Jonathan Yarmis is Doctor Disruptive

You know I’m a gadget junkie.  I’ve been optimistic about Android for several years now.  I own an Android-based phone and am thrilled with it.  I’ve carried various Windows-based tablets for most of the last seven years.  You’d think, therefore, that I’d be the first person to get one of the new Android-based tablets coming to market, like the Samsung Galaxy Tab.  But no, I haven’t bought one nor have I added one to a holiday wish list.

The Samsung device has several fatal flaws which rule out any portable electronic device for me, which is also why I’ve never carried an iPod or iPhone.

• Replaceable battery.  I will never, ever, EVER carry a portable electronic device — at least what I’d call a mission-critical one — that doesn’t have a replaceable battery.  If I can’t replace the battery, there are so many potential negative outcomes to that, I’m not interested in your device.  We’ve all seen it.  People sitting in conferences around the perimeter…because that’s where the plugs are.  Picking and choosing what you do with the device as the day goes on as you attempt to conserve electrical power.  I carry a replacement battery for my Droid so that I never have to worry about this.  I’m free to do whatever I want to do with my device — what I bought the device for in the first place!! — because power isn’t an issue.  If you don’t have a replaceable battery, power is going to be an issue.  Period.
• Non-standard power chargers.  Is there anything more consumer-unfriendly than a proprietary charging plug?  I haven’t asked an engineer but nor have I heard any good reason why you can’t use a mini- or micro-USB plug.  I carry two or three cords like this and a variety of electrical sources (car and wall chargers; USB hubs) that power that plug.  If you’ve got a proprietary plug, I’m not always going to have it with me and I’m not always going to be able to find one when I need one.  Show stopper.  I won’t buy a camera, MP3 player or phone with a proprietary power plug.  I certainly won’t buy a tablet with one.

The bigger issue for Android-based tablets is that the fit-and-finish of the platform is just not prepared for the tablet form factor.  Virtually all applications were not only designed for a smaller screen form factor, they don’t scale up well on bigger screens.  By optimizing for the small screen, they’ve actually sub-0ptimized for larger screens and you’re left with an experience that just feels wrong at best and doesn’t work well, or at all, at worst.

This, ultimately, is the challenge, and opportunity, for Android.  Apple tightly controls the experience, for better in this instance and worse in others.  For Android to make a virtue of its diversity, it has to deliver great experiences across a diversity of platforms, not just enable them.  The learning curve for supporting these multiple experiences isn’t large but to maintain competitiveness with the Apple iOS platform requires great speed.  The early experiences of Android tablets is disappointing.  If I’m not eager to buy one, you’ve got a problem.  And I’m not eager to buy one.  Right now, I’m content to stick with my Droid, my laptop and my netbook.  (OK, my daughter’s netbook.  But she didn’t take it to college with her.)

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It has been more than a year since I’ve posted, and it’s nice to be back.  I’ll talk about my absence in another post but let’s just say that being the “disruptive technologies” guy at a company that doesn’t embrace disruptive technologies is an interesting challenge.  Anyhow, I thought I’d being my return to active blogging with a discussion about my long-time favorite vendor, Microsoft.

Goldman Sachs just downgraded Microsoft’s stock to neutral, saying Microsoft needs to do three things to get back into Goldman’s graces:

1. Increase its dividend
2. Rationalize its consumer strategy
3. Lead in cloud computing.

I’ll touch on each of those in turn but while I haven’t read the Goldman report, it seems to me that they’re missing the two critical places Microsoft needs to succeed at as well:  mobile and social.  Maybe those are covered under “consumer” but (a) I don’t think they fully belong there and (b) I think they’re so critical to Microsoft’s success that they bear separate mention.

As for mobile, it’s clear that the imminent Windows Phone 7 launch is Microsoft’s last chance to get this right.  There are too many platforms fighting for too few developers and while Apple has caved a little on the use of cross-platform tools, developers will still prioritize and exploit platforms in different orders.  I’ll give Microsoft credit for the realization that another iPhone clone (after Android) is not what the market is waiting for.  Whether Windows Phone 7 is different enough, and better at all, is an open question.  I have my considerable doubts but at least Microsoft is pursuing a high risk/high reward strategy instead of a low risk/guaranteed failure one.  We can lament all we want about Microsoft’s litany of failures in this space, and they are considerable, but in a charitable moment I may actually allow that Microsoft’s failures are actually what enabled Apple’s and Google’s successes.  They tried to do the impossible — get the carriers to see the light — well before the carriers were remotely interested in conceding anything.  (The carriers still don’t see the light, but that’s a discussion for another day.)

