Surviving 2014

 

2014 won’t be an easy year for the digital news business. The good news is the list of mandatory actions is coming into sharper focus. Today, we look at key items.  

The hard part is finding positive signs. My own guess: for the news industry, the excruciating migration from print to digital will get worse before it gets better. If I had to draw a J curve, as economists put it, it would look like this:

303-J-curve

Note that the green list is longer than the red one. But we are still not through with the negative key factors.

For the news media industry, advertising will remain problematic this year. The graph below sums up the sector’s dire situation (a US view that mostly applies to other mature markets):

303 revenue

For 2014, planet remains badly aligned:

- There is nothing is sight to correct the huge imbalance between the supply of digital advertising space and advertisers’ demand. Digital media continue to produce millions of new URLs per day that banners simply can’t match. As long as no one is willing to reduce the supply-side, the imbalance is likely to last. This is even more regrettable when considering how the media industry will need to increase its own promotion activities in order to support the diversification that is key to its survival. Practically, if an online publication decided to close 30% of its inventory and assign it to promote its mobile apps, verticals, ancillary products, etc., it would win on both ends. First, it would recreate some scarcity, meaning higher revenue metrics and, second, it would beef up the promotion of its own products. Unfortunately, such an idea won’t last a minute in a short-term budgetary review.
- Thanks to Real-Time Bidding (RTB), publishers actually fuel the price deflation
by auctioning their leftover inventory on various marketplaces. In doing so, they generate some revenue – at the expense of the format’s per unit value (in such auctions, expect no more than 5-10% of nominal prices). In addition this process mechanically applies negative pressure to premium placements because the advertisers will opportunistically purchase a guaranteed and targeted audience wherever available. Even the New York Times will jump on the RTB bandwagon  — “in [its] special way”, it claims. We’ll see.
- Making serious money with mobile ads will remain elusive. For most digital news outlets, mobile users are likely to pass the 50% of the total audience later this year. Unfortunately, the magic advertising formula has yet to be cracked as a mobile user only brings a fraction of the equivalent web revenue. I don’t believe in a miracle ad format that will make the commercial experience “engaging” or “enjoyable”… You don’t “engage” people on the move. You grab, seduce, retain them with repetitive and attractive contents that properly fit their time-wise needs and cognitive availability. Then, if the content is good enough, unique, and able to create a reflexive daily habit — then you might be able to convince a fraction of the audience to pay for it. Note the italics, they point to significant obstacles on the road to the mobile pot of gold.
On mobile, I feel interface quality and selectiveness of functionalities are even less forgiving than on the web: you can’t allow useless stuff on a smartphone screen, there is simply no tolerance for it. All contents being equal, the success of a mobile news product will largely depend on the quality of its interface.

Now let’s turn to the green part, the hopeful one.

Agility. One of the benefits of the continuing newsrooms shrinkage (no, we’re not through, yet) will be news staffs making further gains in agility and polyvalence. As Scott Klein, senior editor for news applications at ProPublica, puts it in the NiemanLab Predictions for 2014 (worth a read):

You can be a good journalist without being able to do lots of things. But every skill you don’t have leaves a whole class of stories out of your reach. And data stories are usually the ones that are hiding in plain sight.

Scraping websites, cleaning data, and querying Excel-breaking data sets are enormously useful ways to get great stories. If you don’t know how to write software to help you acquire and analyze data, there will always be a limit to the size of stories you can get by yourself. And that’s a limit that somebody who competes with you won’t have.

To put it more bluntly, in 2014, thriving newsrooms will share the following characteristics: (a) they will be fastest to inject a critical proportion of new blood in their ranks and (b) they will invest in training to add the skills, mostly tech ones, required by modern journalism.

New Forms of Ads. Digital Advertising is half-way through a decisive transformation. As I wrote here many times, the market will stretch at its extremities; one will end up with more automation (the aforementioned RTB trap) while the other end might be more virtuous. It will be based on tailored promotional operations and Branded Content product lines (see coverage in the Monday Note), both form carrying higher CPMs and better reader acceptance. I’m a true believer in the continuity — not the blend nor the confusion — between journalistic contents and commercial editorial. Brand, companies, have a lot to tell beyond traditional advertising. Most publishers will be slow movers in that field. Even if such new forms of ads turn to be a fad (which I don’t believe), it won’t be a costly mistake to hire a commercial editor flanked by a couple of smart people, a combination of writers and strategic planners (not easy to find, I’ll admit, you might instead consider training existing staff), able to understand and convert client needs into good storytelling aimed at attracting (but not deceiving) readers.

2014 will be the year of media companies realizing they must morph into technology companies — or embrace, one way another, the technologies that guarantee their survival. Consider the following factors: advertising requiring better audience profiling; smart recommendation engines becoming mandatory to retain readers; semantic “footprint” becoming the de rigueur instrument to serve a solvent and loyal readership; journalism thriving through data… These all make the need for tech people able to understand editorial issues more pressing.

As long as those prerequisites are well understood, I’m bullish on the future of digital news.

–frederic.filloux@mondaynote.com
@filloux

The Hybrid Tablet Temptation

 

In no small part, the iPad’s success comes from its uncompromising Do Less To Do More philosophy. Now a reasonably mature product, can the iPad expand its uses without falling into the hybrid PC/tablet trap?

When the iPad came out, almost four years ago, it was immediately misunderstood by industry insiders – and joyously embraced by normal humans. Just Google iPad naysayer for a few nuggets of iPad negativism. Even Google’s CEO, Eric Schmidt, couldn’t avoid the derivative trap: He saw the new object as a mere evolution of an existing one and shrugged off the iPad as a bigger phone. Schmidt should have known better, he had been an Apple director in the days when Jobs believed the two companies were “natural allies”.

I was no wiser. I got my first iPad on launch day and was immediately disappointed. My new tablet wouldn’t let me do the what I did on my MacBook Air – or my tiny EeePC running Windows Xp (not Vista!). For example, writing a Monday Note on an iPad was a practical impossibility – and still is.

I fully accept the personal nature of this view and, further, I don’t buy the media consumption vs. productivity dichotomy Microsoft and its shills (Gartner et al.) tried to foist on us. If by productivity we mean work, work product, earning one’s living, tablets in general and the iPad in particular have more than made the case for their being productivity tools as well as education and entertainment devices.

Still, preparing a mixed media document, even a moderately complex one, irresistibly throws most users back to a conventional PC or laptop. With multiple windows and folders, the PC lets us accumulate text, web pages, spreadsheets and graphics to be distilled, cut and pasted into the intended document.

Microsoft now comes to the rescue. Their hybrid Surface PC/Tablet lets you “consume” media, play games in purely tablet mode – and switch to the comfortable laptop facilities offered by Windows 8. The iPad constricts you to ersatz folders, preventing you to put your document’s building blocks in one place? No problem, the Surface device features a conventional desktop User Interface, familiar folders, comfy Office apps as well as a “modern” tile-based Touch UI. The best of both worlds, skillfully promoted in TV ads promising work and fun rolled into one device.

What’s not to like?

John Kirk, a self-described “recovering attorney”, whose tightly argued and fun columns are always worth reading, has answers. In a post on Tablets Metaphysics – unfortunately behind a paywall – he focuses on the Aristotelian differences between tablets and laptops. Having paid my due$$ to the Techpinions site, I will quote Kirk’s summation [emphasis mine]:

Touch is ACCIDENTAL to a Notebook computer. It’s plastic surgery. It may enhance the usefulness of a Notebook but it doesn’t change the essence of what a Notebook computer is. A keyboard is ACCIDENTAL to a Tablet. It’s plastic surgery. It may enhance the usefulness of a Tablet, but it doesn’t change the essence of what a Tablet is. Further — and this is key — a touch input metaphor and a pixel input metaphor must be wholly different and wholly incompatible with one another. It’s not just that they do not comfortably co-exist within one form factor. It’s also that they do not comfortably co-exist within our minds eye.

In plain words, it’s no accident that tablets and notebooks are distinctly different from one another. On the contrary, their differences — their incompatibilities — are the essence of what makes them what they are.

