Pardon My Disruption: March Edition

I’m a little late getting this post up here — we recorded the session a little over a week ago — but better late than never.  And for the second time in a row, snow interrupted our plans so instead of recording with a live audience at the Stamford Innovation Center, we participated remotely (using Google+ hangouts).  I do need to work on my video skills. Despite having two lamps just out of camera range, my lighting is suboptimal.  Then again, my pretty face is never going to carry the day… :)

For those of you who want to watch the full video (an hour), you can find it here.  This month, we talked about:

  • Yahoo and Marissa Mayer’s work-from-the-office edict
  • Groupon’s CEO resignation
  • The new Facebook feed
  • Microsoft’s EU fine
  • iWatch (we didn’t really talk about this in the video here but I’ve got a few observations)

Yahoo and Working from Home

This is odd, coming from someone who has spent large portions of the last 20 years working from home and who is such a big believer in collaborative technologies, but I totally understand and support Marissa Mayer’s decision to require Yahoo employees to work from the office.  Fundamentally, she inherited a broken company.  I’m a member of a group called the Internet Oldtimers and one of the group’s members described the scenario perfectly.  He said that good people in a bad system become bad people whereas bad people in a good system become immediately evident.  Yahoo had a bad system which encouraged even the best of people to perform at substandard levels.  How do we know Yahoo had a bad system?  Mayer came from Google, as data-driven an organization as I’ve ever encountered, and simply, she went to the data.  It would be one thing if people were working diligently from home but the data just showed another story.  Mayer looked at the VPN logins and quickly discovered that people weren’t connecting to the company’s internal network.  It’s one thing to say collaborative tools enable remote working.  It’s a whole other scenario when your workers aren’t using the collaborative tools!  They didn’t even bother to fake working very well.  Yes, the system was broken.  You could argue that this is a draconian step and that it will cost Yahoo in terms of current employees and ability to recruit new staff.  That may be true but the bigger challenge is reorienting the organization and bold, decisive moves are required.  I don’t expect this to be a permanent work condition but until and unless Mayer showed her commitment to a new Yahoo, she would have been merely rearranging deck chairs on the old Yahoo.  I applaud and support the move.

Groupon’s CEO Resigns

Too much of this story has been about Groupon’s ex-CEO Andrew Mason and his polarizing style, his company accounting challenges and his flamboyant resignation (refreshing in its candor). I actually wrote about Groupon over two years ago, questioning their business, and in the intervening time, I think their challenges have only grown larger.  Here are the fundamental problems for their business (and not just theirs, but LivingSocial and many other daily deals purveyors):

  • The deals are not great for merchants.  They’re indiscriminate, send a bad message, encourage “bad” business, don’t help the merchant’s information-gathering and give the merchant almost no control.  Other than that, they’re great. LOL
  • The wrong party is in control.  Deals should be structured, offered and managed by the merchant itself.  You should be able to offer deals whenever you want to whomever you want.  My favorite talking point here is to use the example of a donut shop.  Let’s say you’ve had a slow day and it’s looking like you’re going to have to throw out a bunch of donuts.  Wouldn’t you want to run a deal at the last minute, just in time for the evening rush hour, offering a special? You could make this look like a customer incentive for your best customers instead of the existing model where you’re discounting products/services that your loyal customers have been paying full price for.  You could make this decision at 4 p.m., instead of weeks or months in advance.  You could do this every time your inventory is high instead of once every few months.  This is a fundamental problem of approach for Groupon and its ilk, and not one a new CEO is going to solve.
  • To feed the public market appetite for growth, Groupon moved from daily deals into an adjacent market, Groupon Goods.  I’ll never understand why companies move into businesses that jettison much of what’s attractive in their legacy business.  The great thing about the daily deal business is that you have no inventory.  Your only three cost buckets are technology, marketing, and your sales commissions.  This is a business with minimal risk as you can align costs relatively easily to revenues.  With Groupon Goods, you’re now taking possession of inventory.  If you don’t sell it, you’re stuck with it…or you have to lower prices, cutting your margins.  Before this, Groupon could have been run out of a phone booth.  Your servers were in the cloud, your salespeople were on the phone or on the road, your inventory was totally digital.  Instead of pushing, and fixing, the core business, Groupon went broader.  Big mistake in my mind.

The New Facebook Feed

Facebook is rolling out a new look and feel.  Again.  I wrote about this challenge even longer ago, almost four years back now.  Back then, the challenge was competing with Twitter and its real-time impact.  That challenge remains to this day and we’re now hearing of Facebook’s plans to incorporate hashtags, mimicking yet another Twitter feature.  Facebook is now fighting battles on multiple fronts.  In addition to Twitter, there’s now a battle for approach and design with Pinterest and Instagram.  Yes, I know Facebook now owns Instagram but if you look at Instagram, Pinterest and even Microsoft’s new platforms, you’ll see a more richly graphical approach.  I won’t get into this approach…well, maybe I will, briefly.  I think much of this is eye candy at the cost of value, information and time.  A picture may be worth a thousand words in some contexts, but in a lot of these instances, I’d rather see the thousand words or at least something that conveys greater value than just an image and a text headline.  I think a lot of the motivation behind this approach is to get people to actually click through on something.  More clicks = more opportunities to display ads or at least pump up your metrics.  For the user — at least for me — more clicks = more time to get to value.  I really don’t like the approach.  But Facebook seems to be embracing the approach, whether it’s to increase its advertising footprint or contain Pinterest.  There are laudable goals in the redesign — more easily connect users with the information they want to connect with — but I’m not convinced this is the real motivation or, if it is, that this redesign accomplishes that goal.  But as always, we’re stuck with it.  Expect to see tons of posts from your friends decrying the new approach…until we accept that this is the way it’s going to be.  Oh well.  At least maybe they’ll fix the multi-columnar approach, the logic of which I still can’t figure out.

