Politico’s Way

September 4, 2011 – 7:55 pm | Edited by Frédéric Filloux

To cover American politics, Politico deploys an editorial staff of 150. This is more than any news organization in the United States for the same beat. It all started five years ago: a niche website launched by three seasoned political reporters who sharpened their claws in mainstream medias. As envisioned by John Harris, Jim VandeHei and Mike Allen, Politico was to start with a kernel of 12 hardcore political reporters who would aggressively run after all the balls.

Four years later, as a new presidential campaign gears up, Politico owns the news cycle, from 4:30am to midnight, on all vectors: web, mobile, television and… print. And it does so in rapid-fire mode.

Last week, I chatted with Bill Nichols, Politico’s managing editor. Before Politico, he spent 24 years at USA Today. There, among the many items on his impressive résumé, he covered six presidential campaigns as well as the State Department. Bill was in Paris to deliver the inaugural lecture at the Journalism School of Sciences-Po where I happen to have a gig (highlight of the lecture summed up in French on Slate.fr). His talk provided the students with a great start for their year; they were listening to a fifty-plus journalist who didn’t hesitate to leave the comfort of a great newspaper to jump into the unknown. Even in 2007, going after the Washington media establishment with a website was quite a bold move. Today, Nichols is obviously having a lot of fun — which is the best message to convey to a crowd of aspiring journalists.

The lessons to draw from Politico’s success are connected journalistic and business ones.

Politico has literally sliced and diced the news cycle with an array of dedicated products fitting all possible subjects, reading time and formats. Anyone serious in politics or government affairs will begin his day with a peek at the mobile version of the Politico Playbook. Described as ” Must-read briefing on what’s driving the day in Washington”, it is written by Mike Allen, the chief White House correspondent. The site features eight other “tip sheets”:

  • Huddle A play-by-play preview of the day’s congressional news
  • Pulse The latest in health care policy every weekday morning
  • Morning Money Political intelligence on the intersection of D.C. and Wall Street
  • Morning Score A pre-dawn guide to the permanent campaign
  • Morning Tech Daily download of technology news from D.C. and Silicon Valley
  • Morning Defense A daily briefing from inside D.C.’s national security apparatus
  • Morning Energy The one-stop source for energy and environment news
  • Influence Intelligence and analysis on lobbying

The idea is to hook the reader on the day’s “must-follow” items. Then, developing stories will be made available in all possible forms: stream of stories as the news dictate, a great deal of support through countless TV appearances (Politico maintains its own studio linked to all networks and all reporters are required to promote their work). Many times a day, breaking news, alerts, warnings are pushed on mobile. Then, to maximize the impact, top stories will be re-edited to feed the eponymous daily. It is published five days a week, only when congress in in session, and its 34,000 (free) copies are distributed at various strategic spots in DC.

Then, the Politico tone. As Bill Nichols acknowledges, Politico’s pitch is slightly more tabloidish than mainstream media. It doesn’t pontificate, nor does it endlessly circle around a subject. It reflects internal newsroom discussions and the talk of the town.  A few days ago, recounts Nichols, the editorial staff was discussing Republican Texas governor Rick Perry’s intellectual ability to run for the presidency; instead of going for a convoluted story loaded with nuances, Politico went straight with this headline: Is Rick Perry Dumb? This treatment was later supplemented by an informative 1600 words piece about Perry’s 2010 book “Fed Up!”, itself a great gift to his opponents. (To nail it, Politico published a Nine questions for Perry article listing subjects the candidate will have hard time eluding.)

That’s Politico’s way: aggressive, relentless, fun, witty, but also dedicated to providing in-depth, well-reported journalism. Last year, the New York Observer ran an interesting story on how The Atlantic (great magazine, along with an equally great site) was fighting back Politico on the Washington scene. David Bradley, owner of Atlantic Media company, had this comment:

“It was much happier to do what we were doing until Politico arrived in the world. Politico introduced a whole new standard of, I wouldn’t say quality, but I would say velocity and metabolism. I responded way too slowly. (…) They are going to be at the more racy, tabloid end of the spectrum. That seems to be the position they have chosen. I think we’ll be more of the authoritative end.”

To which Jim VandeHei retorted

“People come to us because we break news, we are authoritative and we help readers understand how Washington really works. I think Bradley’s description is clearly motivated by business interests. That said, we take all competitors seriously.”

Business is important as well to Politico and its powerful backer, the Allbritton family. As a privately held company it does not disclose financial data. Even with its large staff of 200 in total, it is said to be profitable thanks to its multi-pronged product strategy:

–The web site had an audience of 4 million unique visitors last July, according to Comscore (it should triple during the 2012 campaign). This is rather small compared behemoth such as the Huffington Post or the NYTimes that are more into the 50 million UVs range. But the value extracted from each visitor is quite high.

– Around half of its revenue is coming from the newspaper which sells high premium ads. Thanks to the geographical concentration of the Washington elite, the paper does not cost too much to distribute and its pagination and printing costs are adjusted to the advertising load.

– Last November, Politico launched “Politico Pro”, an in-depth paid-for service focusing on three critical (and lobbying-intensive) issues: energy, technology and healthcare. The price is $2,500 per month (story in the Columbia Journalism Review). “Pro” relies on several dozens of reporters and editors integrated with the rest of the newsroom.

– Recently, Politico added an event department: get-togethers for the Happy Few with big political names, moderated by staffers. The guests don’t pay, but big sponsors do — happily it seems. Events will be organized not only in Washington but on the campaign trail as well.

– Last June, Politico announced an e-Book venture with Random House. The concept: quick accounts, 20,000 to 30,000 words (80-120 pages), of the 2012 campaign. Produced at little additional cost, promoted by the brand, these could be pure gravy.

Politico’s potential revenue pool is huge. According to the Center for Responsive  Politics, the 13,000 registered lobbyists in Washington spent $3.51 billion (!!) in 2010. This is an affluent market, highly concentrated, both geographically and interests wise.

On the surface, Politico’s method of squeezing money from every slice of its market looks logical and reproducible. But its unique ecosystem makes Politico’s success difficult to replicate elsewhere.

— frederic.filloux@mondaynote.com

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An Apple TV Set In Our Future?

September 4, 2011 – 7:34 pm | Edited by Jean-Louis Gassée

Not another Apple TV black box but a real 50” flat-screen TV, “Designed by Apple in California” — and Made in China, like most Apple products. Or Made In Korea, if the company concludes a new pact with its best frenemy, Samsung, the new king of TV sets, the new Sony.

Rumors of an Apple TV set have been circulating for at least two years. In a May 2010 blog post, Peter Yared wrote:

“Stylish, high-end TVs is the last consumer electronics frontier for Apple to dominate, and it will make apps as much of a differentiator on TVs as they were on smartphones.”

and:

“The TV is the last frontier in Silicon Valley’s relentless drive to computerize every screen. With the price of fully Internet-enabling a screen at below $300, everything that people see and touch is being turned into a computer: mobile phones, billboards, price displays, and with the iPad even magazines, books, and newspapers.”

More recently, Gene Munster, an oft-quoted analyst at the PiperJaffray investment bank, repeated his prediction of an Apple TV set launch in 2012, with Stewart Alsop adding:

“Apple will do to television manufacturers what it did to phone makers with the iPhone…”

The idea is exciting and so obvious it’s got to happen. Imagine a true plug-and-play experience. One set with only two wires: power and the cable TV coax. Turn it on, assert your Apple ID credentials and you’re in business. The program guide looks good and is easy to navigate; pay channels are just a click and a password away. The TV runs apps, from games to FaceTime and Skype, it “just works’’ with your other iDevices and also acts as a Wi-Fi base station using the cable provider’s Internet service.

But when we turn to the Small Matter Of Implementation, we see a few obstacles.

