Elon Musk’s Sweet Revenge

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JLG@mondaynote.com

Carriers Still Think We’re Idiots

 

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

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

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

Lucky man.

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

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

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

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

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

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

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

T-Mobile’s pitch:

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

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

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

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

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

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

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

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

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

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

JLG@mondaynote.com

This Wristband Could Change Healthcare

 

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

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

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

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

His goal is nothing less than disrupting the healthcare system.

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

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

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

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

frederic.filloux@mondaynote.com

Apple Buys Intel

 

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

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

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

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

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

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

Apple needs something bigger.

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

Buy Intel.

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

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

Quattrone has their attention. He unfolds the celestial calibration:

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

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

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

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

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

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

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

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

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

Borrow? When they have so much cash?

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

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

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

JLG@mondaynote.com

 

 

What’s the Fuss About Native Ads?

 

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

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

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

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

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

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

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

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

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

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

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

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

frederic.filloux@mondaynote.com

The App Store: Good Deeds, Poor Communication

 

Apple does the right thing when striving to keep its App Store free from promotional trickery – but fails to shed light on the process and, as a result, damages its reputation.

Earlier this month, the Apple App Store removed the popular AppGratis application from its shelves. Then, last week, the App Store censors delivered a decisive blow by suppressing AppGratis’ push notifications to installed apps.
Apple’s reason for the ban: “… the app circumvented App Store rules preventing applications promoting other apps and direct marketing.”

AppGratis CEO Simon Dawlat took to the airwaves, loudly protesting his innocence. The aggrieved entrepreneur criticized Apple’s arbitrary and inconsistent approval process and “out of the blue” removal of AppGratis. He launched an online petition that gathered 571K signatures in just a few hours. He convinced Fleur Pellerin, France’s Minister of Digital Technologies, to run to the wounded company’s bedside and join the protest. Minister Pellerin added a bit of saber-rattling, calling Apple’s actions “brutal” and hinting at plans to ask the EU to examine the takedown.

But then the PR tide turned. An AppGratis document leaked to Business Insider by a “source in the developer community” hints at the company’s unspoken business model: AppGratis will raise your app’s rating in the App Store – for a fee.

Specifically, AppGratis gives developers an estimate of where in Apple’s App Store rankings an App can land based on how much the developer is willing to pay… [The] document shows AppGratis estimates a ~$300,000 buy will land an app in the top five slot in the US version of the App Store.

$300k is a lot of money for a small app developer, but the promise is that the higher ranking will result in increased revenue that will more than cover AppGratis’ “service fee”.

Before the e-dust could settle, Dawlat posted a long-winded blog entry that I assume was meant as a rebuttal. Here’s an excerpt:

People have “accused us” of gaming the top. But the reality is that with or without the “rankings,” our community will still drive millions of installs for the apps we feature. Independently from the App Store. We have never based our business on ranking exposure, because we’ve always expected Apple to chime in at some point, and change that. 

He then went on to announce AppGratis’ “crazy cool” old-yet-new direction [emphasis mine]:

And even more exciting, we’re back to our roots. A crazy cool daily newsletter with millions of subscribers, that will very soon be complemented by the newest and nicest HTML5 WebApp you’ll ever see. Two things we fully own, and that no one can take away from us. So when I stated a week ago that the reports of our death were greatly exaggerated, I wasn’t kidding. Not kidding at all. AppGratis is just getting started.
Because from the bottom of our hearts, we know we add value to this whole ecosystem.
And we intend to keep doing just that.

To shed light on this complicated situation, let’s use an analogy. And since this about a French company, Apple will be represented by Carrefour, the hypermarché giant — something like Walmart, but less polite. If you ask to have your groceries packed up, the cashier throws a plastic bag at you and tells you to do it yourself. You’ll be playing Simon Dawlat.

You approach Carrefour with your unique line of heirloom yogurts made from free range goat milk. It’s an interesting product, but is Carrefour obligated to give you shelf space? Of course not. The store may be inelegant and the staff is rude, but the company has its standards. Carrefour offers to take you on if you agree to its rules concerning shelf displays and promotional activities.