In social, I think Microsoft needs to get much more aggressive but not in building a competitor to Facebook.  They’ve already lost that battle, even while their equity investment in Facebook will produce a nice financial windfall in the next year or two.  Rather, I think the wide open market remains creating the “Facebook for the enterprise.”  This is still an underdeveloped space and the market leaders remain small companies with uncertain futures.  I think we’ll start to see these companies acquired by the bigger players within the next year so Microsoft’s window, if you will, of opportunity is small.  And please don’t tell me that SharePoint is that strategy.  SharePoint is certainly a beachhead Microsoft can exploit but as a user-driven total Facebook-like solution, it’s not even close.  If Microsoft doesn’t act soon, their old nemesis IBM is actually well-positioned here.  I observed to an IBM executive over a year ago that if some company not named IBM had IBM’s product suite, the world would be wild over what they’ve put together.  However, being buried within IBM has cost it broad market awareness.  But as customers start to understand the power of enterprise-grade social networking, IBM is very well positioned to capitalize on that demand.  Microsoft has an even stronger opportunity but is much further away from being able to exploit it.

Now, briefly, to Goldman’s points.

As for the dividend, I’m not a financial analyst but it’s clear that Microsoft has to do something with its amazing cash hoard of over $36.5 billion.  As an analyst, I’d always prefer to see Microsoft come up with interesting internal ways to invest it first, then also to pursue acquisitions, but given its track record and the sheer volume of that cash balance, I can understand demands to return it to shareholders in the form of dividends, especially when the 11 year chart of the stock price is basically flat.

As for the consumer strategy, I think it would be a huge mistake to divest itself of the portfolio.  I think, however, Microsoft needs to better integrate its consumer and enterprise strategies in a coherent whole, exploiting synergies between the two.  From a user perspective, I think the two experiences are totally blurred.  We do consumer things at work and enterprise things at home.  (If you doubt users are doing consumer things at work, see how much time they spend on fantasy football in the office.)  If the user perspective is blurred, there’s an opportunity for someone to provide a blended experience and who better than Microsoft?  In fact, I would argue that this is Microsoft’s opportunity alone.  Do I think they get it?  Nah.  But is it a huge opportunity?  Oh yeah.

Finally with cloud, I would agree with Goldman.  Microsoft has a huge opportunity, and a long-term imperative to be a clear leader here.  However, Christiansen’s “innovator’s dilemma” rears its ugly head here.  While Microsoft has actually been surprisingly aggressive on the server side, their stance with Office continues to lag the market opportunity and other market entrants precisely because the self-impact is greater than the market opportunity.  On the server side, the self-impact is less clear and thus Microsoft can afford to be more aggressive.  However, when it comes to allocation of resources, marketing and development, their packaged offerings certainly get more attention precisely because they get more current revenue.  It’s hard for any CEO of an established company to put weight behind the oft-stated position “we need to attack our own business before someone else does.”  And Steve Ballmer, given his historical background and predilection for sales and marketing would have a harder time than most to actually implement that.  But if he doesn’t…well, the technology industry has always been very unforgiving of market leaders during times of market transition.  With the emergence of new platforms — social, mobile and cloud — unless Microsoft gets more competitive and more aggressive in all three of these areas, it is not out of the realm of possibility to think that Microsoft becomes the CA of this decade, exploiting a captive installed base but doing little else of fundamental interest.

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1. They refer you to their profile on Friendster.  Where it lists as qualifications:  “Twitter is hot.  I’m a twerp.  Coincidence?  I think not.”
2. Their Twitter profile:  Following 12,782, Followers 6, Tweets 2
3. Their Facebook vanity profile:  http://www.facebook.com/HowDoYouUseThisAnyhow?
4. “LinkedIn is, like, for people with jobs.”
5. They’re under 26.  (Revenge for http://www.valleyprblog.com/social-media/a-rant-why-older-generations-shouldnt-blog/)
6. They’re over 50.  (Other than me, of course.)
7. Their resume’ includes any of these campaigns.  Worse, their resume’ includes all of these campaigns:  http://blog.thoughtpick.com/2009/06/10-social-media-campaigns-that-failed-avoid-their-mistakes.html
8. They utter the phrase “but you have to be a part of the conversation” as the answer to every question.   In fact, be wary if they use that as the answer to any question.
9. “Metrics, shmetrics.  We don’t need no stinking measurement.”
10. They’re unfamiliar with YouTube but they’ve Dugg YouPorn.  Multiple times.  Per hour.

