microsoft

Mobile World Clusterf#^k — 2011 Edition

Plus ça change…et plus.

We are at this year’s Mobile World Congress, held last week in Barcelona. One of the usual suspects, AT&T CEO Randall Stephenson, stands and delivers the new and improved party line: App Stores are bad. Stephenson wants cross-platform apps delivered through the Wholesale Applications Community (WAC), whose “commercial launch’’ takes place at the conference.

At last year’s conference, carriers made similar noises, dutifully reported in this 2010 Mobile World Clusterf#^k Monday Note, and no less diligently mocked in TechCrunch

(“The Wholesale Applications Community Sounds Like a Disaster in the Making.”) Now that AT&T is no longer the exclusive iPhone carrier in the US, the App Store that used to boost their iPhone sales (with a fat $100/month ARPU) also benefits Verizon.

AT&T’s carrier-centric view of the world remains unchanged: Phones are a commodity. Their sole raison d’être is to act as a transmission medium, a hard-to-disconnect hose attached to our wallets that sucks out as much money as possible…in legal ways, of course…most of the time.

To Mr. Stephenson, a financial executive (he used to be CFO of Southwestern Bell), Apple’s App Store and its ilk violate the carrier’s birthright. Unveiled last year and re-announced last week, the path to redemption is clear: WAC, a cross-carrier, cross-platform “community.” Who wouldn’t want the security of a carrier-hosted universal application library? Simple, no?

No.

Software is the music of smartphones. Picture two musical instruments, a pipe organ and a spinet piano. Consider the organ in the picture, three keyboards, a pedalboard, the “ranks” (sets of pipes) controlled by stops along the sides:

The organ’s sonic palette is broad and deep: A wide ambitus of pitch, from the gut-wrenching near-subsonic to the hair-raising upper reaches; a panoply of timbres; infinite sustain; capable of terrifying volume…

The spinet…

Music written for an organ transcribed — cross-platformed — for a spinet…it’s just not the same. Why aim for the lowest common denominator?

Metaphor aside, restricting the features and capabilities of an app so it fits on every smartphone doesn’t inspire hardware and software innovation.

Just as important — and I’m not sure I can put this diplomatically — in matters of application software and, more generally, taste, what’s the carriers’ record? Do they think customers care more about “one size fits all” sophistry than they do about quality? Subscribers have proven their willingness to pay a premium for products that demonstrate attention to form and function.

AT&T’s “get off my lawn” attitude reeks of nostalgia for the Good Old Days when carriers dictated features and prices. The inevitable disintermediation of their business started with the iPhone apostasy and will soon expand when an unlocked smartphone from Mediatek (see Stephen Elop’s memo) running an Android derivative (OMS/oPhone or Tapas) can be had for $79 or less.

The cross-carrier/cross-platform WAC will make as much progress this year as it did in the last 12 months. Next year’s PowerPoint slides won’t need much editing.

But that was just the appetizer.

The pièce de résistance at this year’s MWC was the MicroNokia CF:

Nokia has given up on its smartphone platforms and has adopted Windows Phone 7.

  • Symbian (Nokia’s current platform) will be “harvested,” which mean Symbian will be flogged until MicroNokia handsets ship in sufficient volume.
  • Meego (a Linux derivative and Nokia’s former future) has been put to pasture…but will ship as a face-saving “research project.”
  • Qt, Nokia’s cross-platform UI framework, has been abandoned. Microsoft will provide the UI.

This is supposed to reverse Nokia’s well-documented market share and profit decline.

Last year, Nokia fired its CEO, OPK (Olli-Pekka Kallasvuo) and hired a Microsoft executive, Stephen Elop. If you click on the link, you’ll see Nokia’s future CEO with a Nokia exec, Kai Öistämö, now reporting to him. Titillating as they might be, we’ll skip the conspiracy theories, they shed no light on the MicroNokia’s future.

It’s not going to be pretty.

Nokia faces an extremely difficult business model transition. One foot in the “we own everything” boat, the other in the Windows Phone 7 skiff. The integrated business model is sinking, and the new Microsoft smartphone platform isn’t floating very well. Consumers and carriers might desert Symbian devices faster than MicroNokia handsets gain acceptance. (Actually, “handsets” is the wrong word. As discussed in Elop’s Burning Platform memo, “ecosystem” is more appropriate: devices + applications + app store + services + content distribution + carriers.)