Microsoft, deeply set in the culture of backwards compatibility that served it so well for so long did the usual thing, it added a tablet layer on top of Windows 7. The result didn’t take the market by storm and appears to have caused the exit of Steve Sinofsky, the Windows czar now happily ensconced at Harvard Business School and a Board Partner with the Andreessen Horowitz venture firm. Many think the $900M Surface RT write-off also contributed to Ballmer’s August 2013 resignation.

Now equipped with hindsight, Apple’s decision to stick to a “pure” tablet looks more inspired than lucky. If we remember that a tablet project preceded the iPhone, only to be set aside for a while, Apple’s “stubborn minimalism”, its refusal to hybridize the iPad might be seen as the result of long experimentation – with more than a dash of Steve Jobs (and Scott Forstall) inflexibility.

Apple’s bet can be summed up thus: MacBooks and iPads have their respective best use cases, they both reap high customer satisfaction scores. Why ruin a good game?

Critics might add: Why sell one device when we can sell two? Apple would rather “force” us to buy two devices in order to maximize revenue. On this, Tim Cook often reminds Wall Street of Apple’s preference for self-cannibalization, for letting its new and less expensive products displace existing ones. Indeed, the iPad keeps cannibalizing laptops, PCs and Macs alike.

All this leaves one question unanswered: Is that it? Will the iPad fundamentals stay the way they have been from day one? Are we going to be thrown back to our notebooks when composing the moderately complex mixed-media documents I earlier referred to? Or will the iPad hardware/software combination become more adept at such uses?

To start, we can eliminate a mixed-mode iOS/Mac device. Flip a switch, it’s an iPad, flip it again, add a keyboard/touchpad and you have a Mac. No contraption allowed. We know where to turn to for that.

Next, a new iOS version allows multiple windows to appear on the iPad screen; folders are no longer separately attached to each app as they are today but lets us store documents from multiple apps in one place. Add a blinking cursor for text and you have… a Mac, or something too close to a Mac but still different. Precisely the reason why that won’t work.

(This might pose the question of an A7 or A8 processor replacing the Intel chip inside a MacBook Air. It can be done – a “mere matter of software” – but how much would it cut from the manufacturing cost? $30 to $50 perhaps. Nice but not game-changing, a question for another Monday Note.)

More modest, evolutionary changes might still be welcome. Earlier this year, Counternotions proposed a slotted clipboard as An interim solution for iOS ’multitasking‘:

[...] until Apple has a more general solution to multitasking and inter-app navigation, the four-slot clipboard with a visible UI should be announced at WWDC. I believe it would buy Ive another year for a more comprehensive architectural solution, as he’ll likely need it.

This year’s WWDC came and went with the strongest iOS update so far, but no general nor interim solution to the multitasking and inter-app navigation discussed in the post. (Besides  the Counternotions blog, this erudite and enigmatic author also edits counternotions.tumblr.com and can be followed on Twitter as @Kontra.)

A version of the above suggestion could be conceptualized as a floating dropbox to be invoked when needed, hovering above the document worked on. This would not require the recreation of a PC-like windows and desktop UI. Needed components could be extracted from the floating store, dragged and dropped on the work in process.

We’ll have to wait and see if and how Apple evolves the iPad without falling into the hybrid trap.

On even more speculative ground, a recent iPad Air intro video offered a quick glimpse of the Pencil stylus by Fifty-Three, the creators of the well-regarded Paper iPad app. So far, styli haven’t done well on the iPad. Apple only stocks children-oriented devices from Disney and Marvel. Nothing else, in spite of the abundance of such devices offered on Amazon. Perhaps we’ll someday see Apple grant Bill Gates his wish, as recounted by Jobs’ biographer Walter Isaacson:

“I’ve been predicting a tablet with a stylus for many years,” he told me. “I will eventually turn out to be right or be dead.”

Someday, we might see an iPad, larger or not, Pro or not, featuring a screen with more degrees of pressure sensitivity. After seeing David Hockney’s work on iPads at San Francisco’s de Young museum, my hopes are high.

JLG@mondaynote.com

@gassee

Shameless Carriers

 

Wireless carriers used to rule smartphone suppliers. In 2007, Steve Jobs upended such rules. Why can’t the carriers accept the change and enjoy the revenues the iPhone generates for them… and why do tech journalists encourage their whining?

Until about two weeks ago, it seemed that our major wireless carriers had given up whining about the unjust subsidies imposed by a certain overly-confident (they said) handset maker. I hoped that their silence on the topic meant that they had finally realized that the extra revenue (ARPU) generated by these smartphones more than made up for the “subsidy burden”, for the exorbitant amounts of money that (they thought) ended up in the wrong coffers.

Then, I saw this this headline:

Everyone Pays No 5c

The article’s lede promises to reveal secret Apple deals that squeeze rivals and tax you. According to the piece’s “logic”, Apple’s one-sided agreements force carriers to swallow inordinate numbers of iPhones, an arrangement that produces all-around nefarious results. To meet their volume commitments, carriers allocate disproportionate amounts of shelf space to iPhones, thus crowding out competitors. And because the Apple contracts drain their finances, carriers are forced to price other handsets higher than they otherwise would. Hence an “iPhone Tax” that everyone must pay, even when using another brand.

In the same piece, we find dark suggestions that Verizon is threatened by a $12B to $14B shortfall in meeting it’s $23B commitment to purchase Apple handsets. A bit of googling led me to a pair of July 2013 articles (here and here) that back up the prediction by pointing to an anal-ist’s write-up of Verizon’s SEC filings (a medium that, as Regular Monday Note readers know too well, I happily wallow in, especially the always-rich MD&A [Management Discussion and Analysis] section where execs are supposed to help us navigate the filing’s sea of numbers).

I went to Verizon’s SEC Filings page and looked up quarterly and annual reports. The first mention of an Apple agreement appears in the 10-K (annual) filing of February 28th, 2011. Since then, no word whatsoever of any purchase commitment, whether for the iPhone or any other device. If you search for “purchase” and “commitment” in the latest October 2013 SEC document, you’ll only find talk of pension funding and share-repurchase obligations:

Verizon 10-Q Oct 2013 Commitments

One would think that a looming $12B to $14B shortfall — more than a third of Verizon’s $30B quarterly revenue — would be mentioned to shareholders. The worried articles fail to explain Verizon’s silence.

This is both novel and familiar.

The novelty is finding Apple guilty of forcing carriers to raise prices on competitors‘ handsets. I hadn’t seen this angle before.

The familiar is the carriers’ use of journalists who present themselves as independent observers/reporters when, in fact, these practitioners of access journalism carry water for their corporate connections. During a lunch conversation some years ago with a Wall Street Journal repentito, I pointed to a fellatious Microsoft article in his old paper and questioned the excessive reverence: ‘Access, Jean-Louis, access. It’s the price you pay to get the next Ballmer interview… ‘

We saw the process at work in a December 2011 WSJ article titled How the iPhone Zapped Carriers, a devotional piece that makes the key points in the carriers’ incessant complaint:

Carriers do all the grunt work while handset makers and software developers take all the money.
The $400 subsidy per iPhone (and now a similar amount for its best competitors as well) is clearly excessive and must stop.
We need a new business model to account (to monetize) the shift from voice to voracious use of data.

Let’s rewind the tape. Once upon a time, there was The Way of The Carrier. Verizon, Sprint, AT&T treated handsets makers the way a supermarket chain treats yogurt suppliers: We’ll tell you the flavors and quantities we want to carry, we’ll set the delivery schedule, dictate the marketing/branding arrangements, define the return privileges and, of course, we’ll let you know what we want to pay for your product — and when we want to pay it.

Then Steve Jobs hypnotized AT&T’s management. He convinced them to let Apple set the terms for iPhone distribution in exchange for AT&T’s “running the table”. This meant no AT&T fingerprints on Apple’s pristine iPhone, no branding, no independent pricing, no pre-installed crapware — content and software would be downloaded via iTunes, only.

In this arrangement, the iPhone helped AT&T steal customers from its main competitor, Verizon. When Verizon finally signed up with Apple in 2010, they were in a much weaker position than if they had obliged at the very beginning of the Smartphone 2.0 era.

