed of mobile-only quality media, but the ecosystem still has to come up with ad formats that don’t irritate audiences, and adjusting revenue streams won’t be easy. Last October, Andreessen Horowitz’s Benedict Evans came up with his Mobile is Eating the World stack of data. It goes in the same direction as Mary Meeker’s bi-annual State of the Internet slide deck, thus reinterpreted by the Atlantic : Mobile Is Eating Global Attention: 10 Graphs on the State of the Internet.

… And How it Will Impact “The Next Billion”

Quartz coined the “Next Billion” phrase and went on to build a cluster of conferences around it (the next is May 19 in London). If 85% of the world population lives within range of a cell tower (including 2G connectivity), 4.3 billion people are still not connected to the web. They will do so by getting a smartphone. According to the GSMA trade group, the number of smartphones will increase by 3 billion by 2020 as the infrastructure is built and handset prices keep falling (they cost currently less that $75).

More in this series of links from Quartz:

Internet cafes in the developing world find out what happens when everyone gets a smartphone
How to map wealth in Africa using nothing but mobile-phone minutes
How to sell gigabytes to people who’ve never heard of them
This mobile operator wants to charge $2.50 a year for access to Facebook
Kenya’s merchants are warming up to a payment system born in a Seattle basement

Last Fall, BusinessWeek ran a special edition about tech outside Silicon Valley. I found these two pieces:
China’s Xiaomi, the World’s Fastest-Growing Phone Maker
Ten Days in Kenya With No Cash, Only a Phone in Nairobi.

Thanks to fancy technologies, 2015 will see all Internet titans competing for these billions of potential customers. In 2013, Wired came up with The Untold Story of Google’s Quest to Bring the Internet Everywhere—By Balloon, followed by this recent update, Google’s Balloon Internet Experiment, One Year Later.

Time Magazine broke all limits of “access journalism” (lots of space in exchange of an exclusive) with this cover story:

facebook-cover

It’s  a nine pages quasi-stenographed account of a press junket arranged by Facebook in India. In it, Lev Grossman “soberly” sums things up:

Over the past decade, humanity hasn’t just adopted Facebook; we’ve fallen on it like starving people who have been who have been waiting for it our entire lives as it were the last missing piece of our social infrastructure as a species.

Since it is behind a paywall I’m not providing a link for this de facto press kit (I assume you can live without it.)

The social doubters

Not everyone has been touched by grace as Lev Grossman was. Among skeptics, Alexis Madrigal from The Atlantic is one of my favorite. Last month, he wrote The Fall of Facebook, a contrarian piece in which he states that “The social network future dominance is far from assured”. He is not the only one to cast such doubt. Bloomberg, for instance, notes that Facebook’s Popularity Among Teens Dips Again while its columnist Leonid Bershidsky, in his trademark stern way, contends Google Deserves Its Valuation, Facebook Doesn’t. On the social phenomenon, this NYT’s OpEd page: The Flight From Conversation by MIT professor Sherry Turkle is a must read.

Journalism

2014 has been quite a year for journalism with endless reverberations of the Snowden affair and the subsequent release of Citizen Four. A must-read of the documentary background is this NYT story:

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The Snowden affair is sure to give a boost to investigative reporting.

I bet 2015 will see the rise of Pierre Omidyar’s media venture First Look Media. The project has been mocked for its stumbling debut (read Mathew Ingram piece First Look Media has forgotten the number one rule of startups). A few weeks ago, I spoke with Pierre and John Temple, First Look’s chief, at a conference in Phoenix, Arizona. Our discussion fell under the Chatham House Rule, meaning I’m not saying who exactly said what. To me, both men have the vision (and the funding) to build a media that could rattle the right cages. (A good read: The Pierre Omidyar Insurgency — New York Magazine). I simply hope Pierre and John will look beyond the United States, there are plenty of stories in Europe as well. Still on journalism, don’t mis Dan Gillmor’s piece about The New Editors of the Internet (The Atlantic); it raises interesting questions about who controls what we see and don’t see on the Web.

Ebola was — and remains — one of the big stories of the year.

I have two friends — two American doctors — who have been on the front line in Sierra Leone and Liberia for months. There is not a single day when I don’t think about their commitment and the risks they take to help the victims of this terrible disease.

Just to grasp the gruesomeness of the situation, watch this video from Time Magazine in which photojournalist John Moore explains his coverage of the epidemic.