One day, a store manager notices the coupons you’ve enclosed in your yogurt packs. These coupons promote other products that Carrefour stocks, offered at lower prices when purchased on-line. When asked about it, you finally admit that, yes, some of the other manufacturers pay you to include their coupons with your yogurt. Carrefour management throws a plastic bag at you and tells you to pack up and go home. Their store, their rules.

(The analogy is both transparent and flawed. There’s no perfect physical retail analogue for AppGratis’ virtual schtick — getting paid to bubble an app up the App Store rankings. And the App Store doesn’t have a great real-world analogue, either. The App Store’s raison d’être is to make iPhone and iPads more valuable; it’s not a business in itself. But you get the idea.)

To touch on the obvious, Apple isn’t obligated to publish AppGratis or any other app, regardless of a developer’s adherence to the rules.

As for the rules themselves, I read through the App Store Review Guidelines, bracing myself for Apple’s usual hauteur. What I found was a personable, (mostly) well-written document that addresses a number of complicated issues while (mostly) avoiding the opaque legalese found in the licensing agreements we all stopped reading long ago.

The rule that’s most pertinent to the AppGratis case is this [emphasis mine]:

If you attempt to cheat the system (for example, by trying to trick the review process, steal data from users, copy another developer’s work, or manipulate the ratings) your Apps will be removed from the store and you will be expelled from the developer program.

There seems little doubt that AppGratis crossed this line: Its business model is precisely one of artificially enhancing an app’s ratings.

This isn’t a new issue. In September 2012, Apple added a clause (section 2.25) to the Guidelines:

Apps that display Apps other than your own for purchase or promotion in a manner similar to or confusing with the App Store will be rejected.

A good deal of discussion ensued, most of which made clear what awaited AppGratis and others such as FreeAppADay, AppoDay, Daily App Dream, and App Shopper. As explained in a PocketGamer post [emphasis mine]:

The wording is typically vague, but clause 2.25 appears to give Apple carte blanche to put any app that promotes titles from a different developer out of action.
At the moment, we understand Apple’s likely prime targets are pure app promotion services, such as (but not necessarily including) FreeAppADay, AppoDay, AppGratis, Daily App Dream and AppShopper, amongst others.

That clause 2.25 was introduced more than six months ago puts Dawlat’s claim that Apple acted “out of the blue” and Minister Pellerin’s accusation of “brutality” in a different light: Dawlat had ample notice of Apple’s intent.

(Minister Pellerin might now be wondering if her staff performed sufficient research before letting her run to Dawlat’s rescue…or maybe not. Half-baked technopolicy is becoming politics-as-usual in France. Last year, the newly-elected government ran afoul of high-tech entrepreneurs when it announced legislation that would greatly increase taxes on their equity gains, only to beat a hasty half-retreat, leaving the tax question muddier than ever. Perhaps the AppGratis snafu was perceived as an opportunity to earn back some of the lost credit, especially when portraying the situation as a French David vs. an American Goliath.)

Ultimately, Dawlat’s cry of foul will probably be seen as disingenuous and tiresome, not to mention a wasteful distraction… Do the critics of the App Store approval process consider the noise level that approvers must endure? To get to the current 700,000 apps, the company has to scrutinize more than 3,000 new entries a week plus revisions of existing apps. Mistakes will be made. Some apps will be approved only to be yanked when their scheme becomes obvious. Developers will be incensed, and Apple, sensibly, has anticipated the backlash:

If your app is rejected, we have a Review Board that you can appeal to. If you run to the press and trash us, it never helps.

So it’s case closed, right?

Not quite. There remains the problem of perception.

I can’t provide a link to the Guidelines in this Note because the document is only accessible to dues-paying developers (of which I am one). There’s nothing mysterious, secret, or dangerous about these words, they provide no competitive insight that could work to Apple’s disadvantage. Charging a developer just to read the rules gains nothing, and contributes to Apple’s negative image. Attempting to keep them out of the public eye is insulting and futile – developers freely leak and comment on the content.