Microsoft’s EU Fine

Microsoft was fined $731 million by the European Union.  Why? Because it didn’t fully implement its deal to open up the browser market to competition, a deal struck in 2009.  At that time, Microsoft had a near-dominant share of almost 80% of the desktop market.  We all know what’s happened since then. Despite not keeping up its bargain, Microsoft’s share has steadily decreased and it now represents only about half of the desktop market and, if you factor in mobile, considerably less than half.  In fast-moving markets like technology, somehow markets do a better job of adapting to competitive situations than governmental remedies.  I’m not saying that the EU’s fine was misguided — they have to enforce their agreements — I’m just saying that the EU sanctions were, and continue to be, largely ineffective.  Fining someone for four year old behavior (several generations in Internet time) while failing to act on current issues is, unfortunately, what we’ve come to expect from governmental bodies.  I’m not advocating that they go sue Google but if they’re genuinely concerned with fostering real competition, going against emerging and existing monopolists with sanctions with real teeth would be much more impressive than what amounts to a (soft) slap on the wrist to a former monopolist.  If anything, this action would encourage me if I were considering a current offense.  If this is the timeframe and scale over which remedies will be extracted, it’s no deterrent at all.

iWatch

Somehow I can’t get excited about this one.  Perhaps Apple’s going to surprise me.  Again.  But I just don’t see an iWatch as the product which is going to reinvigorate Apple’s prospects.  Back at the beginning of the year, I said their big opportunity is the digital home, and I stand by that belief.  Yeah, yeah, the watch market is a $60 billion market.  But if you’re under about 28, you probably don’t wear a watch.  Can Apple make it cool?  Probably.  But the trend is to bigger screens, not smaller, and I’m just not convinced that anyone can make a watch a compelling companion to my smartphone, and make no mistake about it, this will be a companion product.  I feel bad enough when I have to shell out $100 with every new phone for screen protectors, batteries and the like.  Is it that much more powerful to have reminders on my wrist instead of in my pocket?  Perhaps it could be a little more interesting if it incorporates the emerging niche category of activity monitors like Jawbone’s Up.  We’ll just have to wait and see.

What’s perhaps most problematic for Apple is that their time to market advantage may be non-existent.  Apple has had huge market advantages when it has launched its category-defining products, with competitive responses often lagging by a year or more.  Not so with the watch.  In fact, while the Apple iWatch remains merely a rumor, Samsung has come public with its intention to do one, and its indication that it has been working on it for a long time.  While I question how genuine that effort was prior to the Apple rumors, it’s clearly a different world when a rumored Apple product introduction is met by immediate competitive responses, not stunned gasps of “they did it again.”

What’s Next

In addition to these timely news items, we talked about a couple of larger thematic subjects:

  • The “IT-ization of consumers”
  • What’s next, after social, mobile and cloud

I’m not going to get into these here and now — this blog post is already long enough — but i’m going to write at greater length about these topics in the coming weeks.  I identified social, mobile and cloud as my three disruptive trends, over five years ago.  As they begin to coalesce as I predicted, people started to ask me “so what’s next?”  For a long time, I answered that with “more commercialization and better integration of those pillars.”  We still have a long way to go there. But I already see the seeds of the next big transformation which will, once again, change the face of technology and business.  I just love that about this business; it’s never static…even while we all struggle to keep up with the pace of change and have to fight to incorporate new technologies and approaches.  But the next change is coming and I’ll start surfacing that soon.  (If you want a head start on your competition, you know where to find me.)

 

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Microsoft Tries to Derail the Barnes & Noble Juggernaut (!?)

In the legal morass that is Android comes the latest news that Microsoft is suing Barnes & Noble, alleging patent infringement.  Think about the surface absurdity of that one.  Microsoft suing Barnes & Noble.  Even The Onion hasn’t contemplated this scenario.  So, what’s really going on here.

At a macro level, here’s what’s happening:

  • These kinds of patent lawsuits are so common that I’ve almost stopped looking at them altogether.  Usually it goes like this:
    • Someone sues someone else.
    • The someone else counter-sues.
    • The two companies exchange patent cross-licensing agreements, usually with one side or the other having to kick in some cash.
  • There’s a slight twist to the whole Android scenario, again though one that’s not uncommon.  Most of these patent lawsuits have focused on Android licensees and not the deep-pocketed Google.  It only makes sense to go after the weaker players, albeit ones with sufficient funds to pony up.

What are all these people suing in the Android space trying to accomplish?  It’s real simple.  If you’re trying to sell an operating system into a market where Google is giving it away, you need to make the OS appear not to be free.  In other words, you may not pay for the OS but by the time you factor in legal costs, your free OS all of a sudden isn’t so free.  Somewhere along the line, Google is probably going to have to ante up to help its partners by resolving all of these patent infringement issues.  It probably means Google’s going to have to write a check.  The good news:  they’ve got $34.9 billion in cash on hand and are printing more each quarter.  So much for the chilling effect on Android licensees.