It gets worse. Today, Nokia sells huge volumes everywhere around the world (except in the US), more than 120M phones per quarter, of which 28M are Symbian devices. How will Nokia’s business fare against the surge of unlocked $79 “Android” derivatives?

We hear Nokia’s explanation for not choosing Android: Not enough differentiation, Windows Phone 7 will give us more control over our destiny, we have a “special partnership” with Microsoft. Special, differentiated…but how? What about other Windows Phone 7 licensees? How will Microsoft succeed in creating a thriving ecosystem if one partner is more equal than the others?

Then there’s the money behind the deal. “Billions,” we’re told, but without further details. Will it be cash, considerations in kind, support, licensing rebates, marketing budget? In time, we’ll get more data.

Such alliances have a way of not working with Microsoft, whose record on the matter is terrible. On his Asymco site, Horace Dediu lists Microsoft’s failed smartphone partnerships. At the risk of belaboring the obvious, the common factor in those failures is Microsoft, its culture, its ways.

(But wait, the MicroNokia alliance is different. Stephen Elop is a cultural diplomat, he’s familiar with the Microsoft ethos, he was the executive in charge of the Office documents partnership with Nokia…)

Microsoft is no longer the successful, dominant player that it was in the PC business. It’s trying to get back into a race that RIM, Google, and Apple are winning. As a result, Microsoft is willing to provide incentives to application developers and handset makers. Big incentives.

And big incentives are justifiable. Microsoft execs realize they no longer have the upper hand, that they must use “all means necessary” to get back into the smartphone revolution, the biggest high-tech rocket we’ve ever seen, combining three engines: Cloud, Social, and Very Personal Computers a.k.a. Smartphones.

To Microsoft’s credit, another tenet of its culture is “never give up.” Like the Harvard football coach he once was, Steve Ballmer tells his troops to keep trying and trying until they succeed, and he has the resources, the money, the people — and his board’s support — to keep at it. I take issue with his wanton disregard for annoying facts, but, good faith or not, I can’t help but admire the unwavering leader and the expert showman.

Still, I doubt this MicroNokia deal will be enough to put Microsoft back in the smartphone and tablets race.

With this in mind, why not acquire Nokia and its worldwide manufacturing and distribution?  For Microsoft, this wouldn’t be a first. They went “integrated” (or, if you prefer, “Apple”) with the Xbox business and controlled the platform in its entirety. The MicroNokia marriage would be a difficult one, certainly, but it would give Microsoft more control over its own destiny. Suitable explanations would be provided: It’s a new era, we have an opportunity to become the largest smartphone maker, and (while we’re being cheeky) it’s a way to thwart the looming Google/Android licensing monopoly.

Who knows, Ballmer might change his mind. If he doesn’t, he might put yet another failed partnership on his résumé.

JLG@mondaynote.com

Turning Points

Once upon a time, Microsoft reigned supreme, they were IBM 2.0, having wrestled control of the PC from Big Blue. According to some critics, Microsoft took over the office application market through a combination of embrace, extend, and extinguish and tied sales. The MS M.O. followed this trajectory: First, Bill Gates and his troops would paint a bullseye on a product category—spreadsheets, words processors. Then they’d add features, creating a superset of those offered by Lotus 1-2-3 or WordPerfect. The next move involved the relationship with PC manufacturers: Microsoft (it’s said) tied the sale of the Microsoft Office suite to a Windows license. You want “favorable” terms on Windows? Install Office on the PCs that you sell.

MS Office applications became the Colossus of the business sector. And they established a de facto lingua franca. If you wanted to write a productivity app, you had to speak the MS language—you had to translate to and from Microsoft’s file formats. But these formats were under Microsoft’s sole control, they could “extend” the language at will, and—surprise!—these enhancements favored their own applications. For third-party developers, complete, full-featured compatibility was next to impossible to achieve. Ask the OpenOffice folks.