Far worse is that Apple appears to have a policy (with very few allowances) of refusing to publicly explain its App Store decisions. I realize that some judgments are ineffable, matters of taste, as explained in the Guidelines:

We will reject Apps for any content or behavior that we believe is over the line. What line, you ask? Well, as a Supreme Court Justice once said, “I’ll know it when I see it”. And we think that you will also know it when you cross it.

Apple isn’t wrong to reserve the right to make such decisions. Although insiders may depict the company as obsessive control freaks, “normal” customers seem to appreciate Apple’s efforts to keep the App Store a Clean, Well-Lighted Place.

But maintaining a stony silence when imposing a judgment call is a bad choice, it distances developers, and it inevitably triggers controversy. A few words of explanation would invite respect for having courageously taken a difficult stance.

As already discussed in a recent Monday Note (Apple is Losing The War – Of Words), I find the company’s refusal to engage in more public debate harmful and disrespectful. While the AppGratis incident in itself isn’t overly important, it could be an opportunity for Apple to reconsider its ways.

JLG@mondaynote.com

 

A lesson of Public e-Policy

 

The small Baltic republic of Estonia is run like a corporation. But its president believes government must to play a crucial role in areas of digital policy such as secure ID. 

Toomas Hendrik Ilves must feel one-of-a-kind when he attends international summits. His personal trajectory has nothing in common with the backgrounds of other heads of state. Born in Stockholm in 1953 where his parents had taken refuge from the Soviet-controlled Estonia, Ilves was raised mostly in the United States. There, he got a bachelor’s degree in psychology from Columbia University and a master’s degree in the same subject from the University of Pennsylvania. In 1991, when Estonia became independent, Ilves was in Munich, working as a journalist for Radio Free Europe (he is also fluent English, German and Latin.) Two years later, he was appointed ambassador to — where else? — the United States. In 2006, a centrist coalition elected him president of the republic of Estonia (1.4m inhabitants).

One more thing about Toomas Hendrik Ilves: he programmed his first computer at the age of 13. A skill that would prove decisive for his country’s fate.

Last week in Paris, president Ilves was the keynote speaker at a conference organized by Jouve Group, a 3,000 employees French company specialized in digital distribution. The bow-tied Estonian captivated the audience with his straight speech, the polar opposite of the classic politician’s. Here are abstracts from my notes:

“At the [post-independence] time, the country, plagued by corruption, was rather technologically backward. To give an example, the phone system in the capital [Tallinn] dated back to 1938. One of our first key decisions was to go for the latest digital technologies instead of being encumbered by analog ones. For instance, Finland offered to provide Estonia with much more modern telecommunication switching systems, but still based on analog technology. We declined, and elected instead to buy the latest digital network equipment”.  

Estonia’s ability to build a completely new infrastructure without being dragged down by technologies from the past (and by the old-guard defending it) was essential to the nation’s development. When I later asked him about the main resistance factors he had encountered, he mentioned legacy technologies: “You in France, almost invented the internet with the Minitel. Unfortunately, you were still pushing the Minitel when Mosaic [the first web browser] was invented”. (The videotext-based system was officially retired at last in… 2012. France lost almost a decade by delaying its embrace of Internet Protocols.)

The other key decision was introducing computers in schools and teaching programming on a large scale. Combined to the hunger for openness in a tiny country emerging from 45 years of Soviet domination, this explains why Estonia has become an energetic tech incubator, nurturing big names like Kazaa or Skype (Skype still maintains its R&D center in Tallinn.)

“Every municipality in Estonia wanted to be connected to the Internet, even when officials didn’t know what it was. (…) And we played with envy…. With neighbors such as Finland or Sweden, the countries of Nokia and Ericsson, we wanted to be like them.”  

To further encourage the transition to digital, cities opened Internet centers to give access to people who couldn’t afford computers. If, in Western Europe, the Internet was seen as a prime vector of American imperialism, up in the newly freed Baltic states, it was seen as an instrument of empowerment and access to the world:

“We wanted a take the leap forward and build a modern country from the outset. The first public service we chose to go digital was the tax system. As a result, not only we eliminate corruption in the tax collection system — a computer is difficult to bribe –, but we increased the amount of money the state collected. We put some incentives in: When filing digitally, you’d get your tax refund within two weeks versus several months with paper. Today, more than 95% of tax returns are filed electronically. And the fact that we got more money overcame most of the resistance in the administration and paved the way for future developments”. 