Apple is master of the slow-but-steady, surround-from-below approach. First, sign up a weaker player who will accept Apple’s stringent control in exchange for the opportunity to take business away from the dominant player who balks at Cupertino’s terms. After enough customers have switched to the smaller competitor, the market leader changes its mind and signs up with Apple — on Apple’s terms.

The drill has worked in Japan. The smaller SoftBank signed up with Apple while DoCoMo, Japan’s largest wireless carrier, refused. DoCoMo wanted to install its own software on the iPhone; Apple wouldn’t budge. Subscribers migrated to Softbank in numbers significant enough to change DoCoMo’s mind. The happy ending is DoCoMo and its competitors now appear to sell large numbers of iPhones.

Turning to China, the same maneuver is at work. China Unicom and China Telecom have been selling iPhones with the expected result: They’re taking customers from the giant China Mobile. (There are rumors of an Apple-China Mobile agreement, but it’s unclear when this will happen. We should know soon.)

This only works if – and only if – the iPhone is a great salesman for the carrier. Apple extracts a higher price for its iPhone for two reasons: strong volumes and higher revenue per subscriber compared to other sets. In Horace Dediu’s felicitous words [emphasis mine]:

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

Carriers should stop whining; these are robust companies run by intelligent businesspeople with immense resources at their disposal. As explained in previous Monday Notes (here and here), there’s no rational basis for their kvetching. Assuming they bleed an extra $200 when subsidizing an iPhone (or a top Samsung handset, now that the Korean giant followed suit), they only need $8/month in extra subscriber revenue from the “offending” smartphone. And yet here we are: Randall Stephenson, AT&T’s CEO, predicts the end of subsidies because  “wireless operators can no longer afford to suck up the costs of customers’ devices”.

I don’t know if Stephenson is speaking out of cultural deafness or cynicism, but he’s obscuring the point: There is no subsidy. Carriers extend a loan that users pay back as part of the monthly service payment. Like any loan shark, the carrier likes its subscriber to stay indefinitely in debt, to always come back for more, for a new phone and its ever-revolving payments stream.

I was told as much by Verizon. In preparation for this Monday Note, I went to the Palo Alto Verizon store and asked if I could negotiate a lower monthly payment since Verizon doesn’t subsidize my iPhone (for which I had paid full price). Brian, the pit boss, gave me a definite, if not terribly friendly, answer: “No, you should have bought it from us, you would have paid much less (about $400 less) with a 2-year agreement.” My mistake. Verizon wants to be my loan shark.

In the meantime, AT&T has finally followed T-Mobile’s initiative and has unbundled the service cost from the handset. If you pay full price for your smartphone, an AT&T contract will cost you $15 less than with a subsidized phone on a 2-year agreement. This leads one to wonder how long Verizon can keep its current indifferent price structure.

All this leaves carriers with conflicted feelings: They like their iPhone salesman but, like short-sighted bosses who think their top earner makes too much money, they angle for ways to cut commissions down.

On the other side, Apple’s teams must be spending much energy finding ways to keep generating high monthly revenues for their “victims”.

JLG@mondaynote.com

Other carrier news: Sprint, now owned by SoftBank’s Masayoshi Son, is said to be preparing a $20B bid for T-Mobile. We barely avoided excessive concentration when the Department of Justice nixed AT&T’s attempt to acquire T-Mobile; now we again risk a three-way market and its unavoidable collusions. As much as I admire SoftBank’s founder and am happy he took control of Sprint, I hope our regulators won’t facilitate more concentration.

This might be the last Monday Note for 2013. I’ll soon be in Paris where jet-lag and various (legal) substances will conspire to make writing more difficult. If so, Happy Holidays to Monday Note readers and their loved ones. –

The not-so-quaint charm of the email newsletter

 

In spite of today’s obsession with social networks, the email newsletter remains a potent vector for the dissemination of news and for driving traffic back to websites. It comes with one condition, though: reintroducing a human touch. 

Today, producing a newsletter looks so easy: Select RSS feeds from your site, fire a plug-in to extract selected headlines and areas, insert the feeds in a template and send the whole thing via a router interface. Done.

Many sites do it on auto-pilot. And the result of such automated treatment is crude newsletters throwing together a bunch of headlines and snippets. On the surface, the output does reflect the content of a site, but it actually fails to reveal any editorial choice other than the basic home page hierarchy. An opinion piece, an in-depth profile, or an investigative report will be processed in the same mechanical way: headline, nutgraf, a couple of links and nothing further.

Based on my personal use, such work ends up in a special designated folder I created on my main Gmail account for each publication I subscribe to. After a while, I stopped looking at those robotized emails. To make things worse (for the senders), Google does the filing for me — unbeknownst to me, actually. A couple of months ago, Gmail created several tabs, one of them titled “Promotions”, that collect all newsletters, including the ones I willingly subscribed to. Google chooses for me the emails should I read first. Great. I don’t understand why this arbitrary filtering didn’t trigger any outcry, both from subscribers and publishers of legit newsletters (I happen to be both). Needless to say, the opening rate of emails falling into the infamous Promotions folder is significantly altered. All at the pleasure of Google and its algorithms.

Coming back to the newsletter itself, we can detect the beginning of a shift away from robotized email towards the written-by-humans form.

Again, I’ll refer to Quartz, the business site launched a year ago by the Atlantic Media Group (see a previous Monday Note series here). Their email newsletter is called “The Daily Brief”; it is 800-words long, no images, cleverly written and edited, sent to about 45,000 subscribers worldwide, in three editions (US, Asia, Europe and Africa.)

Here is how it looks on mobile devices:

qz phones

The structure is simple: Five main headers containing five to seven items, each summing up what the story you might click on is about. The headers are: “What to watch today”, “While you were sleeping”, “Quartz obsession interlude” (it refers to Quartz’ proprietary revision of the old beat structure), “Matter of Debate”, and “Surprising discoveries”. A good mixture of news, fun, serendipity, thoughtful items. The links do not always send back to qz.com, they can lead anywhere. Sounds pretty simple at first. But, as Quartz editor Kevin Delaney recently told me, the Daily Brief is the result of a thorough editorial process. The email newsletter is touched by no less than four people, including two seasoned editors, Gideon Lichfield, Quartz global news editor who spent 16 years at the Economist, and Adam Pasick, the Asia editor and a 10-year Reuters veteran. Newsrooms who assign junior writers to expedite email newsletters should think again… Quartz is one of the few media I know to actually devote sizable resources for such a “simple” news product (also read this analysis on MailChimp, Quartz email router). But many are now considering the formula: The Wall Street Journal recently launched its “10-Points” email newsletter, built on the same principles as Quartz’s Daily Brief.

wsj-10points2

Sophisticated email newsletters are not new. For years, bloggers affiliated or not with large media organizations have been using them to promote their work and attract readers, gaining significant traction in the process. To name but a few, Andrew Sullivan’s Daily Dish on Politics, or Andrew Ross Sorkin’s Dealbook (part of NYTimes.com) have become full-fledged news brands. I asked Juan Señor, partner at Innovation-Consulting, who worked on many newspaper modernizations, for his opinion on the matter:

Conceptually, our take and that of other newspapers investing in newsletters or news briefings – as we call them – is that you have to move from commodity news to selling intelligence. In an age of abundance you have to sell scarcity. The laws of economics prescribe that the more abundant a product is, the less valuable it is in price. The more volume I have, the less value I can extract from it.’ 

Juan adds two critical factors needed to create a valued product: Timing — sending a news briefing at the right time to maximize its impact — and the multi-device format.

In spite of their age, email newsletters remain a relative primitive stage. Let’s talk first about the user interface. A newsletter begs to be read both on mobiles and on a desktop. You can no longer decide for the reader which screen size h/she will read your stuff on. Responsive design is mandatory. But applying responsive design techniques is way more complicated for newsletters than it is for websites. Even large medias such as the NYT are providing single formats newsletters. (I will humbly admit that, while the Monday Note blog switched to responsive design a while ago, I’m still struggling to do the same for our newsletter.) While I want to send a newsletter from a series of blog posts in a single stroke, I’m still waiting for the WordPress plug-in that will let me do that through a wide range of email routers. In the same fashion, I would welcome add-ons to the most popular word processors that would output good-looking, responsive html emails.