It worked. For more than 20 years, the Windows + Office combo has been Microsoft’s cash cow. In its 2010 Annual Report, MS reported $37B in revenue—60% of the company—for what is officially called Windows & Windows Live and the Business Division. With an operating profit of $24.7B and a beefy 67% operating margin, Windows + Office accounts for…102% of the company’s operating income?

(The percentage anomaly is due, in part, to the $2.3B lost by the Online Services business. With $2.2B in revenues, that’s more than $2 spent for every $1 in sales. For another part, we have an opaque category, Corporate Level activities, which adds another $4.5B of red ink.)

The mid-90’s, the browser wars. Microsoft seemed content to let Netscape’s Navigator own the scene… until the nascent Web wafted the aroma of monetization. Microsoft’s Internet Explorer began life as an add-on, almost an afterthought, a sop to “unproductive” Web surfers. But with the release of Windows ’95, IE was wired into the operating system, for free (which would eventually land Microsoft in various kinds of legal troubles, now largely forgotten). And, true to the MS M.O., subsequent versions offered “enhancements” to HTML that only IE knew how to interpret. Embrace, extend, extinguish…that was the end of Netscape’s hopes for a revenue stream.

Those were the days. Since then, all of Microsoft’s efforts to control standards have gone nowhere. More

The Apple Licensing Myth

Legends die hard. In the pre-Web days, they got printed and reprinted, told and retold and so became official, like spinach being good for you because it held the iron your red cells needed. After decades of the disgusting veggie inflicted upon young kids – I remember, a scientist went back to the bench and found out there was no digestible iron whatsoever in spinach. You don’t get calcium by ingesting chalk, you need a calcium compound that’ll get through the sophisticated filters in the digestive system. Eating spinach gives you as much  digestible iron as sucking nails.

The spread of legends gets worse with the Web. Stories, I’m avoiding the word “information”, travel fast, I’ll sidestep “light-speed”. Yarns bounce around a world-wide echo chamber. If I hear it from five sources, it must be true. Never mind the so-called sources heard it from one another in sequence. Worse indeed, as the Web never forgets, everything gets cached, archived and will be unearthed by search engines.
This creates a need and entrepreneurs pop out of the quantum vacuum ready to fill it: a Google search reveals at least three companies, reputationrestore.org, reputationrestorer.net and restore-reputation.com who promise to clean up your besmirched Web image. Actually, these three look like the same company and, at the risk of unfairly tarnishing their own rep, they look like one of these only too frequent scams purporting to protect you from scams. Ah well…

So it goes for a tenacious legend, the one that Apple “lost” the market because it failed to license the Mac operating system to “everyone” and thus get to own the market instead of losing it to the “obviously inferior” Microsoft product.
A few days ago, no less than über-blogger Henry Blodget, the Internet Bubble repentito now head of Business Insider blog hub fell for it. This industry observer who admitted he never set foot in an Apple Store, not a sin if your territory is the quick oil-change industry, chides Apple for “making the same mistake again”. In Dear Henry’s view, just like in the 80’s, Apple insists “on selling fully integrated hardware and software devices, instead of focusing on low-cost, widely distributed software”. As a result, Apple will lose to the Open Source Android, just like Apple lost to Microsoft.

I know we shouldn’t let facts get in the way of a good story, but let’s take a closer look at today’s as well as yesterday’s data. More

The Trojan Horse: Web Apps

Web Apps are the future: modern, light, run and updated in the Cloud, they will progressively replace the antiquated, bloated, expensive to buy and manage desktop “client” applications.
So says Google. And walking the talk, they put their Google Apps against the reigning champion of desktop applications: Microsoft Office.
Microsoft never gives up and, as expected, announced a Web-based, a Cloud version of their upcoming Office 2010 along with the classical desktop suite, more feature-rich than ever.

Google Apps are free? Office 2010 on the Web is free. With the advantage of a familiar UI, User Interface, their brand, the desktop version as a fall-back, it would seem Microsoft is staying on top. Google Apps might be free (in most cases) and somewhat fashionable, if only for being “not-Microsoft”, but with the combined desktop and Web versions, Microsoft covers all needs.

Case closed? Not quite. More

Google OS: Chrome-Plated Linux or Microsoft 2.0?