“At some point we decided to give to every citizen a chip-card… In other words, a digital ID card. When I first mentioned this to some Anglo-saxon government officials, they opposed the classic ”Big Brother” argument. Our belief was, if we really wanted to build a digital nation, the government had to be the guarantor of digital authentication by providing everyone with a secure ID. It’s the government’s responsibility to ensure that someone who connects to an online service is the right person. All was built on the public key-private key encryption system. In Estonia, digital ID is a legal signature.The issue of secure ID is essential, otherwise we’ll end-up stealing from ourselves. Big brother is not the State, Big Brother lies in Big Data.”

“In Estonia, every citizen owns his or her data and has full access to it. We currently have about 350 major services securely accessible online. A patient, never gets a paper prescription; the doctor will load the prescription in a the card and the patient can go to any pharmacy. The system will soon be extended to Sweden, Denmark, Finland, Norway, as our citizens travel a lot. In addition, everyone can access their medical records. But they can chose what doctor will see them. I was actually quite surprised when a head of State from Southern Europe told me some paper medical records bear the mention “not to be shown to the patient” [I suspect it was France...]. As for privacy protection, the ID chip-card works both ways. If a policeman wants to check on your boyfriend outside the boundaries of a legal investigation, the system will flag it — it actually happened.” 

As the Estonian president explained, some good decisions also come out of pure serendipity,:

“[In the Nineties], Estonia had the will but not all the financial resources to build all the infrastructure it wanted, such as massive centralized data centers. Instead, the choice was to interconnect in the most secure way all the existing government databases. The result has been a highly decentralized network of government servers that prevent most abuses. Again, the citizen can access his health records, his tax records, the DMV [Department of Motor Vehicles], but none of the respective employees can connect to another database”.

The former Soviet Union had the small Baltic state pay the hard price for its freedom. In that respect, I recommend reading CyberWar by Richard Clarke, a former cyber-security advisor in the Clinton administration, who describes multiple cyber-attacks suffered by Estonia in 2007. These actually helped the country develop skillful specialists in that field. Since 2008, Tallinn harbors NATO’s cyber defense main center in addition to a EU large-scale IT systems center.

Toomas Hendrik Ilves stressed the importance of cyber-defense, both at the public and private sector level:

“Vulnerability to a cyber attacks must be seen as a complete market failure. It is completely unacceptable for a credit card company to deduct theft from its revenue base, or for a water supply company to invoke cyber attack as a force majeure. It is their responsibility to protect their systems and their customers. (…) Every company should be aware of this, otherwise we’ll see all our intellectual property ending up in China”. 

–frederic.filloux@mondaynote.com

Privacy: You Have Nothing To Fear

 

Pervasive sensors and IP connections, coupled with the “infinite” storage and computing power in the Cloud, threaten our privacy. We need to defend ourselves and get control of our personal data amassed by private companies and government agencies.

Optimists and pessimists may inhabit opposing camps, but they do have one thing in common: Their inclinations lead to behaviors that verify their prophecies. I’ve chosen my side: I’m an optimist and have been rewarded accordingly. As a reminder of my attitude, to make sure that the occasional frustrations don’t derail my determination, I keep a little figurine from the Provençal Crèche (Nativity Scene) on my desk. He’s called Lou Ravi, the Enraptured One:

The traditional characterization is that of a gent who wanders the world, innocently marveling at the simplest of miracles. (At times, I wonder if he isn’t just a polite version of the village idiot.)

Recently, a seemingly trivial incident cast a shadow over my life-long optimism, an event that awakened dark thoughts about technology’s impact on our privacy.

As I’m driving on the A10 not-so-freeway towards the Loire châteaux, I see my license plate displayed on a sign that tells me that I’m exceeding the speed limit (130kph, about 80mph). This is novel… where we used to have an anonymous flashing nag, now we’re individually fingered. On the one hand, it’s certainly more helpful than a broad, impersonal warning; on the other, it’s now personal.