What’s particularly interesting about the Microsoft/Barnes & Noble case is that presages interesting competition in the tablet marketplace.  Why should anyone be worried about Barnes & Noble or, by extension, Amazon?  The Barnes & Noble Nook e-reader actually runs on Android.  In effect, they’re selling a specialized Android tablet for $249.  How can they do that when the rest of the Android tablet marketplace is horribly overpriced as I’ve recently blogged?  Welcome to the new world of ecosystems and razors and razor blades.  Amazon and Barnes & Noble can sell these devices at low (or no) margin because the economics of incremental margin on the razor blades (books and other digital content) is so compelling and predictable that it pays to seed the market with devices.  That’s another reason why Apple, asides from supply chain efficiencies, can sell the iPad so competitively.  It can count on a reasonable income stream from the AppStore while in the Android space, those margins go to Google.

Yes, I know that the Nook and the Kindle are not general-purpose tablets.  Today.  But the color Nook is pretty darn close.  The Wall Street Journal’s Brett Arends even recently told readers how to turn their Nooks into tablets.  He overstated his case to make a point:  Barnes & Noble can do this easily and likely will.  If not, they deserve to follow Borders into bankruptcy.

Netting it out:

  • Google is likely to have to share some of its profits with its ecosystem to cover legal exposures.
  • Google is likely to have to share some of its app store revenues with partners.  Otherwise, the situation with competing app stores (already a fracturing standard) is going to get (much) worse rather than better.  They need to do this one quickly.
  • In other words, Android tablets need to get cheaper and Google will have to share its app and advertising revenues to make that happen.
  • Players like Barnes & Noble and Amazon can become strong players in the tablet marketplace because they have the economic model and ecosystem to compete with Apple.  Selling hardware alone is not much fun these days, and is only going to get worse.

Why Letting AT&T Buy T-Mobile Sucks for All of Us

Letting AT&T buy T-Mobile sucks.  Even more insidious are the rumors that regulators have already given this a wink-wink approval.  Why does this suck?  For many years, we Americans lived in a mobile telecommunications backwater.  Large portions of the industrialized world had better, more advanced telecommunications systems than we did and even emerging markets were leapfrogging over our infrastructure and approach.  Then along came Apple.  Regular readers here know I’m no fan of Apple’s business practices but give credit where credit is due.  Apple knew it had something big and knew that it could strong-arm one of our carriers into playing business by its terms.  So committed was Apple to this approach that it was willing to go with AT&T when we all knew, and have come to see more and more, that its network sucked.

Apple begat Android and for a brief period of time, we lived in a world where capabilities and platforms and ecosystems ruled, not carriers with their focus on profits at the complete expense of user experience.  We were already seeing how much carriers hated that world.  Have you seen the crapware loaded on your phone these days, crap that can’t be removed?  Look at Skype on Verizon’s Android.  I can download Verizon’s version of Skype (and not uninstall it after that), which not only just works on 3G, it requires that you turn off WiFi (so that no other applications can access WiFi while you’re Skyping).  I’ve never understood this but I’m guessing that Verizon is scared enough of Skype as a competitor that they want to give it minimal functionality.  This also means that I can’t use WiFi for Skype internationally, even while Verizon’s CDMA technology is deployed only in a few other countries around the world.  Oh by the way, I can download Skype’s version of Skype, but that works only over WiFi.

Get used to it.  This is the world we’re going to see.  We’re likely to see a trifurcation of the app store world.  Trifurcation?  Yes, we’ll probably see app stores emerge from the carriers since they’ll each impose their own requirements for apps to be certified for their networks.  At the very least, since both networks are likely to impose data caps, each with their own byzantine pricing structures, you’ll have to download the app that’s best optimized for the network pricing model.  (You’re going to love that one, app developers.)  And trifurcation?  Well, the cable companies have already banded together to offer unified WiFi in many markets (e.g., TimeWarner and Cablevision in New York City), to better compete against mobile/telco Internet/TV incursion.  We’ll likely see an app store emerge from there, with apps that are designed around a very different model, whereby you do your high bandwidth transactions when connected to WiFi, in an online/offline synchronize model as opposed to the mobile model of perpetually available bandwidth.

This is not progress.  This is not innovation.  In fact, it will stifle innovation and inhibit the deployment of broad-based mobile applications and infrastructure.  What can we do about this?  Not much, I’m afraid.  I’d love to say “write your congressman and write to the FCC,” but I’m not so young and naïve as to believe that would help much.  What would I like to see the regulators do here?  For starters, I’d love to see them disallow the deal on anti-competitive grounds.  If you believe the scenario I outline above is possible or even likely, this clearly is a combination in restraint of trade.  If they won’t do that, at least impose these regulations on the merged entity:

  • Limitations on data caps for a period of 3-5 years.  Anyone with an unlimited plan at the time of the merger gets to keep that as long as they maintain a data contract with the carrier.
  • A prohibition on a carrier app store.
  • Limitations on the crapware installed on phones and/or the ability to remove it, at least after 90 days of phone ownership.
  • Serious notifications of potential data overage where there are data caps.  We’ve only recently gotten that protection for call overages — long overdue, and prompted by European regulators, not ours.  In data, it’s much more insidious because we don’t always know when/how much data we’re using.  There should be onerous requirements on the carriers here, such that we can effectively meter our usage.  And there should be rollover of unused data.

I wish I believed any of this would happen, but I don’t.  Instead, I think we’re about to enter a period where the ironically named Long-Term Evolution (LTE) is actually a major step backwards on the evolutionary scale.  We’ll have faster speeds…and much less ability to exploit them in interesting and game-changing fashion.  It’s a shame that AT&T, who was once broken up by the regulators, is so adept at the regulatory game that it is about to win via acquisition what it could never win the open marketplace.