Mashable also published Eyewitness to Hell: Life in Ebola-Ravaged Liberia, a horrifying photo essay. Also among the must-reads: Inside the Ebola Wars and In the Ebola Ward, both by The New Yorker’s Richard Preston, an expert on the matter and author of the famous book The Hot Zone. On the economics side, Business Week came up with this cover story: How the U.S. Screwed Up in the Fight Against Ebola

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The rise of the Islamic State was the other big story of the year

Here are my picks in the abundant coverage. First, Vice News’ subjective, but extremely effective four part videos was a revelation. For the first time, a reporter was embedded (sort of) in ISIS. (He had to obey the Rules for Journalists in Deir Ezzor compiled by Syria Deeply.)

More classical but definitely a must-read is Guardian’s Isis: the inside story by Martin Chulov, probably the best account so far. As backgrounders, read ISIS’ Harsh Brand of Islam Is Rooted in Austere Saudi Creed (NYT), The Ancestors of ISIS (NYT), How ISIS Works (NYT) and How the US Created the Islamic State  (Vice).

[miscellaneous]

Let’s conclude with subjects such as the Sony hack. First, to get an idea of the relentlessness of the cyberattacks the US faces on a permanent basis, have a look at this real-time map:

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As far as Sony is concerned, the studio’s apparent cowardice shouldn’t have surprised anyone. Still, was the stolen information legitimate news fodder? Certainly not, yells Aaron Sorkin in a New York Times OpEd : The Press Shouldn’t Help the Sony Hackers. Of course it is, retorts Los Angeles Times’ business columnist Michael Hiltzik: Why The press must report those Sony hacks.

In the Sharing Economy, Workers Find Both Freedom and Uncertainty (NYT) or the reality of a Uber/Lyft driver. Uber will remain a big story in 2015 as its ruthlessness will keep feeding the news cycle (read Uber C.E.O. Travis Kalanick’s Warpath (Vanity Fair)

The Military’s Rough Justice on Sexual Assault (NYT) by Natasha Singer who came up with extraordinary journalistic work on the women who dare to fight the institution.

And finally, another Vanity Fair feature: How Marine Salvage Master Nick Sloane Refloated Costa Concordia, and a moving reportage from The New Yorker: Weather Man, Life at a Remote Russian Weather Station served by the work of a fabulous young photographer, Evgenia Abugaeva, herself born in the Russian Arctic town of Tiksi.

Happy Holiday readings. See you next year.

frederic.filloux@mondaynote.com

MSFT Hardware Futures

 

(Strangely, the WordPress software gives me a “Bad Gateway 502″  error message when I fully spell the name of the Redmond company)

by Jean-Louis Gassée

Microsoft’s hardware has long been a source of minor profit and major pain. In this last 2014 Monday Note, we’ll look at the roles Microsoft’s hardware devices will play — or not —  in the company’s future.

Excluding keyboards and the occasional Philippe Starck mouse, Microsoft makes three kinds of hardware: Game consoles, PC-tablet hybrids, and smartphones. We’ll start with the oldest and least problematic category: Game consoles.

Building on the success of DOS and its suite of business applications, Microsoft brought forth the MSX reference platform in 1983. This was a Bill Gates-directed strategic move, he didn’t want to leave the low-end of the market “unguarded”. Marketed as “home computers”, which meant less capable than a “serious” PC, MSX-branded machines were manufactured by the likes of Sony and Yamaha, but its only serious impact was in gaming. As the Wikipedia articles says, “MSX was the platform for which major Japanese game studios, such as Konami and Hudson Soft, produced video game titles.”

For the next two decades, gaming remained a hobby for Microsoft. This changed in 2001 when the company took the matter into its own hands and built the Xbox. Again, the company wanted to guard against “home invasions”.

With its Intel processors and customized version of Windows, the first iteration of the Xbox was little more than a repackaged PC. The 2005 Xbox 360 was a heartier offering: It featured an IBM-designed Power-PC derivative processor and what some call a “second-order derivative” of Windows 2000 ported to the new CPU.

Now we have the Xbox One. Launched in 2013, the platform is supported by a full-fledged ecosystem of apps, media store, and controllers such as the remarkable Kinect motion sensor.