Here’s what I think its taking place:

Microsoft executives and Board members are no dummies: they know Cloud Computing threatens the Windows + Office + Exchange gold mine, the biggest in our industry’s history. They know the future is Office + Exchange running in dual-mode. From the Cloud when a Net connection is available; locally when the Cloud is out of reach. Everything synched back when the connection is restored.
 Imagine Outlook in Cache Mode, just with a browser, without a local client, generalized to all Office applications.
 Their delicate mission, should they choose to accept it, is to move Office and Exchange into the Cloud, into dual-mode applications. The challenge is to get there before Google Apps gain acceptance but without prematurely cannibalizing the existing Office + Exchange profit stream.

On its side, Google wants to protect the search-based advertising gold mine. To do so, they need to hurt Microsoft’s ability to finance a broad-front attack against Google’s core business. That’s why Google wants to offer an alternative to “Office in the Cloud”: with Microsoft no longer able to dictate prices, the Office profit stream would dry up and so would Microsoft’s ability to finance an attack against Google’s core business.

This, I surmise, is the context for last week’s Google Chrome OS announcement — and for a rumored Microsoft event this coming week.

With this in mind, let’s look at Google’s pronunciamento. More

Web video: Microsoft, Adobe or HTML 5?

We have yet another standards battle on our hands — you might say screens, as it concerns Web video. Or we might watch our wallets, as the fight is about who gets the biggest share of the money spent delivering multimedia on our computers, smartphones and, soon, TVs.

My money is on HTML 5, co-opted and promoted by Google and Apple.

First, do we really care about standards? Does it matter that YouTube uses Flash or H.264, that Microsoft is trying to promote Silverlight or that Apple, more prominently, and Google, less vocally, are pushing an open standard called HTML 5?

The answer comes in two parts: we need standards like trains need a single track width across the network, first, and, second, standards are often abused, made into a way to pick pockets.
There is no charge for a train track width standard, but a license fee is required for building cell phones using the CDMA standard. (I won’t go again over well-covered ground, over the history of Windows, Office and Wintel.) The secret, there, is to create critical mass for a way to do something, for said manner to become a standard. Then, you charge for the right to use the method itself or, less directly, for something needed to benefit from it.
For example, if Microsoft manages to make Silverlight a or the Web video/multimedia standard, good things will happen and bad ones will be avoided – from Microsoft’s perspective, that is. More

The New Papyrus

Once upon a time, in 1986, Bill Gates commissioned a book, The New Papyrus, subtitled: The Current and Future State of the Art. I recall an animated conversation with Bill as we were having dinner on top of Seattle’s Space Needle. He was hard at work promoting the CDI, the interactive CD and pushing Japanese manufacturers to give momentum to the CDI-PC, a personal computer centered around the huge storage capabilities (seven hundred megabytes!) afforded by the new medium. Imagine: an entire encyclopedia would fit on just one CD-ROM. The New Papyrus was the future of paper. And, for a while, I thought Bill was right. I treasured the OED II (The Oxford English Dictionary, Second Edition) on CD-ROM. I had lovingly paid about $10K for the paper edition on night at the old Kepler’s bookstore in Menlo Park, happily loading the 20 volumes in my car’s trunk (boot for British readers). A few years later, the CD-ROM edition cost only $700 or so… This was the future. More

Software: how do you compete with free?

That’s the question Steve Ballmer, Microsoft’s CEO, is trying to answer every morning when he goes to work. On the server software side, Windows Server is doing well, especially with the Exchange e-mail server and the unheralded but very good collaboration server, SharePoint.  These products have matured, they’re relatively easy to set up and manage by IT organizations.  The Exchange component  is a spectacular success: it manages e-mail, contacts, calendars for hundreds of thousands of organizations all over the world.  Even Apple finally embraced Exchange: the iPhone now syncs well with Microsoft’s server and the next version of OS X promises “native” Exchange support.  In plainer English: Apple’s Mail, Address Book and iCal programs, for example, will sync with Exchange “out-of-the-box” just like the iPhone does.  (This will be a relief to suffering Entourage users.  Entourage is Microsoft’s own Outlook sibling on the Mac, but it is a poor relative and lacks Windows’ Outlook depth and polish.)  Seeing that Windows Server generated more than $20 billion last year, one is tempted to think everything is going swimmingly. More