Another thing about email design: It must be conceived to be read offline. I live in a 4G city (Paris) but I still get poor 3G or even EDGE service in too many places (French carriers are said to slow down network speed in order to accelerate the switch to 4G). Therefore, the ability to read complete content offline beyond headlines is, in my view, a basic feature. Going a bit further, I would dream of newsletters pre-loading multiple layers of reading, allowing the reader to jump from the main page to one or two levels down — without requiring a connection.

Deeper improvements to newsletters will come from the usual combination of analytics and semantics. A well-crafted engine will detect what parts of an email newsletter I read the most, what subjects I’m more inclined to click on. Then, the system will adapt the content of my newsletters in order to increase my propensity to open and to engage (i.e. to click on links.) This will make the old-fashioned newsletter an even more powerful website traffic vector.

frederic.filloux@mondaynote.com

 

Microsoft CEO Search: Stalemate

 

The Microsoft CEO succession process appears to be stalled. This is a company with immense human, technical, and financial resources; the tech industry is filled with intelligent, energetic, dedicated candidates. What’s wrong with the matchmaking process?

Blond, Japanese, 25 years old, 15 years experience – and bisexual. This is a caricature, but only barely, of the impossible CEO job specs that executive recruiters circulate when on a mission to replace the head of a large company.

The real list of requirements describes a strategist with a piercing eye for the long term… and daily operational details; a fearless leader of people, willing to inflict pain… but with a warm touch; a strong communicator, a great listener, and an upstanding steward of shareholder interests…and of the environment.

When I gently confront a recruiter friend with the impossibility of finding such a multi-talented android, he gives me the Gallic Shrug: “It’s the client, you know. They’re anxious, they don’t know what they want. So, to tranquilize their Board, we throw everything in.”

I ask the distinguished headhunter what character flaws will be tolerated in a candidate. The query is met with incomprehension: “What? No, no, we can’t have character flaws; this situation requires impeccable credentials.” And perfect teeth, one assumes.

Still in a caustic mood, I prod the gent to picture himself driving to Skyline Boulevard and walking to the top of Borel Hill, a great place to meditate. Turning away from the hills that gently roll down to the Pacific, he faces the Valley. Can he sit, quiet his mind, and visualize the gentle crowd of pristine CEOs down there?

No. He’ll see a herd of flawed men and a few women who regularly exhibit unpleasant character traits; who abuse people, facts, and furniture; and who are yet successful and admired. Some are even liked. There are no Mother Theresas, only Larry Ellisons and Marisa Mayers, to say nothing of our dearly departed Steve Jobs. (Actually, the diminutive Albanian nun was said to have had a fiery temper and, perhaps, wasn’t so saintly after all.)

For a large, established company, having to use an executive recruiter to find its next CEO carries a profoundly bad aroma. It means that the directors failed at one of their most important duties: succession planning. Behind this first failure, a second one lurks: The Board probably gave the previous CEO free rein to promote and fire subordinates in a way that prevented successors from emerging.

Is this the picture at Microsoft? Is the protracted search for Steve Ballmer’s successor yet another sign of the Board’s dysfunction? For years, Microsoft directors watched Ballmer swing and miss at one significant product wave after another. They sat by and did nothing as he lost key executives. Finally, in January of this year, Board member John Thompson  broke the bad charm and prodded Ballmer to accelerate the company’s strategic evolution, a conversation that led to the announcement, in August, of Ballmer’s “mutually agreed” departure.

Having badly and repeatedly misjudged the company’s business and its CEO, is the Board looking for an impossibly “well-rounded” candidate: the man or woman who can draw the sword from the stone, someone with a heart and mind pure enough to put the company back on track?

For some time now, we’ve been hearing rumors that Ford’s current CEO, Alan Mulally,  could become Microsoft’s new CEO. Mulally is well-respected for his turnaround experience: Since 2006, he’s been busy reviving the family-controlled Ford, the only Detroit automaker that didn’t need (or take) bailout money. Before Ford, Mulally spent 37 years in engineering and executive management positions at Boeing, where he rubbed elbows with Microsoft royalty in Seattle.

As the rumor has it, Mulally would be appointed as a transitional leader whose main charge would be to groom one of Microsoft’s internal candidates and then step aside as he or she assumes the throne. Will it be (the rumor continues) Satya Nadella, Exec VP of  Cloud and Enterprise activities? Or former Skype CEO Tony Bates, now a post-acquisition Microsoftian? Both are highly regarded inside and outside the company.

(I’m surprised there aren’t more internal candidates. Tech pilgrim Stephen Elop is sometimes mentioned, but I don’t see him in the running. Elop has served his purpose and is back in Redmond — some say he never really left — after a roundtrip to Finland during which he Osborned Nokia, thus lowering the price of acquisition by his former and again employer.)

On the surface, this sounds like an ideal arrangement.

And yet…

For all his intellectual and political acumen, his people and communication skills, Mulally possesses no domain knowledge. He has none of the bad and good experiences that would help him understand the killer details as well as the strategic insights that are needed to run Microsoft — insights that, in retrospect, Ballmer lacked.

But, you’ll say, this is no problem; he can rely on the CEO-in-waiting to evaluate situations for him and make recommendations. No. Mulally would have no way to really weigh the pros and cons outside of the streamlined charts in a fair and balanced PowerPoint presentation.

In addition, the grooming process would prolong the company’s confusing interregnum. The people who have to perform actual work at Microsoft will continue to wonder what will happen to the party line du jour when the “real” CEO finally assumes power. The uncertainty discourages risk-taking and exacerbates politics — who knows who’ll come in tomorrow and reverse course?

Fortunately, the Mulally proposition no longer seems likely. The latest set of rumors have Mulally staying at Ford until the end of 2014. Let’s hope they’re right. Wall Street seems to think so… and expressed its disappointment: After regularly climbing for weeks, Microsoft shares dropped by 2.4% on Thursday, Dec 5th, after Mulally declared that he wouldn’t jump ship.

So where does Microsoft turn, and why are they taking so long? Once you put aside the Mr./Ms. Perfect fantasy, there’s no dearth of capable executives with the brains and guts to run Microsoft. These are people who already run large corporations, or are next-in-line to do so. Exec recruiters worth the pound of flesh they get for their services have e-Rolodexes full of such people — some inside the company itself.

Now, place yourself inside the heart and mind of this intelligent candidate:

‘Do I want to work with that Board? In particular, do I want Bill Gates and his pal Steve Ballmer hovering over everything I do? I know I’ll have to make unpopular decisions and upset more than a few people. What’s in it for me – and for Microsoft – in a situation where unhappy members of the old guard would be tempted to go over my head and whine to Bill and Steve? How long would I last before I get fired or, worse, neutered and lose my mind?’

Consider it a litmus test: Any candidate willing to accept this road to failure is automatically disqualified as being too weak. A worthy contender makes it clear that he or she needs an unfettered mandate with no Office Of The Second Guessing in the back of the boardroom. Bill and Steve would have to go — but the Old Duo doesn’t want to leave.

It’s a stalemate…and that’s the most likely explanation for the protracted recruitment process.

We’ll soon know where Microsoft’s Board stands. Will it favor a truly independent CEO or will it cling to its past sins — and sinners?

Or, as a Valley wag asks: Which elephantine gestation will end first, that of Microsoft’s new CEO, or Apple’s equally well-rounded Mac Pro?

JLG@mondaynote.com

 

News: Mobile Trends to Keep In Mind

 

For publishers, developing an all-out mobile strategy has become both more necessary and more challenging. Today, we look at key data points and trends for such a task. 

#1 The Global Picture
– 1.7bn mobile phones (feature phones and smartphones) were sold in 2012 alone
– 3.2bn people use a mobile phone worldwide
– Smartphones gain quickly as phones are replaced every 18 to 24 months
– PCs are completely left in the dust as shown in this slide from Benedict Evans’ excellent Mobile is Eating the World presentation:

ben-evans

The yellow line has two main components:
– 1 billion Android smartphones are said to be in operation worldwide (source: Google)
– 700 million iOS devices have been sold over time, with 500 million still in use, which corresponds to the number of iTunes accounts (source: Asymco, one of the best references for the mobile market.)
– 450 million Symbian-based feature phones are in operation (Asymco.)