Success hasn’t been easy. The first Xbox sold in modest numbers, 24 million units in about five years. Sales of the second generation Xbox 360 were better — almost 80 million through 2013 — but it was plagued with hardware problems, colloquially known as the Red Ring of Death. Estimates of the number of consoles that were afflicted range from 23% to more than 54%. Predictably, poor reliability translated into heavy financial losses, as much as $2B annually. Today’s Xbox One fares a little better: It lost only $800M for the first eight months of its life, selling 11.7M units in the process.

Microsoft’s latest numbers bundle Xbox game consoles and Surface tablet-PCs into a single Computing & Gaming category that makes up $9.7B of the company’s $87B in revenue for the 2014 Fiscal Year. This means Xbox console contribute less than 10% of total sales, which is probably why Satya Nadella, Microsoft’s new CEO, has carefully positioned the Xbox business as less than central to the company’s business:

“I want us to be comfortable to be proud of Xbox, to give it the air cover of Microsoft, but at the same time not confuse it with our core.”

In other words, the Xbox business can continue… or it could disappear. Either way, it won’t have much effect on Microsoft’s bottom line or its future.

For the moment, and with the assistance of a holiday price cut, Xbox One sales are topping those of the Sony PS4, but that shouldn’t take our attention away from a more important trend: The rise of mobile gaming. Smartphones are gaining in raw computing power, connectivity, display resolution, and, as a result, support from game developers on both Android and iOS platforms. Larger, more capable game consoles aren’t going away, but their growth is likely to slow down.

The history of Xbox problems, Nadella’s lukewarm embrace of the series, the ascendency of mobile gaming… by comparison the Surface tablet should look pretty good.

It doesn’t.

When Steve Ballmer introduced the Surface device in June, 2012, he justified Microsoft’s decision to compete with its own Windows licensees by the need to create a “design point”, a reference for a new type of device that would complement the “re-imagined” Windows 8.

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Two and a half years later, we know two things: Surface tablet sales have been modest (about $2B in the 2014 Fiscal Year ended June 30th), and Windows 8 frustrated so many users that Microsoft decided to re-re-imagine it and will re-introduce it as Windows 10, scheduled to be released in mid-2015.

Microsoft believes its Surface combines the best of the PC with the best of a tablet. While the hybrid form has given rise to some interesting explorations by PC makers, such as the Yoga 3 Pro by Lenovo, many critics — and not just Apple — condemn the hybrid as a compromise, as a neither-nor device that sub-optimizes both its tablet and its PC functions (see the tepid welcome given to the HP Envy).

What would happen if Microsoft stopped making Surface Pro tablets? Not much… perhaps a modest improvement in the company’s profit picture. While the latest quarter of Surface Pro 3 sales appear to have brought a small positive gross margin, Surface devices have cost Microsoft about $1.7B over the past two years. Mission accomplished for the “design point”.

We now turn to smartphones.

Under the Ballmer regime, Microsoft acquired Nokia rather than let its one and only real Windows Phone licensee collapse. It was a strategic move: Microsoft was desperate to achieve any sort of significance in the smartphone world after seeing its older Windows Mobile platform trounced by Google’s Android and Apple’s iOS.

In the latest reported quarter (ended September 30th 2014), Windows Phone hardware revenue was $2.6B. For perspective, iPhone revenue for the same period was $23.7B. Assuming that Apple enjoys about 12% of the world smartphone market, quarterly worldwide revenue for the sector works out to about $200B… of which Microsoft gets 1.3%. Perhaps worse, a recent study says that Microsoft’s share of the all-important China smartphone market is “almost non-existent at 0.4 percent”. (China now has more than twice as many smartphone users, 700M, as the US has people, 319M.)

Hardware development costs are roughly independent of volume, as is running an OS development organization. But hardware production costs are unfavorably impacted by low volumes. Windows Phones sell less and they cost more to make, putting Microsoft’s smartphone business in a dangerous downward spiral. As Horace Dediu once remarked, the phone market doesn’t forgive failure. Once a phone maker falls into the red, it’s nearly impossible to climb back into the black.

What does all this mean for Microsoft?

Satya Nadella, the company’s new CEO, uses the phrase “Mobile First, Cloud First” to express his top-level strategy. It’s a clear and relevant clarion call for the entire organization, and Microsoft seems to do well in the Cloud. But how does the Windows Phone death spiral impact the Mobile First part?