That word again: Open

The Other Steve, Microsoft’s Ballmer, just treated us to another paean to open systems. This was last week at the Churchill Club, a Silicon Valley schmoozing institution.  There, we meet, gossip, drink, dine and watch a never ending and never boring parade of industry figures submitting themselves to soft-ball interviews by local notables of suitable rank.  (Next week, it’ll be Nokia’s CEO, coincidence, just on the eve of launching a new touch-screen music smartphone. Olli-Pekka Kallasvuo will be grilled by Walt Mossberg, the Wall Street Journal’s gadgetmeister.)
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For Ballmer, the interviewer was Ann Winblad, a respected venture investor who once dated Bill Gates, co-founder of Hummer-Winblad, one of the best Valley firms. Her genuinely inspiring life story is here, not in the surprisingly sterile Wikipedia piece.  The edited text of Steve’s remarks can be found on Microsoft’s site and if you search for “Ballmer Churchill Club” on YouTube, you’ll see bits of the Q&A session, often the more interesting part of such event.
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One the themes Microsoft’s CEO harped on was open systems, not open source, he’s not crazy about that kind of openness. Also referred to as “choice”, it is Microsoft’s mantra: With us you have a choice of  manufacturers, processors, peripherals, software.  We’re so used to the PC we tend to forget its industry has achieved the most remarkable ascent to the top of economics and culture the world has ever seen.  In three short decades it has become a trillion dollar ecosystem worldwide with Microsoft alone featuring an enterprise value of about $220 billion and operating margins in the high 30 percents.  (We thought we’d never see anything like this again and we now have Google…)
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Ballmer correctly opposes Apple’s closed control of hardware, software (and distribution) layers of its computers to the more open PC model where manufacturers offer a choice of hardware and software components thus covering a wider range of configurations, applications and prices.  Still, there is little choice outside of Microsoft Office and, for manufacturers, a PC open to both Windows and Linux installed at the factory is still verboten.  Jesuits once used what they called Holy Effrontery in defending their faith (or their power).  Never mind the contradictions, the Microsoft PC model is alive and well.  Which leads Ballmer to extend its open/closed discourse to smartphones where both Windows Mobile and Google’s Android, a nod from Steve, incarnate open choice and Apple behaves in its usual closed ways.  True again.
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But…
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There is a tricky combination of reality and perception, one that resists Ballmer’s forceful (and often very intelligent) assertions. First, for more than five years now, Microsoft’s stock has been essentially flat, a little below $30 a share most of the time.  Then we have Google.  Some call it the next Microsoft, all see its dominance of the search and advertising markets as well as its leadership in Cloud Computing developments.  This can explain the flatlining stock: for investors, even if today’s numbers are very healthy, Microsoft is no longer the king with the attendant ability to “tax” the market, to translate dominance into ever-rising profit streams.
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And we have Vista.  Never before in Microsoft’s history have we seen customers balking at the new version, Vista, and downgrading back to the older one, Xp. Today, if the effect on Microsoft’s profits isn’t clear, the impact on its credibility is inescapable.  Most of Vista’s ills are attributed to driver problems.  In plainer English, drivers are software modules that graft the many different hardware choices onto the core of the operating system.  But don’t think simple graft on a tree, connecting hundreds of delicate synapses is more like it, with many surgeons, hardware manufacturers, operating simultaneously.  Operating systems, all of them, end up with layers upon layers of additions and corrections.  The extensions and patches are needed for new versions to stay compatible with past ones and also to fix old and new bugs.  They look like Babylonian archeological digs with strata of debris marking each generation.  What Ballmer won’t say is this: the open model adds choices and opportunities; the price is higher complexity, fragility.  For Windows, the cost/reward ratio isn’t as good as it used to be when Windows 95 succeeded Windows 3.11 thirteen years ago.
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But, wait, there is more!  For all the preaching of the open/choice Gospel, Microsoft actually uses the closed model as well. I’m a man of principles, tell me the ones that the market doesn’t like and I’ll change them.  Microsoft’s game console, the Xbox?  A closed system, just like Nintendo and Sony.  The first iterations of the company’s open music players platform won’t sell against the closed iPod?  Never mind, Microsoft’s Zune is now an Apple-like platform.  Microsoft bought Danger, a closed smartphone company.  For its hardware, the Sidekick?   For its non-Windows Mobile software platform?  To build a ZunePhone?
Microsoft’s clarity of mind is admirable: it does not confuse what to say and what to do. — JLG
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User experience — Microsoft Buying Love