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The news today that Facebook has accepted $200 million from a Russian investment group, valuing the company at $10 billion, has revived the question of what exactly is Facebook worth.  Much of that discussion has focused around the ability, or lack thereof, of Facebook and other social networks to sell advertising and delivering advertising results.  I think this discussion totally misses the point.  The question isn’t how advertising will work on Facebook but rather how Facebook and social networks change advertising.

I’m loathe to introduce yet another 2.0 moniker but if ever an industry needed to be 2.0-ized, it’s advertising.  Almost a century ago, retailer John Wannamaker is purported to have said “half of all advertising works, I just don’t know which half.”  (This quote is often attributed to PR maven David Ogilvy but my quick persual of the Googlesphere seems to show Wannamaker significantly predating Ogilvy.)  Today, that 50% goal may even be wildly optimistic.  On the Internet, clickthrough rates have fallen precipitiously as clutter has replaced clarity.

I think we’re on the verge of a major rethink of the fundamental premises of advertising.  We have long understood that in addition to challenges in measurement (what works), we also have had challenges in credibility.  Consumers typically rate advertising as their least credible information channel.  However, sellers continued to invest in advertising because they could compensate for the lack of credibility through broad distribution and high impact creative.

Today, however, that equation has been shattered.  Word of mouth/peers have consistently been rated the most credible sources of information but, as the name implied, the distribution model was limited.  Those of you old enough may remember the Clairol ad that showed 2 people who told 2 people such that by the end of the commercial, there were 64 faces on screen.  Today, 1,000 people tell 1,000 people and very quickly the message has reached millions of people.  Credibility now has a channel for mass distribution.  If you don’t think that has profound implications for how we “advertise,” you’re just not paying attention.

The mass distribution of credible information sources will transform advertising.  In fact, early indications show that the impact may even be larger in that people are finding “people like them” who they don’t know are as credible as the people they do know.  In other words, if I’m, say, a CIO, I’ll find the opinions of other CIOs whom I’ve never met every bit as credible as the ones I know.  Maybe more so, in that I’m less willing to denigrate the opinions of people I don’t know whereas the people I know…well, I know their shortcomings and inadequacies.

While no one has cracked the code on this yet, I think there are a few things one can point to:

• Facebooks’s Connect and other similar technologies allow people to bring their social map as they traverse the Internet.  If you haven’t thought yet about how you might incorporate the social map into the way you deal with customers and prospects, call me.  This is going to be huge and the opportunities are immediate.
• I’m a big fan of Loomia’s SeenThis Facebook application.  While a Facebook application, I actually “use” it elsewhere.  In particular, on the Wall Street Journal, you’re probably familiar with the boxes that show what stories other Journal readers have read.  This “most read” designation is rarely interesting to me and generally reflects the editorial judgment of the WSJ editors and what stories they promote.  However, I see an additional box, showing me what stories my Facebook friends and groups have read.  This is a much more interesting designation to me and generally I end up clicking through on most or all of those articles as the “recommendation” from my peer group is much more interesting and relevant to me than the recommendations of the general WSJ readership or editorial board.

Some other time I’ll talk about the overlay of location with social, which is going to further transform advertising.  However, for the sake of today’s discussion, I think social networks are going to transform the way companies communicate with consumers and potential consumers in profoundly interesting ways.  As such, questions of Facebook’s valuation are at best mildly amusing to me.  If Facebook indeed is in the vanguard of transforming the way companies reach consumers, $10 billion will some day seem laughably small.  And it’s not a question of whether this will happen.  It’s only a question of when, how and who.  And as for when, it’s already happening.  Consumers are voting with their clicks that social networks matter.  It’s up to the advertising industry to remove its collective head from its collective, um, sandbox and enable and exploit this transformation.

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Facebook is expected to announce today that it is opening up its news feed to third party application developers.  Twitter has benefitted for some time from the unfettered access of application developers to the Tweatstream, and with this move Facebook continues the move to embrace more Twitter-like functionality that began with the recent interface redesign that made status updates much more prominent.