First, the TV incorporates a set-top box, with storage for the DVR function. It’s feasible: the CableCARD was invented for that very use. The electronics of a set-top box:

Now squeezed onto a card that’s inserted in the back of the TV set:

It’s an attractive idea, but the implementation failed to meet expectations. Although critics accuse cable carriers of being technically incompetent and lazy, I think there’s a more acceptable explanation: Carriers looked at the CableCARD and saw complicated field service calls in their future.  A separate, outboard set-top box is easy to diagnose and fix; a card inside the TV set, not so much. It generates a host of hard-to-understand bugs: Is the card working? Is it kind of working but causing the TV to malfunction? Is the TV working but killing the card?… and so on. More calls, more finger pointing, more expensive field techs…

Apple’s product culture, its talent for giving birth to nicely integrated devices could overcome some of these problems, but not the field tech issue. Would this new product force Apple to deploy its own Geek Squad, or do we see ourselves carrying a 50” Apple TV set back to the store when something goes wrong?

Then there’s the complexity of supporting multiple cable systems. Large carriers, such as Comcast, are known as Multiple System Operators, MSOs, with an emphasis on the “M”. They’re a patchwork of acquired systems that have never needed to be compatible. This would either restrict the TV set to a small number of carriers, or make the product more complicated and prone to more bugs — and more field tech visits.

And there’s Moore’s Law. In addition to the CableCard, the wonder set contains a little computer running iOS, and enough storage for apps and content that’s not hosted by iCloud. Great…but how long will it last? Not in terms of reliability, that’s not a problem — especially with an SSD replacing the DVR’s conventional hard disk — but in terms of being competitive with newer hardware.

Conventional TVs aren’t really affected by Moore’s Law. As long as the electronics work and the display doesn’t fail — and today’s sets are exceptionally reliable — there’s little pressure to upgrade. Once a family shells out for a nice 1080p set, it’s difficult to sell them the new improved model next year.

We’re willing to upgrade our laptops, smartphones, and tablets every year or two because Moore’s Law keeps improving the CPU and other electronics at the rapid rate that made the computer industry’s fortunes. An integrated Apple TV set wouldn’t benefit from better electronics as naturally as an iPhone does…unless, of course, the tiny iOS computer is implemented as an easily accessible plug-in module. This could also solve — or at least mitigate — the field service problem: Bring the module to the store, we’ll diagnose and replace it if needed…or sell you this year’s model.

In one device we might have something like: a CableCard inside an Apple TV 3.0, itself inside a TV set.

With regard to carriers, there’s no need to disintermediate them, no need for Apple to seduce them into giving up content sales the way Jobs did with AT&T. Carriers ought to welcome an Apple TV set as a way to increase their ARPU, but for this to happen much work remains. Try getting a human on the phone when you want to add a channel to your current Comcast bundle. At home, you’re connected through a secure device with a known MAC address, so why can’t you simply point to a channel and click-to-add? This and other bone-headed commercial practices — such as refusing to suspend your billing when you’re between houses — reveals a depth of customer-hostile culture that an Apple or a Google would find intolerable, but might have trouble changing.

I mention Google because they’re in the TV/Internet/Apps integration game as well. The first Google TV wasn’t a success, to say the least. My friends at Logitech lost tens of millions of dollars — and a CEO — with the first iteration. And Sony’s Google TV implementation didn’t fly either.

But the concept remains valid. And now that Google owns Motorola, a company with known expertise in set-top boxes and CableCards, we can expect a next-generation Google TV and, quite likely, a Samsung TV set with an integrated Google TV running Android apps and competing with the putative Apple TV.

I used to think product size, carriers and the rapid obsolescence of the integrated computer made an Apple TV set an impossible dream. I’m not so sure anymore.

— JLG@mondaynote.com

PS: To help think about this some more, a great counter example: the Bose Videowave TV set. I use and like other Bose products but, with this one, what are thinking? $5,000, no cable box integration, a separate console box for the “integrated” set. See the Setup and Owner’s guides for more details.

Posted in hardware | Tagged | Comments (102)

Steve: Who’s Going to Protect Us From Cheap and Mediocre Now?

August 28, 2011 – 10:15 pm | Edited by Jean-Louis Gassée


Not so fast.
Until the last sinew, the last synapse gives up, Steve will continue to influence the company he co-founded and later recreated. Seeing he could no longer ‘‘meet [his] duties and expectations as Apple’s CEO’’, Jobs kicks himself upstairs and becomes Chairman, director, and “mere” Apple employee. In a distant future, I see him haunting the circular hallways of Apple’s Cupertino spaceship, the Commendatore hunting the clock punchers and damning the linear thinkers straight to Hell.

Let’s review. In 1983, Apple’s Board of Directors felt that Steve required “adult supervision’’. John Sculley, the designated grownup, replaced Jobs as CEO and eventually pushed him out of the company.

Fast forward a decade and a half. In 1997, Steve returns to run his company unchallenged…but not unassisted. The Apple 2.0 management team, hand-picked, well-groomed, isn’t so much a stroke of genius as it is an emblem of the enfant terrible all grown up. As the Fortune chart below shows, Apple has no lack of ‘‘bench strength’’– and who’s providing the adult supervision now?

With Steve as Chairman, Tim Cook, Apple’s long-time COO, moves to the center of the chart. He joined the company 13 years ago, has always reported directly to Steve and saw his responsibilities increase over time. He now drives the team that made Apple the most valued and valuable high-tech company in the world.
As for ourselves: No whining. It’s our job, as consumers, to protect ourselves, to vote with our wallets against the bean counters, the Paint by Numbers product planners. It’s our place to provide ‘‘constructive feedback’’ when Apple products fail to meet the combined aesthetic and functional standards Dear Leader drilled into the marketplace. From MobileMe to “skeuomorphic” calendars, address books and bookshelves — to say nothing of fresh Lion bugs. Steve’s Apple may not be perfect, but…

A portentous example: The 1998 Bondi Blue iMac, the first visible re-assertion of Steve’s style — and of Jony Ive’s portfolio in the making:

Immediately iconic, users adored their iMacs. The unexpected shape and color set a new standard for high-tech products, so much so Apple competitors tried to rub the amulet for luck — and showed us what they really stood for: Cheap, imitative mediocrity. I recall going to Palo Alto’s Fry’s store and seeing beige PC clone boxes with candy-colored plastic inserts that approximated the iMac palette.

As a Forbes article put it, speaking of Dell’s similar fig-leaf attempt:

“Dell, ever concerned with keeping its inventory low, seems to be approaching colored notebooks in a much less risky way, using cheaper plastic inserts. Of course, the appearance of the Inspiron doesn’t inspire the way the first iMacs and iBooks did.”

The aesthetic knockoffs weren’t just cheap, they were ugly. The inserts looked even worse than the faux-wood ‘‘accents’’ on Chrysler dashboards. No cojones, no imagination, no taste.

Fast forward a bit more: Steve introduces the Apple Store. We’ll pass over the record-beating numbers and address the two messages the store imparts.
First, the architecture, an expression of the Apple ethos, says: ‘This is what we think of ourselves’.
Second, once inside the store, the experience states: ‘Here’s what we think of our relationship with you, our customer’.
In comparison, I see carriers trying to spruce up their store fronts with shiny metal appliqués — but go inside and you find cheap trade-show modular furniture.

Taste matters. Let’s turn to this YouTube video of the opening of an Apple Store clone. Not a Chinese counterfeit but a Microsoft Store in Scottsdale, Arizona. It starts much like the “real” thing: Happy customer, rows of high-fiving employees, a decor that looks familiar.  But 40 seconds into the one minute video, we get the “tell”, the killer detail that gives the imitation away.  Here we get the men in suits and ties:

Still more evidence of Steve’s influence: Just as HP decides to spin off its PC business (or perhaps not), PC clone makers demand an additional $100 subsidy per ‘‘ultra-portable’’ laptop from Intel. Why? They want to compete with Apple’s increasingly popular MacBook Air. It seems that the “Apple tax”, the premium we’re willing to pay for quality, isn’t enough to dissuade us.

PC clone makers can’t match Apple’s cost or its Bill Of Materials (BOM). The way Apple procures parts and subsystems, the way it runs contract manufacturing and stays on top of complicated but delicate distribution logistics is evidence of the company’s aggressive Supply-Chain Management (SCM). Steve – and thus Apple – understands that the channels need to be fed Just So, neither starved nor stuffed.

I found the BOM story interesting and looked up current ultra-portable prices. Who better than Sony in that product category? I went to their site and got this:

A nice MacBook Air competitor starting at $1969. The real thing starts at $1299.
Quite a reversal of the old world order and, I hope, a source of satisfaction for Jobs.