#2 The Social Picture 

Mobile phone usage for news consumption gets increasingly tied to social networks. Here are some key numbers :
– Facebook: about 1.19bn users; we don’t exactly know how many are active
– Twitter: 232 million users
– LinkedIn: 259 million users

When it comes to news consumption in a social environment, these three channels have different contributions. This chart, drawn from a Pew Research report, shows the penetration of different social networks and the proportion of the US population who get their news from it.

300_pew

One of the most notable data points in the Pew Report is the concentration of sources for social news:
– 65% say to get their news from one social site
– 26% from two sites
– 9% from three sources or more (such as Google +, LinkedIn)

But, as the same time, these sources are completely intertwined. Again, based on the Pew survey, Twitter appears to be the best distributor of news.

Among those who get their news from Twitter:
– 71% also get their news on Facebook
– 27% on YouTube
– 14% on Google+
– 7% on LinkedIn

Put another way, Facebook collects more than half of the adult population’s news consumption on social networks.

But a closer looks at demographics slightly alters the picture because all social networks are not equal when it comes to education and income segmentation:

If you want to reach the Bachelor+ segment, you will get:
– 64% of them on LinkedIn
– 40% on Twitter
but…
– only 30% on Facebook
– 26% on G+
– 23% on YouTube

And if you target the highest income segment (more than $75K per year), you will again favor LinkedIn that collects 63% of news consumers in this slice, more than Facebook (41%)

Coming back to the mobile strategy issue, despite Facebook’s huge adoption, Twitter appears to be the best bet for news content. According to another Pew survey, the Twitter user is more mobile :

Mobile devices are a key point of access for these Twitter news consumers. The vast majority, 85%, get news (of any kind) at least sometimes on mobile devices. That outpaces Facebook news consumers by 20 percentage points; 64% of Facebook news consumers use mobile devices for news. The same is true of 40% of all U.S. adults overall. Twitter news consumers stand out for being younger and more educated than both the population overall and Facebook news consumers

 And, as we saw earlier, Twitter redistributes extremely well on other social platforms. It’s a no brainer: any mobile site or app should carry a set of hashtags, whether it’s a stream of information produced by the brand or prominent bylines known for their insights.

 #3 The Time Spent Picture

Here is why news is so complicated to handle in mobile environments. According to Flurry Analytics: On the 2 hours and 38 minutes spent each day on a smartphone and an a tablet by an American user, news accounts for 2% as measured in app consumption, which accounts for 80% of time spent. The remaining 20% is spent in a browser where we can assume the share of the news to be much higher. But even in the most optimistic hypothesis, news consumption on a mobile device amounts to around 5 to 6% of time spent (this is correlated by other sources such as Nielsen). Note that this proportion seems to decrease as, in May 2011, Flurry Analytics stated news in the apps ecosystems accounted for 9% of time spent.

This view is actually consistent with broader pictures of digital news consumption, such as these two provided by Nielsen, which show that while users spend 50 minutes per month on CNN (thanks to is broad appeal and to its video content), they only spend 18 minutes on the NYT and a mere 8 minutes on the Washington Post:

300 nielsen

All of the above compares to 6hrs 42min spent on Facebook, 2hrs on YouTube or Yahoo sites.

In actionable terms, this shows the importance of having smartphones apps (or mobile web sites) sharply aimed at providing news in the most compact and digestible way. The “need to know” focus is therefore essential in mobile because catching eyeballs and attention has become increasingly challenging. That’s why The New York Times is expected to launch a compact version of its mobile app (currently dubbed N2K, Need to Know, precisely), aimed at the market’s youngest segment and most likely priced just below $10 a month. (The Times also does it because the growth of digital subscriptions aimed at the upper market is slowing down.) At the other end of the spectrum, the NYT is also said to work on digital magazine for iPad, featuring rich multimedia-narrative on (very) long form such the Pulitzer winning Snow Fall (on that matter, the Nieman analysis is worth a read).

This also explains why the most astute digital publishers go for newsletters designed for mobile that are carefully – and wittily – edited by humans. (One example is the Quartz Daily Brief; it’s anecdotal but everyone I recommended this newsletter to now reads it on a daily basis.) I personally no longer believe in automated newsletters that repackage web site headlines, regardless of their quality. On smartphones, fairly sophisticated users (read: educated and affluent) sought by large media demand time-saving services, to the point content, neatly organized in an elegant visual, and — that’s a complicated subject — tailored to their needs way.

#4 The ARPU View

On mobile devices, the Average Revenue per User should be a critical component when shaping a mobile strategy. First, let’s settle the tablet market question. Even though the so-called “cheap Android” segment  ($100-150 for a plastic device running an older version of Android) thrive in emerging markets, when it comes to extracting significant money from users, the iPad runs the show. It accounts for 80% of the tablet web traffic in the US, UK, Germany, France, Japan, and even China (source: Adobe.)

The smartphone is more complicated. A year ago, many studies made by AppAnnie or Flurry Analytics showed that the iPhone ecosystem brought four times more revenue than Android. More recently, Flurry Analytics ran a story stating that the average app price for Android was $0.06 vs. $0.19 for the iPhone and $0.50 for the iPad.

The gap is closing as Android terminals attracts a growing number of affluent users. Still, compared to iOS, it is notoriously difficult to carry paid-for apps and services in the Android ecosystem, and Android ads remains cheaper. It’s likely to remain the case for quite a while as iOS devices are likely to remain much more expensive than Android ones, and therefore more able to attract high-end demographics and the ads that go to them.

How this impacts a smartphone strategy: Publishers might consider different business models for the two main ecosystems. They could go for fairly sophisticated apps in the iOS world, served  by a well-oiled payment system allowing many flavors of In-App add-ons. By contrast, the Android environment favors a more “go-for-volume” approach; but things could evolve quickly as the Android share of high-end audience grows and as the PlayStore gains in sophistication and gets as friction-free as the AppStore.

frederic.filloux@mondaynote.com

Sound Holiday Thoughts

 

Nothing too serious this week. No Microsoft CEO succession, no Samsung $14B marketing budget exceeding Iceland’s GDP, no Apple Doom. Just Holiday – or Cyber Monday – audio talk.

I used to listen to sound. Now I enjoy music. It started with explosives. I was lucky to be born at a time and place (an arch-communist suburb of post-war Paris) where a 9-year old kid could hopscotch to the drugstore around the corner and buy nitric, sulfuric, or hydrochloric acid, sulfur, potassium chlorate, hydrogen peroxide… and other fascinating wares – among which a flogger with short leather lashes I was also acquainted with. Imagine this in today’s California…

After a minor eye-burn incident, I was firmly redirected towards electronics and started building crystal radios, rudimentary AM sets using a galena (lead sulfide) crystal.

My good fortune continued. In 1955, my parents decided to send their increasingly restive child to a Roman Catholic boarding school in Brittany. What awaited me there, besides a solid classical education, was a geeky Prefect of Discipline who had a passion for hobby electronics. After hours, I would go to his study to read Radio Plans and Le Haut-Parleur — the French equivalents of Nuts and Volts — and salivate over the first OC71 transistor that had just landed on his desk (amazingly, the transistor is still available). This was exciting: Fragile, noisy, power hungry vacuum tubes that required both high and low voltages were going to be replaced by transistors. Numerous, randomly successful projects followed: radios, mono and stereo amplifiers, hacked surplus walkie-talkies.

Years later, in June 1968, I landed a dream job launching HP’s first desktop computer, the 9100A, on the French market. I distinctly recall the exultant feeling: After years of the psycho-social moratorium referred to in an earlier Monday Note, I had entered the industry I love to this day.