Stirred from my enraptured stupor, I start counting other ways in which we’re targeted.

Staying within the realm of license plates, we have an official, Wikipedia-sanctioned acronym: ALPR, the Automatic License Plate Reader, a device that’s used (or mis-used) by municipalities to scan every vehicle that enters the city’s limits. An ALPR system is already operational in ritzy Tiburon just north of the Golden Gate Bridge, and it’s being considered in ritzier Piedmont, an island of wealth surrounded by Oakland. The NYPD has used mobile license plate readers to build a “database of 16 million license plates, along with locations where the car was spotted”. (A Google search for Automatic License Plate Reader yields more than 1M hits.)

We also have various flavors of “event data recorders” in our cars. Similar to a plane’s black box, an EDR can regurgitate the sequence of events that preceded a crash. According to the NHTSA (National Highway Traffic Safety Administration), 96% of all 2013 vehicles carry such a device and there is a proposal to make them mandatory in 2015 models.

Insurance companies see the EDR as an opportunity to better evaluate risk so they can offer lower premiums to good drivers. Privacy advocates are concerned that the data could be used for less benevolent purposes:

Though the information is being collected with the best of intentions – safer cars or to provide drivers with more services and conveniences – there is always the danger it can end up in lawsuits, or in the hands of the government or with marketers looking to drum up business from passing motorists.

Again, if you Google “car black box recorder”, you get about 6M hits and a wide range of third-party devices. Some come with a dashboard camera such as we see in American patrol cars (and that have been adopted by a huge number of Russian drivers); others plug into the OBD-II (On-Board Diagnostic) connector that’s present on all modern cars. Combined with accelerometers and precision GPS recording, these draw a very accurate picture of everything we do at the wheel, where, when and how.

It’s not all sinister: With appropriate software, weekend track drivers can visualize and analyze their braking, acceleration, and effective use of apexes. Still, the overall picture is one of omnipresent surveillance. And I’m certainly not encouraged when I read that “anyone with a handheld scanner and access to the port under your steering column can download a wealth of information about your vehicle.”

The regard for privacy that’s demonstrated by the public sector — the government agencies that can have an enormous impact on our lives — is also less than encouraging. We now realize that the IRS reads our email without requiring any authorization or judicial supervision; the DEA complains about iMessage encryption; we have National Security Letters that confer broad and little-supervised snooping powers to US government agencies.

On the private side, Google, Facebook, and cellular carriers amass and trade on our personal data, again, with little or no practical oversight. Try asking any of these companies what sort of information they have on you, to whom they sell it, and if you can have a peek at it.

The litany goes on: Escalating healthcare expenditures give insurers equally escalating incentives to acquire personal behavior data in order to improve their risk calculation (and reject claims). We’re photographed, videoed, and, now, face-recognized everywhere. Try counting the cameras that see you on the street, in stores, elevators, offices.

When we worry about such practices, we get the sort of rote retort infelicitously typified by Eric Schmidt: “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”

Sure, if you have nothing to hide, you have nothing to fear. All you need to do is lead a pristine life. Drive carefully; wait for the green light before you cross the street; eat a balanced diet; don’t take, view, or exchange the wrong pictures; don’t consort with undesirable people; don’t say or write bad words; don’t inhale the wrong smoke…

This is unrealistic.

If there is nowhere to hide, how can disagreements safely ferment in political life, at work, in relationships? By definition, change disturbs something or annoys someone. And, moving to paranoia, or full awareness, the age-old question arises: Who will guard us from the guardians?

Returning to my now slightly-strained optimism, I hope we’ll support the people and organizations, such as the ACLU and many others, who work for our privacy, and that we’ll use our votes to unseat those who sell us out to private and state encroachers. We can start with demanding a handle on who has what data on us. Playing on Habeas Corpus, it’s already called Habeas Data.

I’m curious to see what Google, Verizon, Orange, Facebook, Amazon and many others know about me. Insights await…

JLG@mondaynote.com

Schibsted’s High Octane Diversification

 

The Norwegian media group Schibsted now aggressively invests in startups. The goal: digital dominance, one market at a time. France is in next in line. Here is a look at their strategy. 