Spanning an amazing arc of thirty years, the company with the anti-establishment image has become the most disciplined, best-managed high-tech giant — and arbiter of taste.

When I first met Steve, in February 1981, he was sitting cross-legged on a credenza in the Apple board room, picking his toes. Since then I’ve watched with glee as he went against received wisdom, causing pundits to have fits at every turn. I picture them as a gaggle of eunuchs standing around the caliph’s bed, braying in high-pitched voice: ‘Steve, you’re doing it wrong!’

For a long time, I’ve seen him as having an animal inside him, the one with the desires, the instinct, the drive. In 1985, that animal threw Steve to the ground. He picked himself up at Pixar — you’d be a captain of industry for doing no more — and NeXT. Then, in 1997, armed with Pixar’s success and Next’s technical prowess, he came back to run Apple and make it really his.

He had learned to ride the animal.

Steve and Tim both speak, rightly, of Apple being at the crossroads of technology and humanities, liberal arts. In tribute to Jobs’ aesthetic sense, and why it deeply matters, I’ll conclude with a quote from Herman Hesse’s Steppenwolf:

‘’Before all else, I learned all these playthings were not mere idle trifles invented by manufacturers and dealers for the purposes of gain.  They were, on the contrary, a little or, rather, a big world, authoritative and beautiful, many sided, containing a multiplicity of things all of which had the one and only aim of serving love, refining the senses, giving life to the dead world around us, endowing it in a magical way with new instruments of love, from powder and scent to the dancing show, from ring to cigarette case, from waist buckle to handbag.  This bag was no bag, this purse no purse, flowers no flowers, the fan no fan.  All were the plastic material of love, of magic and delight.  Each was a messenger, a smuggler, a weapon, a battle cry.’’

— JLG@mondaynote.com

Next week: Recipes don’t a chef make.
And, for a good laugh, Macalope’s view of this week’s worse pundits.

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Getting More Bang For Our Bucks

August 28, 2011 – 9:09 pm | Edited by Frédéric Filloux

(Includes correction with the right 3rd graph)

Two important questions in our times of large public debt and lagging economies: Is it effective to inject public money in support of the ailing media industry? And, in order to ensure the best readers’ bang for the taxpayer’s buck, are some models better than others?

Last week, I chatted with Rasmus Kleis Nielsen, a Research Fellow at the Reuters Institute for the Study of Journalism at the University of Oxford, and a communication professor in Denmark. With Geert Linnebank, a former editor-in-chief at Reuters, Rasmus wrote a compelling report on the subject: Public Support for the Media, A Six-Country Overview of Direct and Indirect Subsidies (PDF here). Together, they review public support systems for Finland, France, Germany, Italy, United Kingdom and the United States. A large part of the report looks at the funding of public radio and television channels, which varies widely from one country to another. In this column, I’ll limit myself to public sector funding for the print media.

When it comes to supporting its print press, Finland is a big spender. It invests 22 times more public funds per capita than the United States, nine times more than Germany, five times more than the United Kingdom, four times more than Italy, and three times more than France, see below:

Supporting the press sector is a big deal in Finland, then. In theory. Because, in Finland, like in all Scandinavian countries, newspapers enjoy a huge reach: 79% of the population. This might tempt you into thinking there is a direct relationship between subsidies and penetration. Actually, there is none: According to the report, Germany, which spends 11% of what Finland does, has a newspaper reach of 72%.

Using readership stats provided by the World Association of Newspapers, the picture looks like this:

Combining the two sets of numbers leads to a compelling result: While spending much more than any other country, the Finns get a much better performance. According to the Reuters Institute report, they perform 13 times better than Italy and France, the clear losers of the subsidies systems, as shown here:

We can draw three conclusions from these data sets.

1 / There are no Keynesian mechanisms in evidence when it comes to correlating public spending with print media penetration. The US spends only 16% more per capita than Italy, but have 94% more readers per thousand people. As for Germans, they spend 40% of what the Italians do, but have almost three times more readers. Practically, it means there is no hope to reverse the declining trend by beefing up subsidies.

2 / The Finnish performances is more a matter of editorial product than of public policy. I happen to know quite a bit about the kind of journalism practiced in Nordic countries. It is a fiercely independent, aggressive (in the best sense) kind or reporting. A couple of years ago, I was a jury member for the Schibsted Journalism Award (see my June 2009 column about it). I saw editors making choices, strategizing their coverage, assigning substantial resources to it, and striving to beat their competition. In addition, they provide very efficient public service journalism, lifting the veil on administrative shortfalls and occasional abuses by officials.

From a pure industrial perspective, Scandinavian media companies have once and for all decided competition had to stop right after the newsroom doorstep. For a long time, printing and distribution have been mutualized. Newspapers and magazines have not been spared by erosion, but they are in a much better shape than in most countries.

3 / Contrary to the cliché, internet growth doesn’t cause a decrease in print press penetration. Finland (again) and the UK have both strong readerships and a high number of online users (respectively 57% and 37%).

The Rasmus Nielsen report explains in great detail the complexity and diversity of public funding for media. In passing, it kills long lasting prejudices such as European media being massively state-funded, or an American public sector unsupportive of the media industry.

And there is no one-size-fits-all model.

Still, some ideas emerge — as long as you think media ought to be somewhat subsidized. Which I do, for several reasons:

  • Quality information plays a critical role in democracy.
  • Good reporting remains quite expensive to produce. Remaining able to preserve non-commercial formats (such as NPR or the BBC) leaves no choice but public support.
  • The industry — especially the print press — is in the midst of a radical and costly transformation, and many organizations don’t have enough capital to undertake it.
  • We are facing an historical wave of mediocrity in the information business with wealthy aggregators eager to repackage anything that fits their obsession with eyeballs. (I’m appalled to hear Le Monde is about to strike a deal with the Huffington Post.)

Having said that, for public support to work, critical conditions must be met:
1 / Tight management. Sounds obvious, but too often public money means outrageous waste (as often seen in public broadcasting).
2 / No open-bar. Meaning: no open-ended funding. If money is supposed to help a precise restructuring, it must be tied to measurable results.
3 / Sanitization. Subsidies should rather be indirect than direct. For instance, a tax break as opposed to a grant for a specific company falling below a certain level of advertising (as is the case in France).
4 / No life-support funding. Only support for transformation.

— frederic.filloux@mondaynote.com

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Innovation in turbulent times

August 21, 2011 – 8:31 pm | Edited by Frédéric Filloux

News organizations have an innovation problem. Especially print media. As they gingerly wade into digital, their ability to foster innovation becomes more critical than ever. In today’s fast-changing landscape, they should view innovation as their main weapon against direct competitors and emerging players such as tech startups,.

Unfortunately, print media appears ill-equipped to innovate. The reasons are many.

– The weight of the past. Looking back ten years, making changes to a newspaper or magazine used to be a lengthy and complicated process, with technical, industrial as well as political implications. On the internet, by contrast, major changes are a only few lines of code away. Modern CMS (Content management systems) are designed to allow and sometimes encourage modifications and adaptation to rapidly changing needs. As for applications, a minuscule team needs only a couple of months to engineer an impactful product.

– The takeover of the bean-counters. In the newspaper industry, years of revenue depletion have shifted tremendous power to the financial guys. They performed as requested by shareholders (especially because journalist-bred managers lost their credibility).They cut, downsized, optimized. Not exactly the best petri dish for creativity.

– A risk averse culture. This is mostly a consequence of the previous point. Cost-centered management, added to gloomy business conditions, won’t foster initiative and risk-taking. The result is you will not see a group of journalists putting their job in play in order to launch a new product they believe in.

– No management reform. Each time I look at a newspaper’s org chart, I’m struck by the complexity of the management structure, by the level of red tape still remaining. Curiously enough, very little has been done about it. (In most cases, it has to do with a spreadsheet-driven management unwilling to fight organizational conservatism).

As a result, very few news organizations prepared themselves to switch to a genuine competitive innovation model, more comparable to the one used by technology companies. Having said that, questions arise: How to create an environment that will stimulate new ideas; how to restore a risk-taking culture; should innovation be mostly internalized or outsourced; how to select the best decision-making processes for the new digital-driven world?