On the one hand, this is the right move for Facebook to make and will only serve to increase the value users derive from the Facebook platform.  I have a folder of over 40 Twitter applications that enhance the core value of the platform.  Without these third party applications, Twitter’s value would be severely compromised and its growth stunted.  However, in this rush to Twitterization, I believe Facebook has fundamentally failed to appreciate the messaging taxonomy in which it operates.  In so doing, they will compromise their value to users, perhaps the first real chink in Facebook’s inexorable growth.  (Yes, there has been the occasional terms of condition firestorm but that was ultimately much ado about nothing, as evidenced by the small voter turnout in the recent terms of condition affair.)

So where’s the confusion?  While many people use third party tools to automatically post their Twitter posts directly to their Facebook status, I think the two play fundamentally different roles.  I use my Facebook status to reflect big picture events or thoughts.  As such, I expect the status to remain relatively static, at least as compared with the Twitter feed.    I may only change my Facebook status a few times a day and on occasion, I leave it the same for several days at a time.  By contrast, my Twitter feed may include multiple updates a minute, reflecting minute changes in what I’m doing, what I’m thinking or what I’m looking for.  The Facebook status is for seeing the forest through the trees; the Twitter feed is the very root system of that forest and those trees.

By confusing those two, Facebook risks devaluing the status feed, increasingly its triviality and decreasing my likelihood of perusing it.  I rarely browse the Twitter feed any more, instead relying on a variety of search and filter mechanisms to make sense of the vast stream from the almost 2,000 people I now follow.  By contrast, even with over 1,000 friends on Facebook, I regularly browse the status updates because their high level information is sufficiently valuable for me to devote that level of effort and attention.

For Facebook to retain its level of value to and attention from me — critical if it hopes to increasingly monetize the platform through advertising — it’s essential that they understand the messaging taxonomy in which they play.  At the lowest level, there’s Twitter.  High up on the hierarchy is the Facebook status update.  In between are some of the other elements of the Facebook feed (posts, events, etc.).  Unless Facebook makes steps to embrace this taxonomy, it is at risk of decreasing its user value, something it can ill afford to do.

So the expected announcement today of the opening of the platform to third party developers is a great thing, but if Facebook fails to embrace the messaging taxonomy outlined above, in a few years we may well view today’s announcement as the day Facebook “jumped the shark.”  To date, Facebook has responded quickly and appropriately to major platform gaffes (e.g., Beacon).  This, however, is a much more subtle and insidious “gaffe.”  Let’s see how quickly Facebook reacts…or whether this is a huge and deleterious mistake.

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First of all, sorry for the hiatus.  This unemployment and rehab thing is exhausting, physically and emotionally.  It’s time to get back into the saddle.  And what better day than today?

Qualcomm and Broadcom announced a settlement of their longstanding and broad-based legal battles.  For many of you, these two are perhaps familiar names at best, more likely evoking questions of “what is it exactly they do?”  However, when you realize that they’re effectively the Intel and AMD of the mobility space, it gives their settlement a new perspective.  Make no mistake about it, both have significant ambitions in an increasingly mobile computing platform, and world.

The two have spent considerable energies, monies and court time in fighting each other.  The net result of all this fighting was ultimately some degree of customer uncertainty.  Not customers as in end-users, who are largely unaware of the role these two play, but instead in the minds of handset and other device manufacturers who were often caught up in this maelstrom.  Now that this longstanding battle is behind them, Qualcomm and Broadcom can now devote increasing focus and attention to emerging market opportunities, which are considerable.

Many will focus on this as a Broadcom “win,” and any settlement where you get paid almost a billion dollars is pretty much a win, but I believe Qualcomm is really the big winner here.  Yes, a billion’s a lot of money but Qualcomm’s licensing business model is really a license to print money.  They can afford it.  Heck, the savings in litigation expenses alone is probably almost a wash.  While this doesn’t mean Qualcomm’s legal staff is now sitting around like the Maytag repairman, there’s a real savings here.  More importantly, Qualcomm management can now focus on market opportunities instead of legal strategies.  That can only sharpen their market focus.  Lastly, and most importantly, Qualcomm is now largely unencumbered in its efforts to pursue new opportunities, drive new licensing opportunities and pursue new relationships.  Qualcomm’s toxicity has largely been removed and real barriers to growth have been shed.

That’s an outcome well worth the billion dollars they’ll pay.