This thought haunts most media executives’ sleepless nights:My legacy business is taking a hit from the internet; my digital conversion is basically on track, but it goes with an massive value destruction. We need both a growth engine and consolidation. How do we achieve this? What are our core assets to build upon? Should we undertake a major diversification that could benefit from our brand and know-how?” (At that moment, the buzzer goes off, it’s time to go to work.) Actually, such nighttime cogitations are a good sign, they are the privilege of people gifted with long term view.

The Scandinavian media power house Schibsted ASA falls into the long-termist category.  Key FY 2012 data follow. Revenue: 15bn Norwegian Kroner (€2bn or $2.6bn.); EBIT: 13.5%. The group currently employs 7800 people spread over 29 countries. 40% of the revenue and 69% of the EBITDA come from online activities. Online classifieds account for 25% of revenue and 52% of the EBITDA; the rest in publishing. (The usual disclosure: I worked for Schibsted between 2007 and 2009, in the international division).

The company went through the delicate transition to digital about five years ahead of other media conglomerates in the Western world. To be fair, Schibsted enjoyed unique conditions: profitable print assets, huge penetration in small Nordic markets immune to foreign players, a solid grasp of all components of the business, from copy sales to subscribers for newspapers and magazines, to advertising and distribution channels. In addition, the group enjoys a stable ownership structure (controlled by a trust), and its board always encourages the management to aim high and take risks. The company is led by a lean team: only 60 people at the Oslo headquarters to oversee the entire operations, largely staffed by McKinsey alumni.

The transition began in 1995 when Schibsted came to realize the media sector’s center of gravity would inevitably shift to digital. The move could be progressive for reading habits but it would definitely be swift and hard for critical revenue streams such as classifieds and consumer services. Hence the unofficial motto that’s still remains at the core of Schibsted’s strategy: Accelerating the inevitable (before the inevitable falls on us). Such view led to speeding up the demise of print classifieds, for instance, in order to free oxygen for emerging digital products. Not exactly popular at the time but, thanks to methodical pedagogy, the transition went well.

One after the other, business units moved to digital. Then, the dot-com crash hit. In Norway and Sweden, Schibsted media properties where largely deployed online with large dedicated newsrooms, emerging consumer services built from scratch or from acquisitions. Management wondered what to do: Should we opt for a quick and massive downsizing to offset a brutal 50% drop in advertising revenue? Schibsted took the opposite tack: Yes business is terrible, but this is mostly the result of the financial crisis; the audience is still here, not only it won’t go away but, eventually, it will experience huge growth. This was the basis for two key decisions: Pursuing investments in digital journalism while finding ways to monetize it; and doing whatever it took in order to dominate the classifieds business.

In Sweden, a bright spot kept blinking on Schibsted’s radar. Blocket was growing like crazy. It was a bare-bone classifieds website, offering a mixture of free and premium ads in the simplest and most efficient way. At first, Schibsted Sweden tried to replicate Blocket’s model with the goal of killing it. After all, the group thought, it had all the media firepower needed to lift any brand… Wrong. After a while, it turned out Schibsted’s copycat  still lagged behind the original. In the kind of pragmatism allowed by deep pockets, Schibsted decided to acquire Blocket (for a hefty price). The clever classifieds website will become the matrix for the group’s foray in global classifieds.

In 2006, Schibsted had acquired and developed a cluster of consumer-oriented websites, from Yellow-Pages-like directories, to price-comparisons sites, or consumer-data services. Until then, the whole assemblage had been built on pure opportunism. It was time to put things in order. Hence, in 2007, the creation of Tillväxmedier, the first iteration of Schibsted Development. (The Norwegian version was launched in 2010 and the French one starts this year).

Last week in Paris, I met Richard Sandenskog, Tillväxmedier’s investment manager and Marc Brandsma, the newly appointed CEO of Schibsted Development France. Sandenskog is a former journalist who also spent eight years in London as a product manager for Yahoo!  Brandsma is a seasoned French entrepreneur and former venture capitalist. Despite local particularisms precluding a dumb replication of Nordic successes, two basics principles remain:

1. Invest in the number one in a niche market, or a potential number one in a larger one. “In the online business, there is no room for number two”, said Richard Sandenskog. “We want to leverage our dominance on a given market to build brands and drive traffic. The goal is to find the best way to expose the new brand in different channels and integrate it in various properties. The keyword is relevant traffic. We don’t care for page views for their sake, but for the value they bring. We see clicks as a currency.”