Last week, the New York Times unveiled its Beta 620 initiative. As Matthew Ingram  puts it in Gigaom, the project is the NYT’s version of Google Labs, with selected projects presented to the public. Innovations involve social media, search, recommendation engines, etc. Let’s be clear: I can’t think of many news organizations with the courage and ability to devote anything close to what the Times is investing in its R&D effort. (To get an idea of the New York Times R&D Labs’s scope and ambition, see these videos shot by the Neiman Journalism Lab.) Still, some of their processes and ideas are worth considering. From what I’m told, Beta 620 is the visible part of a program started several years ago, one in which, once a year, everyone is encouraged to present a digital project. Even the least nerdy will be helped in his/her pitch. An ad hoc committee selects a couple of projects and the authors receive a small prize (a thousand dollars or so). More importantly, s/he will get appropriate resources and time to further develop it.

More broadly, the Times has a low-key but efficient way to stimulate innovation or improvements. Take its new CMS. Developed in cooperation with Infosys, it is carefully designed to be safe and robust. But, at the same time, it lets the nerdiest web producers tinker with the code to alter the layout of a page, or to adapt the rendering of the website to a specific need. When someone described how the improvement process was made available to so many, I was surprised by the level of trust the NYTimes is putting in its staff. (Needless to say: this accessibility comes with suitable precautions, tests procedures and so on).

Obviously,  very few news organizations facing a constant revenue depletion can afford a fully-staffed R&D Lab. Having said that, between its internal contest encouraging out-of-the-box thinking and the trusted approach for continuous improvement, The New York Times teaches us a lesson: Fostering innovation is a matter of creating the right environment as much as pouring tons of money in it.

The dominance of finance-driven management impacts innovation. It encourages a short-term approach. Today, an executive team will be much more inclined to spend money with the promise of a quick — even if small — return, as opposed to investing the same amount of cash in an actual new product. To them, the potential for the greater benefit of a truly new creation is outweighed by the risk of a more distant, more uncertain outcome. Investing $100,000 or $500,000 in a marketing campaign, aimed at boosting an existing digital audience, will get a greater consideration than making the same investment in a new app — especially since the performances of the former will be easier and quicker to measure.

Another side-effect is the alteration of the decision-making process. Ten or twenty years ago, sound businesses with decent margins and growth, along with predictable economic conditions, allowed gut-based decisions. Today is the opposite: with all key economic indicators blinking red, management will run for cover by asking for as much data as possible to justify their decision. And a landscape that changes faster than ever before makes getting reliable data a complicated task. Think about the changes we witnessed over the last two years. In a recent interview to McKinsey Quarterly,  Google’s CFO Patrick Pichette acknowledged that, every single day, 15% of the queries it handles are completely new and never seen before. This says a lot about the level of uncertainty the digital business now faces.

What is left to manage innovation? Based on my observations and discussions with project managers and executives, key recommendations emerge:

– Separate short-term tactics from medium-to-longer term strategy initiatives. Marketing is fine, but it doesn’t guarantee lasting results. A great product does.

– Dissociate production from innovation functions. Those who drive the train can’t be asked to design a new locomotive. Nor to oversee it construction.

– Stimulate creativity. Encouraging staff to come forward with new ideas, helping people formulate projects can be done inexpensively.

– Once a project is selected, assign clear objectives, scope, schedule and ways of measuring success or failure.

– Assign a small, dedicated team that will report to the top of the organization, not to middle management.

This sounds like basic and somewhat obvious rules. With one exception: very few news organizations have adopted them.

— frederic.filloux@mondaynote.com

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HP: What Léo Apotheker’s Decisions Mean

August 21, 2011 – 8:29 pm | Edited by Jean-Louis Gassée

Last Monday evening, hours after Google’s $12.5B gamble on Motorola Mobile (MMI), I had an intriguing idea and began drafting a Monday Note to explore its ramifications. It started like this:

Larry, Please Give Us a Free gPhone
In three easy steps, you can finish the job you started with Android:
First, tell Motorola to make a single, really nice gPhone. One model, running a fine-tuned version of Android, with all Google apps and services nicely integrated.
Next, tell carriers that the gPhone is free. No upfront cost, just a modest percentage of the monthly bill, of the carrier’s Holy ARPU.
Finally, tell the world: Google customers, get your free gPhone from the carrier of your choice!

Building and dismantling the business case for such a bold move will have to wait for another week’s fiction.

Today, we look at HP’s new reality: The world’s largest PC maker wants out of the personal business. How its PC division will be “exited” is to be determined. As for the TouchPad tablet and the Pre smartphone, both of which are based on the WebOS platform that HP acquired from Palm in April 2010, their fate is more certain They’re dead.

As business decisions, both moves make sense.
First, the PC. For years now, HP’s Personal System Group (PSG) has been a drag on the company’s earnings. Take a look at the numbers for the most recent quarter (FY Q3) ending July 31st 2011. At about $40B/year and 31% of HP’s total revenue, PSG is a huge business…but it’s shrinking: -3% for the first 9 months with an even greater hit (-17%) in the Consumer PC segment.
Furthermore, PSG doesn’t make real money: 6% operating profit in Q3, a meager improvement over last year’s same quarter when that number was 5%.
And let’s add the working capital required to support the PC channel inventory. Every week of product in the pipeline means at least $500M. If the company manages its channel very efficiently, it’ll have 6 to 8 weeks of products in the channel: that’s $3 -4B.

By contrast, HP’s Imaging and Printing Group seems to be making (I’ll avoid the tempting pun) good money: 16% operating profit with modest but reliable growth (+3%). It’s smaller than PSG, but, at about $26B/year, it’s still quite large.

Despite its size, PSG must be sacrificed so Léo Apotheker’s HP can “go IBM”, focus on selling big iron, software (note the $10.3B acquisition of Autonomy), and professional services to Enterprise customers. Plus some ink on the side.

(Years ago, Lou Gerstner saved Big Blue by getting rid of the commoditized PC business and concentrating on IT services. The right chef to implement that recipe, he kept IBM in business, and, as the Wikipedia article rightly says: “[performed] one of the most remarkable turnarounds in business history”.)

Second, the TouchPad. The “perfect” launch promised by HP’s CEO failed to materialize. Although critics saw great promise in WebOS, most panned the TouchPad. HP promised quick fixes (and even delivered some), execs tried to re-position the product and cut the price.

Nothing worked. The market had spoken.

As All Things D’s Arik Hesseldahl reported, Best Buy is now (supposedly) sitting on most of the 270,000 TouchPads it had stocked, having sold no more than 25,000 of the devices.

Léo’s reaction was swift: no more TouchPads, no more Pre smartphones. WebOS devices are gone. The company is eating $100M to clean things up. (We hear rumors of a fire sale, with some retailers offering basic TouchPads for $100. If true, I’ll get one.)

HP’s explanation: The WebOS ecosystem isn’t strong enough to make the TouchPad a contender in the tablet race…and the company simply wants out of Consumer markets.

A difficult decision, certainly, but clear and logical. Investors might not like that HP has folded their hand in the fast-growing smartphone/tablet game, but the “Going IBM” story, and the associated profit picture, makes sense. Shareholders should be pleased…

…but no: HP’s stock went down 20% on Friday, losing 27% for the week:

Why?

Let’s start with the exit from the PC business. HP’s announcement was vague and unactionable. In reply to a question about the precise fate of HP’s PC business, this is what Léo said during the Q&A part of Thursday’s conference call:

“Let me try to answer this and we’ll try to answer this as a team. So what the board and the management team have been working very diligently over the last period is to really look at all of our options and what the board has decided to do, together with the management team, is to look at all of the strategic options around PSG. And we’re really examining all of them. The announcement of today will allow us to look at this much more closely, including all of the synergies and other aspects of this operation. And over time, a decision will or will not crystallize on what the most appropriate way is to deal with PSG going forward. That’s all I can say about this right now, and we will refrain from commenting on what the strategic options are until the board will make such a decision.”

This is terrible. Worse than a terse ‘No Comment’. Either HP comes out and says ‘We’re spinning off PSG, Toff Bradley, its current head will run it, it’ll be called APC’, or it says nothing until it has a real announcement.