Why Do Android Tablets Cost More than the iPad?

You know me.  I don’t own any Apple products any more.  I have:

  • HP desktop
  • HP convertible tablet laptop
  • Android cell phone
  • Sansa MP3 player

I can see the utility of a pure tablet given how much I travel (which I think is its optimal use case:  on the train/plane/Starbucks).  I’d like to buy an Android tablet.  With yesterday’s introduction of the iPad2, I am however left scratching my head.  Even before this, I was wondering “how in the world can the Android tablets be priced 20-50% more than an iPad?”  Hence, my list of the top 10 reasons someone would buy/pay more for an Android tablet.

  1. What’s an iPad?
  2. I’d pay anything to avoid enriching Apple.
  3. I work at Google…although Google employees may hold out until the holidays to see if they’re getting one free.
  4. Google Maps.  Oh, you mean I can buy a third-party GPS solution that is every bit as good and works off
  5. I’m too unhip to be let into the Apple Store.  (There are those who actually posit the Apple Store as part of the reason.  Apple doesn’t have to worry about retail margins so they can price below those who must support those margins too.  I don’t think this is an excuse, though it is a factor.)
  6. I hate waiting in lines to get technology products.
  7. I drive a Lexus and have gotten used to paying premium pricing for the same products.
  8. There must be a TCO argument in favor of Android, right?
  9. XOOM sounds so much cooler than iPad.
  10. If I’m stupid enough to buy an Android tablet right now, I’m stupid enough to pay a premium for it.

Truthfully, I really don’t understand it.  I’d expect Android tablets to cost $100 less than an iPad.  At least.  At current price points, they’re going to kill the market.  So, what do I think the real reasons are?  I’m stretching here.

  • They know Android isn’t really ready yet for the tablet form factor so they’re pricing it so only the really committed will buy in now.  Purposely keep the market away even while you’re dipping your toe in.
  • The various parties to the ecosystem are really that clueless to think that their Smartphone success will translate to the tablet market and that they can support comparable/premium pricing.

Honestly, I’m baffled.  If they’ve got me ready to buy an iPad, they’ve really accomplished something very bad.

Twitter: How do You Monetize Infrastructure?

In case you missed it, there’s a fascinating battle going on over in Twitter-land.  For much of the weekend, some of the Twitter clients from Ubermedia, the leading provider of Twitter clients, were shut down for unspecified violations of Twitter terms of service.  First of all, who is Ubermedia?  Ubermedia delivers Twitter client tools including Echofon and Twidroyd, and just this month they announced the acquisition of Tweetdeck.  The net result is that approximately 20% of Twitter traffic flows through Ubermedia clients.  That’s why this skirmish is so interesting.  Ultimately it’s about who gets to monetize the Twitter platform…and Twitter’s not in the pole position.

Much of my recent conversation here on this blog has related to Apple and the control it exerts over its ecosystem and its ability to extract revenue and profit from the “partners” in the ecosystem.  Give Apple credit.  They figured out how to build an infrastructure and an ecosystem whereby they profit handsomely and where they further profit from the infrastructure investments of others.  Look at what Apple has done to the rest of the wireless industry.  With just 3% of the handsets by volume, Apple is generating 2x the profits of the rest of the handset industry combined.  How do you think AT&T feels about that?  And how excited is Verizon to turn over some of their profitability to Apple?  The carriers are in a desperate struggle to be more than just “dumb pipes,” having ceded value to the platform and client providers like Apple, Google and RIM.

So what does this have to do with Twitter?  For Twitter, the situation is more dire than for the cell phone carriers.  At least the carriers have a direct revenue source for their infrastructure, paid for by the consumer (even while they’re fighting over what portion of the revenues generated should be theirs).  And for many years, their capital expenditures were covered by the fees they were extracting because it’s only recently that the platform providers have exploded onto the scene to compete for ecosystem dollars.  Twitter, by contrast, has no financial relationship with anyone in its ecosystem and has largely funded its infrastructure on its own.  (Well, on the dollars of its venture investors.)

Meanwhile, on the backs of this capital investment and Twitter’s open approach, a whole host of services have emerged on top of and around the core Twitter feed.  This is what makes Twitter interesting.  The raw feed itself is rather overwhelming.  It’s only through all of these third-party tools that Twitter starts to become the invaluable resource that it is to so many of us.  And these are where the monetization opportunities come in.  Google built its multi-billion dollar empire on search, selling keywords next to organic search and delivering contextual advertising via its “clients,” like Gmail and Google Docs.  Similarly, Ubermedia can build quite a nice advertising business via contextual advertising alongside the Tweetstream it delivers via its Twitter clients.  And what does Twitter get?  A hearty pat on the back.  Sure, Twitter can sell advertising too but without the contextual knowledge that comes from the client tools, Twitter’s advertising is as likely to be intrusive as it is to be contextual.

Thus, Twitter fires a shot across the bow of Ubermedia, the company best positioned to compete for the dollars Twitter believes to be rightfully theirs.  Yes, there were trademark infringement issues, which were quickly resolved.  This brouhaha was not about that.  This was about the race to monetize Twitter, a race the core platform provider is falling behind in.