2. Picking the right product in the right sector. In Sweden, the Schibsted Developement portfolio evolves around the idea of empowering the consumer. To sum up: people are increasingly lost in a jungle of pricing, plans, offers, deals, for the services they need. It could be cell phones, energy bills, consumer loans… Hence a pattern for acquisitions: a bulk purchase web site for electricity (the Swedish market is largely deregulated with about 100 utilities companies); a helper to find the best cellular carrier plan based on individual usage; a personal finance site that lets consumers shop around for the best loan without degrading their credit rating; a personal factoring service where anyone can auction off invoices, etc.
Most are now #1 on their segment. “We give the power back to the consumer, sums up Richard Sandenskog. We are like Mother Teresa but we make money doing it….” Altogether, Tillväxmedier’s portfolio encompasses about 20 companies that made a billion of Swedish Kröner (€120m, $155m) in 2012 with a 12% EBITDA (several companies are in the growth phase.) All in five years…

France will be a different story. It’s five times bigger than Sweden, a market in which startups can be expensive. But what triggered Schibsted ASA’s decision to create a growth vehicle here is the spectacular performance of the classifieds site LeBoncoin.fr (see a previous Monday Note Schibsted’s extraordinary click machines): €98m in revenue and a cool 68% EBITDA last year. LeBoncoin draws 17m unique viewers (according to Nielsen). Based on this valuable asset, explains Marc Brandsma, the goal is to create the #1 online group in France (besides Facebook and Google). “The typical players we are looking for are B2C companies that already have a proven product — we won’t invest in PowerPoint presentations — driven by a management team aiming to be the leader in their market. Then we acquire it; we buy out all minority shareholders if necessary”. No kolkhoz here; decisions must be made quickly, without interference. “At that point, adds Brandsma we tell managers we’ll take care of growth by providing traffic, brand notoriety, marketing, all based on best practices and proven Schibsted expertise”. Two sectors Marc Brandsma says he won’t touch, though: business-to-business services and news media (ouch…)

frederic.filloux@mondaynote.com

Facebook Home: Another Android Lock Pick

 

Facebook’s new Home on Android smartphone is an audacious attempt to demote the OS to a utility role, to keep to itself user data Android was supposed to feed into Google’s advertising business. Google’s reaction will be worth watching.

Amazon’s Kindle Fire, announced late September 2011, is viewed as a clever “Android lock pick“. Notwithstanding the term’s illicit flavor, Amazon’s burglary is entirely legal, an intended consequence of Google’s decision to Open Source their Android mobile operating system. Download the Android source code here, modify it to your heart’s — or business needs’ — content, load it onto a device and sell as many as you’d like.

Because it doesn’t fully meet the terms of the Android Compatibility Program, Amazon’s proprietary version isn’t allowed to use the Android trademark and the company had to open its own App Store. In industry argot, Amazon “forked” Android; they spawned an incompatible branch in the Android Source Tree.

The result of this heretic version of Android is a platform that’s tuned to Amazon’s own needs: Promoting its e-commerce without feeding Google’s advertising money pump.

And that brings us to Facebook’s new Home.

(The company’s slick presentation is here. Business Insider’s also provides a helpful gallery.)

Zuckerberg’s new creation is the latest instance of the noble pursuit of making the user’s life easier by wrapping a shell around existing software. Creating a shell isn’t a shallow endeavor; Windows started its life as a GUI shell wrapped around MS-DOS.  Even venerable Unix command line interfaces such as C shell, Bourne, and Bash (which can be found inside OS X) are user-friendly — or “somewhat friendlier” — wrappers around the Unix kernel. (Sometimes this noble pursuit is taken too far — remember Microsoft’s Bob? It was the source of many jokes.)