With more money, I was able to afford better turntables, tape decks, receivers, amplifiers and, above all, speakers. For a while I started to listen more to the sound they produced than to the music itself. The Lacanians have a phrase for the disease: Regressive Fixation On Partial Objects…

HP had installed an über-geek, Barney Oliver, as head of its Research organization, HP Labs. Adored for his giant intellect and free spirit, Oliver decided stereo amplifiers of the day (early 70′s) were either expensive frauds or noisy trash. Or both. So he raided the HP parts bin and built us a real stereo amplifier. (The manual and schematics are lovingly preserved here.) Four hundred were built. I bought two, because you never know. This was a vastly “overbuilt” device that used high-precision gas chromatograph attenuators with .1dB steps as volume controls. (Most of us have trouble perceiving a 1dB difference.) The power supply had such enormous capacitors that the amplifier would keep “playing” for 25 seconds after it was turned off.

HP, the old, real HP, truly was technophile heaven.

As years passed, I became uncomfortable with the audio arms race, the amps that pushed out hundreds or even thousands of watts, the claims of ever-vanishing .1%, nay. .01% distortion levels, the speakers that cost tens of thousands of dollars. (The Rolls-Royce of audio equipment of the time was…McIntosh.)

A chance encounter with The Audio Critic helped me on the road to recovery. Peter Aczel, the magazine’s publisher and main author is a determined Objectivist Audiophile, a camp that believes that “audio components and systems must pass rigorously conducted double-blind tests and meet specified performance requirements in order to validate the claims made by their proponents”. Committed to debunking Subjectivists‘ claims of “philosophic absolutes” and ethereal nuance, Aczel has attracted the ire of high-end equipment makers who hate it when he proves that their oxygen-free copper cables with carefully aligned grains are no better than 12-gauge zip wire at 30 cents per foot.

(A helpful insight from Aczel: In an A/B audio comparison, the louder gear inevitably wins, so loudness needs to be carefully equalized. This “sounds” like the reason why, over the last two or three decades, wines have increased their alcohol concentration to 14% or more: In tastings, the stronger wine is almost always preferred.)

The real turning point from sound fetishism to music appreciation came in early 2002 when I bought an iMac G4 that came with two small but surprisingly good external loudspeakers:

iMac G4 w Speakers

They won’t fill a concert hall, they can’t compete with my old JBL speakers but coupled with iTunes, the iMac had become a pleasant stereo. (Due, of course, to the improvements in magnetic alloys such as neodymium compounds, more efficient Class D amplifiers, and… but I’ll stop before I relapse.)

A decade later — and skipping the politically incorrect jokes about married men experiencing premature hearing impairment in the high-frequency region of the spectrum — I’m now able to focus on music and expect the reproduction equipment to stay out of the way, in both practical and auditory terms.

Today’s “disk drives” are solid state and store hundreds of gigabytes; CDs and DVDs have all but disappeared; iPods, after a few years in the sun, have been absorbed into phones and tablets. (And we watch iTunes on the road to becoming Apple’s Windows Vista.)

After years of experiment, I’ve come to a happy set of arrangements for enjoying music at home, at work, and on the go. Perhaps these will help your own entertainment. (Needless to say, I bought all the following – and many others – with my own money, and the Monday Note doesn’t receive compensation of any kind.)

At home, I use a Bose Companion V desktop set-up. It consists of two pods, one on each side of the screen, plus a bass module anywhere under the desk. Bose’s idea is to take your PC’s output from a USB port and process it to add an illusion of depth/breadth when sitting at your desk. For me, it works. And the output is strong enough for a family/kitchen/dining room.

That said, I’m not fond of all Bose products. I find the smaller Companion units too bass-heavy, and I didn’t like (and returned) their AirPlay speaker. As for the company’s design sensibility, Amar Bose gave me the evil eye more than 15 years ago when I dared suggest that the industrial design of his Wave System could use updating (I was visiting his Framingham Mountain office with a “noted Silicon Valley electrics retailer”). The design hasn’t changed and is selling well.

At the office, I followed advice from my old friends at Logitech and bought two Ultimate Ears Bluetooth speakers. With a (recently improved) smartphone app, they provide very good stereo sound. At $360/pair, the UE system costs about the same as the Companion V; what UE lacks in the Bose’s power, it makes up for in portability. The only knock is that the mini-USB charging port is under the speaker’s bottom — you have to turn it on its head to charge it..

Speaking of portability, Bose’s Soundlink Mini, another testament to modern speaker and amplifier technology, fits in a bag or roll-aboard and shocks unprepared listeners with its clean, powerful sound and clean design. No discounts on Amazon, which we can attribute to Bose’s unwavering price control and to the system’s desirability.

I kept the best for last: Noise-reducing earphones. The premise is simple: A microphone captures ambient sound, embedded circuitry flips the waveform and adds it into the signal, thus canceling the background noise and allowing us to enjoy our music undisturbed. This is a consumer application of Bose’s first noise-canceling headphones for aviation applications, still considered the domain’s standard. A “pro” set cost about $1,000. Consumer versions are $300 or less.

To my ears, early models were disappointing, they introduced small levels of parasitic noise and featured indifferent music reproduction. Nonetheless, sales were strong.

Later models, from Bose and others, improved both music playback and noise cancelation, but still felt big, unwieldy. Again, a matter of personal preference.

Yielding to the friendly bedside manner of an Apple Store gent, I recently bought a pair of Bose QC 20i “noiseless” earphones (about $300). The earbuds are comfortable and so “skin-friendly” that you forget you’re wearing them (I mention this because comfort will always trump quality). They’re also more secure, less prone to falling out of your ears than are Apple’s own devices.

Now, as I take my evening walk in the streets of Palo Alto enjoying the Bach Partitas, the street noise is barely a whisper, cars seem to glide by as they were all Teslas. For civility and safety, there’s a button to defeat noise reduction, and the mandatory Pause for phone or street conversations. There are other nice details such as a spring-loaded clip for your shirt or lapel, or a dead-battery mode that still lets music — and noise —  come through.

Next week, we’ll return to more cosmic concerns.

JLG@mondaynote.com

The Internet of Things: Look, It Must Work

 

For twenty-five years, we’ve been promised a thoroughly connected world in which our “things” become smarter, safer and save energy. But progress doesn’t seem to match the glowing predictions.

The presentation is straightforward and enticing:

Picture this: A 25¢ smart chip inside a light-bulb socket. Networked through the 110V wires, it provides centralized on-off control and monitors the bulb’s “health” by constantly measuring electrical resistance. Imagine the benefits in a large office, with thousands, or even tens of thousands of fixtures. Energy is saved as lighting is now under central, constantly adaptable control. Maintenance is easier, pinpointed, less expensive: Bulbs are changed at precisely the right time, just before the filament burns out.
Now, add this magic chip to any and all appliances and visualize the enormity of the economic and ease-of-use benefits. This is no dream. . . we’re already working on agreements in energy-conscious Scandinavia.

When did this take place?

There is a one-word giveaway to this otherwise timeless pitch: filament. Incandescent lights have been regulated out of existence, replaced first by CFLs (compact fluorescent lamps — expensive and not so pleasant) and then by LEDs (still expensive, but much nicer).

The pitch, reproduced with a bit of license, took place in 1986. It’s from the business plan of a company called Echelon, the brainchild of Mike Markkula, Apple’s original angel investor and second CEO.

The idea seemed obvious, inevitable: The relentless physics of Moore’s Law would make chips smaller, more powerful, and less expensive. Connected to a central household brain, these chips would control everything from lightbulbs and door locks to furnaces and stoves. Our lives would be safer and easier. . . and we’d all conserve energy.

The idea expresses itself in variations of the core Home Automation concept, the breadth of which you can visualize by googling “home automation images”:

Home Automation Pics copy

In 1992, Vint Cerf, our beloved Internet pioneer, posed with his famous IP On Everything t-shirt:

Vint Cerf T-Shirt IP On Everything copy

This was a modern, ringing restatement of Echelon’s vision: The objects in our homes and offices will have sensors and actuators. . . and a two-way connection to the Internet, to a world of data, applications, people (and, inevitably, marketing trolls).

It’s been a quarter century since Echelon started, more than two decades since Vint Cerf’s pithy yet profound prophecy. We now speak of the Internet Of Things and make bold predictions of billions of interconnected devices.

Earlier this year, Cisco invited us to “capture our share” of the $14.4T (yes, T as in trillion) business opportunity that The Internet of Everything (IoE) will create in the coming decade. Dave Evans, Cisco’s chief futurist, tells us that within ten years we’ll see “50 billion connected things in the world, with trillions of connections among them“.