Where will this end up?  I’m sure there are some pretty heated conversations going on between Twitter and Ubermedia.  It’s a delicate dance between the two.  Twitter can’t afford to scare away its ecosystem that makes the infrastructure valuable.  At the same time, punishing their end users is never a good idea, especially such a fickle crowd as tech early adopters.  Twitter’s in a strong position, but it’s not unassailable.  However, Ubermedia also now has a pretty good idea of what it means to be on Twitter’s bad side.  Twitter could put them out of business tomorrow.  Thus, the two parties have the strongest of all possible reasons to figure out how to economically co-exist.  I think in the coming weeks and months we’ll see some joint announcements from the two about their plans to monetize the Twitter platform.  Consider this, then, the first negotiating ploy.  “I own your traffic.”  “Well, I can shut that traffic off.”  There’s a lot at stake here but there’s enough to go around to make both parties happy.

(As an aside, this was another interesting moment for Quora and its position among the tech leadership.  A question about why Twitter shut off Ubermedia garnered responses from Bill Gross, Ubermedia’s CEO, and Matt Graves, Twitter’s communications director, although there’s some doubt as to whether the post really came from Graves.)

UPDATE 2/21:  By the way, fear not for either party.  For those of you who think “I knew Twitter ultimately had no business model,” they still have considerable value for other infrastructure players or those who would like to get into/expand their infrastructure play.  In other words, even without a business model, someone will and should pay billions for them.  The case is a little murkier for Ubermedia.  As my friend and colleague Sean Bohan noted, “you play by the open API, you die by the open API.”  Twitter can continue to encroach on Ubermedia’s space.  Much as I hated it, for a brief period of time over the weekend, I had to move to an alternative Twitter client, and the pain of doing so (i.e., the switching cost) was very low.  But Twitter’s not about to shut off its third party ecosystem.  The damage would be too severe.  And thus, Ubermedia, who has critical mass, is both a target but an important ally.  “Frienemy” at its finest.

Apple: That Didn’t Take Long

Two weeks ago, I blogged that Apple was picking fights (then Sony) that it had no business picking.  The latest go-round now is with big publishers over how to sell subscriptions on the iPad and iPhone.  Naturally, Apple wants to dictate terms and extract its 30%.  Whereas bullying the music industry was pretty easy and, one could argue, justified, with these content producers, its a tougher argument and a tougher settlement.

In music, you could credibly argue that Apple made the digital music industry.  Before Apple came along, things were fractured, to say the least.  Apple unified a market, created a great experience, strong-armed the labels…and deserves to share in the fruits of its success.  With books, newspapers and magazines, it’s a different case.

  1. These players had well-honed approaches and strategies before Apple came on the scene.
  2. These players are much better politically-connected than the music people who, ultimately, are small and don’t influence politicians very much.  Magazines and newspapers:  bigger and, oh yeah, that political clout.

Not surprisingly, therefore, the Justice Department and the FTC are said to be looking into Apple’s business practices.  Wow.  That didn’t take long.  Apple announces something on Tuesday, on Wednesday Google launches a competitive offering (taking only 10%) and on Thursday there are rumors of government involvement.  If that didn’t tell you Apple picked the wrong fight this time.

We’ve seen what government intervention did to IBM, AT&T and Microsoft over the years.  We’re seeing Google’s challenges now.  Welcome to the party, Apple.  I reiterate my position that two weeks ago could have been Apple’s zenith.

The New Math: When 5 + 4 = 1 (Nokia and Microsoft Get Together)

The rumored partnership of Nokia and Microsoft has come to pass, as Nokia announced today that it is going to embrace Windows Phone as their primary smartphone platform.   I’m not going to go into a deep analysis of the keys to success.  That will be well covered in the news today.  The big one obviously is how many platforms will developers support?  iPhone, of course.  Android is on the cusp of becoming 1a to Apple’s 1.  A must-do platform.  In certain markets (e.g., enterprise), Blackberry is 1b or at least a strong contender.  HP made its WebOS move earlier in the week, with some interesting value propositions, linking computers, tablets, phones and peripherals.  What would make Windows Phone compelling for developers?

Nokia has had its own set of challenges.  While they long said they were the world’s largest Smartphone company, they were kidding no one.  Once the iPhone came out, they were yesterday’s news.  Once Android gained momentum, they were in full denial mode.  They missed key trends (like Americans were buying clamshell phones) and took years to rectify the shortcoming, never to regain market position.

So now Nokia and Microsoft are partnering.  Not surprising, considering where Nokia’s new CEO, Stephen Elop came from.  (Microsoft, if you don’t already know.)  It didn’t take him long on the job to conclude that Nokia’s own efforts were failing and ultimately failed.  Nor did it take him long to conclude that his best strategic bet was Microsoft.  Given his background and their mutual desperation, it didn’t take long to conclude this deal.  In some ways, it’s almost stunning in its rapidity.

I just want to ask one simple question:  when have  two waning market players ever combined together to create one market-winning entrant?  I was sitting in a session yesterday at New York’s Social Media Week next to IBM AR star Mauricio Godoy and I asked him to come up with any examples of where this had worked.  Interestingly, he came up with a couple of situations.  Involving musical artists/groups.  I’m not sure they were entirely compelling but at least they had merit worth discussing.  But neither he nor I, nor anyone else I’ve asked this question to, could come up with a compelling instance where two fading businesses combined to reassert market leadership or even competitiveness.

Combining my problems with your problems sometimes solves both our problems.  More often, however, it increases complexity and amplifies both of our problems.  Friend and fellow analyst Bob Egan Tweeted this morning “Execution has been Nokia’s shortfall yet now it seems they are taking on even more execution complexity. Was hoping for simpler more focused.”