In keeping with its stated strategy, the company came up with Office apps on iOS and Android, causing bewilderment and frustration to Windows Phone loyalists who feel they’d been left behind. Versions of Office on the two leading mobile platforms ensures Microsoft’s presence on most smartphones, so why bother making Windows Phones?

Four and a half years ago, in a Monday Note titled Science Fiction: Nokia Goes Android, I fantasized that Nokia ought to drop its many versions of Symbian and adopt Android instead. Nokia insiders objected that embracing a “foreign OS” would cause them to lose control of their destiny. But that’s exactly what happened to them anyway when they jumped into bed with Stephen Elop and, a bit later, with Windows Phone. This started a process that severely damaged phone sales, ending with Microsoft acquisition of what was already a captive licensee.

Now the Android question rises again.

Should Microsoft pursue what looks like a manly but losing Windows Phone hardware strategy or switch to making and selling Android phones? Or should it drop an expensive smartphone design, manufacturing, and distribution effort altogether, and stay focused on what it does already, Mobile First, Cloud First applications?

The Intel Enigma

 

by Jean-Louis Gassée

Intel once turned down the opportunity to become the sole supplier of iPhone processors. Why haven’t they let go of their defocused search for the Next Big Thing and, instead, used All Means Necessary to regain the account?

Intel is a prosperous company. For the quarter ended last September, Intel scored $14.6B in Sales, 65% Gross Margin and $4.5B in Operating Income, a nice progression from the same period a year ago:

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A 65% Gross Margin is enviable for any company, and exceptional for a hardware maker: Intel’s GM is up in software territory. By comparison, Apple’s Gross Margin – considered too comfortable by followers of the Church of Market Share – stands at 38.6% for the 2014 Fiscal Year ended last September.

But when we take a closer look at the numbers, the picture isn’t as rosy.  Nearly 90% of Intel’s revenue — $12.9B of the total $14.6B  — comes from two groups: PC and Data Center (servers, networking, storage). Intel’s presence in the mobile world? Nonexistent:

348_non_existent

Essentially no revenue for Mobile and Communications, and a $1B loss. Looking at the past four quarters, Intel has lost about $4B in the pursuit of the mobile market (Daniel Eran Dilger says $7B in the past two years).

How did Intel handle the problem? By sweeping it under the rug. In November, Intel CEO Brian Krzanich announced that the company was merging Mobile into the PC group and would discontinue its $51 per Android tablet subsidy in 2015. This came just weeks after Krzanich had proclaimed Mission Accomplished in the tablet field:

“‘We’ve made good progress getting into tablets’ Krzanich told reporters ahead of the annual Intel Developer Forum in San Francisco. ‘We’ve gone from nothing to something where I consider us a real tablet manufacturer.’”

348The company’s inability to break into the mobile field — into any field other than PCs and servers — isn’t new, and it has worried Intel for decades. Company execs and strategists aren’t happy being the hardware half of Wintel, with being yoked to Microsoft’s fortunes. They like the money, but they want a “second source” for their profits, something other than the x-86 market, so they’ve embarked on a never-ending quest for the next stage in the Intel rocket.

(Of course, the company isn’t blind to the benefits of the Wintel alliance: Given two processors of equal merit, the one running Windows fetches the higher price, hence the ferocious tactics that have landed the company in court on several occasions.)

In its search for the Next Big Thing, Intel has tried alternatives to the x-86 architecture and come up with failures such as the iAPX 32 and the Itanium high-end server processor. The latter, a puzzling adoption of HP’s PA-RISC architecture, was quickly dubbed Itanic by tech wags as results failed to match lofty launch projections.

Intel has tried server farms, modems, networking equipment and, I kid you not, toy microscopes, but they somehow never got around to mobile. In the pre-iPhone days of the mobile world, the dominant players — Nokia, Motorola, Palm, Blackberry — all used processors based on the ARM architecture, processors that were too small and inexpensive to interest Intel. No money there, they cost 1/10th or less of a PC processor.

Steve Jobs offered Intel a chance to get into the mobile game: He asked the company to bid on an ARM-derivative for the iPhone. As Paul Otellini, Intel’s CEO at the time, wistfully and gallantly recounted, he gave the opportunity a pass, thinking the numbers (price and quantity) were too low. (An ex-Intel acquaintance told me that the business people felt they should go after Nokia, instead, because of its huge volume at the time.)

In 2006, after missing the iPhone, Intel sold its ARM processor business to Marvell.