Maybe. . . but that’s a lot of “things”.

As Network World points out, “[m]ore than 99 percent of physical objects are not now connected to the Internet”. The exact percentage matters less than the existential truth that the obvious, attractive, inevitable idea of a universe of interconnected objects is taking a long, long time to materialize.

Does the concept need a Steve Jobs to coalesce the disparate components into a coherent, vibrant genre? Are important pieces still missing? Or, like Artificial Intelligence (rebranded as Machine Learning in an attempt to soothe the pain of repeated disappointments), are we looking at an ever-receding horizon?

Echelon’s current state (the company went public in 1998) serves as a poster child for the gulf between the $14.4T vision and today’s reality.

First, some context: Mike Markkula, who is still Vice Chairman of Echelon, has assembled a strong Board of Valley veterans who have relevant experience (I know several of them well — these aren’t just “decorative directors”). The company’s Investor Overview offers an impressive Corporate Profile [emphasis mine]:

“Echelon Corporation is an energy control networking company, with the world’s most widely deployed proven, open standard, multi-application platform, selling complete systems and embedded sub-systems for smart grid, smart city and smart building applications. Our platform is embedded in more than 100 million devices, 35 million homes, and 300,000 buildings and powers energy savings applications for smart grids, smart cities and smart buildings. We help our customers reduce operational costs, enhance satisfaction and safety, grow revenues and prepare for a dynamic future.”

But the latest Earnings Call Presentation paints a different picture:

Echelon Q3FY13 Highlights Edited copy

The Gross Margin is good (58.5%), as is the company’s cash position ($56.7M). . . but Echelon’s business is a tiny $18M — about a millionth of Cisco’s predicted motherlode. That’s a decrease of 38% compared to the same quarter last year.

So, we have a company that’s in the hands of competent technologist who have deep knowledge of the domain; a company with real, proven products that have been deployed in millions of homes and offices— but with little revenue to show for its technology and experience.

This seems to be the case for the Everything Connected industry in general. There’s no General Electric, no Microsoft, no Google (the latter abandoned its PowerMeter initiative in 2011).

Why not? The answer might lie in the Echelon presentation already mentioned:

echelin ioT

After more than 25 years of developing devices and platforms, Echelon concludes that the Internet of Things isn’t going to be felt as a direct, personal experience. Instead, it will be mostly invisible: components and subsystems in factories, warehouses, fleets of trucks and buses, office buildings. . .

Consumers certainly don’t have to be sold on the benefits of connected devices. We can’t function without our smartphones, tablets, and PCs. But once we stray outside the really personal computer domain, the desirability of connected devices drops dramatically.

The dream of giving sensors, actuators, and an Internet connection to everyday objects feels good, until one looks at matters of practical and commercial implementation. Will the software in my smart toaster be subject to a licensing agreement? Will it stop toasting if I don’t renew my subscription? (This isn’t just a dystopian strawman; one electric car manufacturer says it can remotely disable the battery if you don’t pay up.)

And then there are the (very real) security and privacy concerns. Could our appliances be hacked? Could my toaster spy on me, collect more data to be used to peddle related goods?

Home automation and security systems seem like a natural fit for the Internet of Things, but they’re still expensive, complicated, and fragile – if not hopelessly primitive. Some connected thermostats, such as the Nest (with its smoke and carbon monoxide detector), work well, but most of them are stubbornly user-hostile.

When we wander into the realm of connected appliances what we see are novelties, fit only for hobbyists and technofetishists (do we really need a toaster that sends a tweet when it’s done?). This is nothing like the smartphone wave, for a simple reason: Appliances are just that, appliances. It’s word we use as an insult to describe a boring car.

JLG@mondaynote.com

 

What to do with $250m in digital journalism? (II)

 

In a previous Monday Note, we looked at an ideal newsroom, profusely funded by Pierre Omidyar and managed by whistleblowing facilitator Glenn Greenwald, a structure that combines the agility of a tech startup with the highest of journalistic standards. Today, we look at the product and the business model.   

Profit or non-profit? Definitely for-profit! First, because the eBay founder’s track record (see this The New Inquiry article) shows a fierce appetite for profitable ventures. And second, because there no such thing as a free and independent media press without a strong business side: financial vulnerability is journalism’s worst enemy while profit breeds scalability. How to make money, then, with a narrow niche such as investigative journalism? Can Omidyar’s venture move beyond the cross-subsidy system that powered legacy media for decades? This weekend, in a FT.com interview, Henry Blodget justified the deluge of eye-grabbing headlines spread over Business Insider by saying “The dining and motoring sections pay for the Iraq bureau”. . .

For this, Omidyar can look at a wide set of choices: he could devise click-driven contents built on the proven high volume / cheap ads equation. Or he could opt for what I’ll call the Porsche Model, one in which the most visible activity (in this case sports car manufacturing) brings only a marginal contribution to the P&L when compared to its financial activities: in 2009, Porsche made $1bn in profit from car sales and almost $7bn betting on Volkswagen stock. More realistically, an endowment-like model sounds natural for a deep-pocketed investor like Pierre Omidyar. Most US universities are doing fine with that model: a large sum of money, the endowment, is invested and produces enough interest to run operations. One sure thing: If he really wants to go against big corporations and finance, to shield it from pressure, Omidyar should keep its business model disconnected from its editorial operation.

Investigative journalism is a field in which the subscription model can work. In France, the web site Mediapart offers a credible example. Known for, among many others feats, its investigation of the Budget Minister’s hidden Swiss bank account that led to its resignation, Mediapart maintains a newsroom of seasoned reporters working on hot topics. In five years, it collected close to 80,000 subscribers paying €9.90 per month; the web site intends to make €6m ($8m) in revenue and a profit of €0.4m ($0.5m) this year. Small amounts indeed, but not so bad for a market one fifth the size of the US. Scaling up to the huge English-speaking market, and assuming that it will go for a global scope rather than a US-centric coverage, the Omidyar-Greenwald venture could shoot for 500,000 to 800,000 subscribers within a few years, achieving $40m to $60m in yearly revenue.

On the product side, the motto should be Try Everything – on multiple segments and platforms.

Here is possible product-line structure:

298 graph

Mobile should primarily be a news updating vector. In a developing story, say hearings on the NSA scandal, readers want quotes, live blogging, snapshots – all easy to grab while on the go. Addiction must be the goal.

Newsletters deserve particular attention. They remain an excellent vector to distribute news and a powerful traffic driver. But this requires two conditions: First, they must be carefully designed, written by human beings and not by robots. Second, they must be run like an e-commerce operation: a combination of mass emailing and heavy personalization based on collected navigation data. For an editorial product, this means mapping out granular “semantic profiles” in order to serve users with tailored contents. If the Omidyar-Greenwald project lives up to its promise, it will deliver a regular stream of exclusive stuff. A cleverly engineered email system (both editorially and technically) stands good chances  to become a must-read.

User profiling must allow the creation of several verticals. Judging who will join the venture from the first bylines (see article in CNet), the coverage intends te be broad: from national security to White House politics, sports issues (a sure click-bait), civil liberties, military affairs, etc. This justifies working on audience segmentation, as not everyone will be interested in the same subject. The same goes for social web extensions: the more segmented, the better.

Web TV. If you want to go beyond kittens or Nascar crashes, providing TV contents on the web is more difficult that it appears. But “programs” available in Scandinavia show that, for developing stories, Web TV can be a great substitute for conventional TV as it allows simultaneous coverage of multiple events. Nordic viewers love that.

Fact-checking. Since the Omidyar-Greenwald project is built. t on trust and transparency, it should consider launching the equivalent of politifact.com, a fact-checking web site operated by the Tampa Bay Times, which landed a Pulitzer Prize in 2009. A vertical fact-checking site on national security, privacy and data protection issue would definitely be a hit.

Other languages. Going after the Chinese market could be hard to resist. According to Internet World Stats, it is by far the largest single market in the world with 538 million people connected to the web in 2012. For a media venture aimed at lifting the veil on corruption, China offers strong potential in itself. As far as evading censorship, it should be an appealing challenge for the squad of hackers hired by Omidyar-Greenwald.