Often in business conversations, you hear people say that they’re looking for situations where 1+1 is greater than 2.  Here we have a situation where 5+4 is supposed to produce 1 or 2.  Now I admit that I’m just old enough that I missed the “new math” in high school.  (My sister, two years younger, learned it.)  But I don’t see the math working.  And in a market so dynamic and fast-moving, combining these two entities, neither of them known for their speed, may just hasten their mutual demise.  (I would, however, love to hear of successful business combinations in this vein in the comments.  Anyone?)

Microsoft: Putting the Inmates in Charge of the Asylum

I received a Tweet the other day from a former client, the always-insightful John Taschek, VP of Strategy at Salesforce.com, asking for my take on this news story about a rumor that Microsoft CEO Steve Ballmer is going to make significant management changes, elevating people with engineering backgrounds at the expense of those with marketing backgrounds.  There are so many ways this is just troubling when it comes to what ails Microsoft.  Let me outline just a few of them:

  • Putting engineers in charge of anything is generally a bad idea.
  • If bad marketing is Microsoft’s problem (and it’s one of them), putting engineers in charge of things does not solve that problem.
  • Microsoft’s biggest challenges are generally neither related to bad marketing nor stifled engineering.  They’re related to bigness and the innovator’s dilemma, as expressed by Clayton Christiansen.  (I find it personally exciting that this is discussed in the Wikipedia article on “disruptive technology.”  While I wasn’t using the term in 1995 when it was first ascribed by Christiansen, it has been my career since 1979 so I guess I owe a debt of gratitude to him for giving definition to my life.)

Those of you who like typical blog posts can stop now.  Those of you who know me, however, realize that these call for further discussion.

So why is putting engineers in charge a bad idea?  The best way I can explain it is through an old joke.

Talking frog

A man was crossing a road one day when a frog called out to him and said: “If you kiss me, I’ll turn into a beautiful princess.”  He bent over, picked up the frog and put it in his pocket. The frog spoke up again and said: “If you kiss me and turn me back into a beautiful princess, I will stay with you for one week.”  The man took the frog out of his pocket, smiled at it and returned it to the pocket. The frog then cried out: “If you kiss me and turn me back into a princess, I’ll stay with you and do ANYTHING you want.” Again the man took the frog out, smiled at it and put it back into his pocket.
Finally, the frog asked: “What is the matter ? I’ve told you I’m a beautiful princess, that I’ll stay with you for a week and do anything you want. Why won’t you kiss me ?”  The man said, “Look I’m a software engineer. I don’t have time for a girlfriend, but a talking frog is cool.”

Engineers are brilliant at what they do.  Understanding what users want is not one of the things that they’re brilliant at.  I’m often asked why, in a coming up on 32 year technology career, I’ve never lived in the Bay Area.  Oh, I’ve visited there a lot, almost certainly over 100 times in that time span.  The way I always explain it?  Silicon Valley’s hometown newspaper, the San Jose Mercury News, I say, has technology on the front page of the paper five out of seven days.  My hometown newspaper, the New York Times has technology on the front page of the paper five times a year, twice after an Apple product introduction and three other times…when something goes catastrophically wrong.  Engineers are great at figuring out what’s possible.  Marketers, at least good ones, are supposed to be great at figuring out what users want.  The intersection of the two is where magic is made.

Steve Jobs is not an engineer.  Steve Wozniak was Jobs’s original technological guru.  Jobs has a remarkable understanding of what consumers want, usually before they know they want it themselves.  Steve Ballmer is a marketing guy from way back.  Putting the engineers in charge is perhaps the most damning thing he could ever do.  I have known SteveB since 1987 and have been a staunch defender of his for a long time, even when it wasn’t popular, both early in his reign and lately.  If this is his strategy for returning Microsoft to its former glory, well…Steve, you just lost me.

So, what is Microsoft’s bigger issue and how do you solve it?  Microsoft does not lack for technical excellence nor innovative ideas.  The Kinect is a great example of what Microsoft can do and the business rewards it can result in.  It’s also instructive in how Microsoft works.  Microsoft has been doing research about alternative input approaches for decades.  Yet all we had in the market was the keyboard and mouse.  Oh yeah, Microsoft did tablets too.  We see where they took that.  But I digress.  How is it that the Kinect came to market?  You can bet that if Nintendo hadn’t invented the Wii, the Kinect might not have seen the light of day for another decade.  Microsoft was threatened.  Someone else had asserted market leadership and, with it, sales success.  Only then was Microsoft able to identify technologies it had that could return the Xbox to sales competitiveness.

This has been Microsoft’s response for way too long.  When threatened, they innovate…or at least get competitive.  The browser is another great example of that.  Threatened by Netscape, they came up with the competitive Internet Explorer (and used anti-competitive measures to bring it to prominence).  Almost every subsequent browser innovation from Microsoft has been spurred by, or copied from, alternative browsers.

I am aware of way too many Microsoft products and technologies that were quashed or watered down, not because of marketing, not because of engineering, but because of internal politics.  This is not a recent phenomenon but has been a Microsoft “sickness” for over a decade.

Witness Microsoft’s response to the cloud.  They have been reasonably aggressive when it comes to server-side cloud initiatives with Azure.  That’s because Microsoft’s upside is larger than its risk.  Yes, self-impact is a concern but if they can further damage Oracle/Sun, IBM or Salesforce, well, then Microsoft’s upside potential is great and the strategic beachhead is important.  Whither, however, Office for the cloud?  Oh, yes, they’re getting around to it.  They’re hardly, however, aggressive about it.  Why?  Because Office is one of the great cash cows in the history of technology and they’re in no rush to gore that cow while no one else is really threatening them.