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I’ve also started guest blogging at BusinessWeek.com and here’s my first posting there.  It even made it to the home page of the web site there.  🙂

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Dear Steve:

I’ve known you for a little over 21 years now and I’ve only felt strongly enough to comment to you strongly and vocally three timesin those 21 years, our initial meeting regarding LAN Manager, with regards to the IBM OS/2 “divorce” and, more recently, about .Net and your Internet strategy positioning.  This is the fourth, and perhaps most urgent, time.  Those other three were done during a period of Microsoft ascendancy and domination.  (I know you can’t say that word in front of the DOJ, but between us friends…)  While a $4 billion profit in your most recent quarter isn’t shabby, we both know this is an incredibly sensitive time in the company’s, and the technology market’s, history.

Everyone’s asking “what’s up with Yahoo” and asking, again, what you should do about that.  You’ve given me a good year’s worth of newspaper exposure in the ebb-and-flow of the whole thing but it’s time not only to get it done, it’s time to take a more expansive vision of what Microsoft needs to do.  Much as it’s an important war to win, search advertising is the old battle.  There are newer battles emerging and if you continue to lag in those as you have in search, your very relevance will be called into question.

So, what do I think you need to do?

1. Buy Yahoo.  Not just search but the whole thing.  There are so many assets there that you will need to leverage that you’d be crazy not to take the whole thing.  It’s not just search advertising.  It’s display.  It’s mobile.  It’s cloud.  It’s eyeballs.  Yahoo has a lot of assets beyond search, which you need.
2. Focus on monetizing video.  Even while you still struggle with Zune, you’re once again fighting the last battle.  Surely you remember the first video ever played on MTV.   It was the Buggles’ “Video Killed the Radio Star.”  Those who don’t learn from history are doomed to repeat it.  Video is where the excitement is today (even while that’s not where the big money is…yet).  The big studios are making progress here, Google is still feeling its way and Apple scares the studios.  Hurry up on this one.
3. An equity investment in Facebook does not a social media strategy make.  I fervently believe that social networks will emerge some day (a few years away yet) as a dominant “advertising” platform.  We trust the opinions of our friends and people like us more than we do brands and companies.  Somewhere we’re going to figure out how to use social media to supplant “traditional” forms of advertising (and I include search advertising as traditional in this context).  I’d tell you how I think that’s going to play out, but that one’s worth of a consulting engagement, not a blog post.  I spent a good portion of the last year helping companies sort through their “Facebook for the enterprise” options.  Why haven’t you made SharePoint the no-brainer solution?  Instead, you’ve left it to a slew of smaller vendors…and increasingly Google.  Social networking is both an infrastructure play and a “user interface” play.  You’re behind in both.
4. If you’re waiting for the inflection point at which time cloud computing becomes a compelling play, the economy has pushed us to that point.  Don’t be so totally large enterprise-focused that you miss the fundamental change that’s already taking place in small-and-medium-sized businesses.  Cloud computing economics are compelling.  Yes, yes, I understand your software-plus-services play, and even embrace it but if you start from a Windows+Office mindset rather than a minimalist cloud infrastructure basis, you risk missing focusing on what the market really wants in the longer term.  Yes, Azure was a good start.  Developers are important and letting them leverage investments will be huge.  But you risk losing relevance when you focus so much already on Windows 7 and let the Office group persist with their embarrassing (non-)approach to cloud computing.  You talked in your earnings announcement about how global economic markets are resetting.  That reset, with lower expectations, is a seminal moment for the adoption of cloud computing.  It’s going to come even faster than you’re now thinking.  This one of all you can’t afford to lose.
5. Lastly, mobility.  This one has to frustrate you.  You had the right idea.  You were early to market.  And what did that earn you?  The right to see Apple and then Google strong-arm the carriers in a way they couldn’t have without your “failure.”  But now that they’ve done so, what are you going to do about it?  I’ve been a Windows Mobile user on phones and PDAs for a long time now and I look with envy at the Apple application marketplace.  Have you tried installing apps on one of your phones ever?  If Steve Jobs were Microsoft CEO, he’d fire the entire team responsible for the Windows Mobile application installation procedure.  Visibly and painfully.  Simply, you need to fix the user experience, galvanize the application developer community, stand up to the carriers and get ahead of the curve, with mobile video and location-based services the two areas I’d focus on.  Maybe go buy Qualcomm while you’re buying things.

I know this is a lot, in a bad economic climate.  However, to fail at any of these puts Microsoft’s future relevance at risk.  To fail at all of them, and a candid assessment would probably say that’s what’s going on…well, that should be a terrifying thought to you.

Good luck.

Jonathan

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