(See more abstracts in this PC Magazine post, and in Seeking Alpha’s full transcript. As the quote above demonstrates, the Q&A part of an earnings call is always more revealing than the “prepared statement” vetted by a brigade of lawyers, accountants and PR flacks.)

In my line of business, “the exploration of strategic alternatives’’ means you’re trying to pawn something off. It’s usually done discreetly for fear of making the merchandise look tired.

Here, HP trumpets that it wants to rid itself of the PC business. People or companies shopping for a new PC will look elsewhere, forcing HP to drastically cut prices to keep their current product moving. In turn, this will undercut the price HP can expect to get for its PC business. No wonder Michael Dell is snickering on Twitter:

(Of course, this is the same Michael Dell who, in 1997, told everyone Steve Jobs ought to shut Apple down and distribute the cash to shareholders…)

Shareholders don’t like this uncertainty, they don’t like what could happen to PSG revenue while the “alternatives” are “explored”. They’re becoming uncomfortable with HP’s erratic and bombastic public statements, and the premature release of financial information. The latter happened last quarter, following the leak of an internal memo discussing a “tough quarter”, and it happened again this past Thursday, when more leaks forced HP to release earnings while the market was still open. This might seem like a technicality, but the stock market is supposed to provide equal access to information. Insiders have an unfair advantage and, thus, are prohibited from trading. A selective leak gives an unfair advantage to a few outsiders.
To level the playing field, the SEC issued a Selective Disclosure rule, known as Reg FD, obligating companies to immediately disclose all information to all shareholders. This is serious because some investors stand to gain or lose millions of dollars when a company makes such mistakes. Two in a row reflects poorly on management — or on the organization’s loyalty to the boss.

Examples of HP statements that should have been avoided are, unfortunately, easy to come by. The latest is the “tablet effect” mentioned by Léo in the Q3 earnings conference call. Yes, there is the Unmentionable Tablet, but while affirming its impact on your business might sound courageous, it also downgrades PSG’s perceived value as the “strategic alternatives” are being explored.

(Contrast this with Microsoft’s PR: their chief propagandist, the witty, diplomatic and literate Frank X. Shaw doesn’t stray from Microsoft’s PC-centric party line. In his latest post, Where the PC is headed: Plus is the New “Post”, Shaw explains how irreplaceable the PC is and how these other devices are just PC companions. You agree or disagree, partially or totally, but Microsoft doesn’t waver. For a witty deconstruction of Frank’s post, see Brian S. Hall’s translation here.)

Then we have various “the WebOS isn’t dead” statements, HP’s messages to its staff and to the outside world saying there’s still a future for the platform. Does the company think it’ll find an Asian manufacturer – Samsung, perhaps – who’s eager to “go Apple”, to make integrated hardware/software tablets and phones in an effort to fight the Cupertino company?

Seeing an opportunity, Microsoft wastes no time:

Cheeky and effective, a well-run operation. (Go to Twitter to see the amazing response and Brandon Watson manning the ramparts.)
We’ve had HP’s CEO touting its company’s goal to snag Apple’s cool factor, an admirable but long term goal, requiring a lot of patience and money — and the right company culture. (How long did it take Jobs to turn the “marginal”, “on the losing side of history” perception around? This wasn’t a goal, but a byproduct. And, the “being on the losing side” meme still lingers.)
I’ll end the litany with the “WebOS running on 100 million devices” fallacy (see the March 13th, 2011 Monday Note). The Write Once, Run Everywhere mantra doesn’t work anymore. Credibility is sapped when “Run Everywhere” includes destinations as heterogeneous as PC pre-boot, printers, smartphones, and tablets.

Investors listen to HP’s pronouncements and wonder: Which of these statements do we believe? Which will stand the test of a few months? In the meantime, they dump the stock.

Let’s end on a humorous note. I found a buyer for HP’s PC business: Microsoft.

“Steve [Ballmer, that is], please give us a free PC!”.

Responding to a promo on Microsoft’s on-line store last Thanksgiving, I bought a version of Office 2010 for $199 and got a free PC to go with it. The PC was a cheap Dell netbook running a castrated version of Windows 7 that caused no end of trouble when attempting to connect to the office Exchange server. In spite of years of experience in such setups, I was stymied. It took our IT person a good 20 minutes to get it done, muttering expletives at the Windows 7 Starter Edition’s artificial limitations.

Ballmer could put an end to that suffering, make sure everything runs smoothly and have nice products to sell — or to give away with a software purchase — in the 75 expensive Microsoft Stores opening across the country. Come to think of it, Ballmer could snatch Borders stores before Google does in order to get choice retail locations for the gPhone blitzkrieg mentioned above. There’s a great one on University Avenue in Palo Alto, right across an Apple Store.

And just like makers of Android smartphones profess happiness at Google’s $12.5B acquisition of Motorola Mobile, we can be sure that Acer, Asus, and others would rejoice when Microsoft starts making its own PCs and Windows 8 tablets.

Isn’t the end-to-end integrated Kinect, Microsoft’s fasted growing business, making a good case for Ballmer’s next move?

Just kidding.

— JLG@mondaynote.com

PS: For me, HP’s move is an especially sad one.This is the (formerly) great company that gave me my biggest break in business. In June ’68, they hired me to launch their first desktop computer on the French market. Later, as reminisced in the May 9th, 2010 Monday Note, I saw HP rise to the top of the nascent personal computer market, only to lose it to machines using “cheap” microprocessors, and to rise to the top again after the Compaq acquisition. And now, HP exits the PC business from the top.
Gizmodo has a related recollection of HP’s early personal computing days. —

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Gunning for the Copyright Reformers

August 14, 2011 – 8:36 pm | Edited by Frédéric Filloux

Going after copyright reformers is risky business. To digital zealots, defending copyright is like advocating the return to the typewriter. (I personally like typewriters; I own several and I recommend a wonderful 1997 Atlantic piece on them at Longform.org). Going after sworn copyright opponents is what Robert Levine does in his just-published  book Free Ride — How the Internet is Destroying the Culture Business and How the Culture Business can Fight Back.

The pitch: Digital corporations are conspiring to promote the free ideology that has been plaguing the internet over the last decade. With their immense financial firepower, the Googles and the Apples and the Silicon Valley venture capital firms that funded Napster did whatever it took to undermine the concept of copyright. From lobbying the United States Congress to funding free-culture advocates, they created a groundswell for rip-and-burn products that would sell their MP3 devices. They got lawmakers and pundits to pave the way for a general ransacking of intellectual property — from music to journalistic content. Once Levine makes his point, he explores possible solutions to restore value to creativity (We’ll address these in a future column).

Needless to say, Robert Levine has produced a non-politically correct opus. And that’s what makes his book fascinating.

To start, the author reframes the famous quote, “Information wants to be free.” Free Ride recalls the complete sentence as far more nuanced. This is actually what tech writer Stewart Brand said at an 1984 a hacker conference:

“One one hand information wants to be expensive because it’s so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other.”

Few quotes in recent history have been more twisted and misinterpreted than this one. Everyone jumped on Stewart Brand’s distinction between collecting information and making it available to the audience. While the cost of the former remains high — at least for those producing original information, or content — the marginal cost of broadcasting it fell dramatically, and that is what sparked the idea of a zero-cost culture. Yet, “media products have never been priced according to their marginal cost,” Levine says, and therefore, free is an idea that’s hard to defend.

As described in Free Ride, US lawmakers played a critical role in opening the floodgates of piracy and copyright violation on the internet. On October 28, 1998, Bill Clinton signed the Digital Millennium Copyright Act. That law, says Levine, gave a “safe harbor” to internet service providers and some online companies. No longer liable for copyright infringement based on the actions of users,  Levine writes that the “safe harbor made it easier for sites like YouTube to become valuable forums for amateur creativity. But it also let them build big businesses out of professional content they didn’t pay for.” That, he says, is how Congress created YouTube. (Google purchased it in 2006 for $1.65 billon).