Silicon Valley VC-dom is having a grand time watching Microsoft. It always did, in fear some time, with hope the Bill Gates would buy ingenious or annoying startups at other moments, always with respect for the giant’s impact on the high-tech industry.

Lately, the respect has turned into puzzlement. Because of, to simplify, Google and Vista. Google has exposed Microsoft’s inability to have any significant impact on search, advertising and, more generally, Cloud computing.

Vista surprised everyone, myself included, by how immature and uninteresting it is. To the point where Ballmer had to call it a “work in progress” — this five years after the previous version, Windows XP. So immature that many large organizations have decided against upgrading and launched a campaign to “save XP”, to force Microsoft to keep it available indefinitely. The market reaction to the new 2007 version of Office has been similar: Why bother?

I’ll hasten to say Microsoft is still hugely profitable: just Office made it more money in one quarter than Google in an entire year. But, last week, puzzlement turned into something else: a mixture of incredulity and worry. Is this all Microsoft has to offer to take Google down from its number one position?

“Microsoft is going to pay us to search!” said many stories. Not quite. It’s more complicated. When I search for a Nikon lens in Microsoft’s new Live Search site, I get offers from selected merchants. When I buy, Microsoft gives me a small percentage of the purchase price, 2% to 4%. So, I set up the Microsoft rebate money to go to my PayPal account and off I go, looking for the Nikon 85 mm 1.4 lens of my dreams. (Don’t go to Livesearch.com, that’s another company, they’re probably holding out for a better offer from Redmond.) For a lens worth about $1,000, live.com gets me 6 stores with discounts in the 2% to 4% range. Out of curiosity, I try Goggle. In one instance, the same merchant, B&H, offers the same lens for less than on live.com, in an “imported” version. And when I do research on the other Microsoft-offered merchants I won’t name here, I see slightly lower prices. But… a bit of research shows the sellers are labeled as crooks or worse by dissatisfied customers. Google also reminds me Amazon offers the lens for $999, free two-day shipping and no doubt about integrity. I try another search, for an inexpensive camera this time. The results are similar: the lowest price is from a company with an ugly reputation (and recently sold to another entity). For $10 more, you buy from Amazon. No complication, no paying one price and getting the discount later from Microsoft.

Let’s review. Microsoft Live Search: not really cheaper, not safer, not simpler.
Speaking of safety, it is fair to point out that some of the merchants featured on the right-side of the Google results page are known bait-and-switch artists. Also, several “shopping engines” on the same list are honey traps working for the scammers just mentioned. The good news is two minutes of googling gets you plenty of data on these schemes. Caveat emptor.
The other news from Microsoft is Per Action pricing. The advertiser only pays if the customer buys, downloads, makes a reservation. Much better than Per Click pricing, no? No. Merchants continuously evolve statistics measuring the conversion of clicks into action. In other words: How many clicks to get an action, a purchase. As a result, they already bid the clicking business with the Per Action cost in mind.

Is this how Microsoft is going to lift themselves from their 9% share in search (vs. Google’s 60% and growing)? Probably not. That’s why they’re still angling for a deal with Yahoo! Buying their search business only this time.

For more, a niece piece by Henry Blodget in Silicon Alley Insider: From the VC perspective, here, it’s hard to avoid ambivalence. Yes, this is quality entertainment. But how does this lead us to healthy start-ups? Even a “less than Google” search engine will get you a long litany of Microsoft fumbling attempts at gaining a meaningful share of the on-line business. Do we have a Satan IV (an old sci-fi novella) questions? Will the “new Microsoft” of the on-line world be as domineering as the old one was in the PC business, draining much of the resources, much of the money out of the domain?
In plain(er) English: how much oxygen left after Goggle inspires? – JLG