Facebook Home is a shell wrapped around Android; it’s a software layer that sits on top of everything else on your smartphone. Your Facebook friends, your timeline, conversations, everything is in one place. It also gives you a simple, clean way to get to other applications should you feel the need to leave the Facebook corral… but the intent is clear: Why would you ever want to leave Home?

This is audacious and clever, everything we’ve come to expect from the company’s founder.

To start with, and contrary to the speculation leading up to the announcement, Facebook didn’t unveil a piece of hardware. Why bother with design, manufacture, distribution and support, only to sell a few million devices — a tiny fraction of your one billion users — when you can sneak in and take over a much larger number of Android smartphones at a much smaller cost?

Second, Home is not only well-aligned with Facebook’s real business, advertising revenue, it’s even more aligned with an important part of the company’s business strategy: keeping that revenue out of Google’s hands. Android’s only raison d’être is to attract a captive audience, to offer free services (search, email, maps…) in order to gain access to the users’ actions and data, which Google then cashes in by selling eyeballs to advertisers. By “floating” above Android, Home can keep these actions and data to itself, out of Google’s reach.

Facebook, like Amazon, wants to keep control of its core business. But unlike Amazon, Facebook didn’t “fork” Android, it merely demoted it to an OS layer that sits underneath the Home shell.

On paper and in the demos, it sounds like Zuckerberg has run the table… but moving from concept to reality complicates matters.

First, Facebook Home isn’t the only Android shell. An important example is Samsung, the leading Android player: it provides its own TouchWiz UI. Given that the Korean giant is obviously determined to stay in control of its own core business, one wonders how the company will welcome Facebook Home into the family of Galaxy phones and phablets. Will it be a warm embrace, or will Samsung continually modify its software in order to keep Home one step behind?

More generally, Facebook has admitted that differences in Android implementations prevent the first release of Home from working on all Android phones. In order to achieve the coverage they’ll need to keep Google (and its Google+ social networking effort) at bay, Facebook could be sucked into a quagmire of development and support.

Last but not least, there’s Google’s reaction.

So far, we’ve heard little but mellifluous pablum from Google in response to Home. (Microsoft, on the other hand, quickly attempted to point out that they were first with an all-your-activities-friends-communications shell in Windows Phone but, in this game, Android is the new Windows and Microsoft is the Apple of the early 90′s.)

Google has shown that it can play nice with its competitors — as long as they aren’t actually competing on the same turf. The Mountain View company doesn’t mind making substantial ($1B or more) Traffic Acquisition payments to Apple because the two don’t compete in the Search and Advertising business. Facebook taking over an Android smartphone is another matter entirely. Google and Facebook are in the same game; they both crave access to user data.

Google could sit back and observe for a while, quantify Facebook’s actual takeover of Android phones, keep tabs on users’ reactions. Perhaps Home will be perceived as yet another walled garden with a massive handover of private data to Facebook.

But Google already sees trouble for its Android strategy.

Many Asian handset makers now adopt Android without including services such as Google Search, Gmail, and Google Maps, the all-important user data pumps. Samsung still uses many of these services but, having gained a leading role on the Android platform, it might demand more money for the user data it feeds to Google, or even fork the code.

In this context, Facebook Home could be perceived as yet another threat to the Android business model.

A number of possible responses come to mind.

In the computer industry, being annoyed or worse by “compatible” hardware or software isn’t new. As a result, the responses are well honed. You can keep changing the interface, thus making it difficult for the parasitic product to bite into its host and suck its blood (data, in this case), or you change the licensing terms.

Google could change or hide its APIs (Application Programming Interfaces) in order to limit Home’s functionality, or even prevent it from running at all (at least until a particularly nasty “bug” is fixed). Worse, Google could makes changes that cause the Facebook shell to still run, but poorly.

I’ll hasten to say that I doubt Google would do any of this deliberately — it would violate the company’s Don’t Be Evil ethos. But… accidents could happen, such as when a hapless Google engineer mistakenly captured Wifi data.

Seriously, FaceBook Home is yet another pick of the Android lock, a threat against Google’s core strategy that will have to be addressed, either with specific countermeasures or with more global changes in the platform’s monetization.

JLG@mondaynote.com