The book’s most spectacular deconstruction involves Lawrence Lessig. The Harvard law professor is one of the most outspoken opponents of tough copyright. For years, he’s been criss-crossing the world delivering well-crafted, compelling presentations about the need to overhaul copyright. When, in 2007, Viacom sued YouTube for copyright infringement, seeking more than a billion dollars in damages, Lessig accused Viacom of trying to overturn the Digital Millennium Copyright Act. It was a de facto defense of Google by Lessig who at the time was head of the Center for Internet and Society at Stanford University. What Lessig failed to disclose is that two weeks after closing the deal to acquire YouTube, Google made a $2-million donation to the Stanford Center, and a year later gave another $1.5 million to Creative Commons, Lessig’s most famous intellectual baby. To be fair, Levine told me he didn’t believe Lessig’s positions on copyright were influenced by the grants from Google. Moreover, Google set aside $100 million to fight the Viacom lawsuit. Numerous examples throughout Free Ride show how technology companies are committed to influence public policy. Ironically, Lawrence Lessig’s newest crusade at Harvard is about corruption in Washington.

Robert Levine’s book could be disputed on a few items.

- One, he’s too kind to the music industry. (His view may have been influenced by his tenure as executive editor of Billboard magazine where he witnessed first-hand the self-inflicted deterioration of the music industry.) The music business missed all the trains: (a) it defended the physical model up to the last minute even as its annihilation seemed unavoidable; (b) it extended as long as it could the double screwing of consumers and artists alike (sadly, poor analog artists have been replaced by poor digital ones).

- Two, he tends to forget the general complacency of content creators toward all forms of digital looting. I’ve often described in the Monday Note how publishers – blinded by the short-term appeal of the eyeball count – became consenting victims of all sorts of aggregators (see my Lenin’s Rope series).

- Three, the advent of free content has in fact unleashed talent. Unknown authors have been able to rise from obscurity thanks to direct access to the audience. And some have found alternative ways to make money (more on this in another future column).

Lastly, the unfolding of technology made the relaxing of copyright unavoidable. The Digital Millennium Copyright Act may have accelerated the transition but it didn’t cause the upheaval. Today, BitTorrent file transfer for music and movies accounts for about 10-12% of the internet bandwidth consumption, and YouTube accounts for 11%. Pirated content represents almost 100% of the former and about a third of the latter. Huge numbers, indeed, and huge losses for the music and movie industries. But Netflix with its legitimate content now accounts for 30% of the entire internet traffic (Hulu has less than 2%) and iTunes is growing faster than ever. And some economists do consider that giving up a large quantity of content for free is the price that must be paid to preserve a marketable share.

The music industry paid a terrible price during the digital transition, with a drop of 50% of its sales in one decade. But it would be unfair to make lenient lawmakers and internet pirates the main culprits. Unbundling played a critical role as well, just as in the newspaper industry. Being able to buy a single song on iTunes (instead of an album), or hoping that a single article on a web page will generate enough viewers to pay for itself (instead or purchasing an entire bundled newspaper) caused a great deal of damage.

As plagued as it is by piracy, the movie industry is immune to the notion of unbundling, which partly explains why box office revenue between 2006 and 2010 rose by 30% outside the United States and by 15% in the US/Canada market. Although the number of moviegoers is slipping, the industry has been able to find its way into the digital world.

Robert Levine’s book is a must-read that reframes the debate on the evolution of copyright. In an unusual way, it encompasses a European view on the issue (Levine lives part-time in Berlin). That makes the book even more interesting as countries explore ways for content creators to finance their work while not killing the formidable creative freedom unleashed by the digital world.

—frederic.filloux@mondaynote.com

Free Ride, By Robert Levine is published by Bodley Head in the UK (available now on Amazon UK)and by Doubleday in the US (available oct 25 on Amazon US) and is also available the iTunes iBook Store.

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Steve, Please Buy Us A Carrier!

August 14, 2011 – 8:32 pm | Edited by Jean-Louis Gassée

We’re at the end of the 2011 iPhone 5 launch. The demos went well; Steve Jobs has come back on stage to thank everyone and conclude the proceedings, “…but before you go, just One More Thing. I’d like you to meet someone.” And the CEO of Deutsche Telekom walks onstage. “Deutsche Telekom owns a company you know as T-Mobile USA, but let’s start calling it by its new name: Apple Wireless.”

An audible gasp — louder than the one when Jobs announced the $499 price for the iPad – and then the room erupts in applause. At long last, iPhone users will enjoy the level of carrier service and support that is their birthright.

This is fiction, of course, wishful thinking. But bear with me…

The idea came up during a “what if” conversation with my wife Brigitte, while walking along University Avenue in Palo Alto. What should Apple do with its almost beyond comprehension $76B in cash? The COO of the Gassée family is creative and practical, an abstract painter turned “lumber VAR”–she builds or rebuilds houses in Palo Alto. She’s not enthralled by technology and takes a utilitarian view of computers, phones, navigation systems, tablets…an attitude that provides a useful counterpoint to my sometimes overly-enthusiastic embrace of anything that computes.

She immediately nixes a big acquisition that could dilute Apple’s culture, an aspect of the company that’s integrally important to Steve. She has no interest in financial engineering and concludes that Apple will continue to make small acquisitions that pose few cultural challenges–but small buyouts won’t solve the cash “problem”. What to do with all that money?

As we chat, we walk by the wireless carrier stores: T-Mobile, a couple AT&T retailers (one is shutting down), Verizon and, next to the Apple Store, Sprint, a big store with a bored sales staff that easily outnumbers the customers. “Why doesn’t Jobs buy a carrier?” she asks, “He’d easily do a better job than these people….”

As befits our well-debugged relationship, I immediately launch into a critique of her suggestion: “This is a terrible idea, on so many counts!”.

First, there are regulatory problems. Getting FCC approval for a new iPhone is one thing; wrestling with Washington bureaucrats for spectrum allocation is another.  Apple’s maverick culture, its blatant spite for government bureaucrats and Congress windbags won’t do well there.

Second, carriers are capital intensive: Their return on equity (the profit-per-dollar invested in the business) is way below what Apple enjoys, in spite of its having “way too much cash for its own good.” For example, last quarter, AT&T’s Net Income was $3.6B for $113.8B in Equity, a ratio of 3.16%. Apple’s numbers were $7.3B for $69.3, a ratio of 10.5% — more than 3 times AT&T’s.

And just imagine the other carriers’ reactions. Not only would they kick Apple products from their networks and stores, Apple would find itself in court for anticompetitive practices, for unfairly favoring its own wireless arm.

One can see Apple’s stock losing 10% on the day of the announcement and critics would have yet another field day: “Apple does it again, their Walled Garden™ just grew taller walls!”.

But it’s also a beguiling idea. Let me count the ways.

Imagine the dancing in the streets. Apple would be finishing the job it started when it broke AT&T’s err… back, when it took over content distribution with iTunes. We don’t like carriers; we experience their service as both poor and expensive, to say nothing of their impenetrable and ever-changing contract pricing:

(Not to pick on AT&T. Every carrier offers a similar, bewildering array of entrapping offers.)

By contrast, imagine Apple’s simpler pricing. Three tiers to fit your appetite for data: $49, $79, $129 per month. No gimmicks, no SMS surprises, no fees piled up at the bottom of the bill: Just the price in your contract, plus taxes. If you approach the data limit for your plan, you get an SMS offering to upgrade you to the next level–but only for this month. No underhanded up-sell.

With $76B in cash and another $10B or so per quarter, a carrier is certainly within Apple’s budget. AT&T, with its $167B market cap, is probably out of reach (and too complicated, too many businesses), and Verizon ($97B), with its dying landline business and unionized workforce, isn’t in keeping with Apple’s ways.

But consider another carrier, T-Mobile USA. It no longer offers landline services, it’s non-union, and it’s affordable—it got a $39B offer from AT&T. Acquiring T-Mobile from its parent company Deutsche Telekom offers several advantages.

To start with, it prevents an abomination before the lord: It kills AT&T’s predatory acquisition attempt. Furthermore, as my friend Peter Yared noted, Apple might very well have big mounds of cash sitting outside the US, potentially subject to taxation if repatriated. Problem solved. Peter Oppenheimer, Apple’s CFO, shows up at Deutsche Telekom’s HQ in Bonn bearing a smile and an RSA dongle: “You have a Mac I can use to make the wire transfer?” No, they don’t. But a nice 30-year Anniversary Lenovo PC will do for the transaction.