When iPhones and Android-based smartphones took off, Intel insisted they weren’t concerned, that they would triumph in the end: We will win because our unapproachable manufacturing technology will produce x-86 processors that are superior in every way to ARM-based competitors.

We’ve heard this line every year since. The latest version is summarized in this slide from a November Investor Meeting:

348_intel_transistor

What Intel contends here is that they always have a three-year lead over their competition. — it’s just a given. What company execs fail to explain is why smartphone manufacturers have failed to see the light, and why Android tablet makers had to be bribed.

Now it seems that Intel has discovered the Internet of Things… and Wearables, of course. If you have the patience, flip through this 66-slide presentation that tells us that IoT will be huge because the objects around us will all become intelligent (a story we’ve already heard from companies such as Cisco — which is also looking for its Next Big Thing).

348_intel_IoT_evryw

Naturally, wearables are in there:

348_intel_IoT_evryw

This is painful. The whole presentation is an Everything And The Kitchen Sink assemblage of unoriginal ideas. There’s no focus in Intel’s Theory of Everything, no way to see when, where, and how the company will actually rise above the IoT noise.

As for wearables — now fashionable in more ways than one — Intel touts its new MICA bracelet:

348_fashion

You can “pre-order” yours at Opening Ceremony and have it delivered in time for Christmas.

Let’s not forget Intel’s partnership with Google for the next-gen Google Glass, nor the company’s acquisition of Basis, a maker of fitness wearables.

Certainly, the more “initiatives” Intel throws at the wall the higher the chances that one of them will stick. But from the outside, it feels like Intel is being driven by courtiers and PowerPoint makers, that senior management really doesn’t know what to do – and what not to do. (Krzanich says he green-lighted the MICA project because his wife approved of it “after using it for several days”.)

Of all the things Intel should and shouldn’t have done, the Apple element figures mightily. Since Intel offered a whopping $51 Android tablet subsidy, a charity that landed its mobile activities $7B in the red over two years, why didn’t the company offer Apple a $10 or $20 subsidy per processor as a way get the manufacturing relationship restarted? ‘We’ll beat Samsung’s prices, we’ll be your second source.’ If Intel’s 14nm process is so superior, how come Intel execs didn’t convince Apple to dump frenemy Samsung?

I see three possible answers.

One is that the 14 nanometer process is woefully late. Deliveries of some Broadwell chips (the nickname of the next round of x-86 processors) are now slated for early- to mid-2105. Apple might feel that Intel’s process needs to mature before it can deliver 300M units.

The second is that Intel’s claim of a three-year technology lead might be less than reliable. Samsung could be closer to delivering 14nm chips than Intel would like us (and itself) to believe.

Or perhaps Intel sees Apple as a real adversary that’s intent on designing all of its own processors, even for laptops and desktops that are currently powered by x-86 chips. But even so, why not become the preferred fabricator?

The Intel enigma remains: There’s no clear, resounding answer to the What’s Next?question, only some lingering puzzlement over What Happened?

JLG@mondaynote.com

The Rise of AdBlock Reveals A Serious Problem in the Advertising Ecosystem

 

By Frédéric Filloux

Seeing a threat to their ecosystem, French publishers follow their German colleagues and prepare to sue startup Eyeo GmbH, the creator of anti-advertising software AdBlock Plus. But they cannot ignore that, by using ABP, millions of users actively protest against the worst forms of advertising. 

On grounds that it represents a major economic threat to their business, two groups of French publishers are considering a lawsuit against AdBlockPlus creator Eyeo GmbH. (Les Echos, broke the news in this story, in French).
Plaintiffs are said to be the GESTE and the French Internet Advertising Bureau. The first is known for its aggressive stance against Google via its contribution to the Open Internet Project. (To be clear, GESTE said they were at a “legal consulting stage”, no formal complaint has been filed yet.) By his actions, the second plaintiff, the French branch of the Internet Advertising Bureau is in fact acknowledging its failure to tame the excesses of the digital advertising market.

Regardless of its validity, the legal action misses a critical point. By downloading the plug-in AdBlock Plus (ABP) on a massive scale, users do vote with their mice against the growing invasiveness of digital advertising. Therefore, suing Eyeo, the company that maintains ABP, is like using Aspirin to fight cancer. A different approach is required but very few seem ready to face that fact.