A print version? Yes. It sounds weird, but I strongly believe that a well-designed weekly, large format (tabloid or Berliner), distributed on selected, affluent markets, would complete the product line. Print remains a vector of choice for specific, long-form readings, ambitious news scenographies with high impact photographs, for an in-depth profile or a public interest story.

Global Thinking. Its potential for worldwide reach is one of this venture’s most interesting factors. It will be of limited interest if it doesn’t embrace a global approach to public interest journalism in large democracies but also in countries that are deprived of a free press (a long list). Creating a high standard, worldwide affiliation system to promote investigative journalism everywhere, regardless of the economic and political constraints, should definitely be on the founders’ roadmap.

frederic.filloux@mondaynote.com

Amazon and Apple Business Models

 

Amazon “loses” money, Apple makes tons if it. And yet, Wall Street prefers Jeff Bezos’s losses to Tim Cook’s. A look at the two very different cash machines will help dispel the false paradox.

The words above were spoken by an old friend and Amazon veteran, as three French émigrés talked shop at a Palo Alto watering hole. The riposte would fit as the epigraph for The Amazon Money Pump For Dummies, an explanation of Amazon’s ever-ascending stock price while the company keeps “losing money”.

(I don’t like the term Business Model, and Bizmodel even less so. I prefer Money Pump with its lively evocations: attach the hose, adjust the valves, prime the mechanism, and then watch the flow of money from the customer’s pocket to the investor’s purse).

Last quarter, Amazon’s revenue grew by 24% year-on-year, and lost about 1% of its net sales of $17B. This strong but profitless revenue growth follows an established pattern:

AMZN No Profit Growth copy
Despite the company’s flat-lined profits, Wall Street loves Amazon and keeps sending its shares to new heights. Since its 1997 IP0, AMZN has gone from $23 to $369/share:

298 share 21x
How come?

[Professional accountants: Avert your eyes; the following simplification could hurt.

Profit isn't cash, it's merely an increase in the value of your assets. Such increase can be illiquid. Profit is an accountant's opinion. Cash is a fact.]

Amazon uses its e-commerce genius to prime the money pump. The company seduces customers through low prices, prompt delivery, an ever-expanding array of services and products, and exemplary customer attention. What keeps the pump going is the lag between the moment they ding my credit card and the time that they pay Samsung for the Galaxy Note tablet I ordered. Last quarter, Amazon’s daily revenue was about $200M ($17B divided by 90 days). If it waits just 24 hours to pay its suppliers, the company has $200M to play with. If it delays payment for a month, that’s $6B it can use to invest in developing the business. Delay an entire quarter…the numbers become dizzying.

But, you’ll say, there’s nothing profoundly original there. All businesses play this game, retail chains depend on it. Definitely — but what sets Amazon apart is what it does with that flow of free cash. The company is relentless in building the best services and logistics machine on Earth. Just this week, we read that Amazon has hired the US Post Office to deliver Amazon packages (only) on Sundays.

Amazon uses cash to build a better Amazon that keeps bringing in more cash.

Why do suppliers “loan” Amazon such enormous amounts of cash? Why do they let the company grow on their backs? Because, just like Wall Street, they trust that the company will keep growing and give them ever more business. Amazon might be a hard taskmaster, but it can be trusted to pay its bills (eventually) — the same cannot be said of some other retail organizations.

Amazon doesn’t care that it doesn’t make a “profit” on the sale of a box of Uni-Ball pens that it ships for free. Rather, it focuses on pumping enormous amounts of cash into the virtuous spiral of an ever-expanding business. Wall Street rewards the company with an equally expanding market cap.

How long can Amazon’s expansion last? Will the tree grow to the sky? If we consider a single line of business — books, for example — saturation will inevitably set in. But one of the many facets of Bezos’ genius is that he’s always been able to find new territories. Amazon Web Services is one area where the company is now larger than all of its competitors combined, and shows no sign of slowing down or of approaching saturation.

In the end, we mustn’t be fooled by the simplicity of Amazon’s money pump. Bezos’ genius is in the implementation, in the details. Like a chef who’s not afraid to disclose his recipes, Bezos writes to his shareholders every year — his missives are all here — And he always appends his first 1997 letter, thus reminding everyone that he’s not about to lose the plot.

The other friend in this conversation, an old Apple hand, happily nodded along as our ex-Amazon compatriot told stories from his years in the Seattle trenches. When asked about the Apple money pump and why Wall Street didn’t seem to respect Apple’s huge profits, he started with an epigraph of his own:

The simplest encapsulation of Apple’s business model is the iPod.

To paraphrase: The iPod is the movie star, it brings the audience flocking to the theatre; iTunes is the supporting cast.

iTunes was initially perceived as a money-losing operation, but without it the iPod would have been a good-looking but not terribly useful piece of hardware. iTunes propelled iPod volumes and margin by providing an ecosystem that comprised two innovations: “music by the slice” (vs. albums,) and a truly new micro-payment system (99 cents charged to a credit card).

That model is what powers the Apple money pump today. The company’s personal computers — smartphones, tablets, and laptops/desktops — are the movie stars. Everything else exists to make these lead products more useful and pleasant. Operating systems, applications, stores, Apple TV, the putative iWatch…they’re all part of the supporting cast.

Our Apple friend offered another thought: The iPod marked the beginning of the Post-PC era. By 2006 — a year before the introduction of the iPhone — iPod sales had exceeded Mac revenue.

Speaking of cash, Apple doesn’t need to play Amazon’s timing games. Product margins range from 20-25% for desktops and laptops (compared to HP’s 3-5%), to 65% or more for iPhones. With cash reserves reaching $147B at the end of September 2013, Apple has had to buy shares back and pay dividends to bleed off the excess.

Far from needing a “loan” from its suppliers, Apple heads in exactly the opposite direction. On page 37 of the company’s 2013 10-K (annual) filing, you’ll find a note referring to “third-party manufacturing commitments and component purchase commitments of $18.6 billion“. This is a serious cash outlay, an advance to suppliers to secure components and manufacturing capacity that works out to $50 for every person in the US…

Wall Street’s cautious regard for Apple seems ill-advised given Apple’s ability to generate cash in embarrassing amounts. As the graph below shows, after following a trajectory superficially similar to Amazon’s, Apple apparently “fell from grace” in 2012:

298 fall from grace
I can think of two explanations, the first one local, the other global.

During Fiscal 2012, ending in September of that year, Apple’s Gross Margins reached an unprecedented high of 43.9%. By all standards, this was extremely unusual for a hardware company and, as it turned out, it was unsustainable. In 2013, Apple Gross Margin dropped by more than 6 percentage points (630 basis points in McKinsey-speak), an enormous amount. Wall Street felt the feast was over.

Also, Fiscal 2013 was seen as a drought year. There were no substantial new products beyond the iPhone 5 and the iPad mini announced in September and October 2012, and there was trouble getting the new iMacs into customers’ hands during the Holiday season.

More globally important is the feeling that Apple has become a “hits” business. iPhones now represent 53% of Apple’s revenue, and much more (70%?) of its profits. They sell well, everything looks rosy…until the next season, or the next round of competitive announcements.

This is what makes Wall Street nervous: To some, Apple now looks like a movie studio that’s too dependent on the popularity of its small stable of stars.

We hear that history will repeat itself, that the iPhone/iPad will lose the battle to Android, just as the Mac “lost” to Windows in the last century.

Our ex-Apple friend prefers an automotive analogy. Audi, Tim Cook’s preferred brand, owns a small portion of the luxury car market (about 7.5%), but it constantly posts increasing profits — and shows no sign of slacking off. Similarly, today’s $21B Mac business holds a mere 10% of the PC market, but Apple “uses” that small share to command 45% of market profits. The formula is no secret but, as with Amazon’s logistics and service, the payoff is in the implementation, how the chef combines the ingredients. It’s the “mere matter of implementation” that eluded Steve Ballmer’s comprehension when he called the MacBook an Intel laptop with an Apple logo slapped on it. Why wouldn’t the Mac recipe also work for smartphones and tablets?

JLG@mondaynote.com