Once the deed is inked, the hard work starts. This will probably be a two-year exercise.

Decisions will have to be made. Tactfully convert existing T-Mobile users to iPhones or free them go elsewhere? (The competition will, of course, welcome these ‘‘victims’’ with open arms.) Retrain employees or offer them a decent exit package?

But the big task, the goal of the acquisition: Play the Apple vertical integration game and adapt the network to support one and only one type of smartphone, Apple’s.

Other cellular networks have to serve a wide range of devices — from basic phones to gluttonous high-end smartphones — and support a mess of protocols: Ancient ones with layer upon layer of patches, more modern ones with their factory-fresh bugs. Contrast this with Apple Wireless’ simpler task of serving one type of phone, one type of protocol. Given the two-year time frame, let’s assume the protocol will be a stable variant of what markitects call LTE or 4G. And, from there, voice and data coexistence, smoother video calls, voice-mail on iCloud, and so on.

And that’s just T-Mobile. Need more spectrum? $10B, three months of net cash flow, gets you Sprint.

Another possibility, admittedly remote, is to use tight wireless network integration with iCloud to create an inexpensive “smart dumbphone”.

What I mean is: Today’s iPhone is an app phone. It has enough hardware oomph to run a wide range of applications, all “wired” to a screen size. Because of this, cutting the iPhone’s bill of materials in half is well-nigh impossible — an “iPhone Nano” would be a much more difficult proposition than the iPod Nano. Apple would need to send developers back to their Xcode.

A better alternative would be to jettison native apps altogether, to go back to the Summer of 2007, when Steve Jobs promoted Web 2.0 apps for the first iPhone. Today, the pitch would be HTML5 Web Apps. We can already see a few good ones on iPhones and iPads, such as the new HTML5 Kindle app:

Or the nicely interactive iPhone manual, which feels like a “real” app:

A putative iPhone Nano on the no-less putative Apple Wireless network would be a dumbphone with HTML5 smarts and tightly integrated (I’ll use the P-word) proprietary services to make it sing and dance.

(As it happens, someone else already came up with the name Cloud Phone, see Trevor Sheridan’s post on the Apple’N’Apps site.)

As for the reaction from competing carriers, one has only to turn to the history of Apple Stores to get an answer. Existing retailers didn’t ditch Apple products when the company started its own retail chain. In fact, Apple Stores set a new standard in pre- and post-sale service. As a result, competing retailers raised their game. One can expect a similar reaction from AT&T and Verizon when faced with Apple Wireless.

So, yes, it’s a beguiling idea, but…

Would buying a carrier make sense financially? Look at AT&T’s iPhone ARPU, reported at more than $100/month. For Apple Wireless, this translates into more than $1B per million iPhones on its network. In 2010, T-Mobile’s ARPU was approximately $50/month for its 33.7 million customers. It’s tempting to look at the potential billions in service revenue and pronounce Apple Wireless the next big revenue opportunity.

But service isn’t Apple’s way of making money. Their one and only goal is selling devices. Everything else is in support of that goal. Execs, starting with the CEO, will wax poetic about the crystalline purity of software, more/better/faster content, new iCloud services; but what really counts is device revenue and profit. In the iPod days, iTunes didn’t make money, but it boosted device volume and margin. For today’s $100B Apple, a couple of billions in iTunes revenue is nice, it pays the bills, but it doesn’t move the needle. The iPhone is what does.

A wireless carrier owned, operated and integrated by Apple would only take two or three years to generate (much) more revenue than iTunes. But would it sell twice as many iPhones? Probably not.

It’s a nice fantasy, a carrier with the service quality and simplicity we get today when we enter an Apple Store. But for the fantasy to become reality, Apple Wireless would need to give birth to services that generate significant new hardware opportunities – opportunities that would need to be unavailable through Verizon and AT&T (otherwise, what’s the point?).

Another way to deflate the fantasy is to consider the US-only nature. Apple can’t and won’t go around the world and buy wireless carriers. With China soon to become Apple’s largest and most profitable market, the company isn’t about to lose sight of that prize, to be distracted by the complicated task of acquiring and integrating a US carrier.

That was the reverie…

Back to reality, why can’t carriers stop playing their games and show us some decency?

— JLG@mondaynote.com

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Catching the Cloud

July 17, 2011 – 5:16 pm | Edited by Frédéric Filloux

When it comes to contracting for a computer service, there is little choice but hoping for the best. Small or mid-size companies, especially those located outside the United States, are betting they’ll never have to go to court – usually one located 11,000km and thousands of dollars in legal fees away. Let’s face it: contracting with a large American company is a jump into the unknown. Agreements are written in an obscure form of English, often presented in PDF format, transparently implying modifications are out of question. Should you consider litigating, be prepared to make your case before a judge located on the West Coast of the United States. The not-so-subliminal reading of such contracts: ‘Sue me…’, with a grin.

The Cloud’s rise to prominence makes things worse. A growing number of companies and individuals handle their data to a remote infrastructure offering little hope of any legal leverage. The Cloud is the ultimate form of the outsourcing cascade. A US-based company rents capacity wherever electric power is cheap, connections reliable, and climate friendly to server farms cooling towers. As world connectivity expands, so do eligible regions. (While doing research for this column, I found Greenland was for served by a 960 Gbps (Gigabit per second) undersea cable linked to Iceland. In turn, the volcano island is linked to the rest of the world via a the huge 5 Tbps “Danice” cable). Datacenters are sprinkled over a number of countries and workload moves from one server farm to another as capacity management dictates. At this point, no company knows for sure where its data reside. This raises further legal hurdles as Cloud operators might be tempted to deploy datacenters in less stable but cheaper countries with even looser contractual protections.

European lawyers are beginning to look at better ways to protect their clients’ interests. A couple of weeks ago, I discussed the legal implications of Cloud Computing with Guillaume Seligmann, the lead tech attorney at the law firm Cotty Vivant Marchisio & Lauzeral. (He is also an associate professor at l’Ecole Centrale a prominent French engineering school). ‘When it comes to Cloud Computing, the relationship between the service provider and the customer is by nature asymmetrical’, he says. ‘The former has thousands if not millions of customers and limited liability; in case of litigation, it will have entire control over elements of proof. As for the customer, he bears the risk of having his service interrupted, his data lost or corrupted — when not retained by the supplier, or accessed by third parties and government agencies)’.
In theory, the contract is the first line of defense. ‘It is, except there is usually little room for negotiation on contracts engineered by expert American attorneys, based on US legislation and destined to be handled by US judges. Our conclusion is that solely relying on contracts is largely insufficient because it may not offer efficient means of sanctioning breaches in the agreement’.

The CVML partner then laid out six critical elements to be implemented in European legislation. These would legally supersede US contractual terms and, as a result, better protect European customers.

1 / Transparency. Guillaume Seligmann suggests a set of standard indicators pertaining to service availability, backup arrangements and pricing – like in the banking industry for instance. In Europe, a bank must provide a borrower with the full extent of his commitments when underwriting a loan. (Some economists say this disposition played a significant role at containing the credit bubble that devastated the US economy).

2 / Incident notifications. Today, unless he is directly affected, the customer learns about outages from specialized medias, rarely though a detailed notification from the service provider. Again, says Seligmann, the Cloud operator should have the obligation to report in greater details all incidents as well as steps taken to contain damage. This would allow the customer to take all measures required to protect his business operations.

3 / Data restitution. On this crucial matter, most contracts remain vague. In many instances, the customer wanting to terminate his contract and to get back his precious data, will get a large dump of raw data, sometimes in the provider’s proprietary format. ‘That’s unacceptable’, says the attorney. ‘The customer should have the absolute guarantee that, at any moment of his choosing, he we have the right to get the latest backed-up version of his data, presented in a standard format immediately useable by another provider. By no means can data be held hostage in the event of a lawsuit’.

4 / Control and certification. Foreign-headquartered companies, themselves renting facilities in other countries, create a chain fraught with serious hazards. The only way to mitigate risks is to give customers the ability to monitor at all times the facility hosting their data. Probably not the easiest to implement for confidentiality and security reasons. At least, says Guillaume Seligmann, any Cloud provider should be certified by a third party entity in the same way many industries (energy, transportation, banking) get certifications and ratings from specialized agencies – think about how critical such provisions are for airlines or nuclear power plants.