What do you think we’d have now if Steve Jobs were in charge of Microsoft and Office?  Do I really even have to answer that question?

No, Microsoft’s problem isn’t that the marketers were in charge and now the engineers will come in on their white steeds to save the day.  Engineering and marketing have to work in concert, driven by a compelling vision that unifies the two, often warring, groups, espoused by a leader with the strength of character to make these groups work together when their individual priorities and incentives are not necessarily aligned.  Apple does that beautifully.  Google does that occasionally well.  Throwing a bone to John, who motivated this post in the first place:  Salesforce does that pretty well too.  Microsoft?  Not so well.

There was a time when Microsoft faced a challenge from the Internet.  Almost 16 years ago now, Bill Gates issued a famous memo, a call to arms.  That is what Microsoft needs now.  A definition of what it is and, more importantly, what it needs to be.  Again, if this were Apple, Bill Gates would make a triumphant return, leading the company back to its former glory.  But Bill has other priorities on his mind and the world is a better place for that.  Is Steve Ballmer the man for that task?  I honestly don’t know.  And that’s perhaps the most damning statement of all about Microsoft.  I don’t know.

Apple: When is Enough Enough?

I’m a big admirer of Apple.  They design incredible products.  They innovate and, beyond innovation, they create new categories and approaches.  They have been richly rewarded for that and are now the second highest valued company in the world, behind ExxonMobil.  You know there’s a “but” coming.  And it’s a big one.  Is it good for anyone (other than Apple) — even you — when they put their hand so deep in everyone’s pocket and when they tell you and me how to do business?  (Full disclaimer:  I don’t own any Apple products.  I have a Sansa MP3 player, because I like the Rhapsody subscription music model.  I actually like the Microsoft Zune subscription model even better, because then I get to rent and own music, but that’s maybe my next device consideration.  I have an Android-based Motorola Droid, largely because I’m on Verizon and won’t buy any electronic device without a replaceable battery, so no, I’m not getting on line for a Verizon iPhone.  I do, however, own some really old Macs and an original, and still working Newton.  And my introduction to the technology industry in 1979 was on an Apple II+.  But I digress…)

The latest flap is over Sony’s e-reader application where Sony wants to enable users to buy books without paying Apple its 30% “tax.”  Apple, however, is insisting that all purchases must be made “in-app”…and as such, Apple wants to take its share of the transaction.

So, let’s get this straight.  Apple owns complete control over whether your application makes it into the app store and if they say no, there’s basically no “legitimate” way for you to get an application on to your phone.  With Android, while the default is to only allow apps to come in through the Android market, a simple uncheck in settings allows you to install applications from any source.  Apple will tell you that’s to protect the user experience.  That’s the same argument the telcos used to exclude devices from their network until, paradoxically, the iPhone came along and led to a new OS-centric model of wireless carriers here in the States and opened up the market to innovation that had been stalled for a decade.  In other words, bullsh**, Apple.

But that’s not enough for Apple.  Once the app has been approved, they want their full share of any revenue generated and won’t allow solutions that circumvent their taxing mechanism, regardless of how consumer-friendly and/or app provider-friendly those solutions are.  If you want to make money on the iPhone, pay us our 30%.  (This one will get really interesting the first time Oracle and SAP get serious about mobile apps.  Clash of the Titans anyone?  But it probably won’t get to that.  Read on.)

If this were any vendor other than Apple, the hue and cry would be so incredibly loud that it would drown out conversation about American Idol.  But Apple, our little darling, gets away scot-free.  Imagine if Microsoft said “any transaction that occurs on a Windows machine will henceforth and forever more involve a payment to Microsoft.”  The antitrust lawyers would move so fast that time would actually go backwards.  But Apple?

Actually, I think this time Apple made a mistake.  A big mistake.  This one is so outrageously wrong that it’s sure to draw scrutiny from all corners.  This could be the proverbial straw that broke the camel’s back.  Apple probably thought “well, it’s only Sony.  Who cares about them any more.”  The real target, of course, is Amazon whose Kindle software is available on all platforms (imagine that, not just iPhone and iPad) and whose sales enrich Amazon’s coffers.  Amazon is a threat to Apple’s control of the ecosystem.  If Kindle is the standard for some forms of digital content, how can Apple own the whole process they way they do with music and, increasingly, video?  If someone is able to stand up to Apple and not pay their ransom, what does that mean for all the others who feel they are being held captive?

So Apple started with Sony.  A trial balloon if you will.  This, however, could instead become Apple’s trial by fire.  What Apple’s trying to do here makes Google’s and Facebook’s privacy intrusions seem like a walk in the park.  Quite simply, Apple is trying to put a meter on the flow of digital content over the Internet.  I’m loathe to draw comparisons to what’s going on in Egypt this week.  Clearly, that’s a real-life saga that dwarves anything we’re talking about here.  However, it’s hard to ignore the parallels.  Enough is enough.  Whether it’s a military dictatorship or a technological one, at some point the citizenry/customers say this has gone on too long and we need to push back.

While I’m not of course predicting such a dire outcome, this could some day be remembered as Apple’s Waterloo.  They’re inviting legislative scrutiny in the United States and around the world.  They’re forcing their “partners” to stand up and revolt.  And most dangerous of all, they’re risking the love and support of their fan base.  If there’s a coordinated effort on the part of content creators across all media types (books, music, video and, with today’s announcement of The Daily, news and information) — heck, even without a coordinated effort — the risk to Apple’s reputation, position (and market cap) is considerable.