I use AdBlock Plus on a daily basis. I’m not especially proud of this, nor do I support anti-advertising activism, I use the ad-blocker for practical, not ideological, reasons. On too many sites, the invasion of pop-up windows and heavily animated ad “creations” has became an annoyance. A visual and a technical one. When a page loads, the HTML code “calls” all sorts of modules, sometimes 10 or 15. Each sends a request to an ad server and sometimes, for the richest content, the ad elements trigger the activation of a third-party plug-in like Adobe’s Shockwave which will work hard to render the animated ads. Most of the time, these ads are poorly optimized because creative agencies don’t waste their precious time on such trivial task as providing clean, efficient code to their clients. As a consequence, the computer’s CPU is heavily taxed, it overheats, making fans buzz loudly. Suddenly, you feel like your MacBook Pro is about to take off. That’s why, with a couple of clicks, I installed AdBlock Plus. My ABP has spared me several thousands of ad exposures. My surfing is now faster, crash-free, and web pages looks better.

I asked around and I couldn’t find a friend or a colleague not using the magic plug-in. Everyone seems to enjoy ad-free surfing. If this spreads, it could threaten the very existence of a vast majority of websites that rely on advertising.

First, a reality check. How big and dangerous is the phenomenon? PageFair, a startup-based in Dublin, Ireland, comes up with some facts. Here are key elements drawn from a 17-pages PDF document available here.

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Put another way, if your site, or your apps, are saturated with pop-up windows, screaming videos impossible to mute or skip, you are encouraging the adoption of AdBlock Plus — and once it’s installed on a browser, do not expect any turning  back. As an example of an unwitting APB advocate:

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Eyeo’s AdBlock Plus takes the advertising rejection in its own hands — but these are greedy and dirty ones. Far from being the work of a selfless white knight, Eyeo’s business model borders on racketeering. In its Acceptable Ads Manifesto, Eyeo states the virtues of what the company feels are tolerable formats:

1. Acceptable Ads are not annoying.
2. Acceptable Ads do not disrupt or distort the page content we’re trying to read.
3. Acceptable Ads are transparent with us about being an ad.
4. Acceptable Ads are effective without shouting at us.
5. Acceptable Ads are appropriate to the site that we are on.

Who could disagree? But such blandishments go with a ruthless business model that attests to the merits of straight talk:

We are being paid by some larger properties that serve non-intrusive advertisements that want to participate in the Acceptable Ads initiative.
Whitelisting is free for all small and medium-sized websites and blogs. However, managing this list requires significant effort on our side and this task cannot be completely taken over by volunteers as it happens with common filter lists.
Note that we will never whitelist any ads that don’t meet these criteria. There is no way to buy a spot in the whitelist. Also note that whitelisting is free for small- and medium-sized websites.
In addition, we received startup capital from our investors, like Tim Schumacher, who believe in Acceptable Ads and want to see the concept succeed.

Of course, there is no public rate card. Eyeo doesn’t provide any measure of what defines  “small and medium size websites” either. A 5 million monthly uniques site can be small in the English speaking market but huge in Finland. And the number of “larger properties” and the amount they had to pay to be whitelisted remains a closely guarded secret. According to some German websites, Eyeo is said to have snatched $30m from big internet players; not bad for a less than 30 people operation (depending of the recurrence of this “compliance fee” — for lack of a better term.)

There are several issues here.

One, a single private entity cannot decide what is acceptable or not for an entire sector. Especially in such an opaque fashion.

Two, we must admit that Eyeo GmbH is filling a vacuum created by the incompetence and sloppiness of the advertising community’s, namely creative agencies, media buyers and organizations that are supposed to coordinate the whole ecosystem (such as the Internet Advertising Bureau.)

Three, the rise of ad blockers is the offspring of two major trends: a continual deflation of digital ads economics, and the growing reliance on ad exchanges and Real Time Bidding, both pushing prices further down.

Even Google begins to realize that the explosion of questionable advertising formats has become a problem. Proof is its recent Contributor program that proposes ad-free navigation in exchange for a fee ranging from $1 to $3 per month (read this story on NiemanLab, and more in a future Monday Note).

The growing rejection of advertising AdBlock Plus is built upon is indeed a threat to the ecosystem and it needs to be addressed decisively. For example, by bringing at the same table publishers and advertisers to meet and design ways to clean up the ad mess. But the entity and leaders who can do the job have yet to be found.

frederic.filloux@mondaynote.com