5 / Governing laws. The idea is to avoid the usual clause: “For any dispute, the parties consent to personal jurisdiction in, and the exclusive venue of, the courts of Santa Clara County, California”. To many European companies, this sounds like preemptive surrender. According to Seligmann’s proposal, the end-user should have the option to take his case before his own national court and the local judge should have the power to order really effective remedies. This is the only way to make the prospect of litigation a realistic one.

6 / Enforceability. The credibility of the points stated above depends on their ability to supersede and to render ineffective conflicting contractual terms imposed by the service provider. In that respect, the European Union is well armed to impose such constraints, as it already did on personal data protection. In the US, imposing the same rules might be a different story.

The overall issue of regulating the cloud is far from anecdotal. Within a few years, we can bet the bulk of our hard drives – individual as well as collective ones – will be in other people’s large hands: Amazon S3 storage service now stores 339 billion objects – twice last year’s volume.
We’ll gain in terms of convenience and efficiency. We should also gain in security.

—  frederic.filloux@mondaynote.com

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10 Years of Apple Stores: the non-celebration

July 17, 2011 – 5:15 pm | Edited by Jean-Louis Gassée

Apple and understatement aren’t close relatives. Not that they don’t have a right to strut a bit: after all, under its returning co-founder, Apple 2.0 performed the most stunning corporate turn around ever — and shows no sign of slowing down. As a result, product launches, developer conferences and quarterly earnings announcements all turn into opportunities for the company to blow its own horn.
So, when the 10th anniversary of the first Apple Store came by, I expected a big celebration: fireworks, decorated stores, laser engravings on Anniversary Edition iPods, a coffee table book with a Steve Jobs foreword, a speech, a video… Yet, on May 19th, nothing happened. At least publicly.
All we got was a leaked internal poster celebrating 10 years of achievements and learnings:

An eyeful or an eye-chart. You can get a more legible PDF version from ifoAppleStore.com. Or, courtesy of Tech Evangelist Joey deVilla, a version obligingly rendered in text with paragraphs. Longish as it might be, the document is worth reading: it rings true and proud; it is manifesto of Apple’s retail philosophy — and of its impact on the entire company.

I decided there had to be a reason for the official quiet. I wanted to make the anniversary a Monday Note topic, but hearing the silence and unable to ascribe a meaning to it, I decided to bin the topic for a while.

The wait didn’t last long: Ron Johnson, Apple’s Sr. VP or Retail Operation announced his departure right after the June 6-10 WWDC. Divorce papers the morning after the anniversary… The muting of the celebration made (some) sense.

But why did Ron Johnson leave?

Under his tenure, Apple Stores have become the envy of the retail industry, breaking one record after another: revenue per square feet, year-to-year growth, store size, foot traffic and architectural design. (See here for a neat set of Apple Store statistics.)
With such a record, one can easily see Apple’s “retail guru” standing up, declaring “My Job Is Done” and leaving on a high note.
Then, sparing us the rote “spending more time with my family” explanation, Ron states he always wanted to be the CEO of a major retail chain. JC Penney just happened to need a new CEO, this was an opportunity to fulfill a long-time ambition, to become his own boss.

All very logical, but, for a number of reasons, the polished tale doesn’t quite ring true.

First, with 326 Apple Stores, the job isn’t quite done. Exceedingly well done so far, but not complete. For example, after the US, China is now Apple’s second market, it is where Apple experiences its largest year-to-year growth. According to ifoAppleStore.com, the site that does an excellent job of documenting the life of Apple Stores, Apple will open 25 more stores in China by the end of 2012. My own observations of Apple’s third market, Western Europe, lead me to believe Apple is very far from reaching saturation there. For example, with a population of about 36 million, California has 49 Apple Stores. France, with a population of 62 million, only has 7. Per capita GDP differences ($47K vs. $34K yearly) don’t account for the disparity. We can safely assume this applies to Western Europe as a whole, showing how much headroom Apple Stores still have there.
No one knows what the saturation is, fortunes have been lost by those who believe trees grow to the sky, but there is no reason to consider Apple Stores are “done”. One could just as easily call today’s Apple Stores network ‘’a good start’’.

Second, Apple Stores are always evolving. This gets us much closer to the real explanation than my previous point. The never ending stream of changes, the attention ranging from architectural design to minute furniture details all bear another man’s imprint: Steve Jobs’. We’ll recall he picked Bohlin Cywinski Jackson as the architects for Pixar’s elegant headquarters — and kept using the firm for most Apple Stores building or renovation projects. In the process, several Apple Stores became architectural icons. Then, when it came to interior design, Jony Ive, Apple’s Senior VP of Industrial Design took a lead role.
For the ever changing details, watch Steve Jobs proudly take us through the first Apple Store in this 2001 video. And compare with today’s setup.
For amateurs of minutiae, ignore the main checkout podium where MacBooks run transactions and, instead, take a look at a standard product display table. Your friendly Apple Store employee just performed a painless cashectomy using the newer iPod Touch-based portable Point Of Sale terminal. Now, where is the printer for your receipt? Affixed under the table’s main board, upside down, invisible. No unseemly display of non-Apple appliances. For the occasional cash transaction, foreign visitors mostly, a few tables also carry a barely visible cash drawer cut in the side.

Recently, stores reduced space dedicated to accessories, peripherals and, with the Mac App Store in mind, boxed software. This resulted in more room for something called Personal Setup, where an Apple employee helps a customer get started with his/her new purchase.

You get the idea: “Apple”, meaning Steve Jobs, is never satisfied, always looking for ways to improve its stores or, for that matter, anything else Apple.

In the end, in spite of his signal contribution to Apple’s success, Johnson must have felt disenfranchised. Coming in, he brought with him expertise and contacts “Apple” didn’t possess. Over time, Jobs’ keen interest in the matter turned into heavy involvement in every facet of the operation. Apple Stores became Steve’s brainchild, not Ron’s. Hence his decision to look for an opportunity to be really in charge, as opposed to working for a gifted, focused and strong-willed visionary.

Now, why did Ron Johnson pick JC Penney?

He doesn’t need the money, we’re told he made about $400M working at Apple. And JC Penney, to say it politely, isn’t the most attractive of US retailers. Once an American icon, JC Penney is now a tired chain. All the better, some say: Ron Johnson will bring some of the Apple magic and revive the company. This is drawing a very superficial comparison:  the two kinds of retail establishments couldn’t be further apart. Apple runs with a very small number of SKUs (Stock Keeping Units), a very short product line. Conventional retailers tens of thousands of different products. Apple is willing to spend tens of millions on a single store, JC Penney never did and very likely never will. Apple products are often elegant, if not iconic, not something that can be said of JC Penney’s merchandise.
Further, it looks like Ron’s CEO title isn’t exactly endowed with full meaning: Reuters and the WSJ let us know his role will be “limited”, at least initially, “focussed on marketing and merchandise selection, while Ullman [the real CEO and Chairman] will oversee the more common executive responsibilities of accounting, finance, corporate strategy and logistics…”
The Ullman in question is Myron (Mike) Ullman, age 64, a veteran retail executive with experience at LVMH’s DFS (Duty Free Stores) business unit and RH Macy, among others. He also sits on the Board of Directors of companies such as Starbuck’s and Global Crossings, and of several Bay Area charitable organizations.
Another unexplained datum is Ron’s start date: November 1st. The most likely but hard to confirm explanation must lie in a paragraph of his Apple exit agreement.
When that date comes, we’ll see if Mike Ullman really handles the reins to Ron or if the Apple alumnus finds himself working for yet another strong-willed boss.

Back to the Apple stores and to Ron Johnson’s legacy: quoting David Berman and his quarterly DeeBee Index, USA Today reports Apple contributed to 20% of “all sales growth by publicly traded retailers in the U.S”, this for the first three months of 2011. One has to qualify the number a bit: it relates to publicly traded retailers only, not to the entire US retail sector. Still, keeping in mind the likes of Walmart are all publicly traded, Apple’s share is surprisingly high.

We’ll now more in a few days, when Apple releases its numbers for Q2, the April to June 2001 quarter.

— JLG@mondaynote.com

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