Apple is restricting choice, controlling innovation and enriching its coffers.  And it’s not benefiting you.  Enough is finally enough.

I do believe that this week may well have been the Zenith of Apple’s power.  And that’s pretty remarkable to contemplate.  Pride goeth before the fall.

How Important is Steve Jobs?

With the news that Steve Jobs is taking another medical leave from Apple — his third — it’s legitimate to ask the question of just how essential he is to Apple’s success.  This is going to be a quick post, because I think the truth of the matter is that there are probably only 20 people who can answer that question…and they’re so secretive and such a part of the Jobsian communications strategy that we’re not likely to know the answer to that question for another year or more.

By all accounts, COO Tim Cook is a buttoned-down manager.  Apple has been AMR Research’s (now Gartner’s) #1 in its Supply Chain Top 25 for three years in a row.  Thus, I think it’s safe to say that Apple’s ability to execute its plan is in safe hands.  Cook has probably been running large amounts of the operational show for years anyhow.  How much it has helped him to have Jobs’s notoriously strong hammer can be asked, but ultimately this is not where Apple’s potential issues lie.

More to be questioned is how much of the marketing power of Apple is attributable to the “Jobsian reality field” and how much of the product vision is directly attributable to Jobs.  Jobs has indicated that he’s going to remain engaged as CEO and assuming there’s some veracity to that assertion, it’s reasonable to assume that his exquisite sense of product development will continue to guide the company.  With the Verizon announcement, the iPhone momentum continues even while Android continues to make inroads in the smartphone marketplace.  Apple’s business plan never was to be the volume leader so this marketplace condition was to be expected.  The same will probably happen in the tablet marketplace; Apple is quite happy to be the pioneer and then to reap early-mover profits while moving gracefully into the premium price place of the market.  But given that, the question becomes “what’s next?”  Apple has introduced two category-creating, or at least redefining, products in a row.  They probably need another home run in the next two years to sustain their momentum and lofty market perceptions.  Without Jobs at the plate, you’d have to question Apple’s ability, or at least likelihood, of hitting another home run.

This concern extends to Apple’s marketing as well.  Again, they do a remarkable job, second to none certainly in the technology space , and even the broader consumer space.  Here’s where it gets hard to call.  Jobs doesn’t have to be omnipresent to sustain the Jobsian magic.  In fact, lesser Jobs could actually mean more impact when he’s around.  On the other hand, if he becomes perceived as merely a figurehead disassociated from the company he used to rule with an iron fist, his magic could be compromised.

Apple more than most companies is a cult of personality and the extended absence of its leader is a challenge for the company.  That said, I don’t think it’s an insurmountable challenge.  Microsoft was able to transition from a “cult of Bill Gates” to something more nuanced.  But that was much easier because the cult of Bill was vastly weaker than the cult of Steve and the truth of a Bill-ruled company was less than the truth of a Steve-ruled company.  I think we’re nearing the time when for myriad reasons Apple is going to need to let Jobs sprinkle some pixie dust on someone else, a visionary who can sustain the momentum and help transition the cult of Steve back once again to the cult of Apple.  This mingling of Jobs and Apple is a relatively recent phenomenon.  While a search of Time Magazine’s web site and Google couldn’t help me locate the quote, I have vivid recollections of a late 80′s/early 90′s quote there which said “second perhaps only to Harley Davidson is an Apple user’s love of their computer and the company who makes it.”  The Jobs worship started with his return to the company who ousted him and with each successive product success, it grew only larger.  It’s imperative now for Apple to share the spotlight, to bring a new person to the forefront as well as transition that passion back to the company so that it transcend’s Jobs, whatever his health.

So, back to the question that started my musings.  I think Steve Jobs is as important to Apple’s success as any one individual has ever been to any technology company.  Any extended absence by him could prove to be damaging to Apple’s future products and prospects.  It sounds like there’s time for Apple and Jobs to transition that passion back more heavily to the company so that it can thrive in the inevitable absence of Jobs, whether it be this health-related matter, his waning interest or any other thing in life that could lead to his moving on/out.

He’ll be a tough act to follow, no doubt…but not impossible.  Back in the late 80′s, I actually had Steve Jobs as the luncheon speaker at a Gartner PC conference I was running.  This was right after he had introduced the NeXT computer, an amazing piece of software engineering that stood to transform the way we created and used software.  He had demonstrated it weeks earlier at Gartner’s offices in Stamford, after which none other than Gideon Gartner came to me and said “do you think we should standardize our company on these?”  The demonstration was that compelling.  I, being a noted curmudgeon, said “give me a night to think on it,” after which I came up with any number of good reasons why it wasn’t the right thing to do.  At the conference, Steve did his thing, and it was amazing.  You could hear jaws dropping in the audience.  I don’t know how many of you have ever given a meal speech but let me tell you, it’s the hardest thing in the world.  Within three minutes, all you hear is silverware clanking and the din of conversation at the tables gets louder and louder.  Not this time.  Jobs had their rapt attention.  You could have heard a pin drop.  At the end, thunderous applause.  Well, I was the next speaker.  Now what do I do?  How do you follow God and the 10 Commandments?  All I was talking about was operating system futures.  So I asked the audience, “how many of you want one of those things right now?”  Every hand in the room went up.  Then I said “how many of you are ready to standardize your company on those things tomorrow?”  Every hand went down.  (Well, I’m pretty sure Gideon wasn’t in the audience.)  I then said “so now let’s focus on what our real options might be.”

So you can follow Steve Jobs.  I’m just glad that I don’t have to do it again.

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